Legislature(2005 - 2006)BUTROVICH 205
02/24/2006 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Department of Revenue – Robynn Wilson, Director, Tax Division | |
| Dr. Chuck Logsdon, Consultant to the Governor on Gas Line Negotiations | |
| Department of Revenue – Roger Marks, Economist | |
| Department of Law – Robert Mintz, Assistant Attorney General and Dan Dickinson, Cpa, Consultant to the Governor | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 305 | TELECONFERENCED | |
SB 305-OIL AND GAS PRODUCTION TAX
3:40:10 PM
CHAIR THOMAS WAGONER announced SB 305 to be up for
consideration.
^Department of Revenue - Robynn Wilson, Director, Tax Division
ROBYNN WILSON, Director, Tax Division, Department of Revenue,
introduced Dr. Chuck Logsdon, former chief petroleum economist
for the State of Alaska. He has 25 years experience in petroleum
economics and is currently a consultant for the governor's
office on the gas line negotiations.
3:40:39 PM
^Dr. Chuck Logsdon, Consultant to the Governor on gas line
negotiations
DR. CHUCK LOGSDON presented a PowerPoint presentation entitled
Alaska's Production Tax, Theory and Practice. In 2005, the
production tax brought in approximately 24 percent of Alaska's
oil revenue. Royalties depicted in the chart on page 2 of the
presentation include the Permanent Fund. The property tax
depicted includes taxes shared by the municipalities. Royalties
are 53 percent of the pie, the property tax is seven percent and
the corporate income tax is 14 percent. The production tax is a
tax on the severing of the resource from the state assessed as
either a percentage of value or on a minimum cents per barrel or
mcf, whichever is pertinent.
Things really started taking off when Prudhoe Bay was discovered
in 1968 and the tax has experienced many modifications since
that time, he stated. Alaska added fields continually and peaked
with Endicott and Lisburne in 1989, which put the pipeline
output up to two million barrels per day. Since then the Alpine
and Northstar have been the most productive oil fields.
Governor Murkowski's objective is to maximize government take
and to maximize the value of the resource. However, it must be
recognized that oil companies have a different objective and the
two must meet to the benefit of each. Norway is the country with
the tax system closest to the PPT and so the presentation will
focus on the Norwegian Petroleum Directorate.
3:47:27 PM
Slide 13 shows the geological learning curve from the beginning
of oil exploration in Alaska. The cumulative production curve of
the North Slope is close to the maturity part of the learning
curve and indicates a good time to encourage incentives and to
spend money.
3:49:48 PM
The experts have repeatedly advised that taxes based on net are
more economically efficient because they allow investors to
recover their investment and a rate of return. This ensures a
competitive area to invest in. Governments should style their
fiscal system around their geology because some production is
much closer to the market than others.
Studies show that investors did well during the period of 1992-
1994 because of lucrative oil fields being in a high-priced
environment. The bottom line on international comparisons is
that Alaska is in the middle of the pack. Dr. van Mures' latest
recommendation is that Alaska could take 25 percent of the oil
revenue, make tax credits and allowances, and encourage the kind
of exploration that matches the geology of the state. That is,
the smaller fields that have not experienced much drilling
should be scrutinized and perhaps explored.
3:54:57 PM
DR. LOGSDON said Alaska should think seriously about making its
system work more like some of the profit-oriented systems in the
world. The state has been reluctant to change the system in the
past due to significant concern about low oil prices. Changing
oil fiscal regimes is not taken lightly especially in a
declining production environment.
DR. LOGSDON concluded the presentation by saying Alaska should
change the petroleum production tax. The state would still get
its royalty share calculated before upstream cost deduction and
would still have a piece of world-wide corporate income as long
as the companies produce in Alaska. Alaska would also have a
property tax. Alaska would generate more revenue as well as
provide a significant incentive for investors to continue
developing oil and gas.
