Legislature(2009 - 2010)BARNES 124
04/07/2010 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| HB337 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 305 | TELECONFERENCED | |
| += | HB 337 | TELECONFERENCED | |
| *+ | HB 320 | TELECONFERENCED | |
| *+ | HB 332 | TELECONFERENCED | |
| + | HB 411 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 305-SEPARATE OIL & GAS PROD. TAX/ DEDUCTIONS
1:12:06 PM
CO-CHAIR NEUMAN announced that the first order of business would
be SENATE BILL NO. 305, "An Act relating to the tax on oil and
gas production; and providing for an effective date." [Before
the committee was CSSB 305(FIN).]
1:12:55 PM
CO-CHAIR JOHNSON announced that amendments on the bill must be
submitted by 4/8/10 in order to be introduced on 4/9/10. He
said the schedule for the meeting would be to recess at 3:00
p.m. and return to a call of the chair to hear HB 337.
1:14:27 PM
MILES BAKER, Staff to Senator Bert Stedman, Alaska State
Legislature, introduced SB 305 on behalf of the Senate Finance
Committee, sponsor. He stated that the current tax rate of oil
and gas activities is based on the combined British thermal unit
(Btu) value of oil and gas. However, oil and gas can have
vastly different values on a Btu basis. The current structure,
in conjunction with the uncertainty of future prices, exposes
the state to significant financial risk under a major gas sale.
In addition, this structure creates economic instability for any
entity that chooses to participate in the development or
financing of a natural gas pipeline in Alaska. Senate Bill 305
separates oil and natural gas for the purpose of calculating the
progressivity portion of the production tax under AS 43.55. The
intent of the bill is for progressivity surcharges for oil and
Cook Inlet and in-state gas to be calculated together - but
distinctly separate from export gas - instead of the current
practice where oil and gas are combined. However, the
progressivity mechanism is unchanged, and remains based on 0.4
percent of the production value that exceeds $30 per barrel of
oil, and $30 per Btu barrel equivalent for gas. Furthermore,
the base tax rate is unchanged at 25 percent of production tax
value. Mr. Baker gave a description of the effect of the bill
by saying it is "kind of creating two separate 'buckets' that we
use to do our progressivity calculation. Instead of having one
state-wide progressivity calculation, we would have two ... the
first would be based on oil, Cook Inlet gas, and other in-state
gas with the progressivity calculated together, and the non-Cook
Inlet gas used in state would be treated as it is now."
1:16:43 PM
MR. BAKER continued to explain that the reason for this change
is because there is some gas being produced in the state and the
lower value of that gas is combined with the higher valued oil,
and that brings down the value of the revenue to the state. The
bill, by splitting out oil and gas, would preclude producers of
gas to use that "dilution" against their oil tax liability. Mr.
Baker clarified that the intent of the bill is not to create an
additional tax liability, but the estimated cost of the dilution
effect ranges from $40 million to $170 million per year. Thus,
the state is currently giving up anywhere from $50 million to
$200 million a year. Again, splitting oil and gas directly
represents a tax increase, but this mechanism will separate the
two for the purpose of a future major gas sale, and not have the
impact affect the current minimal in-state gas use. Therefore,
the two buckets allow for the dilution effect for current in-
state gas, and for a separate calculation in the event of a
major gas sale, or for export gas.
1:19:41 PM
CO-CHAIR NEUMAN asked whether the effect on state general fund
revenue is about $2 billion.
1:20:07 PM
MR. BAKER, in response, called attention to the document
provided in the committee packet titled, "SB 305: The
Separation of Oil from Gas for the Oil & Gas Production Tax,"
from Logsdon & Associates, and dated 4/7/10. He said the chart
on page 13 shows oil and gas price parity relationships, and
that the $2 billion figure shown in scenario 3 is based on a
$120 oil price and an $8 gas price, which is a parity that is
equivalent to current prices, and what the U.S. Department of
Energy (DOE) projects for the time period at the beginning of
production from a gas pipeline. Therefore, with a $120 price of
oil and an $8 price of gas parity, under the current tax
structure and without the separation of how progressivity is
calculated, the annual tax reduction from combining oil and gas
is estimated to be $2 billion.
1:22:01 PM
REPRESENTATIVE SEATON observed the estimate on page 13 assumes
that gas is taxed separately at 25 percent plus progressivity to
generate $1.1 billion in tax revenue. He asked whether the
sponsor has confidence that this tax rate would produce a gas
pipeline.
1:22:45 PM
MR. BAKER asked for the question to be restated.
1:23:29 PM
REPRESENTATIVE SEATON restated his question, and added, "Did the
sponsor ... the Senate Finance Committee, believe that it was in
the realm of possibility that we would get a gas line at 25
percent profits tax plus progressivity?" He agreed that there
is a discrepancy in numbers; however, most of the testimony
heard by the committee asserts that those numbers are based on a
tax rate that would never produce a gas pipeline.
