Legislature(2009 - 2010)HOUSE FINANCE 519
04/14/2010 08:30 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB230 | |
| SB144 | |
| SB269 | |
| SB235 | |
| HB317 | |
| HB69 | |
| SB305 | |
| HB69 | |
| HB421 | |
| SB219 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 230 | TELECONFERENCED | |
| + | SB 144 | TELECONFERENCED | |
| + | SB 219 | TELECONFERENCED | |
| + | SB 235 | TELECONFERENCED | |
| + | SB 269 | TELECONFERENCED | |
| + | SB 305 | TELECONFERENCED | |
| + | HB 69 | TELECONFERENCED | |
| += | HB 317 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 421 | TELECONFERENCED | |
SENATE BILL NO. 305
"An Act relating to the tax on oil and gas production;
and providing for an effective date."
1:46:04 PM
Co-Chair Hawker explained that SB 305 addresses the
decoupling of oil from gas as related to the oil and gas
production tax and the interplay of the issue with Alaska
Gasline Inducement Act (AGIA) legislation in the
forthcoming open season. He reported that the bill had been
thoroughly vetted on the Senate side with a lot of
technical analysis and that the bill had also been
carefully reviewed in the House Resources Committee.
Co-Chair Hawker stated his intent to accomplish the mission
of the sponsors. He anticipated a difference of opinion
from the administration on the necessity of passing the
bill. He outlined his plan for the bill in the House
Finance Committee.
1:50:55 PM
SENATOR BERT STEDMAN, CO-CHAIR, SENATE FINANCE COMMITTEE,
SPONSOR, provided an overview of the history of the
legislation. His initial concern was looking at the issue
from a fiscal position and determining that the state was
potentially at a fiscal disadvantage at the level of
billions of dollars. He recognized the difficulty of
communicating the magnitude of the fiscal challenges. He
explained Senator Paskvan's role as a legal advisor on the
legislation. He believed Senator Paskvan had the advantage
of entering the legislature after the discussions on the
Petroleum Production Tax (PPT), Alaska's Clear and
Equitable Share (ACES), and AGIA; he believed a fresh eye
would be helpful.
1:54:13 PM
Senator Stedman referred to the time when the state
functioned under the Economic Limit Factor (ELF) or tax and
royalty regime and was transitioning to a production-
sharing arrangement. He noted that North America is
basically structured under the tax and royalty approach and
most of the global hydrocarbon basins have production-
sharing or profit-sharing arrangements. He recalled that
after extensive legislative review of the ELF structure,
the fiscal regime of Alaska was restructured to production
sharing. He noted that months were spent in the legislature
adjusting the new structure, especially related to
progressivity. The royalties had been left in place;
however, it became clear that the share going to the state
would decline when the price of oil went from $60 to $80
per barrel. Concern about the decline led to progressivity,
an added tax that would protect the state when oil prices
were high. The decision had been made to stop the PPT at
$60 per barrel; in hindsight that was too low. There was
debate about progressivity.
Senator Stedman referred to negotiations for a gas line
under the Murkowski administration and a proposal to take
20 percent of the gas (12.5 percent of royalties plus 7.5
percent severance), own 20 percent of the pipe, have a 20
percent capital credit, and a 20 percent base tax. The base
tax was increased to 25 percent. At the time, there was no
gas to speak of. Cook Inlet was separated from the
discussion as an old, declining basin; the new tax regime
did not apply to it. The only gas in the state was in Cook
Inlet and in the Arctic. The gas field in Prudhoe Bay was
going to be taken in-kind. All of the focus of the
discussions at the time was on oil. Gas was intentionally
set aside.
1:58:09 PM
Senator Stedman continued that adjustments were made
through ACES and AGIA; the 20 percent ownership in pipe and
the 20 percent ownership in gas fell away. However, the gas
tax structure was still left in place.
Senator Stedman underlined that the legislature had
structured progressivity around oil. He described gas as a
lower-valued hydro-carbon; oil produces six times more
energy per volume than gas, and is eight or ten times more
valuable. In the eight to ten range there is not a lot of
impact on the fiscal regime. There has been a structural
change within the economy and the energy world in the past
three or four past years. Vast supplies of natural gas have
been discovered globally, lowering the pressure on gas,
while upward pressure has been put on oil. Currently, oil
is valued at about $80 per barrel and gas is at $4, a 20 to
1 ratio.