3:59:46 PM
SENATOR BERT STEDMAN referred to slide 4 and a chart showing the
growth curve and asked whether it compared to basic company
growth charts like one would see in an economics classroom. He
noted that previous testimony suggested the North Slope area
might still be in the early stages of production.
MR. LOGSDON said economists and engineers do not have a good
handle on the technology aspect of oil production. Exploration
and development costs were lowered dramatically with the
technology boost in the 1980s, using computers to evaluate
geology. There were also advances in well-drilling technology
overall. The reason for the shape of the growth chart is that
companies tend to produce the big easy fields first and then
they go on to the smaller challenging fields. One could argue
that the North Slope is at the late growth phase or the early
maturity phase.
4:03:06 PM
When the National Petrochemical and Refiners Association (NPRA)
opened, Arco and ConocoPhillips drilled a lot of wells and found
oil in small accumulations but a far distance from the existing
collection infrastructure. There were issues of getting access
to the area and that should be considered for incentive-type
thinking.
4:05:07 PM
SENATOR BEN STEVENS said the ultimate goal was to lengthen the
longevity of the life of the North Slope so that it would reach
maximum potential of production of petroleum products. He said
Norway has included the incorporation and exploitation of the
gas reserves, which Alaska doesn't have. He suggested that
developing the natural gas potential would lift the oil
production line in Dr. Logsdon's growth chart.
DR. LOGSDON agreed that was the ultimate goal. The potential to
generate resources from the gas preserves, once the pipeline is
in, should easily be as much as Alaska has obtained from oil
production.
BEN STEVENS maintained that the growth chart was not a fair
comparison with Norway because it lacks the natural gas indices.
4:09:36 PM
CHAIR WAGONER asked the impact that SB 305 would have on prior
tax legislation.
4:10:13 PM
DR. LOGSDON said the fundamental change would be in the way the
PPT would be imposed. The critical element being added to the
tax base is to allow deduction of upstream costs.
4:11:16 PM
SENATOR KIM ELTON asked Dr. Logsdon whether the existing
incentives would still be needed.
DR. LOGSDON did not know. He said current incentives have had
positive effects on developing Cook Inlet.
SENATOR ELTON asked whether the Department of Revenue has
considered looking at the existing incentives to see whether
they were still necessary.
DR. LOGSDON said past legislation doesn't carry the same impact
as SB 305. The credits allowed under the PPT are an alternative
to the current system.
MS. WILSON explained that the current credit embodied under
Alaska Statute Section 025 would become an alternative credit to
the PPT. The company would have to choose between the two.
4:15:28 PM
^Department of Revenue - Roger Marks, Economist
ROGER MARKS, Economist, Department of Revenue (DOR) said he
wanted to discuss specific provisions in the bill that address
the incentives for small producers and new investors both large
and small. Small producers are very important in the mix of oil
producers and add diversity and additional opinions on
production potential. Small producers tend to drill more
exploratory wells and are not afraid of risk.
With NPRA coming on and ANWR opening, there are opportunities
for more investors. Shell has picked up several leases around
the state and Anadarko is expanding on the western northern
slope. SB 305 sets out to assist small companies and attract new
investors.
4:18:50 PM at ease 4:32:48 PM
MR. MARKS provided committee members with an overview chart of
the Cook Inlet producers, the North Slope producers and the
combined statewide oil production.
4:34:44 PM
SB 305 would allow a mechanism for attracting new large-scale
investors by allowing them to convert their losses to a credit
by taking the tax rate (.2) times one million dollars, which
would equal $200,000, and that could be sold to someone else for
immediate use. The credit would be sold at 90 percent of face
value.
Buying credits is risk-free money and there are at least five
producers in the state who would be in the market for the
credits. Selling a credit at 90 percent of face value converts
to $180,000 for the seller and that monetizes the loss early on
a net present value basis.
4:36:50 PM
The ability to sell credits is identical. A company that invests
$1 million dollars realizes a $200,000 credit and they can sell
that credit for 90 percent of face value and monetize the credit
early.