1:24:43 PM
MR. BAKER recognized that with the price parity projections,
there is concern that by going into an open season negotiation
with the current tax structure, there would be a negative tax
rate on Alaska's gas. He opined the sponsor feels that, at the
minimum, the tax should be zero, and that the state should not
go into negotiations "starting that far behind the power curve."
Furthermore, it was also recognized that the gas progressivity
structure, if left the same and affected by rates, slopes, and
triggers, was all "set up on oil, those were never conceived to
be the potentially proper progressivity mechanism that you would
want if you were going to tax your gas separately." Thus the
sponsor realized that all of those factors have to be on the
table for negotiation under the terms of a conditional open
season. In fact, royalty rates, progressivity, and all of
Alaska's tax structure would be part of what would be
negotiated. He concluded that splitting oil and gas results in
a tax structure that does not work well for gas, however, this
action acknowledges the state's intent to treat oil and gas
separately for the first time.
1:27:23 PM
CO-CHAIR NEUMAN, noting the approaching open season, recalled
that one of the inducements of the Alaska Gasline Inducement Act
(AGIA) was to lock in the tax rate for up to 10 years. He
questioned the wisdom of locking in the present tax rate when it
would have a negative impact on general fund revenues. In
addition, he opined the bill does not change tax structure, but
looks at oil taxes and gas taxes differently as they are both
energy producing components that are treated differently on the
world market, and have different values.
1:28:57 PM
CO-CHAIR JOHNSON referred to the previous presentation of these
estimates and pointed out that the $2 billion estimate was not a
prediction, but a number "carried out to a worst case scenario,
and somewhere in between zero, and this number, is what we're
basically gambling." He stressed that testimony by consultants
on the related House bill was identical and the estimates were
used illustratively.
1:29:57 PM
REPRESENTATIVE GUTTENBERG asked whether the Senate Finance
Committee explored any scenarios or alternatives that create a
floor, "so that it would never go below that rate, on either
side, or both, or a combination [there]of."
1:31:13 PM
MR. BAKER related that the Joint Committee on Legislative Budget
and Audit (JBUD) hired Dr. David Wood, David Wood & Associates,
United Kingdom, to create a robust model of Alaska's tax
structure, taking into consideration all of the variables and
unknowns. This model has been presented to other legislative
committees; and in fact, the first point of his analysis was
that Alaska's coupled tax structure is fundamentally flawed.
Furthermore, the analysis indicated that there are many
incentives used to encourage production, and Alaska must address
the decoupling issue and regressive taxes, such as property
taxes and royalty taxes, that are "built-in at the base level of
their business." Although Dr. Wood could address the mechanics
of the tax structure at the legislature's request, Mr. Baker
opined that the sponsor of the bill decided "to tackle the
decoupling."
1:35:24 PM
PATRICK GALVIN, Commissioner, Department of Revenue (DOR),
informed the committee the decoupling issue is complex with many
aspects to explore. He advised that his presentation is from "a
very high level [and I] tried to boil down what I see as the
issues, the policy issues, that are presented by this bill." In
addition, significant analysis has been done this session, and
the presentation attempts to cover the key points relative to
the legislature's decision-making process.
1:36:44 PM
CO-CHAIR NEUMAN asked whether this is an issue of which the
department is aware.
1:37:00 PM
COMMISSIONER GALVIN said yes. The "dilution effect" was built
into the system as an intended result of the "net base tax
system with the progressivity element." In fact, the department
testified in 2007 as to its impact on incentives for heavy oil
development and the gas project. Furthermore, in January 2008,
the department cautioned that revenue from a gas line, based on
prices then, would result in a reduction of oil taxes of about
$1 billion per year; in other words, that was presented as an
incentive for gas line development. Since then, oil and gas
prices have caused the projection of the dilution effect to be
much greater than anticipated, and the department now recognizes
that there are significant advantages, in terms of the state's
fiscal policy, of having the combination of oil and gas working
together. Commissioner Galvin acknowledged, however, that there
are extreme situations concerning the price differential between
oil and gas that need to be addressed, hence the decoupling
solution. Although there are less extreme ways to address the
situation, such as a minimum tax mechanism, the Senate Finance
Committee pursued decoupling, thus DOR has completed additional
analysis of SB 305.
1:40:10 PM
COMMISSIONER GALVIN continued to explain that his testimony
today will provide a context in which to look at the decoupling
issue, clarify where the state currently is in the gas line
development process, and examine expectations for the next few
years. Open season for the Alaska Pipeline Project (APP) begins
April 30, and Denali - The Alaska Gas Pipeline (Denali)
submitted its plan to the Federal Energy Regulatory Commission
(FEC) today. The open seasons will go through the summer, and
negotiations on agreements will continue through this year.
