Legislature(2005 - 2006)HOUSE FINANCE 519
03/31/2006 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB488 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 488 | TELECONFERENCED | |
HOUSE BILL NO. 488
"An Act repealing the oil production tax and gas
production tax and providing for a production tax on
the net value of oil and gas; relating to the
relationship of the production tax to other taxes;
relating to the dates tax payments and surcharges are
due under AS 43.55; relating to interest on
overpayments under AS 43.55; relating to the treatment
of oil and gas production tax in a producer's
settlement with the royalty owner; relating to flared
gas, and to oil and gas used in the operation of a
lease or property, under AS 43.55; relating to the
prevailing value of oil or gas under AS 43.55;
providing for tax credits against the tax due under AS
43.55 for certain expenditures, losses, and surcharges;
relating to statements or other information required to
be filed with or furnished to the Department of
Revenue, and relating to the penalty for failure to
file certain reports, under AS 43.55; relating to the
powers of the Department of Revenue, and to the
disclosure of certain information required to be
furnished to the Department of Revenue, under AS 43.55;
relating to criminal penalties for violating conditions
governing access to and use of confidential information
relating to the oil and gas production tax; relating to
the deposit of money collected by the Department of
Revenue under AS 43.55; relating to the calculation of
the gross value at the point of production of oil or
gas; relating to the determination of the net value of
taxable oil and gas for purposes of a production tax on
the net value of oil and gas; relating to the
definitions of 'gas,' 'oil,' and certain other terms
for purposes of AS 43.55; making conforming amendments;
and providing for an effective date."
MARK HANLEY, MANAGER, PUBLIC AFFAIRS, ALASKA-ANADARKO,
referred to a handout entitled "Anadarko - PPT Discussion"
(copy on file). He gave a brief overview of Anadarko, an
independent producer without refineries or gas stations.
Anadarko has 3,000 employees and operations around the
world. The headquarters are in Houston, Texas.
Mr. Hanley referred to Slide 2, "Anadarko's Alaska Acreage
Position". The pink acreage shows fields operated by other
companies, generally ConocoPhillips. In the yellow acreage
Anadarko is the operator, and includes Arctic Slope Regional
Corporation land. Anadarko has about 2.2 million net acres,
on par with ConocoPhillips. Anadarko has an extensive
position across the North Slope.
Mr. Hanley explained that Slide 3 shows the opportunities in
Alaska: a world class petroleum basin, a significant
remaining resource potential, legacy type prospectivity
(Anchor Fields), favorable political environment, and
abundant new entrants/partnering opportunities.
1:53:03 PM
Mr. Hanley discussed the challenges found in Alaska:
maturing basin/materiality, high costs, lack of
infrastructure and competition, limited access to facilities
and pipelines, extremely long lead-time exploration,
seasonal drilling and regulatory timing requirements, and a
lack of a gas market. He stressed that Anadarko is very
supportive of getting a gas line bill.
Mr. Hanley spoke of PPT from Anadarko's point of view. They
support the original bill and feel that the administration
did a good job of balancing issues and priorities. Anadarko
pays more in taxes, but exploration economics improve and
there is some downside price protection.
1:55:57 PM
Mr. Hanley shared an editorial from the March 17, Anchorage
Daily News. Anadarko believes that declining production is
the biggest issue. Each new forecast shows a further drop
in North Slope production.
Mr. Hanley maintained that more production is needed. He
referred to Slide 6: Declining production is the primary
driver of lower state revenue. Increased investment,
compared with today's levels, is needed to increase
production and stem decline. The original bill offset tax
increase with credits and allowances. Tax rate increases
and allowance decreases, with no credit offsets, reduce
Anadarko's economics.
1:58:51 PM
Mr. Hanley referred to a chart by Dr. Pedro Van Meurs, which
shows the 25 percent tax rate. It shows the value of the
$73 million allowance. Mr. Hanley disagreed with Dr. Van
Meur's idea that increasing the tax rate does not have an
impact. He compared the economics with the existing system
to the PPT. At lower prices the state assumes more risk; at
higher prices they get more of the "high side". The
companies are giving up some of the high side, as well. He
questioned where the kickoff point should be.
2:03:06 PM
Mr. Hanley referred to Slide 11, which shows small oil
development - after tax net present value discounted at 12
percent vs. wellhead oil price. He noted a difference
between Dr. Van Meurs' graph in that the wellhead price
instead of the WTI price is used in Anadarko's graph. He
emphasized the concept that the $73 million has value and
20/20 is better, and he cautioned to carefully consider
where the crossover point is.
2:05:45 PM
Representative Weyhrauch requested that Mr. Hanley reference
the bill during the discussion.
Mr. Hanley addressed key issues regarding PPT. He informed
the committee that the 20 percent tax rate is found on page
3, lines 21-26 of the bill. He said Anadarko agrees with
that rate. He related that as the tax rate is increased,
the company's economics is decreased.
Mr. Hanley explained the tax escalator is also known as the
windfall profits tax or the progressive tax. In the bill it
is found on page 4, lines 7-15. Some say that once $50 per
barrel is achieved, then a higher rate is paid. He
maintained that the increment is paid on the whole thing.
