Legislature(2009 - 2010)BARNES 124
04/11/2010 12:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| HB365 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 301 | TELECONFERENCED | |
| += | HB 365 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 305 | TELECONFERENCED | |
SB 305-SEPARATE OIL & GAS PROD. TAX/ DEDUCTIONS
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 the House committee substitute (CS)
for committee substitute (CS) for SB 305(RES), Version 26-
LS1577\M, Bullock, 4/10/11.]
12:38:14 PM
PAT GALVIN, Commissioner, Department of Revenue (DOR), indicated
that he would be referring to a hard copy of a slide
presentation [included in the committee packet], rather than
actually showing the slides.
12:39:03 PM
COMMISSIONER GALVIN said the slides offer modeling tables,
compare the overall oil and gas tax under SB 305 to the status
quo, and they show the oil tax and gas tax components
separately. He pointed out that 90 percent of the time, SB 305
results in numbers in green blocks, which means that it
increases the overall tax revenue to the state, except in the
few situations where there are red boxes. He directed attention
to page 20, which begins the section of the slides that shows
the modeling on gas production tax obligation, and page 21,
which shows the comparisons of the gas production tax status quo
compared to the gas production tax under SB 305. He explained
that numbers in red boxes indicate that the status quo is higher
than what it would be under SB 305. Slide 21 shows figures
based on barrels of oil equivalent (BOE) cost allocation; slide
22 shows figures based on point of production (POP) cost
allocation, which he pointed out is still mostly red boxes.
COMMISSIONER GALVIN, in response to Representative P. Wilson,
explained that the yellow boxes in the models mean that there is
no difference between the status quo and SB 305. He said, "For
those low oil prices, at any parity, there is no gas production
tax, so it's all zero. It isn't until you actually start having
a gas that's worth enough to have a gas production tax that you
see the deviation."
12:43:22 PM
COMMISSIONER GALVIN noted that across the top of the models is
shown the oil prices, and in the left-hand column is shown the
gas price parity - the ratio between the oil and gas price. He
demonstrated that at an oil price of $40 and a gas parity of
8:1, the price would be $4. Commissioner Galvin said one
determination that was made was, under SB 305, how far costs
would have to be pushed to oil in order to make the gas
production tax obligation higher after decoupling. He stated a
figure of 90 percent and said the results are shown on slide 24.
He said the rest of the models show varying assumptions,
including lower oil production.
12:45:32 PM
REPRESENTATIVE TUCK asked what has to be done in order to push
the cost to 90 percent oil and 10 percent gas.
COMMISSIONER GALVIN responded that since the statute does not
indicate a cost allocation method, the potential allocation
method is "somewhat loose." He explained that the department
would have to go through a regulatory process to develop that.
He stated that the volume metric BOE basis and the POP basis are
fairly straightforward, but other methods could be used that
would result in different allocations. He said production could
be set up at 100 percent, so that, for example, only those costs
that are 100 percent gas would be attributed to gas. He said
the department was not trying to identify a particular method,
but rather was attempting to determine: "If the method [that]
was chosen resulted in this kind of disparate treatment of
costs, how far would they have to go in order to cause a
different outcome?"
12:47:19 PM
COMMISSIONER GALVIN said the charts are significant. The charts
that show a lot of green boxes indicate that under SB 305, the
overall revenue would be increased. However, he emphasized that
it is important to note that "this is not locked in." In fact,
he recollected that the presentation to the committee on 4/10/10
"indicated that it's expected that it will be negotiated down."
However, he said the slides, starting with 21, show what is
going to be locked in. He said, "The red part is what gets set
in the [Alaska Gas Inducement Act] AGIA inducement." The state
gas tax obligation will be lower.
12:48:23 PM
CO-CHAIR NEUMAN directed attention to the model charts on slides
3 and 21, and noted that they are basically an inverse of each
other. He offered his understanding that the figures in red on
slide 21 are locked in, while the figures in green on slide 3
get locked in.
COMMISSIONER GALVIN responded that that is not correct. He
explained that on slide 3, the only figures that are locked in
are those in red. He said, "The oil portion is not locked in."
He noted that some of the statements that had been made during
the 4/10/10 hearing indicated that there is some confusion on
this point. He offered further clarification, noting that the
gas tax obligation is locked in at the open season, while the
oil tax portion is not. Therefore, the numbers in green are not
locked in. Furthermore, he offered his understanding that it is
the expectation of the bill sponsor that those numbers are going
to change before gas is actually produced.
12:50:23 PM
CO-CHAIR NEUMAN responded that the discussion is about gas
obligations that would be locked in at the start of the open
season, as with AGIA, not about locking in oil.
COMMISSIONER GALVIN said that is right, which, he explained, is
why the discussion about a $2 billion loss is not a reflection
on what is actually being locked in; that is not part of the
dynamic. He concluded, "What's being locked in is the gas
portion of it, which is going to lower under SB 305 than under
the status quo."
CO-CHAIR NEUMAN said he thinks Senator Stedman had [at a
previous meeting] tried to make the point that the value of gas
to the state is considerably lower. He said the amount of
revenue from oil and gas that the state would be taking in to
the General Fund revenue would be lower "because the gas prices
are so much lower, and it dilutes the price of the oil."
COMMISSIONER GALVIN answered that is correct. He said that
would be in effect when gas is shipped only if the legislature
"decides not to change that between now and first gas."
CO-CHAIR NEUMAN said, "Only if we don't decouple it."
COMMISSIONER GALVIN responded no. He explained that there are
other ways of dealing with it without decoupling it.