1:41:10 PM
REPRESENTATIVE GUTTENBERG surmised the only decoupling issue
facing the state now is with AGIA and not the Denali project.
1:41:42 PM
COMMISSIONER GALVIN clarified that the decoupling bill will
affect the economics of either project because it will become
the law of the land. He agreed, however, that the tax
inducement in AGIA is not available for the Denali project.
REPRESENTATIVE GUTTENBERG confirmed that decoupling changes the
state's tax law for all projects.
1:42:45 PM
CO-CHAIR NEUMAN asked how decoupling changes the tax structure.
1:43:21 PM
COMMISSIONER GALVIN explained that the current system combines
oil and gas and taxes them as a whole because oil and gas are
produced together. In contrast, wood and coal have energy
value, but they are not produced with oil. However, oil and gas
come out together, and if the state is going to have separate
systems to tax them, then the state's current tax system must be
changed, and SB 305 takes half of the calculation - revenue,
less cost, equal profit - and splits those costs in a way yet to
be determined. The result will be different economics for oil,
for gas, and for the taxes on the underlying profits.
Commissioner Galvin observed, "Regardless of whether the rate,
the progressivity rate, the kick-off rate for progressivity, are
changed, the fact of the matter is, we're going to end up with a
different tax system for oil then we have now, [and a] different
tax system for gas then we have now."
1:44:52 PM
CO-CHAIR NEUMAN opined that is the intent of the bill.
COMMISSIONER GALVIN agreed.
CO-CHAIR NEUMAN pointed out other gas and gas line developments
that are underway.
1:45:44 PM
COMMISSIONER GALVIN returned to upcoming events related to the
gas line projects and advised that the department is looking at
precedent agreements, full commitments from shippers,
sanctioning the project, and entering into transportation
services agreements, all effective around 2014. Between now and
then there will be ongoing discussions about project economics,
the cash flow needed by producers, and the relative risks the
state is willing to bear. At the conclusion of these
discussions will be agreement on the amount of fiscal
predictability that the producers are going to need to make
commitments. He disagreed with the initial premise that the
state's "take," including property taxes and royalty rates, is
up for negotiation. Conversely, Commissioner Galvin expressed
his belief that "fiscal certainty, fiscal predictability is
something that the producers have clearly stated they require."
However, the department looked at the economics of the project,
in terms of cash flow, and believes that under the state's
current system, as of now, there is adequate cash flow to the
producers. He stressed that the state's position should be one
of not conceding the question of whether a change in the state's
cash flow is required.
1:48:34 PM
CO-CHAIR NEUMAN recalled that one of the inducements under AGIA
is that a participant in the first open season gets a "lock-in
on your tax rate."
COMMISSIONER GALVIN clarified that the applicable rate is on the
gas production tax.
CO-CHAIR NEUMAN said his point is that the state may make full
commitments for shipping gas until 2014 at a locked-in rate, but
continue to change rates for the fiscal predictability that the
producers need.
1:49:40 PM
COMMISSIONER GALVIN explained that AGIA legislation assures a
10-year fiscal certainty aspect to gas production taxes;
however, producers have consistently said 10 years is not long
enough, and there is still uncertainty. Regardless of whether
producers qualify for the AGIA inducement, he said he expects
producers will ask for more durability and predictability after
the open season. The question remains about how flexible the
state will be in terms of its negotiation position.
1:50:40 PM
CO-CHAIR NEUMAN noted the Commissioner's reference to
assumptions and stated his concern is with the law as it stands
today.
1:50:51 PM
COMMISSIONER GALVIN said he was not contradicting current law at
all.
1:51:01 PM
REPRESENTATIVE SEATON expressed his belief that Alaska's Clear
and Equitable Share (ACES) inducement for gas was the difference
between the tax rate during the first open season and what was
subsequently negotiated.
1:51:34 PM
COMMISSIONER GALVIN advised that the inducement is the gas
production tax obligation not the tax rate, but the obligation
under the current system that sets the ceiling. He said,
"Whatever the obligation, the gas production tax obligation
that's under the current system in place, is what sets the
ceiling."
1:52:37 PM
COMMISSIONER GALVIN, in response to Representative Guttenberg,
said he would explain the difference between the rate and the
obligation later in his testimony. He then turned to the
subject of the primary considerations of today, and said that
there will be a period of uncertainty during open season when
there will be ongoing discussions in regard to the state's
fiscal system, and what needs to be in place for the long-term.