MR. MARKS posed an example of an explorer with no assets coming
to Alaska to explore. They spend $10 million dollars and drill a
dry hole. Under the current system the state would chip in
nothing but under SB 305 that company would be able to convert
that loss to a $2 million dollar credit. With the PPT the state
would be risk sharing.
4:38:42 PM
SB 305 would allow a mechanism to attract small investors with
the $73 million dollar allowance. Under the current system small
fields pay no tax and this should continue because it encourages
development of small fields.
4:40:17 PM
SENATOR RALPH SEEKINS referred to slides 4 and 5 and noted that
under the proposition none of the current producers in Cook
Inlet or North Slope would pay a tax.
MR. MARKS said it is a consolidated tax statewide and Chevron
Unocal and Exxon would pay tax but the small producers would
not.
SENATOR SEEKINS referred to slide 5 [North Slope] and said that
ConocoPhillips, BP and ExxonMobil would be the only ones to pay
a tax.
MR. MARKS responded that would depend on the price of oil.
SENATOR SEEKINS asked Mr. Marks the companies they expect to be
attracted to the Alaska market.
MR. MARKS said the incentives could attract targets around
Fairbanks, Nenana Basin and possibly Cook Inlet. The allowance,
coupled with the ability to sell credits and sell losses should
bring more small producers into the state. Larger companies
don't have the appetite for the smaller targets, he said. Most
of the North Slope is leased up already and besides, it is very
expensive and very difficult for small producers to operate
there. Basically the first 5,000 barrels a day at $40 a wellhead
or $50 dollar market price would not pay any tax.
4:45:18 PM
SENATOR ELTON asked Mr. Marks to clarify whether it would be the
first 5,000 barrels for all companies.
MR. MARKS said the way the bill works is that the first $73
million dollars per year would go untaxed.
SENATOR ELTON asked the reason for proposing this statewide and
not just for the frontier or heavy oil fields.
MR. MARKS deferred the question to later in the presentation. He
said the goal in designing the allowance was a judgment of about
a $50 price; a 5,000 barrel-a-day field should pay no tax. At
lower prices, larger fields would pay no tax. At higher
production there would be a lower price threshold.
With a $73 million dollar allowance and a $53 dollar a barrel
market price, the first 5,000 barrels a day would pay no tax. At
$30 the first $12,000 barrel a day would pay no tax and at
higher productions such as 20,000 barrels a day the price
threshold would be at $23 dollars a barrel to pay no tax.
4:49:20 PM
CHAIR WAGONER asked the reason the entire state was included
instead of splitting off the major oil producers and focusing on
the smaller producers.
MR. MARKS said when advantage is given to some companies and not
others it creates a chance for monkey business.
4:51:33 PM
Cook Inlet is 80 percent gas and 20 percent oil. The industry
there is evolving as there is a decrease in production and most
of the assets are old, depreciated, and paid for. The new
development is mainly looking for gas and there have been small
discoveries. In addition, the prices are getting much higher
because the RCA has granted UNOCAL the right to sell their gas
at higher prices. Marathon is attempting to garner the same deal
and so if that evolves it would be much more profitable.
4:52:44 PM
The taxes on gas may increase on existing fields as they realize
the credits and deductions and the ability to market losses.
4:53:43 PM
The gas severance taxes in Cook Inlet and the North Slope are
subject to a gas ELF, which is also broken. The formula, set up
in 1977 is much simpler than the oil ELF and is still in place.
[Mr. Marks referred the committee to slide 17 - a snapshot of
the Cook Inlet gas ELF.] He explained the chart and said it
proved that the ELF was antiquated and was giving producers
seven times more than they should be recovering for operating
costs.
4:58:22 PM
MR. MARKS concluded by stating the governor's administration
promotes SB 305 and believes it would attract new investors to
Alaska.
4:59:34 PM
CHAIR WAGONER posed a hypothetical scenario of a small producer
in Cook Inlet with 35-year old platforms who currently pays the
state a very low severance tax due to the reduction. The annual
revenue is $60 million. Production expenses are $15 million, and
annual capital costs are $10 million. He asked the amount they
would pay in production taxes and royalties under SB 305.