Senator Stedman relayed that a couple of years ago, the
Legislative Budget and Audit Committee found a consultant
to make a mathematical model of Prudhoe Bay, Kuparuk, and
Alpine fields so that the legislature could measure and
evaluate a potential gasline proposal. He had requested
that the consultant review the oil tax structure and the
gas tax structure and measure the offset (or subsidy or
dilution) resulting from large gas volumes and oil volumes;
the total revenue was going down instead of up.
Senator Stedman referred to a March 2, 2010 memorandum from
Dr. David Wood, a consultant to the legislature (copy on
file) calculating the impact over the past couple of years.
Dr. Wood had presented his findings to the House Resources
Committee. Some believed the policy implications were huge
and asked for a presentation before the Legislative Budget
and Audit Committee.
Senator Stedman reported that he had become greatly
concerned about Dr. Wood's analysis of the dilution effect
in terms of the fiscal impact to the state but also about
the lack of recognition in the legislature of the potential
impact. He emphasized that the mechanism is extremely
complicated and the numbers are unbelievably large.
Senator Stedman continued that the AGIA open season came
around and Mr. Tony Palmer from TransCanada came before the
legislature to discuss potential costs of a mainline pipe.
Mr. Palmer referred to estimated tariffs and price
expectations.
2:03:50 PM
Senator Stedman maintained that under the AGIA terms the
state faced a contractual obligation to lock in the gas tax
by May 1, 2010. He noted that the state has the ability to
adjust oil tax up or down, but not gas tax.
Senator Stedman explained that the Senate Finance Committee
had spent several weeks studying the information available,
starting with the basic structure of the oil and gas tax.
Oil was covered in the first week and then the hypothetical
4.5 billion cubic feet per day (Bcf/day) gas model. He
underlined that the conclusions were "not pretty." The
administration did a review as well, but their numbers were
not any better.
Senator Stedman emphasized that the state had a good
revenue stream with oil, but when oil is 15 times more
valuable than gas, the total dollars to the treasury went
down with gas. He was alarmed that the state has spent
thirty years waiting for a gas line and a strong gas
economy, when it was clear that without gas revenue, there
would be no gas economy.
Senator Stedman pointed to current numbers, stressing that
what matters is the relationship between oil and gas
prices. With oil standing alone, the state would make $8.6
billion; with gas, the state would make $330 million.
Noting that the progressivity calculations are based on 30
days, with 30 days before first gas at ten to twelve years
out, the revenue stream would be $8.6 billion (annualized
over 12 months). Given that number, the legislature might
work the budget details.
2:08:22 PM
Senator Stedman continued that first gas could come, and
thirty days later the state might find out, for example,
that the same volume of oil (500,000 barrels) was being
pumped and gas was flowing well, but the revenue would then
be only $5.2 billion. He warned that under the example, the
state could suddenly lose $3.4 billion and make only $330
million in gas. The net loss could be $3.1 billion. The gas
line would have to be shut down and there would be serious
budget problems. Nothing could be done because the state
would be under contractual obligation for the following ten
years.
Senator Stedman questioned how the legislature could answer
to future generations for such a significant loss after
waiting thirty to forty years for gas to flow. He commented
that he and other legislators had traveled throughout
Canada and the United States to energy conferences and
looked carefully at the models. There had been
consideration about how to incentivize an oil basin,
including adjusting progressivity, production-sharing, and
base tax numbers or shifting property taxes for things like
a gas treatment plant.
Senator Stedman stressed that the Arctic has a world-class
oil basin. He argued that the state was not creating an
incentive, but giving away revenue at a "staggering"
magnitude. For example, the state could build a $100
million road to encourage drilling and exploration or build
a port at Anchorage for several hundred million. He did not
want the state to give away billions of dollars year after
year.
Senator Stedman suggested buying equity in a project, such
as buying 10 or 20 percent of the pipe, so that the state
would make the 12 or 13 percent regulated rate of return
rather than handing the cash to others.
Senator Stedman emphasized that the problem was the quickly
approaching lock-down date on May 1, 2010, the first day of
binding open season.
2:14:04 PM
Senator Stedman warned that the magnitude of the problem is
so severe that if AGIA succeeds and the first binding open
season succeeds, the industry could lock the state down and
it would be "game over." He pointed out that the only
leverage the state has left is oil, if gas cannot be moved.
He argued that politically, oil taxes could not be raised
by one third (the amount required to make up the gap in the
previous example). Compared to other structures around the
world, he believed the current tax structure in Alaska is a
burden. He felt that the state was currently giving its oil
away and that oil revenue had to be protected through
adjustments and incentives, and the gas pipeline had to be
made competitive and attractive.