For example, if the state's interest can be protected during
this period by achieving a gas pipeline, and by securing an
appropriate share of revenue from oil and gas production once a
gas pipeline is in place. On this issue there are two
considerations: 1. whether our fiscal system is attractive
enough to get a gas pipeline project; 2. whether the potentially
locked-in portion of the fiscal system is set at an acceptable
level for the state. To address these considerations,
Commissioner Galvin said the department modeled the provisions
of SB 305, in comparison to the status quo, using broad and
varied comparisons from an oil price range of $40 to $200 per
barrel and a gas price parity range of $6 to $26. The model
also assumed oil production of 500 thousand barrels of oil per
day (500 MMbl/d); a 4.5 billion cubic feet per day (Bcf/d) gas
pipeline; operating expenses (OPEX) of $2.2 billion; capital
expenses (CAPEX) of $2.2 billion.
1:56:05 PM
COMMISSIONER GALVIN displayed a PowerPoint presentation by the
Alaska Department of Revenue titled, "Comments on CSSB
305(FIN)," and dated 4/7/10. Slide 5 titled, "In all of the
Cases Run: CSSB305(FIN) Results in a Lower "Locked-in" Gas Tax
Obligation," illustrated two buckets, one of taxes defined by
the bill and one of the status quo. Because the bill does not
set a cost allocation, there are a variety of cost allocation
methods that can be used by the model, such as an individual
basis, or formulas using a Btu barrel equivalent (BOE) basis or
a point of production (PoP) basis. He described some of these
methods and cautioned that "you get two different numbers,
wildly different numbers, and we'll show you that."
1:58:49 PM
CO-CHAIR NEUMAN asked the commissioner to identify the colored
areas on the slide. He then observed that the problem with Btu
equivalents is that not all oil and gas are the same; in fact,
there is a tremendous variation depending on the presence of
natural gas liquids. To try to base the model on a Btu
equivalent simply using "60 percent of your costs for gas, 40
percent for oil, well that gas could be so much different ...
that's the issue I've always had with Btu equivalent.... I
don't think it's an appropriate way to do it."
1:59:46 PM
COMMISSIONER GALVIN explained that if the gas stream is broken
down into its Btu equivalents, more value is given to gas that
has liquids in it, when compared to other gas, and it will take
less of it to equate to one barrel of oil. This is a method
that allows one to recognize that there is a difference in value
and quality that can be set on a volume basis. On the other
hand, the PoP value method can be used, which is based on the
dollar value of the commodity itself. He advised that different
cost allocation methods are used for analysis and because the
bill does not specify which cost allocation method is to be
used, the department has "no magic that I'm going to come up
with, through a [regulatory] process that's going to somehow,
empirically come up with one. But if you don't like Btu basis
... then it would be best to have that in the statute."
2:02:18 PM
CO-CHAIR NEUMAN restated his point that the department is using
Btu equivalencies that are based on a percentage of gas and oil
out of a well, in volume, yet the Btu values are different
across just about every oil and gas field.
2:02:48 PM
COMMISSIONER GALVIN assured the committee that the Btu value is
established based upon the quality of the product; however, he
acknowledged that at this time, there is a cause for confusion
during his presentation when he gives examples and assumptions.
He returned to slide 5 and noted that the assumption, for the
purpose of the model, is that the cost allocation would either
be on a BOE or a PoP basis, simply to make the presentation of
the results of the model easier.
2:04:17 PM
REPRESENTATIVE P. WILSON observed that the PoP is the net after
the tariff and asked, "Is that counting upstream or ... upstream
and downstream, or just downstream?"
2:04:53 PM
COMMISSIONER GALVIN said for a gas pipeline, it includes the gas
treatment plant, the main pipeline, and smaller pipelines to the
market. Those are the only costs being deducted from the sales
price to establish the PoP value. Gathering lines, processing
plants, and wells are the costs that must be allocated; thus it
needs to be determined which of the upstream costs are being
incurred to produce both oil and gas, and how much will be
deducted from oil revenue and how much will be deducted from gas
revenue. Therefore, for a point of production basis, the
percentages of the value of the gas and the value of the oil
determine the way the costs are split. He stressed that this is
not what the tax is based on, but these are the two methods
being used in the model.
COMMISSIONER GALVIN, in response to Co-Chair Neuman's earlier
question, said that on slide 5 the bar identified as
CSSB305(FIN) is the separate gas tax and the separate oil tax,
using the same tax rates that are in current law. The taxes are
illustrated as separate because the bill calculates the taxes
separately. To do that, the costs must also be separated, and
the cost allocation will make the adjustment. Slides 5, 6, and
7 do not use numbers, but merely compare the relative size of
the bars.