He gave an example. He advised that it is not a normal
windfall profits tax. He noted that costs are not
considered and will go up. Steel and labor costs will
increase. He opined that the tax needs to apply to the net.
Mr. Hanley questioned if $50 is the right number. Companies
look at various numbers, but many use the upside.
2:12:55 PM
Mr. Hanley referred to a slide used in a previous
presentation regarding Economic Oil Reserves in Central
North Slope Alaska at Alternative Prices. He suggested that
Alaska should not plan on $60 oil prices. As the price
forecast goes up, some of the economically recoverable
reserves are limited. He showed a graph that depicts
Expected Discoveries Under Alternative Prices. He noted
that the $8 difference between WTI and ANS is significant.
He questioned if using WTI is the right thing to do. He
advised to go to $55 and use ANS, which is equivalent to
$63 WTI.
2:17:36 PM
Representative Hawker asked about ANS vs. WTI. He
summarized that the three major players have the ability to
unduly influence price. The dominance of the three major
players is a detriment. Mr. Hanley responded, "If they can
do it, they should be doing it now". He said he finds it
hard to believe.
Representative Hawker said he appreciates the distinction
given between ANS, WTI, and wellhead. He stated he wants
the index to be as objective, verifiable, independent, and
determinable as possible. He asked if the wellhead met
those criteria, as well as the West Coast pricings. Mr.
Hanley agreed with Representative Hawker's concept that it
needs to be fair and should take into account the actual
factors that are out there. He pointed out the difficulty
of figuring out what an average wellhead is, due to the
variety. Representative Hawker concluded that there are as
many challenges writing a structure based on wellhead as
based on West Coast.
2:21:35 PM
Mr. Hanley spoke in support of the $73 million allowance
that has been turned into a $12 million credit, which is
more valuable to small players. For Anadarko if $73 million
went away it would be like increasing the tax rate to 25
percent. For the larger companies, it would be like taking
their tax rate to 20.5 percent. He mentioned the 10-year
sunset on the $73 million allowance found in the bill on
page 24, line 13. He spoke of the sunset's affect on a new
player's buying leases having no value for credit down the
line.
2:25:00 PM
Representative Weyhrauch summarized that the House Resources
version turned the $73 million into a $12 million credit.
He inquired about an unfinished statement regarding $14
million. Mr. Hanley explained that the 20 percent tax rate,
when it was an allowance, was the equivalent of a $14
million credit. The $73 million was reduced to $60 million
and turned into a $12 million credit. The intent was to
encourage new players and smaller players. He repeated that
the sunset would eliminate this credit for smaller
companies.
Representative Hawker asked for an opinion on the credits
mentioned in the governor's bill. Mr. Hanley said he did
not see that presentation. Representative Hawker wanted to
discuss this further with Mr. Hanley. Mr. Hanley said the
credit is non-transferable and non-sellable and applies
after all other deductions and credits are taken.
Representative Hawker noted that the intent of the $12
million credit is to benefit the small players, but everyone
benefits. He suggested it not be made available to the big
players. Mr. Hanley said that is a policy call. Currently,
all existing companies would qualify. The tradeoff is a
higher tax rate. It creates an incentive for some and
applies to everyone so it is equitable.
2:30:33 PM
Mr. Hanley talked about the transition allowance, also
called the five-year look back, on page 27, lines 24-27,
which allows for a credit for the first three months of the
year. In December 2004, Anadarko submitted approval for two
satellites, and then the governor came out with the
aggregation decision. The projects were put on hold. He
explained the negotiation process with the administration.
Anadarko decided to go ahead with the projects and spent
over $400 million getting them into production. Now the
company will be hit with a higher tax rate. Had they known
this was coming they would have put it off for a year and a
half in order to receive the 20 percent deduction and
credit. With no transition there won't be any credits and
there will be a higher tax rate. Anadarko supports a look-
back provision.
Representative Hawker requested an opinion on the 2-for-1
proposal. He spoke of concerns with the five-year look
back. Mr. Hanley thought that the 2-for-1 would be
beneficial for a longer time period than 3 years, such as 10
years.
2:36:07 PM
Mr. Hanley spoke about point of production on page 17, lines
5-16 of the bill. The concept is to remove the cost of
transportation from the point of production, which makes
sense. Page 25, line 24 starts to describe what the gross
value at the point of production means. It means "where oil
goes into the pipeline in pipeline quality". Everything it
takes to get oil into pipeline quality is upstream of the
point of production and qualifies for the credits and
deductions.
2:38:22 PM
Mr. Hanley continued the discussion regarding gas and the
point of production, which is upstream of any treatment
facility. The treatment facility is not included for the
purposes of credits and deductions. He speculated that in
the new gas contract the treatment facility would be
included. He opined that in future gas exploration,
treatment facilities should be included.
In response to a question by Representative Weyhrauch, Mr.
Hanley observed that the provision was in the original bill
and was not added in the House Resources Committee.
2:40:47 PM
Representative Kelly requested suggestions from Mr. Hanley
as to what language could be used in the bill to solve the
problems he mentioned. Mr. Hanley agreed to do that. He
observed that he would need to talk to the administration
for clarification.