12:52:05 PM
REPRESENTATIVE TUCK, based on what was just imparted, offered
his understanding that because of the current structure in place
going into open season, the state is not locking in oil taxes
whatsoever, but is putting a system in place that producers can
take advantage of when the first open season begins. So, there
is no dilution effect, unless the state allows the status quo to
continue after the gas taxes have been set. He said the state
has the opportunity to make changes later on. He concluded,
"All we're really talking about is locking in the gas rate at
open season."
12:53:13 PM
COMMISSIONER GALVIN replied that is correct. He reminded the
committee that because of what the modeling results show, if the
status quo is left in place through the open season and the
higher gas tax amount is locked in, and then SB 305 is passed,
the end result will be the same. He explained, "You can
decouple afterwards in the same manner SB 305 proposes, and the
lock-in at the open season will not impact that; you're not
losing any ground."
12:53:53 PM
REPRESENTATIVE TUCK asked if "going to one bucket, two bucket,
back to one bucket" would have the same effect as postponing SB
305 until after open season.
COMMISSIONER GALVIN answered no.
12:54:32 PM
REPRESENTATIVE GUTTENBERG, using a combination lock as a
metaphor, described oil, gas, parity, cost allocation, and the
dilution effect as ongoing, fluctuating components, and
described the gas tax [obligation] scheduled for May 1 as the
one tumbler that locks in place. He asked how long all the
other components would remain in play.
COMMISSIONER GALVIN responded, "If somebody qualifies for the
AGIA inducement, then they would have the right to that for 10
years after first gas."
REPRESENTATIVE GUTTENBERG, regarding the "one bucket, two
bucket" scenario, asked if that entity would "come back and
negotiate the fiscal terms."
COMMISSIONER GALVIN answered, "That was what was presented
(indisc. - overlapping voices)."
12:56:19 PM
REPRESENTATIVE P. WILSON said she knows it is the gas
obligation, not the gas tax, which gets locked in, but she asked
Commissioner Galvin to shed light on that issue.
COMMISSIONER GALVIN said under the AGIA inducement, tax
obligation on gas being shipped will be calculated under the
taxes in place at the time. Those taxes are then compared to
the gas production tax obligation under the tax system that was
in effect at the beginning of the open season. He said, "It's
the dollar amount that you would owe under the tax system in the
future compared to what you would owe under the tax system at
the time of the open season."
REPRESENTATIVE P. WILSON asked what the obligation would be
right now if gas was being moved. She said she knows
percentages and volume are not part of the calculation, but
numbers are, and she asked Commissioner Galvin to offer a
comprehensible explanation using numbers.
COMMISSIONER GALVIN responded that currently gas is not taxed
separately; therefore, there is no separate gas tax rate.
CO-CHAIR NEUMAN asked, "What is the tax rate on gas right now,
then?"
12:58:33 PM
COMMISSIONER GALVIN responded, "It is the combination of the oil
and the gas taxed at 25 percent, plus progressivity." He
continued as follows:
If you only had gas production, then that gas
production would be taxed at 25 percent, plus
progressivity. What we do for the purposes of being
able to calculate your gas production tax obligation
under today's system, is we allow you to basically
calculate your total tax obligation under oil and gas
combined. ... So, you take your oil and your gas
production together, and you combine them under the
current system, to establish what your overall tax
obligation is. And then we use the percent of value
represented by the oil and the gas to take
proportionally that obligation and split it between
oil and gas. And so, depending on the amount of a
particular tax payer's oil and their gas, their
overall rate, as it were, will be different. But what
the modeling shows is that that method of combining
your oil and your gas, taxing at today's system, and
then [proportioning] that obligation between oil and
gas results in a higher gas production tax obligation
than what you would get if you calculated your tax
separately under SB 305.
1:00:45 PM
REPRESENTATIVE P. WILSON offered her understanding that
Commissioner Galvin is saying that overall it is best to
separate, because that will result in a higher obligation to the
state.
COMMISSIONER GALVIN responded that as it is currently
structured, there will be a lower obligation to the state under
the separate calculation than under the current calculation; a
lower obligation to the state would be locked in. In response
to Co-Chair Neuman, he said he means under gas; he explained,
"They have no lock-in on their total obligation." The total
obligation calculated would generally be higher when oil and gas
are calculated together. He added, "But the oil portion is not
locked in; only the gas portion is being locked in."
REPRESENTATIVE P. WILSON asked, "So, why would we do that if
it's going to be less money to the state."
COMMISSIONER GALVIN said he thinks the argument is that doing so
would provide further inducement at the open season. He
deferred to the bill sponsor for further reasons.
1:02:21 PM
REPRESENTATIVE P. WILSON surmised that the idea is to offer
inducement through a good deal on gas, and "as soon as they get
that, then they're going to start working on us on the oil."
COMMISSIONER GALVIN said he thinks that is the idea behind "the
two bucket thing."
REPRESENTATIVE P. WILSON proffered that the legislature must
decide if this is a good idea.
COMMISSIONER GALVIN concurred that that is the job of the
legislature.
1:02:54 PM
REPRESENTATIVE SEATON, directing attention to slides 21 and 22,
surmised that whether a BOE or POP allocation, the state would
be locking in a much lower rate on gas for the start of open
season if it adopts CSSB 305(FIN).
COMMISSIONER GALVIN replied that he would not say that in all
cases the state would locking in a much lower rate; he said it
generally would be the same or lower, and only sometimes much
lower.