Senator Stedman stated that he did not want the legacy of
giving away the state's oil. He noted that the state can
legally decouple at any time, but he argued that if it is
done before May 1, 2010, there would be less fiscal risk
than waiting until after the date. He thought the state
could gamble that the price of gas would go higher than the
price of oil, but he did not think the projections
supported such a gamble. He believed there would be higher-
valued oil and lower-valued natural gas because of the
amount of gas available.
2:18:43 PM
Co-Chair Hawker stated for the record that he agreed with
the problem identified by Senator Stedman. He relayed that
he had participated in the discussions about PPT, ACES, and
AGIA. In 2006, there was a session during which the new
proposal for the profit-sharing production tax was vetted.
He noted that it had been universally appreciated that the
ELF had become outdated and needed to be replaced. A
special session was called where the debate continued.
During the interim between two special sessions, he and
others met to consider the deadlocked bill; the "producer
pay plan" was crafted as an evolution of the profit-sharing
production tax involving an incentive to lower tax rates
for producers increasing production.
Co-Chair Hawker continued that the new bill made it through
the House and was fine-tuned by the Senate; the producer
pay plan developed into the profit-sharing production tax
(PPT). The bill was crafted in his office with the
Department of Revenue (DOR) to address the oil ELF, but as
time passed, it became clear that the gas ELF also needed
to be addressed through a different formula. He witnessed
that the crafters of the legislation had believed they did
not have to worry about the gas tax for another 15 years.
They understood that it would be complex to structure both
a new tax on oil and on gas and decided to put them under
the same tax regime, although there was a different price
structure on oil than on gas; one was sold by the barrel
and the other by thousands or millions of cubic feet. In
addition, there was a significant value difference. The
same tax rate could not be put on the different values.
Co-Chair Hawker recalled that the crafters came up with the
idea of the British Thermal Unit (BTU) equivalency formula.
However, that would work only if the BTU equivalency was
the same as the price equivalency. They knew that combining
low-value gas and high-value oil would result in a diluted
tax structure, but knew also that there would be 15 years
to deal with the problem.
2:23:13 PM
Co-Chair Hawker noted that the progressivity feature added
by ACES exacerbated the problem as it triggered profound
value differences. Next, AGIA was passed and provided
"fiscal certainty" for the players: the gas-production tax
would be fixed at the start of the first day of the binding
open season. The lock-in provision based on the start of
the first open season suddenly reduced the 15 years they
had previous assumed they had to 15 months. He admitted
that when AGIA passed, he had not made the connection that
the time would be shortened.
Co-Chair Hawker agreed that on May 1, 2010, the state would
be locked in to the gas tax structure for ten years. He
emphasized that the crafters of the structure had not
intended the outcome.
SENATOR JOE PASKVAN informed the committee that he had
arrived at the same conclusion as Senator Stedman regarding
the need for decoupling gas and oil. He had begun by
reading the AGIA statutes to understand the extent of the
lock-in that the state was facing on May 1. He had reviewed
the opinion of Attorney General David Marquez and his
analysis under the Stranded Gas Development Act of the risk
to the state of Alaska.
Senator Paskvan reported that he had called the current
Attorney General Dan Sullivan two months ago and told him
he believed there was a tremendous risk and that he was not
legally comfortable with. He emphasized that the legal
issues were complex. He thought the number one issue before
the current legislature was the fiscal issue. He agreed
that the magnitude of the problem was so great that it
could result in Alaska giving up 100 percent of any
production tax on natural gas and 100 percent of its
royalty. The state would have to use oil savings while the
gas flows.
2:27:57 PM
Senator Paskvan stressed that the monthly analysis of the
situation was that Alaska would be bringing in about $725
million per month in the first 30 days before the 4.5 Bcf/d
of gas flows; after the gas flows, the state would receive
less than $500 million per month. Hundreds of millions of
dollars would be lost each month. He called the situation a
"third-world resource extraction model" where the state
would pay while the resource leaves the state.
Senator Paskvan argued that decoupling gas and oil would
result in absolutely no increase in oil tax and that the
trigger point at 25 percent and the slope of progressivity
would remain the same. The gas tax would remain the same,
at 25 percent with the same slope of progressivity. The
state would be protected if gas became more valuable than
oil.
Senator Paskvan underlined the conclusion that decoupling
is necessary. He added that the only other issue before the
legislature was the question of the methodology of
determining the gas production tax obligation specifically
referenced in AGIA statute Section 320. He referred to a
presentation by DOR Commissioner Pat Galvin to the Senate
Finance Committee. Commissioner Galvin had used the point-
of-production tax (the system put in by regulation 15,
AAC.90.220) and arrived at a gas production tax obligation
of $1.2 billion. Decoupling and using a point-of-production
analysis, using the same structure used by the commissioner
would allocate 78 percent of the cost to oil and 22 percent
of the cost to gas. The tax obligation on a decoupled basis
would be approximately $1,015,500. He stressed that that is
the beginning point for negotiation.