MR. MARKS did the calculations and replied they would pay $5
million in taxes. He said you would subtract the $15 million and
the $10 million from $60 million, which equals $35 million. You
would subject that to a 20 percent tax rate, which would be $7
million. Then you would subtract 20 percent of the $10 million
capital, which would be $2 million and that equals $5 million. A
rough estimate shows their tax would go from $3 million to $5
million. Actually, he said, there is that $73 million dollar
allowance and so in this case their tax would be zero.
5:02:45 PM
SENATOR ELTON asked whether he said the tax rate for that
hypothetical company would go from $3 million down to zero.
MR. MARKS said yes, if that was their entire operation in the
state.
MS. WILSON noted they would also pay corporate income tax and
property tax.
MR. MARKS added that company could sell their credit and get the
$2 million dollar credit as well.
5:03:39 PM
SENATOR BEN STEVENS asked what exactly the PPT would apply to.
MR. MARKS replied the PPT would apply to oil and gas in Cook
Inlet and the North Slope. However, an upstream production such
as capital costs to develop Point Thompson would be a deduction
on the PPT for development of gas as well.
5:07:00 PM
^Department of Law - Robert Mintz, Assistant Attorney General
and Dan Dickinson, CPA, Consultant to the Governor
DAN DICKINSON, Certified Public Accountant and ROBERT MINTZ,
Assistant Attorney General, Department of Law (DOL) presented a
sectional analysis of the bill for the committee. There are two
different provisions; one that would change the production tax
and the other is a miscellaneous collection of improvements,
corrections, and clarifications to the bill.
5:09:58 PM
MR. MINTZ began by answering a past question of Senator Elton's
regarding a potential for a producer to defer taking a deduction
until the future. He said it would be hard to conceive of any
advantage in deferring a deduction because the value would be
the same in any given year.
MR. MINTZ began the presentation entitled Presentation on SB 305
& HB 488 before Senate and House Resources Committees. The core
provision of the bill is AS 43.55.011(a). The tax would be on
oil and gas together and would remain a monthly tax. It would be
equal to 20 percent of the net value of the oil and gas. The
definition of "net value" is under AS 43.55.160(a) and starts
with the gross value at the point of production.
5:12:32 PM
CHAIR WAGONER asked Mr. Mintz whether any future change to the
oil tax would affect taxes on the gas pipeline.
MR. MINTZ replied the bill is written as a law of general
applicability that would apply the same to all oil and gas
produced anywhere in the state. Any other distinctions would be
addressed in the contract.
5:13:53 PM
MR. DICKINSON said the discussion is still ongoing regarding
exactly what period each aspect of oil fiscal stability would
have. As constructed, if the Legislature were to change the oil
tax in the future there would be a need for additional drafting
to address the gas tax.
SENATOR SEEKINS referred to slide 4 and asked Mr. Mintz what he
meant by the words, "as adjusted."
MR. MINTZ said it was intended to net out receipts that should
be credited against the expenditures.
Slide 5: Gross value at the point of production is currently
defined but the bill would amend the definition slightly so that
the point of production is moved downstream of a gas processing
plant, which is different than a gas treatment plant. The bill
does not change the fundamental concept of gross value at the
point of production.
5:17:57 PM
Slide 6: Gross value at the point of production is calculated
using the reasonable costs of transportation.
5:18:40 PM
SENATOR ELTON asked whether there would be a different net value
for Cook Inlet oil than for North Slope oil because the
transportation costs would be different since Cook Inlet doesn't
go through the trans-Alaska pipeline system (TAPS).
MR. DICKINSON said that is correct. Even so, a company on the
North Slope that just spent a lot of money on transportation
costs in a year with high TAPS tariffs would see a very
different price than someone with a low TAPS tariff using very
old and depreciated transportation.
SENATOR ELTON asked Mr. Dickinson whether they back out profits
that an owner might get for transporting the oil.