REPRESENTATIVE SEATON, directing attention to the [yellow] boxes
in the charts on slides 21 and 22, offered his understanding
that "the only place where it basically appears to be the same
in those is where it's zero."
COMMISSIONER GALVIN answered, "Generally it's where ... you're
moving the costs to the side where you're lowering the gas value
to the point where there isn't much tax being acquired under
either system."
1:04:33 PM
REPRESENTATIVE SEATON, regarding Version M, "where we are
rolling it in for a day or two and then rolling it out," asked
how the calculations would be made and what the administrative
liabilities or complications would be "on a short window of
lock-in."
COMMISSIONER GALVIN answered that they would be significant. He
said the department anticipates a tremendous amount of work to
establish the two-day cost allocation and accounting method. He
indicated he is talking about a method by which accounting would
need to be taken care of for two days a month when calculating
progressivity and two days a year when calculating base tax. He
said there are seven different buckets to allocate between, and
then some would be combined, and he predicted that would "take
some figuring out." He said the Department of Law and
Department of Revenue have been struggling over the last 24
hours to figure out how exactly this would be done, and there
are still a lot of unanswered questions. He said, "For us it
raises significant concerns about ... what would happen if you
actually did this sort of two-day gimmick of popping [in] a tax
system ... in a short period of time."
1:06:37 PM
REPRESENTATIVE SEATON asked if the administration would be
constrained in its ability to negotiate gas and oil during the
operation of the pipeline if there are conditional bids during
open season and negotiations on fiscal terms is anticipated.
COMMISSIONER GALVIN responded that if the gas tax obligation
that has been locked in is lowered, then arguably that would
potentially impact what the expectations of the parties are in
terms of what they have already acquired a right to and "what
they would be seeking to work outside of that." Regarding
[Version M], he expressed concern about the gimmick of "having
the tax kind of pop in for two days and pop back out." He said
the Department of Law finds no precedent for this and does not
know what kind of legal issues that may raise. It could have a
detrimental impact, because it creates a sense of, "Well, what
did you do, what was this two-day thing?" He said decoupling or
not decoupling and when it happens or doesn't is a policy call.
Version M, he stated, "throws a whole different layer on top of
that," which he said is, in and of itself, troubling. He
recommended that the state make a decision on which tax system
it wants and put it into place.
1:09:54 PM
COMMISSIONER GALVIN, in response to Co-Chair Neuman, said the
current tax rate on oil and gas is 25 percent plus
progressivity. If SB 305 is passed, then there would be one
rate on oil and one on gas, and although they would be the same
rate, decoupling would result in much different tax obligations
to the State of Alaska. In response to a follow-up question, he
clarified that the gas production tax that is being locked in
would be lower if [SB 305] is passed, while the overall
obligation of oil and gas would be expected to be higher.
1:11:28 PM
CO-CHAIR NEUMAN clarified that he wants to know what the total
effect would be to the General Fund revenue, and he offered his
understanding that Commissioner Galvin had just said that with
or without decoupling, gas and oil will both be taxed at 25
percent plus progressivity. He further offered his
understanding that under AGIA, rates for gas will be locked in
for up to 10 years, so that at the projected rates, there would
be a decline in revenue to the state's General Fund.
COMMISSIONER GALVIN said that is not correct. He explained that
"the chart with all the green" - the chart that shows that the
tax revenue is going to go up with SB 305 - is not being locked
in. He observed that the committee seems to be in confusion
regarding this issue, and he emphasized the willingness of the
Department of Law to come offer clarification. He stated that
overall, oil and gas obligation is not being locked in; what is
being locked in is the gas production tax portion that is lower
under SB 305.
1:13:12 PM
REPRESENTATIVE NEUMAN said, "So, the ... gas tax obligation will
be locked in."
COMMISSIONER GALVIN answered, "No, it is not. The overall gas
direct tax obligation is not locked in."
REPRESENTATIVE NEUMAN said, "Not the obligation, but the tax
rate."
COMMISSIONER GALVIN responded, "No, it's not locked in either.
You can change the oil tax any time after the open season."
CO-CHAIR NEUMAN observed that Commissioner Galvin had just said
oil tax, and he said, "The gas tax will be 25 percent plus
progressivity."
COMMISSIONER GALVIN corrected, "No, it won't. The gas
production tax obligation that is calculated under the current
system, which includes the regulations, is locked in - not the
rate."
CO-CHAIR NEUMAN asked, "So, the 25 percent plus progressivity is
not locked in?"
COMMISSIONER GALVIN answered, "No, it's not."
1:13:54 PM
CO-CHAIR NEUMAN offered his understanding that previously
Commissioner Galvin had said it was, and he said he is confused.
COMMISSIONER GALVIN denied he had done so. He indicated that
previously, when it was suggested that the tax rate was being
locked in, he had specifically said it is not being locked in.
1:14:12 PM
REPRESENTATIVE EDGMON offered his understanding that decoupling
would increase the overall tax obligation "on the oil side of
the equation," and he opined that that may be a disincentive and
could "engender certain behavior by the industry." He said,
"So, the notion that ... this is all about oil, and that it's
going to create more revenue for the State of Alaska over a
period of time, has to undergo that test of the reality of maybe
the higher tax, by virtue of decoupling, having an adversarial
impact on the oil industry's behavior ...." He asked Mr. Marks
if that is correct.
COMMISSIONER GALVIN answered yes.