Senator Paskvan concluded that the state should keep its
eye on the top line for gross revenues for both products on
a decoupled basis and then look at the negotiation position
by making sure that the starting point is at the billion
dollar range.
Co-Chair Hawker noted that SB 305 was the proposed solution
and would be presented by the consultants.
2:32:18 PM
Representative Gara commented on the difficulty of shifting
ideologies without preconceptions. He noted that with some
language changes he might agree with the senators and
Representative Hawker. He pointed out that he had been
present throughout the PPT and ACES debates and had not
been told once that Alaska could have a gas pipeline and a
oil pipeline that produced less revenue than an oil
pipeline alone. He believed the issue was very important.
Representative Gara stated that he, Senator Hollis French,
and others had tried to push for separate oil and gas taxes
and were told that it could not be done. He wanted to enter
into gasline negotiations from the strongest position
possible. He listed previous concerns that had been
addressed, including that it made sense to leave
progressivity in. He had committed to let industry deduct
gas field costs from oil taxes in order to move a gasline
forward, and he thought it would be wise to craft language
so that the small amount of gas produced on the North Slope
would not have to be burdened with decoupling in the
meantime.
Vice-Chair Thomas stated concerns about the timing of the
legislation; he worried that the House would not have the
time with the legislation that the Senate had. He agreed
that the issue was huge. He did not want to lose money, but
he wanted more information about the gas taxes and urged
proceeding with caution.
2:37:34 PM
Senator Stedman pointed out that currently there was cross-
subsidy going on as there was gas in the Arctic and Cook
Inlet as well as Prudhoe Bay-Kuparik, but emphasized that
SB 305 was revenue-neutral. He recalled that in the last
three years the impact to the treasury has been roughly
$250 million without gas. There was language in the bill to
protect the industry so they would get the current
dilution. The crafters did not want to "rock the boat";
they wanted to protect the state from being locked in on
May 1.
Co-Chair Stoltze emphasized the importance of the May 1,
2010 date and the consequences of the administration
deciding not to sign the bill. Senator Stedman agreed
regarding the importance of the date.
Co-Chair Hawker reported that the administration had
testified that it views the problem as less severe.
Vice-Chair Thomas queried what could happen if the governor
vetoed the bill. He wondered whether the legislature could
override the veto in time. Senator Paskvan did not know. He
believed the effective date on the statute was January 1.
Co-Chair Stoltze hoped there would be more testimony
related to the importance of timing.
2:42:07 PM AT EASE
2:42:22 PM RECONVENED
Representative Fairclough believed there was time before
May 1 to fully understand the issue.
Co-Chair Hawker pointed to extensive testimony and analysis
on the bill's website.
ROGER MARKS, PETROLEUM ECONOMIST, LEGISLATIVE BUDGET &
AUDIT COMMITTEE, introduced himself and his partner as
being from Logsdon & Associates and under contract with the
Legislative Budget and Audit Committee to assist the
legislature in gas taxation matters.
Co-Chair Hawker queried their qualifications related to oil
and gas issues. Mr. Marks replied that they had worked for
the Tax Division of DOR for many years on the oil and gas
production tax and issues of gas commercialization.
CHUCK LOGSDON, PETROLEUM ECONOMIST, LEGISLATIVE BUDGET &
AUDIT COMMITTEE, added that they had over fifty years of
experience between the two of them in evaluating petroleum
taxation related to the Alaska fiscal system.
Mr. Marks provided a summary of the premise and rationale
for the bill and a description of how the bill works, using
a PowerPoint presentation, "SB 305: The De-Coupling of Oil
from Gas for the Oil and Gas Production Tax, Logsdon &
Associates, House Finance Committee, April 14, 2010" (copy
on file). He began with Slide 2, "Acronyms":
BBL barrel
BCF billions of cubic feet
MMBTU millions of BTUs
BOE barrel of oil equivalent
Mr. Marks detailed that a barrel (bbl) is how the volume of
oil is measured and the unit of how oil is sold. Billions
of cubic feet (Bcf) refers to how the volume of gas is
measured. He explained that natural gas contains mostly
methane but also butane and heavier hydrocarbons; while the
volume is measured in cubic feet, it is sold in terms of
the millions of British Thermal Unit (BTU) content (MMBTU).