2:07:46 PM
COMMISSIONER GALVIN stated the right hand bar represents the
status quo under the current combined tax system, and there is
no separate gas portion or oil portion. However, because of the
AGIA tax inducement, the department had to come up with a way to
derive the gas production tax obligation so it could be compared
to some future law that may be in place. In fact, in the
present regulations, there is a method to attribute current
production tax obligations between oil and gas, so the gas
production tax can be established for AGIA tax inducement
purposes. Therefore, slide 5 shows that for all of the
different price relationships, the gas tax being locked-in
without changes is always higher than the tax set by the passage
of the proposed decoupling statute.
2:09:44 PM
COMMISSIONER GALVIN, in response to Co-Chair Neuman, said the
current system, under ACES, is the combined production tax that
results in a single number for oil and gas together, that the
producer owes to the state. For example, an oil and gas
producer has a gas line, prepares its taxes, and determines its
tax obligation to the state is $5 billion. The department,
under current regulation, uses the relative PoP value, and
determines how much is the oil portion and how much is the gas
portion. Thus the $5 billion may be divided into $2 billion for
gas and $3 billion for oil. In the same example, if oil and gas
are separated and calculated differently, the gas tax portion
will be less than $2 billion in every price comparison.
2:11:57 PM
COMMISSIONER GALVIN continued to slide 6 titled, "In All of the
Cases Run: CSSB305(FIN) Raises Oil Taxes," and pointed out that
in all of the models that were run, the separate oil tax under
the proposed decoupled law is larger than the attributed oil tax
under the status quo. Furthermore, in 90 percent of the cases
the combined tax obligation of separate oil and separate gas is
larger than when the two are combined under the status quo. It
is important to understand that while the overall state revenue
is increased by separation, the portion that is "fixed" by the
AGIA open season is always lower under SB 305 than under the
status quo.
2:13:39 PM
CO-CHAIR NEUMAN asked whether the regulations are written yet.
COMMISSIONER GALVIN said the regulations are final.
2:13:50 PM
CO-CHAIR NEUMAN surmised that the regulations are final on
evaluating PoP, yet Btu values are different. He asked whether
the regulations tell industry and the department how to tax
those different rates and volumes, based upon Btu equivalents at
the PoP.
COMMISSIONER GALVIN said yes.
2:15:03 PM
CO-CHAIR NEUMAN asked for examples from different fields for
comparison. In response to Commissioner Galvin's request for
clarification, he remarked:
You have your point of production ... at the meter ...
the point of production, and then your value of that
is based on market values, so you've got that point of
production value. Then, because the Btu equivalents
are different between different oil and gas fields ...
that produce both oil and gas, and because those Btu
values are so much different between each one of those
wells, what I'd like to see is a chart that talks
about ... the Btu value...
COMMISSIONER GALVIN agreed to provide information on potential
oil and gas mixes, the potential heat value of the gasses, and
the calculation method for establishing that value.
2:16:30 PM
CO-CHAIR NEUMAN observed that the Gubik field has a lot of
methane, and so has a very low Btu value, but possibly high
levels of gas. Therefore, the low Btu value would be a
disincentive to exploration. Co-Chair Neuman said this subject
would be discussed at another time.
2:17:46 PM
REPRESENTATIVE P. WILSON understood Commissioner Galvin to be
saying that if gas and oil taxes are separated, the state would
make more money because it would make more on oil.
COMMISSIONER GALVIN agreed. He referred back to page 13 of the
presentation by Logsdon & Associates, and pointed out that the
gas is not being taxed differently, but that the oil is getting
the full brunt of the tax against it. He said, "The oil is
paying full progressivity at that price and it's not getting the
benefit of the gas reducing the progressivity against the oil
tax." In fact, by decoupling, the state is increasing the oil
tax. He opined this change is not necessarily wrong, but that
is "the mechanics of it." In addition, he clarified that the
part being locked-in at open season is not the "so-called $2
billion loss", but is the gas production tax obligation.
CO-CHAIR NEUMAN observed that is the dispute with the numbers.
COMMISSIONER GALVIN stated the legislature's economists are not
disputing his statements - they have yet to testify on this.
2:21:09 PM
REPRESENTATIVE SEATON also referred to page 13 of the report by
Logsdon & Associates, and asked whether the amount attributed to
gas tax is higher because of the way the regulations read
regarding the PoP value. In all of the scenarios, the gas alone
tax is $1.1 billion.
2:22:09 PM
COMMISSIONER GALVIN said yes, and added that if the numbers from
page 13 are projected onto slide 5, at a $120 oil price and an
$8 gas price, the separate oil tax (green) section of the left
bar would be $6.4 billion and the separate gas tax (red) section
would be $1.1 billion. The red and green sections combined
would be $7.5 billion. The bar on the right would be $5.5
billion in total size, as the regulations take that $5.5 billion
and divide it between oil and gas; in fact, he estimated that
the red section would be $1.2 billion and the green section
would be $4.3 billion.