1:16:08 PM
REPRESENTATIVE TUCK, referring to Version M, stated his
understanding that once there is a gas production tax obligation
determination in open season, potentially revenues to the state
of oil and gas combined may decrease. However, initially the
gas portion will be higher under status quo. He asked if a
comparison has been made as to "what we would have in that
scenario" with production profits tax (PPT). He asked, "Would
we still be up from where we were in 2007 under PPT program,
revenue-wise?"
COMMISSIONER GALVIN answered that the issue "cuts" a couple
different ways. He said the dilution effect of oil & gas is
exacerbated by the steepness of the progressivity (indisc.),
because what is happening is that as gas is brought in, the per
barrel profit of the oil, combined stream, is being lowered, and
because the progressivity line was steep, progressivity is
falling at a rapid rate, bringing down value, as well. He said
to answer Representative Tuck's question, he would have to
compare two different numbers, and so, the answer is probably
not one or the other. Using $120 oil and $8 gas as an example,
he said the current tax system is bringing a lot more at $120
oil. He mentioned slides that show, under a combined system,
$5.5 billion, which is considered to be a huge loss to the
state, and he said that under PPT, that amount would not get
"anywhere close to $5.5 [billion]," because there would not be
$120 oil.
1:19:19 PM
CO-CHAIR NEUMAN questioned if consideration is being made to go
back to PPT.
REPRESENTATIVE TUCK said "all this" was determined during
discussion of Alaska's Clear and Equitable Share (ACES); back
when the state was figuring out what needed to happen to get a
gasline going. He said "this coupling situation" could be
viewed as a form of incentive to get a gasline going for the
state by allowing tax breaks to the oil industry. He said he is
talking about behavior change. He expressed concern in going
into open season without as much revenue leverage for
negotiations "under just gas." Furthermore, he expressed
concern regarding the opportunity for the oil and gas industry
to take advantage of "maneuvering towards gas" by allowing
discounts for oil. He opined that the state would still be
better off than it was with the 2007 PPT plan "if we leave it as
it is and go status quo."
REPRESENTATIVE TUCK said one policy decision is whether to keep
things at status quo, where the oil and gas industry knows what
to expect and the state has more leverage going into
negotiations, or to decouple because of the concerns of the lost
revenue that the State of Alaska will have. He questioned what
the effects of decoupling would have on future gas negotiations,
because there will be less revenue coming in under the gas
portion of decoupling. Version M, he highlighted, proposes a
system "where we opt in and out." He offered his understanding
that most oil and gas producers are actually looking for oil but
finding gas along the way; they are able to "write off what they
find in gas," but they may not be able to do so under the
decoupling plan. He said, "I think that's the reason why ...
we're going to this ... one bucket, two bucket, one bucket
(indisc.)."
REPRESENTATIVE TUCK said he wants to see comparisons between the
proposed plan and PPT.
1:23:03 PM
COMMISSIONER GALVIN said he thinks it would be an intriguing
point of reference to go back to PPT, and he said he would
attempt to formulate that model as soon as possible.
1:23:18 PM
CO-CHAIR JOHNSON said he thinks Representative Tuck's comments
are accurate. He proffered that the purpose of [Version M] and
"one bucket, two bucket, one bucket, two bucket" is to protect
producers for cost allocation, so that if producers drill,
allocating against gas, the producers would not be able to write
that off until they sell the gas. He said it doesn't really
have anything to do with whether or not decoupling happens.
1:24:20 PM
REPRESENTATIVE SEATON stated his understanding that the dilution
effect between oil and gas is beneficial to production,
drilling, and getting development going; however, a policy call
is being made that as soon as gas starts down the pipeline, the
dilution effect would be negative, and the state wants to get
the maximum tax from oil, without any dilution effect from the
gas rate. He asked for confirmation that that is correct.
1:25:48 PM
CO-CHAIR JOHNSON clarified that "the amendment" has nothing to
do with whether or not he supports decoupling; it is an
opportunity to protect against cost allocation problems that
have been brought to his attention. He expressed his wish to
see the bill moved out of committee "with a protection that
doesn't disincentivize production."
1:28:46 PM
REPRESENTATIVE SEATON asked Co-Chair Johnson to confirm that he
is talking about [Amendment 4], which is contained within
Version M.
CO-CHAIR JOHNSON said that is correct.
REPRESENTATIVE SEATON said he understands the amendment, but
that is not the only thing that may pass out of committee; the
purpose of the bill is to decide whether to couple or decouple.
CO-CHAIR JOHNSON clarified that he does not think the larger
policy call regarding coupling or decoupling has to do with
bucket progressivity calculations. He continued as follows:
We're spending an awful lot of time on the two days -
the window, and I want to be very clear why that was
done: not to doing anything, not to lock anything in,
wish we didn't have to do that; it is to protect
future investment so that they can allocate their
costs in a way that they can ... best maximize what we
did when we passed ACES.
1:31:00 PM
REPRESENTATIVE SEATON asked, "So that's what the amendment does
between now and the flow of gas at 1.5 [billion cubic feet]
Bcf/day?"
REPRESENTATIVE JOHNSON said [Amendment 4] locks in a structure
for cost allocation and taxes. The bigger issue, he said, is
whether to chose coupling or decoupling. He reiterated that the
committee is spending a lot of time on the bucket issue, and he
would like the focus to be on coupling and decoupling.
1:32:11 PM
COMMISSIONER GALVIN, as a tax administrator, beseeched the
committee not to put in place a two-day tax policy. He
continued:
You can add in a cost allocation in the statute that
says that costs will be allocated based upon current
production, not upon some expectation of future
production, and relieve this concern and have it so
that you have a system in place on one day and a new
system the next day, and that's the tax policy of the
state. To have it come in, come out, come in, come
out ... [is] just not good tax policy.