Finally, the barrel of oil equivalent (BOE) puts gas on the
same basis of oil so they can be added up, measured, and
compared by converting MMBTUs of gas to bbls of oil. A
barrel of oil has 6 million BTUs; taking the amount of BTUs
of gas and dividing by 6 puts the gas on a barrel of oil
equivalent (BOE).
2:47:29 PM
Mr. Marks turned to Slide 3, "The Problem":
• The progressivity part of the production tax rate is
based on per barrel oil or per BTU gas profitability
• Under current law oil and gas are combined for
calculating the progressivity
• Oil is worth much more than gas
• With a major gas sale, combining the lower value gas
with the higher value oil will "dilute" the per barrel
oil profitability:
- Driving down the progressivity factor
- Materially reducing production taxes
Mr. Marks detailed that there is currently a base tax rate
of 25 percent on the oil and gas production tax;
progressivity is added to that to give a higher rate if the
value of the oil or gas is above a certain rate.
Co-Chair Hawker summarized that when gas comes on the unit
higher values of the oil are diluted.
Mr. Marks reviewed Slide 4, "Oil vs. Gas Value":
• Now:
- Gas: $4/mmbtu
- Oil: $80/bbl ($13/mmbtu)
• Department of Energy forecast for 2020:
- Gas: $8/mmbtu
- Oil: $120/bbl ($20/mmbtu)
• Transportation cost deductions:
- Gas: $5.00/mmbtu to Lower 48
- Oil: $6.00/bbl ($1.00/mmbtu)
Mr. Marks detailed that on a straight BTU to BTU basis, oil
is currently worth about three times as much as gas. The
U.S. Department of Energy forecast for 2020 (when it is
hoped that a major gas sale would start) is $8/MMBTU, while
the forecast for oil is around $20/MMBTU, or about 2.5
times as much as gas. In addition, in Alaska the
differences are exacerbated by transportation costs. The
tax is based on net value. Gas will have a much higher
transportation cost than oil per MMBTU, about five times as
much.
2:50:52 PM
Mr. Marks directed attention to Slide 5, "How the Tax Rate
is Determined":
• Base 25% rate
• Plus progressivity
- Progressivity is based on the net value per BOE:
• Oil Alone: Total oil value / Total oil
barrels
• Combined Oil & Gas: Total oil and gas net
value / Total oil and gas BOE's
- When lower value gas is added to the higher value
oil the average net value of the combined oil and
gas goes down
Representative Doogan asked whether part of the problem
would be a lot of low-value gas compared to relatively less
high-value oil. Mr. Marks responded that he was correct and
suggested thinking of the relationship as a fraction with
the numerator being the value and the denominator being the
amount of production.
Representative Doogan noted that a lot of the issue is
related to the theory that there would be a lock-down when
companies nominate gas during the open season. He asked
whether the problem would be exacerbated as more gas is
nominated. Mr. Marks responded that he was correct; the
greater the difference between oil and gas value, the
larger the problem, and the more gas there is relative to
oil, the greater the problem.
Mr. Marks turned to Slide 6, "Reference Case," or how the
world might look in 2020:
• Oil
- 500,000 barrels per day
- $120/bbl market price
• Gas
- 4.5 bcf/day
- $8/mmbtu market price
• Upstream costs
- $2.2 billion capital
- $2.2 billion operating
2:54:39 PM
Co-Chair Hawker noted that the same reference numbers had
been used in the previous committee. He asked whether the
upstream operating and capital expenses were reasonable
costs to anticipate. Mr. Marks believed the numbers were
reasonable and consistent with current costs, adjusted for
inflation plus additional costs that may occur with new
fields like Pt. Thompson.
Representative Austerman asked whether the 500,000 barrels
per day was taxable oil. Mr. Marks agreed; the numbers are
DOR's forecast for production in 2020.
Mr. Marks moved on to Slide 7, "What Happens under Status
Quo":
• Oil taxes under status quo prior to gas production:
Net value of oil = $86/bbl (tax rate 47%)
Oil Tax = $6.1 billion
• Add a 4.5 bcf/day of gas:
Combined net value of oil and gas = $47/bbl (tax
rate 32%)
Total oil & gas taxes: $5.5 billion
• Bottom line: The drop in the tax rate of oil more than
offsets all the the taxes on gas. Not only does the
state not received any additional revenues from the
gas, but oil revenues drop as well.
Mr. Marks detailed that the numbers assume oil production
similar to present levels and no gasline, 500,000 barrels
per day and the $120 Lower 48 price. When the costs are
subtracted to get to the net or production tax value, the
net value is approximately $86/bbl. Given the way
progressivity works, when the amount above $30 is subject
to a 0.4 percent slope per dollar, the tax rate is 47
percent at $86/bbl. The tax rate would be $6.1 billion
annually.