MR. DICKINSON said they do not.
MR. MINTZ added for the record that they were talking about
gross value at the point of production.
5:21:21 PM
Slide 7: AS 43.55.150(d) provides for simplification of the
calculation and the Department of Revenue (DOR) would be allowed
to authorize a taxpayer to use a simplified formula to calculate
gross value at the point of production. The most notable example
would be if the taxpayer has a royalty settlement agreement with
the Department of Natural Resources (DNR) that provides for a
way to calculate value for royalty purposes.
MR. DICKINSON added over time the DOR and the DNR have developed
different rules for different reasons but fundamentally they do
the same calculation, which starts with the value it sold for
and then deducts the cost to get to the wellhead.
5:22:55 PM
Slide 8: For net value start with gross value and then deduct
lease expenditures, which are the total costs upstream of the
point of production. They have to be direct costs of exploring
for developing or producing oil or gas in Alaska.
5:24:19 PM
CHAIR WAGONER interrupted to say the reason for revamping the
tax structure is because ELF wasn't working in all cases on the
North Slope.
5:25:21 PM
SENATOR SEEKINS asked Mr. Dickinson whether he had information
that identified the companies that have made substantial capital
investments in the oil fields.
MR. DICKINSON responded half of the production comes from
Prudhoe Bay. ConocoPhillips and ExxonMobil each own 36 percent,
BP owns 18 percent and then there are smaller owners. Further
west ConocoPhillips owns 78 percent and Anadarko owns 22 percent
so there are significant investments there.
SENATOR SEEKINS expressed interest in seeing a comparison of the
companies that have invested heavily over the last five years
and those that have not and whether the companies that did not
invest would profit more than those that did invest.
MR. DICKINSON said that was right. That is the reason for
creating the process to recover investment costs.
SENATOR STEDMAN noted an undoubtable correlation between capital
expenditures and a majority market share.
MR. DICKINSON agreed.
5:30:34 PM
SENATOR ELTON asked Mr. Dickinson for an estimate of the cost to
the state for the provision and also to compare that to a cost
if applied to the depreciated value.
MR. DICKINSON said he would get the information together.
5:31:54 PM
Slide 10: In determining direct, ordinary, and necessary costs,
the department shall give substantial weight to typical industry
practices and standards that are reflected in joint operating
agreements.
In particular situations the department may allow a producer to
rely on the billings as equal to the lease expenditures.
Subsection (d) gives a list of certain items that are not
eligible to be deducted.
5:35:03 PM
Slide 12: AS 43.55.160(e) provides the concept to get to the net
costs.
MR. DICKINSON clarified that the royalty owner would not share
in any lease costs. Field cost deductions are for the lease-type
operations and they allow for 20 percent of eight-eighths as the
appropriate deduction.
5:37:26 PM
SENATOR BEN STEVENS said on the corporate side they would only
be allowed to deduct 20 percent of seven-eighths.
MR. DICKINSON replied it would be roughly the same effect as the
income tax.
MR. MINTZ said the third category of adjustments is if a
producer purchased a capital asset and that purchase price was a
deductible lease expenditure and then later sold the asset, the
sale price is recaptured to get the net deductible of
expenditures.
Slide 13: Transitional investment expenditures are capital
expenditures from the previous five years. AS 43.55.160(a) also
refers to subsection (i), which is where the $73 million dollar
allowance comes in and the producer has to be qualified to get
the allowance. The purpose of the qualification is to make sure
they don't multiply the number of producer entities so that each
one gets the $73 million dollar allowance.
5:40:40 PM
SENATOR ELTON asked whether the smaller companies would delay
making the decision to take the $73 million dollars until the
last minute when they knew how much money they would end up
making for the year.
MR. DICKINSON said a company that knew they would make between
$70-80 million would estimate 20 percent of the $2 million and
spread it over the 12 months. The alternative is they would
assume that the first six months was covered and so they
wouldn't pay anything until the final months.