COMMISSIONER GALVIN, in response to Co-Chair Neuman, said taxes
for progressivity are done monthly, and taxes for the 25 percent
base are done annually. He explained that taxes on
progressivity are based on a monthly average price of oil and
gas, which is why he is concerned about the proposed two-day
separate tax system. He said daily production numbers are
available; however, what is not known are: the selling price,
the costs for that particular day, and how to take those costs
and attribute them to a single day's worth of activity.
CO-CHAIR NEUMAN suggested that if the two-day plan saves the
state billions of dollars, then perhaps the department could
afford additional staff to manage it.
COMMISSIONER GALVIN remarked that if the plan were to save
billions of dollars, then it may be worth it.
1:34:44 PM
REPRESENTATIVE EDGMON opined that this is an important point.
He offered his understanding that it is not possible to
predetermine what oil revenues would be in the future.
COMMISSIONER GALVIN said one issue is regarding what could
potentially happen at the end of the month if the state shifts
to a different tax system for two days.
REPRESENTATIVE EDGMON emphasized that there is no way to predict
that the state will have so much more money by shifting the
taxes for two days that it will be able to hire more people in
the department.
COMMISSIONER GALVIN responded:
No, we won't have any more money this year as a result
of this. In fact, we're going to lock in a lower tax
rate, so there's no guarantee of more money anywhere
down the line.
1:36:22 PM
REPRESENTATIVE EDGMON observed that many suppositions are being
made, and he offered his understanding that the administration
is saying that it is difficult to base a model upon supposition.
He said he wants to know if a plan is actually going to make
money for the state.
CO-CHAIR NEUMAN related his understanding that the plan is not
formulated to gain money, but to protect the state against
losing money.
1:37:38 PM
REPRESENTATIVE GUTTENBERG asked if an analysis has been done by
the Office of the Attorney General regarding [the two-day tax
shift].
COMMISSIONER GALVIN answered yes. In response to a follow-up
question, he said he would prefer that someone from the Office
the Attorney General relates the details of the analysis to the
committee.
1:38:34 PM
REPRESENTATIVE SEATON offered his understanding, based on all
the examples the committee has been given, that the current
system of taxation based on $128 BOE gives the state $5.5
billion in tax revenue, and "if we split them apart, we'll be
able to get ... $ 3 billion more revenue from the oil company."
He said he is confused, because he has heard from oil companies
and some testifiers that "tax extractions from the North Slope"
are too high, and bills have been introduced to lower tax rates
and progressivity. He asked Commissioner Galvin if he thinks an
annual increase from $5.5 billion to $8.8 billion "extracted
from producers on the North Slope" would have an effect on
exploration, production, and operation on the North Slope.
1:40:15 PM
COMMISSIONER GALVIN said that would depend on the profitability
of the operations in general. He explained, for example, that
just because one tax obligation is higher than another, doesn't
automatically make it a less attractive investment fund. He
continued:
That said, when you look at the stated expectation of
getting this maximum dollar that's identified - if you
separate the two and ... keep the same system - I
think that calls into question whether or not that
provides an incentive for participation in a gas
project. That number's fairly significant, and it
does not react to changes in prices like you'd like to
see if you were an investor worried about your
(indisc.).
1:41:24 PM
REPRESENTATIVE JOHNSON asked Commissioner Galvin if he
understands what it is he is trying to do in regard to the
"start/stop." He stated, "This is what [Legislative Legal and
Research Services] came up with as a solution to my very simple
request." He said he has a conceptual amendment that he does
not think would quite work, because he said he thinks "for a
period of time in between, the little guy's hurt - the explorer
who has no production." He asked Commissioner Galvin if he
could come up with an amendment to SB 305 so that the cost
allocation would be applied to oil and the cost allocation
between gas and oil would not be separated during the period
until first gas flows. He said neither he nor Legislative Legal
and Research Services could do so.
1:42:36 PM
COMMISSIONER GALVIN responded that there is a two-step policy
call that would have to be made for that purpose. The first
step is to choose a cost allocation method based upon either BOE
or POP value. That allows the second step to be taken, which is
that cost will be allocated based on current production rather
than anticipation of future production. He emphasized that
without knowing the actual underlying allocation methodologies,
it is difficult to "write the second step." He concluded, "And
so, if you want to go through both those steps and put that in
place, then, yes, we can ... help write that for you." In
response to a follow-up question, he said the cost allocation
method for the Cook Inlet to North Slope relationship was on a
BOE basis; there is no law of the land in terms of overall cost
allocation.
1:44:11 PM
COMMISSIONER GALVIN, in response to Co-Chair Neuman, stated,
"The way that we value gas is we use a [British thermal unit]
Btu equivalent in order to be able to blend it with oil; that's
your BOE combination." He offered his understanding that Co-
Chair Johnson is asking what current cost allocation method is
being used in "the one portion of the law in which we allocate
costs." He continued as follows:
And in that we use a volumetric basis that would use a
Btu equivalent. So, we can do that and expand that
within this law to say that will be the system that's
used across the board, and then we can say that it
will be based upon the current production level." We
can also ... give you both if you want; I can write
one that says it's going to be on the relative value
of the point of production, and then it will be
allocated based upon current production, as well.
1:45:49 PM
REPRESENTATIVE JOHNSON asked Commissioner Galvin to explain how,
after May 1, the state can go back to "doing it the way we are
today."