Mr. Marks explained that adding a 4.5 Bcf/day gasline on
top of the oil production would not affect oil; but
combining the lower-value gas with the higher-value oil
would reduce the $86/bbl average BOE value down to $47/bbl.
Co-Chair Hawker asked whether the scenario would occur when
the switch is flipped on and gas is produced. Mr. Marks
agreed; the prices would occur when the average value of
the oil is diluted by the gas. Without the gas, oil would
have the $86/bbl tax value at 47 percent tax rate;
switching on the gas would bring the combined value down
from $86/bbl to $47/bbl (tax rate at 32 percent).
Mr. Marks highlighted that the total taxes would then be
$5.5 billion for both the oil and the gas. There would be
no additional taxes from the gas and the oil revenue would
drop as well.
Mr. Marks reported that over the past months he and Mr.
Logsdon had looked extensively at other international
petroleum fiscal regimes. They could find no other place on
the planet where a jurisdiction combines substances of
different values and the basis for taxation is the combined
per unit value.
Co-Chair Hawker clarified that the comparisons referred to
annualized numbers. Mr. Marks concurred, and emphasized
that the $5.5 billion was the total taxes from the oil and
the gas both, compared to the $6.1 billion that was oil
alone.
2:59:11 PM
Representative Kelly queried writing regulations [adopted
by DOR during AGIA] related to changing the point of
production and the BTU oil equivalent. Mr. Marks replied
that he would get to the issue.
Representative Doogan asked the value of gas in the
example. Mr. Marks replied that the value of gas on a MMBTU
basis would be about $1.60 and on a BTU basis $9 to $10.
The dilution effect drags the oil taxes down and the gas
taxes up, but the net effect is that the oil effect
overwhelms the gas effect, which creates the drop in
revenue when oil and gas are both being produced.
Vice-Chair Thomas asked what would motivate a person who
voted against ACES to vote for decoupling. Mr. Marks
replied that the issue was a policy call. He stated as an
analyst that whether a person liked ACES or not, it was the
law of the land. He stressed that ACES would stay in effect
just as it was passed except that it would apply to oil and
gas distinctly.
Co-Chair Hawker agreed that the question was on his mind as
well. He reiterated that the crafters of PPT knew that the
dilution problem would have to be dealt with. He believed
the issue was a long-term consistency one and that SB 305
would "buy an insurance policy, just in case."
3:04:39 PM
Representative Austerman asked for clarification about the
numbers arrived at. Mr. Marks replied that the assumptions
start with $86/bbl oil and the gas at $9 on a BOE basis and
ends up with and average of $47 for per unit value oil and
gas combined.
Representative Austerman queried the value of the $8 when
oil and gas are combined. Mr. Marks responded that the
value was about $1.60.
Representative Gara went back to Representative Kelly's
question. He summarized that (related to valuing the gas)
the Senate had passed a version on a BTU basis; the House
Resources Committee worked with the administration and came
up with a point-of-production basis for the value. Whether
there is a BTU basis that results in a lower gas tax or a
point-of-production basis that is higher, the goal is to
not start the open season with a gas tax that is too low as
it might only go lower with negotiations. He queried the
regulations passed with a definition of gas taxes. He asked
whether the DOR regulations would be overridden if SB 305
were passed.
Mr. Marks clarified that there were two different issues.
With decoupling, there would be the issue of allocating
costs between oil and gas. The regulations adopted by DOR
several weeks ago stipulate that under AGIA the gas part of
the tax is locked in. Since under the status quo there is
one total tax that does not separate gas tax and oil tax,
the department needs to come up with a way to ascribe how
much of the $5.5 billion is gas. Tax is being allocated,
not costs, using gross value. He agreed that if SB 305
passed, the adopted regulations would not make sense.
Decoupling would make clear how much the gas taxes are.
3:09:12 PM
Representative Gara wanted assurance that Mr. Marks would
work with the administration if SB 305 says that the
regulations are no longer necessary. Mr. Marks thought the
question was for the administration.
Representative Fairclough summarized her understanding: the
oil tax at $6.1 billion is an equivalent when taken into
barrels; when the 4.5 Bcf/day gas is added, which will be
taxed at the combined rate, the new combined rate equals
the $47 per barrel (taxed at 32 percent). She asked the
values of the oil and the gas. Mr. Marks replied that the
value of oil has not changed.
Representative Fairclough queried the difference in the tax
rate. Mr. Marks replied that the tax rate on the $86 oil is
47 percent.