2:23:32 PM
CO-CHAIR NEUMAN noted some of these comparisons are shown on
subsequent slides.
2:23:50 PM
COMMISSIONER GALVIN directed attention to slide 8, titled
"Example Cases," and indicated that estimates on page 13 of the
Logsdon & Associates report are based on splitting costs by 90
percent to oil and 10 percent to gas (90:10). He stated that
this ratio represents "an extreme allocation that does not
reflect either point of production or a BOE equivalent basis."
He further explained that of the illustrated four graphs, the
first being a BOE cost allocation at $120 oil and $8 gas, which
is a 15:1 price relationship. The second was a PoP cost
allocation at 15:1. The third graph was a BOE cost allocation
at $120 oil and $15 gas, which is an 8:1 price relationship.
The fourth was a PoP cost allocation at 8:1. The first graph
also illustrates a total tax difference of about $3 billion to
the state, exclusively because the oil tax is almost double.
The attributed gas portion under the status quo is $1.2 billion,
but the separate gas tax is less, and that is the portion that
would be locked-in at open season.
2:26:54 PM
COMMISSIONER GALVIN pointed out the second graph that
illustrated the PoP method of cost allocation, and said that in
this case, $600 million in total state tax revenue is lost, oil
is reduced to $7 billion, and gas increases to $900 million.
Thus, the results of the proposed bill are dependent on the
regulations, but regardless of which, the gas tax generated is
less.
2:28:05 PM
CO-CHAIR NEUMAN said he thinks that is what the bill sponsor is
trying to show.
COMMISSIONER GALVIN agreed it is a significant tax increase.
CO-CHAIR NEUMAN recognized the different values of PoP and BOE.
2:28:39 PM
REPRESENTATIVE SEATON observed that regardless of the scenario,
if the tax is decoupled the amount of gas tax is going to be
less than the amount attributed to gas. Therefore, the state
would lock-in at open season a smaller amount of gas tax than
under either allocation scheme under AGIA.
COMMISSIONER GALVIN said yes.
2:29:57 PM
REPRESENTATIVE P. WILSON opined decoupling would raise the oil
tax.
COMMISSIONER GALVIN agreed.
2:30:22 PM
REPRESENTATIVE SEATON interjected that the significant action is
that the state would be raising the oil tax but lessening the
gas tax and, at open season, under AGIA, guaranteeing that the
companies will have the tax liability on gas as the law exists
at that time; thus the tax attributable to gas under the
combined status is higher, and if separated, there is a lower
tax liability.
COMMISSIONER GALVIN said yes.
2:31:14 PM
CO-CHAIR NEUMAN indicated that the regulations do not take into
account "higher oil tax productions."
2:31:49 PM
COMMISSIONER GALVIN clarified that the aforementioned
regulations deal with attributing the current tax obligation for
the purposes of the AGIA tax inducement. The department has
produced a book on how to value the gas and oil, and what the
tax value is; however, the department has not produced
regulations that put in place a cost allocation method for all
oil and gas, which the bill requires it to do.
2:33:08 PM
COMMISSIONER GALVIN directed attention to slide 9 titled,
"Observations," and stated that CSSB 305(FIN) increases oil
taxes, and in almost all cases increases total oil and gas
taxes. It provides a higher starting point for further
discussions with producers; however, it negatively affects
projected gas pipeline economics. In addition, it would lock in
a lower gas tax ceiling, which enhances the value of the AGIA
tax inducement, but reduces the state's flexibility after open
season. He then advised that the bill could be passed after
open season without conflicting with the AGIA tax inducement.
2:35:16 PM
The committee took an at-ease from 2:35 p.m. to 2:36 p.m.
2:36:23 PM
SENATOR BERT STEDMAN, Alaska State Legislature, said he has not
had an opportunity to review the presentation by the DOR. He
noted that over the last three months there has been concern
about the potential of a cross-subsidy at the time of the first
large gas flow from Alaska's oil and gas basin. About two years
ago, the Joint Committee on Legislative Budget and Audit hired
Dr. Wood to study the issue of the tax structure within the oil
basin, and to consult with the legislature. Senator Stedman
said the concern of some legislators was about the way the oil
tax is structured. In fact, during the discussion about the
Petroleum Production Tax (PPT), legislators took the discussion
of gas off of the table and concentrated on the oil tax,
eventually transitioning from the Economic Limit Factor (ELF) to
PPT, and then to ACES. At the time PPT was written, former
Governor Murkowski was adamant that progressivity was not to be
included in the tax. However, during the development of ACES,
the legislature included a component of PPT which was the
multiplier Btu equivalency that is part of the tax structure
today. As a matter of fact, the legislature has never taken a
policy position on the gas tax itself and as the state
approached open season, there was interest in discussing three
issues of a gas tax: the subject of HB 305, the gas tax level,
and progressivity on gas. The legislature, administration, and
the industry agreed that sufficient information was not
available at that time to develop legislation on the base gas
tax, or on progressivity. However, one component remains in the
current tax legislation.