1:46:12 PM
COMMISSIONER GALVIN said there are two issues created today by
decoupling: the state currently allows producers to blend their
oil and gas when calculating their progressivity rate; and the
state has a different methodology to determine the tax
obligation for gas that's produced in the state and for oil or
gas that is produced in Cook Inlet, but allows all that to be
blended for the purposes of determining progressivity for North
Slope oil. He continued as follows:
The way that the bill is currently structured ...
requires us to break it down into even buckets between
Cook Inlet oil, Cook Inlet gas, North Slope oil, North
Slope gas, and then blend the ones that we want to
blend currently, and have those blended throughout so
that we can have a system that sustains the open
season and into first gas, and we don't have to have
things change around.
You can do a cost allocation method that ensures that
the costs are going to flow with the production and
into the bucket that you're trying to have them apply
against. I think that's what Roger attempted when he
wrote the conceptual amendment he described, and we
can work with him to refine that, so that that's the
way that it would flow. But it has to have, as a base
assumption, that you're either going to use a BOE or a
POP methodology.
REPRESENTATIVE JOHNSON requested that Co-Chair Neuman write both
amendments. He asked Commission Galvin if he has the
aforementioned conceptual amendment.
COMMISSIONER GALVIN answered yes.
1:48:09 PM
CO-CHAIR JOHNSON said:
The concern is that -- and the committee can have this
if they want to see what we're -- I think they may
already have it -- but two -- number one works
(indisc.) people no production that are ... only
explorers and no production, it might, during the
period of time, if the open season was expanded to
more than a few days, they might have no place to
apply their ... cost. So, if we could fix that point
in this conceptual amendment, I'm more than happy to
shred this. This is what our legal department came up
with as a solution to the problem.
Then we get on to the bigger policy decision of
whether or not we want to couple or decouple.
1:49:09 PM
CO-CHAIR NEUMAN offered his understanding that not all oil is
the same; the amount of Btus makes a difference, and if it has
more energy it is worth more.
COMMISSIONER GALVIN responded that Btus make a difference in
regard to gas; however, with oil there are other issues with
regard to impurities, et cetera, which establish the quality and
value.
CO-CHAIR NEUMAN recollected being told that dry gas with a lot
of methane lowers the value of the gas, whereas Prudhoe Bay gas
or white gas with a lot of natural gas liquids in it is worth
more, based on a Btu value. He said, then, that it is necessary
to look at the quantities of gas and the value of it based on
the Btus. In other words, he concluded that the amount produced
multiplied by the Btu equivalent value equals the value of the
gas.
COMMISSIONER GALVIN said there are more regulations involved;
however, in response to Co-Chair Neuman, he said that is "one
way to look at it."
1:51:14 PM
REPRESENTATIVE TUCK offered his understanding that it has been
determined that the state would not lock in the dilution effect
when it goes into open season in status quo; therefore, the
state would not be locking in oil taxes. Furthermore, there is
a concern that the state wants to keep things status quo, which
is why Version M is before the committee, "to opt in, opt out,
or go from one bucket to two buckets, [and] back to one bucket."
He offered his understanding that the reason to go back to one
bucket after a couple days is "to protect the gas and how it's
combined with oil currently, so that oil and gas producers can
continue with that tax advantage." Furthermore, he said "we" do
not want to stifle the future of gas production by prematurely
decoupling.
REPRESENTATIVE TUCK, regarding Co-Chair Johnson's concern about
what decoupling would do to the current system until gas starts
flowing, said it almost sounds like it would be better to wait
to "do something like SB 305 until after open season."
1:54:32 PM
The committee took an at-ease from 1:54 p.m. to 1:56 p.m.
1:56:58 PM
ROGER MARKS, Consulting Petroleum Economist, Logsdon &
Associates, told the committee that he would discuss the tax
under the status quo versus decoupling, including what the
numbers mean, what rates are behind them, and why one appears to
be so much higher than the other. He directed attention to a
slide presentation in the committee packet labeled "SB 305:
Notes on Operation of Tax," which he said was presented on April
9 and was mistakenly labeled SB 350. He then directed attention
to slide 6 of that handout, to the tax amount made under
decoupling, which is $333,539,063. He said that number divided
by the gross rate is approximately 6 percent of gross. He
recollected that someone had asked if that is similar to the
economic limit factor (ELF) and whether it is a good idea to
compare it to ELF. Mr. Marks said he would give a different
perspective.
MR. MARKS said the $333,539,063 was derived through the current
tax, which is 25 percent of production tax value, plus
progressivity, minus credits. He said decoupling does not
change the tax rate; the rate would be locked in under SB 305.
He relayed that this tax rate came out of ACES, and "insofar as
ACES was appropriate then, it's appropriate now." He explained
that because this is a net tax, as prices and production tax
value rise, the tax, as a percentage of gross value, would be
much higher.
1:59:53 PM
MR. MARKS reviewed that under the attributed gas tax - DOR's
methodology using the status quo of allocating the total
combined tax - the amount is $1,199,688,523 [shown on slide 4];
under decoupling, the total is $333,539,063.
MR. MARKS related that in marketing there is a term called
anchoring, which is when marketers plant suggestions as to the
worth of a product, often using what is a called the
manufacturer's suggested retail price (MSRP), and then lower the
price to make people think they are getting a good deal. He
offered examples. He said price anchoring is what is going on
in terms of the $1,199,688,523 versus the $333,539,063. In
response to Representative Tuck, he explained that he is
suggesting that committee members are looking at the
$333,539,063 and thinking that that is a low number, because
they are comparing it to the $1,999,688.523. He said the latter
number is high because of certain problems, which he said he
will define.