Representative Fairclough asked for clarification. Mr.
Marks explained that the tax went from 47 percent to 32
percent because of progressivity. Even though there is
higher value for the oil, dropping the tax rate 15 percent
on the total value accounts for the $1.6 billion less.
Mr. Logsdon added that the weight average should come out
to $47/bbl if the volume in barrels were multiplied by the
barrel price for oil and the volume of the gas were
multiplied by the barrel equivalent price of the gas. Mr.
Marks elaborated that if the 4.5 Bcf/day on a BOE basis was
divided by 6, the result would be about 750,000 BOEs per
day; 750,000 BOEs of gas and 500,000 BOEs of oil, or a
production ratio of 60 percent gas and 40 percent oil.
Mr. Marks continued that the other side is relative value.
He compared $86/bbl oil; at a BOE equivalent, the gas is
about $9 ($1.66/MMBTU). He stressed that to put oil and gas
on an equivalent basis, the $8 gas with transportation
costs subtracted is worth about $1.66/MMBTU.
3:14:47 PM
Mr. Marks turned to Slide 8, "What Happens with Decoupling
[Using relative gross value to allocate cost]":
• $120 oil and $8 gas
- Status quo taxes = $5.5 billion
- De-coupled taxes = $7.9 billion
$2.4 billion difference
• Annual difference at other prices:
- $100 oil / $8 gas: $1.4 billion
- $80 oil / $8 gas: $0.8 billion
Mr. Marks detailed that the difference between the status
quo and decoupling would be around $2.4 billion. When
decoupling, the costs need to be allocated between oil and
gas. He referred to a recent amendment by the House
Resources Committee to allocate based on the relative gross
value of oil and gas (the gross value is market price less
transportation). Using the gross value, the difference
would be $2.4 billion between the status quo and
decoupling. He noted that the bigger difference between oil
and gas value, the bigger the difference between the status
quo and decoupling. He covered the annual difference at
other prices for oil.
Co-Chair Hawker queried the break-even point. Mr. Marks
replied progressivity is not linear. Co-Chair Hawker stated
that the closer oil and gas come in price, there is less of
a problem. Mr. Marks thought the question was how SB 305
would decouple oil from gas.
Co-Chair Hawker contended that SB 305 is hard to understand
and must be taken in context with the entire statute; he
believed the presentation defined the simpler concept
embodied in the bill.
Representative Austerman asked whether the PowerPoint
information was based on the amended bill coming out of the
House Resource Committee or the Senate version. Co-Chair
Hawker answered that the two versions were the same for the
purposes of the current conversation; the major difference
in the House Resources Committee version is an additional
mechanism that would make the tax take effect for about
three days, go away, and then take effect ten years in the
future. The mechanism remained unchanged.
3:18:10 PM
Mr. Marks asserted that SB 305 was changing one small thing
in how the production tax works, which would make a big
difference. He directed attention to Slide 9, "How SB 305
Works," highlighting the difference in calculation between
the current tax regime and decoupling:
• Currently
- Each company calculates one statewide
progressivity rate based on all combined oil and
gas activity (oil, Cook Inlet gas, other in-state
gas)
• Under SB 305: Two Progressivity Calculations
- Bucket 1: Same current activity (oil, CI gas,
other in-state gas) will continue to be
calculated together
• No tax increase on current activity
- Bucket 2: Progressivity on export gas will be
calculated distinctly (same formula)
• Will not dilute oil progressivity
Mr. Marks detailed that currently there is one
progressivity rate based on all combined oil and gas
activity. Progressivity under SB 305, by contrast, would
use two calculations, first separating current activity and
export gas into two "buckets." Bucket 1 would contain all
current activity; there would be no tax increase.
Co-Chair Hawker stated that there would be no change in
activity and no change in taxes.
Mr. Marks continued that without SB 305, there would be
only one statewide bucket and when a major gas deal
happens, the gas exported would dilute the value of the
oil. Senate Bill 305 would set up a new bucket (Bucket 2)
containing only the export gas; progressivity would be
calculated on the export gas exactly as it is calculated
under ACES. He underlined that calculating the export gas
separately would prevent the export gas from diluting the
oil activity.
Co-Chair Hawker summarized that the oil activity,
calculated as it is currently would remain in Bucket 1,
while the new export gas would be in Bucket 2 with a
separate calculation.
3:20:54 PM
Representative Gara asked whether gas that is not exported
but used in the state would remain under the current ACES
tax. Mr. Marks responded in the affirmative.