2:40:54 PM
SENATOR STEDMAN further recalled that early in 2010, Mr. Tony
Palmer, vice-president for Alaska gas development, TransCanada,
Alberta, Canada, gave a presentation to the legislature
regarding open season and revealed a range of tariffs and
forward price expectations for oil and gas from the DOE for
2020-2030. The tariffs and price expectations were entered into
a model, and the offset to the state's gas revenue "actually
took out the royalties and then removed part of the revenue off
of oil." Senator Stedman then had Dr. Wood complete more
detailed analyses that showed the state would be facing a
significant revenue offset and basically giving away its gas
revenue, when the price ratio between gas and oil spreads.
Historically, the price ratio has been between 8:1-10:1, but the
state's tax structure is based on energy equivalency, about 6:1,
thus if the price of gas and oil is in the range of 8:1 with oil
being more valuable, the state is "relatively comfortable."
However, in the last three years the ratio has been 14:1-20:1,
and there are significant revenue offsets at 15:1. Today, DOE
expectations are 15:1-17:1, and Dr. Wood can provide projections
on how this would have affected the state's treasury.
2:43:51 PM
SENATOR STEDMAN expressed his belief that the ratio staying
around 15:1 versus around 8:1 is more probable. Clearly, DOE
forecasts and expectations are in the higher range; therefore,
the state's position is unknown. At the time of the "open
season lock-down day on May 1," the state will still have the
ability to decouple, but the impact or flexibility from that
action is substantially higher today because under AGIA, the
flexibility surrounding the gas tax is lost. He maintained this
is the cause for urgency and it is in the state's best interest
to negotiate with two separate revenue streams. In addition,
Dr. Wood has modeled the ability for the state to predict
outcomes, and illustrated that when the price multiple is moved
from 8:1-9:1 to 15:1-20:1, there are huge changes in cash flow
resulting in significant financial damage to the state; in fact,
when oil volumes are removed predictions become almost
impossible.
2:46:38 PM
SENATOR STEDMAN opined members of the legislature did not
recognize the magnitude of the state's possible loss, of around
$2 billion, when the ratio is 15:1. He argued that the
probability of an outcome that is not in the state's interest is
substantially higher than the other way around. Furthermore,
the dynamics of a global market for shale gas and liquefied
natural gas (LNG) arise as Alaska is "locked-in a position,
under AGIA, where we can't, we don't have the flexibility."
Senator Paskvan, who did not experience the PPT, ACES, and AGIA
processes, was asked to help look at the legal aspects of this
matter because, as Senator Stedman said, "Frankly, I'm very
confident, that what's going on here is a world-class petro
dollar shell game being played on the State of Alaska, there's
actually no doubt in my mind." He cautioned that the
legislature will be provided with charts, formulas, and
regulations, but the fiscal regime of every hydrocarbon basin in
the world comes down to the amount of cash flow to the industry
and the sovereign - the state and federal government - and urged
the committee to watch the cash flow.
2:49:40 PM
SENATOR STEDMAN provided the example of today's multiple of
20:1, which are an $85 oil price and a $4 gas price. Thirty
days after the gas is turned on, he predicted DOR would report
no increase in revenue, that no revenue was made from the gas,
and that the oil revenue has declined. Nowhere else in the
world is hydrocarbon given away; in fact, troubled basins are
incentivized through tax relief, royalty relief, and perhaps
progressivity, but the hydrocarbon is not given away. Senator
Stedman concluded that after all of the analyses, the answer is
found in the cash. The bill is not an incentive for the
industry and will not affect open season, but it will affect the
state's ability to protect its revenue stream from the marketing
of its gas.
2:51:54 PM
CO-CHAIR NEUMAN referred to the variance in differentials over
time and pointed out that the ratio in 1982 was 20:1. He asked
for the effect of present-day competition, pointing out that was
not an issue for energy in the '80s. Today there is financial
support from the government for hydro, solar, and wind energy;
in fact, the world has changed, and the market in America has
changed.