2:04:29 PM
REPRESENTATIVE TUCK offered his understanding that these numbers
were provided by Mr. Marks, and they are numbers that he is
"using."
MR. MARKS confirmed that is correct. Regarding the perception
that the $1,999,688,523 is too high, Mr. Marks said "when you
combine things," the result is the dilution effect, by which oil
gets "diluted down" and gas gets "diluted up." When both oil
and gas are combined, the progressivity is being calculated on a
production tax value per BOE equivalent of $46.98, which when
put on a gas net value per Btu is $7.83. When oil and gas are
decoupled, the value of gas, undiluted by the oil, is apparent;
when oil and gas are coupled, the gas value is being diluted by
the oil to the $7.83 amount. The net value per BOE of the gas
alone is $9.98 or $1.66 thousand thousand British thermal units
(MMBtu). When combined, he said, the gas gets valued as if it's
worth $46.98 or $7.83/MMBtu, thus under status quo, that gas
with a value of $1.66 is being taxed as if it has a value of
$7.83. He said that is one reason why the gas tax shown under
status quo is so high.
2:06:34 PM
REPRESENTATIVE P. WILSON asked:
The real reason that we do it is so that they don't
have to pay as much oil tax, because we're diluting
the gas and the oil, and what this is allowing them to
do is take off more expenses, right? So, that's why
we did it, really, all together like that?
MR. MARKS indicated that the answer depends on whether history
is interpreted such that it was intended that oil and gas should
really be combined to compute the tax. He added, "And the way
the tax was written it does this, but it's an effect that
happens when you combine them." He offered his interpretation
that when PPT and ACES were enacted, people were focused on oil
and it applied to gas "by happenstance."
2:08:28 PM
MR. MARKS, in response to a follow-up question, said right now
there is no gas that is diluting the oil, but with decoupling,
all the costs would get to be deducted, and the decision would
need to be made as to how much cost is oil and how much is gas.
2:09:46 PM
CO-CHAIR NEUMAN opined that absolutely nothing would be done
except for in two days.
2:09:54 PM
REPRESENTATIVE TUCK recollected that someone had remarked that
decoupling was never an issue in ACES. Conversely, he pointed
out that during discussions of ACES there was a lot of talk
about the coupling and decoupling issue.
MR. MARKS said his views are subjective, and the views of others
may differ.
2:11:21 PM
REPRESENTATIVE SEATON relayed that when he was on the House
Resources Standing Committee during the discussions on PPT, the
committee considered progressivity, so, the issue is not
unanticipated. Regarding Mr. Marks' previous explanation of
price anchoring, he said he thinks folks are more sophisticated
than that. He said that in the past, [the House Resources
Standing Committee] talked extensively in an attempt to
determine the proper Henry Hub and accelerator or decelerator
for taxes. He said the whole purpose was to leave them together
so that at negotiations the state could determine the proper
relationship based on project cost and prices. He said he has a
problem with the committee now attempting in one week to
determine that the attributable costs are wrong and determining
that another method should be chosen in order to fix a
contribution from a gas tax for ten years after gas flows. He
questioned the attempt to fix rates and the tax obligation
calculated on gas production tax without the experts present.
REPRESENTATIVE SEATON asked Mr. Marks:
If you were going into negotiations on a pipeline,
would you expect the ... MSRP to fool the oil
companies; would you like to have your hands tied at a
low rate before you ever went in; or would you like to
have all of those issues on the table ... to be able
to negotiate from a much stronger position?
2:14:11 PM
MR. MARKS clarified that his purpose in bringing up the MSRP
analogy was to indicate why people may think the $333,539,063 is
too low, because they have the $1,199,688,523, which is based on
the combined methodology. Furthermore, he said the analogy was
to show that the $333,539,063 is based on the 25 percent tax
rate in ACES, which is in place now and would be locked in, and
to explain why there are "some problems with that high number" -
why it may not be a productive number to lock in going forward.
The analogy was not brought up as a means to discuss negotiation
intricacies with the producers, he said.
MR. MARKS referred to a chart that he said he handed out "this
morning."
2:16:02 PM
REPRESENTATIVE P. WILSON asked, "Just so I understand, the ...
first two columns are decoupled, so, the second two columns are
what?"
MR. MARKS answered that the first two columns include the exact
same data that is on [slide] 6, which is that with oil and gas
decoupled, the tax rate with progressivity is 53.99 percent for
oil and 25 percent for gas.
CO-CHAIR NEUMAN asked Mr. Marks to explain decoupled tax rates
and implied attributed tax rates.
MR. MARKS, regarding implied attributed tax rates, said when oil
and gas are decoupled, the result is the ability to see what oil
and gas are worth individually, undiluted by each other. When
combined, the tax is based on $46.98, and the value of the oil
has been diluted down, while the value of the gas has been
diluted up. Under decoupling, the oil is worth $102.48; the gas
is worth $9.98 per BOE or $1.66/MMBtu. He said with decoupling
there are gross values and costs that are subtracted, and the
production tax value is $2,390,156,250, which is subject to the
tax. He said, "So in this applied attributed tax rate, we have
the same number: that's your production tax value, undiluted by
the oil." He continued as follows:
But under the status quo, with the Department of
Revenue using these attributed tax rates. If we look
at this $1.199 million as the tax, and we look at
$2.390 billion as the production tax value, what is
the implied tax value that that ... means? And you
would need a tax value of 61 percent applied to the
net value of $2.390 billion to get that tax.