5:41:37 PM
Slide 17 looks at qualified capital expenditures, which is
defined in AS 43.55.024(a). It has to be lease expenditure and
there are three established categories. It is limited to the
purchase of new assets. The tax is a monthly tax but there are
some annual aspects of it, namely within a calendar year lease
expenditures that cannot be used within a month can be used in
another month.
5:46:34 PM
CHAIR WAGONER asked whether platform demolition costs would be
allowed for a credit.
MR. DICKINSON suspected they were considered intangible costs.
SENATOR ELTON assumed that would be covered as a deduction to
get back to net value rather than credit.
MR. DICKINSON said it would definitely qualify as an operating
cost.
MR. MINTZ said there was a sort of double-dip intended in the
bill regarding capital expenditures because lease expenditures
include both operating and capital expenditures and they are
deductible in coming up with net value. The subset of lease
expenditures, which are qualified capital expenditures, are also
eligible for capital expenditure credit and that is deliberate
to give additional incentive for the investment.
5:49:29 PM
Slide 20: Steps in calculation. The second part of the
presentation is a flowchart that explains the fundamentals of
how the tax is calculated. Slide 21 shows how to get to
statewide gross value of producer's oil and gas. Slide 22 shows
the flowchart of obtaining deductible lease expenditures.
Slide 23 shows the flowchart of the transitional investment
expenditures for deduction. The total is divided by 72, which
represents six years multiplied by 12 months a year.
Slide 24 demonstrates the flowchart for the $73 million dollar
allowance. Once a company demonstrates their eligibility for the
allowance they can take up to $73 million dollars a year and
transfer that into a monthly allowance for the given month.
Slide 25 demonstrates the flowchart of how the total gross value
minus adjusted lease expenditures, other deductions, and the
allowance get to the net value of the oil and gas.
5:54:20 PM
Slide 26 addresses tax credits. One important point is that AS
43.55.160(m) says for purposes of the credits, an explorer is
considered a producer because the DNR defines a producer as
someone who owns a working interest. Some forms of exploration
are undertaken before there is a lease or a permit. The bill
allows for explorers that incur exploration expenditures to be
able to treat those as losses and as capital expenditures.
5:56:15 PM
Slide 27 details a schematic of the transferable tax credit
certificate process. The DNR holds the application process for
the certificate and the DOR issues it. In order to have the
process take place relatively quickly, there is a requirement
that the department act within 60 days after receiving the
completed application. Once the certificate is issued, the buyer
would be able to absolutely rely on that credit.
Slide 28 details the actual tax calculation. As for purchased
credits there is a limitation on that. Each month the credit
cannot be used to reduce the producer's tax more than 20
percent.
5:59:12 PM
Slide 29 demonstrates the tax payment scheme. Currently the tax
on oil and gas produced in a given month is due at the end of
the next month. That is retained but with a slight adjustment.
Upstream costs might not always be known until after the
calendar year and so the bill makes only 90 percent of the
actual tax due at the end of the month. The remainder would be
st
due March 31 of the next calendar year. If the producer pays
less than the 90 percent there would be interest owed on the
deficiency until it is paid. If there were an overpayment during
the year, the department would not pay interest back to the
producer.
6:01:14 PM
CHAIR WAGONER asked Mr. Dickinson whether there have been
problems collecting on back interest in the past.
MR. DICKINSON responded there is an issue with the 11 percent
compounding interest rate, which is very high. Companies should
be able to learn sooner that they owe that money.
CHAIR WAGONER asked whether a true up every six months would
negate some of that.
st
MR. DICKINSON said the reason for the March 31 true up is
because a lot of the credits are going to be termed by the
actual federal income tax treatment. Companies generally figure
their federal taxes once a year.
6:03:52 PM
SENATOR BEN STEVENS complimented Mr. Mintz and Mr. Dickinson on
their presentation.
CHAIR WAGONER recessed the meeting until 9:00 am on Saturday
February 25, 2006 at 6:06:16 PM.
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