Co-Chair Hawker noted that Cook Inlet gas would stay
permanently under ELF. Mr. Marks added that it would be
calculated under progressivity but would pay under ELF.
Representative Austerman asked how "export gas" was
defined. Mr. Marks replied that export gas is gas that
leaves the state and is used outside the state, with the
exception of Cook Inlet gas.
Co-Chair Hawker clarified that the gas referred to would be
from the North Slope. Mr. Marks agreed that the liquid
natural gas (LNG) is part of Bucket 1; export gas would
come from outside of Cook Inlet and leave the state, such
as North Slope gas that would go to Canada and the Lower
48.
Representative Gara pointed out that there could not be a
separate, lower tax on gas used in-state. He asked whether
the Bucket 2 language could stipulate that decoupling would
begin when North Slope gas began to be exported. He was
concerned with constitutional issues. Mr. Marks responded
that Bucket 2 would be empty until a major gas sale is made
and that the in-state gas would be Bucket 1.
3:24:16 PM
Mr. Marks pointed to Slides 10 and 11 with visual
illustrations of the two buckets.
Representative Fairclough asked whether Bucket 1 would have
the combined tax rate and Bucket 2 would not. Mr. Marks
answered in the affirmative; the combined tax rate
currently in effect would be in Bucket 1.
Co-Chair Hawker added that pure decoupling, or putting all
gas in one bucket and all oil in another, would penalize
the companies that are currently producing both oil and
gas.
Mr. Marks reported that the bucket system was structured in
the Senate Finance Committee; the intent was that there not
be a tax increase at this time.
Vice-Chair Thomas queried the tax rate for spur lines taken
off the main gasline. He wondered what the royalty rate
would be to the in-state users. Mr. Marks responded that
under the current production tax, all in-state gas has a
tax rate that is subject to old ELF provisions, a low tax
of $0.17/MMBTU regardless of the price.
Vice-Chair Thomas clarified that the rate applied to any
gas used in the state.
Co-Chair Hawker acknowledged that current statute could
face federal constitutional challenges, as different tax
structures are set up for in-state gas from the same
source. He stated that the possibility would not become
real until the state has actually exported gas. He thought
the issue did not have to be dealt with in the current
legislative session.
3:28:28 PM
Representative Gara wanted the bill written in a way that
is constitutional. He fully intended to leave the lower tax
rate on in-state use of gas as long as possible.
Representative Gara summarized that by mixing oil and gas,
the state essentially short-changes itself on the oil tax
rate in cases where there is low-priced gas. Mr. Marks
agreed.
Representative Gara stated for the record that the state is
currently giving a benefit to companies like ConocoPhillips
by allowing them to dilute oil tax payments with Cook Inlet
gas costs. Mr. Marks agreed.
Co-Chair Hawker took issue with the language "short-
changing" the state, which implied a motive that he did not
think existed.
Representative Gara restated that one of the benefits to
producers who provide in-state gas is a slightly lower tax
rate. Mr. Marks responded that PPT was designed as a state-
wide tax based on state-wide activity. Combining oil and
gas does reduce the tax.
Co-Chair Hawker explained that the sponsor's bill did not
intend to fiscally impact current producers relying on
current law. The bill intended to accommodate the interim
period and not disrupt producers from developing new gas
sources. He noted that the House Resources Committee
addressed the issue by creating a window that would open
and then close through a trigger mechanism. He referred to
concerns about the mechanism and hoped to find a better one
allowing a durable statute that would provide the hold-
harmless for existing producers. He reported that his
office had been working closely with the consultants and
DOR; both had arrived at a similar concept on a joint
proposal that would address the issue.
3:33:58 PM
Representative Kelly asked whether the major players from
the industry would be present for the discussion. Co-Chair
Hawker anticipated that they could join in public testimony
voluntarily or they could be required to join.
Representative Kelly wanted a complete record and hoped
they would be required to participate.
Representative Austerman asked for clarification regarding
LNG. Mr. Marks explained that the portion of the gas that
stayed in-state would be Bucket 1; North Slope gas that was
exported through an in-state line through Southcentral and
Valdez would be Bucket 2.
Co-Chair Stoltze stated that he did not want producers to
be compelled to testify.
3:37:17 PM
Representative Kelly maintained that it would be a mistake
to leave out information from the group because of the
short time allowed.
Representative Fairclough agreed with comments on both
sides of the issue and suggested that a time could be
specified for testimony from the players.
Co-Chair Hawker spoke to the timeline for the amendment.
SB 305 was HEARD and HELD in Committee for further
consideration.
3:40:22 PM AT EASE
4:03:00 PM RECONVENED