So, the reason those numbers are so high under the
status quo, with the combined methodology, is in
essence in this example ... a 61 percent tax on the
gas.
MR. MARKS said last night he reviewed the information from
Commissioner Galvin that compares the gas combined and the gas
decoupled, and he indicated that so much of the included charts
are in red that "it looks like a civil war battlefield." He
advised the committee to question whether high tax rates would
be the best incentive for getting people to subscribe to the
open season and whether "if that's what's being locked in" is
the best environment in which "to start a deliberative process
down the road."
2:20:05 PM
REPRESENTATIVE TUCK, referring to the Logsdon & Associates
presentation dated April 9, 2010, stated, "So, ... when we look
at implied attributed tax rates, we're not going to even
consider the decoupled tax rates in making those determinations;
it's all going to be in one bucket." In response to Mr. Marks,
he clarified that his statement pertains to current law.
MR. MARKS clarified that under current law, "you'll get $1.199
billion." He explained, "That's because you've calculated it
combined by using $46.98 as the value of the oil and the value
of the gas, and you get this ... number here." He continued as
follows:
If you look at ... the tax you get as a percentage of
your production tax value, you ... would need a tax
rate of 61 percent applied to the decoupled value of
the gas, which is what the gas is worth undiluted by
the oil. You would need a 61 percent rate to get
that. So, in essence, under the status quo, if SB 305
doesn't pass, ... you would [be] taxing the production
tax value of gas as it's undiluted by oil at a 61
percent tax rate.
2:22:03 PM
REPRESENTATIVE TUCK, referring to slide 4 of the April 9
presentation, oil and gas tax combined, asked what the gas to
oil ratio was.
MR. MARKS responded that under the regulations of the Department
of Resources, the total tax - the $5.5 billion - is allocated
based on the relative gross value; therefore, it is 22 percent
gas and 70 percent oil. In response to a follow-up question, he
said the ratio of the price of gas to the price of oil is $120
to $8.
REPRESENTATIVE TUCK observed that is a 15:1 ratio. He then
directed attention to slide 2 of the same handout, to the upper-
left chart, which shows the 15:1 ratio. He offered his
understanding that Mr. Marks is saying that "we should be at 1.9
attributed to gas rather than what we have in PowerPoint 3." He
continued:
We have two examples of one -- we have that one, it's
0.3.
MR. MARKS replied, "Right, and that's the 333 million we get
under ... SB 305."
REPRESENTATIVE TUCK said, "And if we separate it we go to ...
1.2."
MR. MARKS confirmed that is correct.
2:24:06 PM
REPRESENTATIVE SEATON indicated that if the status quo is 1.2
attributable to gas, then there would be 4 times as much tax
attributable to gas under the status quo as there would be under
SB 305. He said the tax rate on gas is the only thing that is
fixed into law at open season.
2:24:37 PM
REPRESENTATIVE TUCK said, "I just wanted to hear it one more
time that that is 0.3 or 305 and 1.2 on status quo." He asked
Mr. Marks if he agrees with "those two numbers."
MR. MARKS confirmed that is correct. He said, "And again, that
matches these numbers here: there's the 1.2 on slide 4, when
it's combined; and there's the 0.3 on slide 6 where they're
decoupled."
2:25:08 PM
REPRESENTATIVE EDGMON directed attention to "the slide with the
two bars" on "page 3," and he stated, "That $3 billion has got
to come from somewhere, right? And it's coming from the oil
companies."
MR. MARKS replied that that $3 billion is "the difference in
production tax by diluting the value of the oil through..."
REPRESENTATIVE EDGMON said that represents an increase in tax of
oil companies.
2:25:55 PM
MR. MARKS said what that actually represents is the drop in tax
that would occur pursuant to having oil flowing by itself and
then having gas flow on top of that. The $3 billion represents
the decrease in tax resulting from the dilution of the oil
value.
2:26:23 PM
MR. MARKS, in response to Chair Neuman, said under status quo
the state would be making $5.5 billion. He said that prior to a
gas sale, the state will have $8.7 billion in tax on gas alone.
Under the status quo, if gas is brought in, the state ends up
with $5.5 billion, which means about $3 billion of oil tax that
was being paid before disappears, even though there is a big
money-making gas operation overlaid on top of oil.
2:28:14 PM
REPRESENTATIVE EDGMON reiterated his concern that in the state's
attempt to provide an incentive to the industry on the gas side,
it may be providing a larger disincentive on the oil side. He
surmised that Mr. Marks would disagree with that summation.
2:28:48 PM
CO-CHAIR NEUMAN announced that SB 305 would be held over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 305 REV Qualifying For the AGIA Tax Inducement - Final.pdf |
HRES 4/11/2010 12:00:00 PM |
SB 305 |
| SB 305 LogsdonAssociates HRES 4.09.10.pdf |
HRES 4/11/2010 12:00:00 PM |
SB 305 |
| SB 305 REV Modeling Runs - Back-Up - Final.pdf |
HRES 4/11/2010 12:00:00 PM |
SB 305 |
| SB 305 REV How the AGIA Gas tax Inducement Works - final.pdf |
HRES 4/11/2010 12:00:00 PM |
SB 305 |
| SB 305 REV Cost Allocation Methodology - final.pdf |
HRES 4/11/2010 12:00:00 PM |
SB 305 |