2:53:45 PM
SENATOR JOE PASKVAN, Alaska State Legislature, addressing the
previous point regarding the difference between the price of the
commodity and the Btu equivalency, said historically there is
deviation from the 6:1 benchmark. He questioned what magnitude
of risk that would make to the state, considering that the DOE
forecasts a ratio of 14:1-18:1 for 100 percent of the time into
the future. He advised that at 12:1 the production tax is
eliminated, at 15:1 the royalty revenue is eliminated, and at
20:1 savings would be used to export the resource. Senator
Paskvan said he reviewed this situation, "looking at it through
the legal eyes," and his alert to the attorney general
instigated almost $1 million in research by the department of
law (DOL). This is important, not because of the cost to the
state, but because it is an indication that this is an extremely
complex legal issue of "first impression" to the state, and
holds significant legal risk. Therefore, the only answer would
come at a time in the future when Alaska is being sued, billions
of dollars are at risk, and the state is waiting for a decision
from the Alaska Supreme Court. Senator Paskvan opined action
can be taken before May 1 with zero legal risk, but after May 1,
the attorney general has advised any action is subject to legal
issues. He observed that Alaska has two world-class resources,
oil and natural gas, and each resource should be addressed on
its own merits; for example, the gas pipeline should stand
alone, and decoupling now allows that to occur without the
effect of dilution on the state's treasury. Senator Paskvan
concluded that this is not a Republican or Democratic issue, but
an action to protect the state's treasury and cash flow.
2:58:24 PM
CO-CHAIR NEUMAN asked for Senator Stedman's opinion on taxing
for value based on Btu equivalent.
2:58:51 PM
SENATOR STEDMAN responded that cost allocation is a difficult
section of the bill due to its importance to cash flow between
the state, the industry, and the federal government. There were
two constraints when dealing with the issue of cost allocation:
the administration was encouraged to use a barrel of oil
equivalency through regulation, and there was an urgency to put
the bill on the House calendar. He opined there is insufficient
information to answer the cost allocation question; however, the
departments have access to confidential information and are in a
better position to find the correct answer, along with the
legislature's expert consultants. Moreover, between now and
sanctioning, that subject will come to conclusion during
negotiations between the state and producers. Senator Stedman
urged the committee to study Dr. David Wood's calculations on
the revenue impact. Even today without gas running, for Cook
Inlet and on the North Slope, the cross-subsidy impact over the
last three years is about $250 million to the treasury.
3:01:35 PM
REPRESENTATIVE P. WILSON observed that DOR scenarios indicated
that decoupling dropped the gas revenue, but increased the oil
tax. She asked whether Dr. Wood reported on this effect.
3:02:34 PM
SENATOR STEDMAN has heard a similar debate in the media and
agreed, "You could look at it that way." However, the gas
revenue is the state's revenue, not the industry's revenue.
This is not a tax increase and that argument is a bizarre twist
of the mathematics of what is going on. He remarked:
Have the gas tax calculation run and put a stack of
cash on the table, have the oil tax run and put a
stack on the table, and then start playing this shell
game, and watch the state's pile go down, and the
industry's pile go up. And everything else stays the
same. ... But to what references exactly that the
commissioner made, I wasn't in the room, I haven't
seen his presentation, so I can't really comment on
that.
3:04:05 PM
[SB 305 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 305 versionW.A.pdf |
HRES 4/7/2010 1:00:00 PM |
SB 305 |
| SB 305 sponsor statement.pdf |
HRES 4/7/2010 1:00:00 PM |
SB 305 |
| SB 305 W.A.sec.analysis.pdf |
HRES 4/7/2010 1:00:00 PM |
SB 305 |
| SB 305 40710 LogsdonAssocHouseRes.pdf |
HRES 4/7/2010 1:00:00 PM |
SB 305 |
| SB 305 1-2-033110-FIN-Y.pdf |
HRES 4/7/2010 1:00:00 PM |
SB 305 |
| HB 411A.pdf |
HRES 4/7/2010 1:00:00 PM |
HB 411 |
| SB 305 Amend WA.2 Rep. Seaton.pdf |
HRES 4/7/2010 1:00:00 PM |
SB 305 |
| 2-17-2010_MOU_AIDEA_AEA.pdf |
HRES 4/7/2010 1:00:00 PM |
|
| HB 411-1-2-030810-CED-N.pdf |
HRES 4/7/2010 1:00:00 PM |
HB 411 |
| HB 411-2-1-022610-REV-N.pdf |
HRES 4/7/2010 1:00:00 PM |
HB 411 |
| HB 411-3-1-022610-DOT-N.pdf |
HRES 4/7/2010 1:00:00 PM |
HB 411 |
| HB 411-4-2-030810-CED-Y.pdf |
HRES 4/7/2010 1:00:00 PM |
HB 411 |
| SB 305 AOGA Testimony 4.7.10.pdf |
HRES 4/7/2010 1:00:00 PM |
SB 305 |
| SB305 Dept of Rev 4-7-10 final.pdf |
HRES 4/7/2010 1:00:00 PM |
SB 305 |