Representative Kelly reiterated his desire to have input
from Anadarko.
2:43:42 PM
Representative Kerttula referred to page 2, lines 1 and 2.
She questioned why the producers have to subtract a payment
received for "the use by another person of a production
facility in which the producer has an ownership interest"
from those things that they can deduct. She predicted that
would be problematic as far as access. Mr. Hanley agreed.
He observed that it would be considered income and the
state's goal is that it not be deductible. He said that he
does not know if it would have a negative impact.
Representative Hawker referred to the gas point of
production determination. He questioned if the development
of Point Thompson was included. Mr. Hanley did not know how
Point Thompson would be developed and if there would be
separate gas treatment facilities. He concluded that
everything upstream would probably be included. He felt
that it should be included if a separate treatment facility
were needed.
2:47:36 PM
Mr. Hanley spoke to new gas economics, much of which remains
unclear, which is typically worse than oil. He maintained
that the government take is less than on oil. The cost of
transportation versus the overall value of the product is a
much higher percentage. The existing severance tax starts
at 12.5 percent for oil and goes up to 15 percent after five
years. Gas severance tax starts at 10 percent and does not
go up. The escalator for gas starts at $8 and is higher on
a relative basis than the $50 on oil. He suggested that
there should be some extra incentives for gas.
2:51:09 PM
In response to a question by Representative Kelly, Mr.
Hanley noted that on page 11, line 16, the existing
expiration incentive credit system, more incentives were
given for exploration. He felt that the 10-year extension
is appropriate. The extension on the $73 million was
problematic because it applies to production.
He suggested either the credit in SB 185 or the 20 percent
credit, but not both. The wells close to infrastructure
would take the 20 percent credit under PPT. Bigger wells
would take an additional 20 percent credit. Representative
Kelly summarized that it pertains to both gas and oil. Mr.
Hanley said that is correct.
Representative Weyhrauch noted that he found the 10-year
extension on page 12. He asked where the 40 percent credit
is located. Mr. Hanley responded that nothing was changed
in the existing statute. They allowed the production credit
to apply to the tax due under the new PPT. He pointed to
page 8, line 7, which allows for the 20 percent credit under
PPT or the credits in the existing law.
2:56:23 PM
Representative Kelly questioned if SB 185 solves the problem
on the gas. Mr. Hanley felt that it offset some of the
changes that were made such as reducing the credit to $12
million, but that it did not solve the problems. SB 185 is
not as valuable as PPT, since it does not change the
question of gas being disadvantaged to oil.
2:57:32 PM
At Ease
3:11:05 PM
Questions and Answers with the Administration
ROBYNN WILSON, DIRECTOR, DIVISION OF TAX, DEPARTMENT OF
REVENUE, addressed questions on PPT legislation. She read
and responded to questions 1 and 2:
1. Why did the Governor offer five-year transition
(clawback) when capital has already been depreciated in
the tax rate over a five to seven year period?
The Governor believes that this is a fairness issue.
Once enacted, the PPT will measure tax based on net
profit. These will be profits generated by investments
made prior to the effective date of the legislation. The
cost of all new investments will be reflected in the
calculation of net profits; the costs will be deducted.
However, the costs incurred for recent investments would
not otherwise be reflected in the calculation. Without
the transition deduction, the producer would be taxed on
the profits generated by assets, which would not be
properly represented in the profit calculation.
Much of the oil and gas equipment is depreciated over
seven years for federal tax purposes. In addition,
certain oil and gas equipment is depreciated over 15
years. To our knowledge, the only oil and gas equipment
with a 5-year life is offshore drilling equipment. It is
notable, also, that these lives are those articulated for
federal tax purposes. For accounting purposes, the
depreciable lives are often longer than the lives under
federal tax law. This means that very few of the assets
are fully depreciated, even for those assets purchased
five years ago.
The Governor believes that it is fair to give a five-year
look back for, in effect, depreciation expense on recent
investments that are generating future profits, which
will be subject to tax.
2. Requested a written explanation of progressivity
clause versus Governor's Bill.
As presented by the Governor, HB 488 included a fair tax
rate of 20% of net profit. The Governor believes this
strikes a good balance for long-term state fiscal health.
That bill did not include a progressive tax rate. Over
the long run, increased revenues should be driven by
increased investment and production rather then swings in
commodity prices.
The CS for HB 388(RES) includes a two-pronged progressive
tax rate. At prices between $50 and $100 per barrel, the
progressive rate adds 3/10% of the wellhead value for
every dollar the market price is over $50. If the price
of oil exceeds $110 per barrel, the tax jumps up to 37.5%
of gross wellhead value. The Governor believes that this
is excessive, and will hinder future investment in the
state.
3:15:23 PM
Representative Kerttula referred to Mr. Hanley's testimony.
She noted that every dollar is taxed, not just the amount
over $50. Ms. Wilson said it is true that the progressive
tax generates a percentage of that tax on the gross.
Representative Kerttula asked if a normal progressivity
works and what the implications are.
DAN DICKINSON, CONSULTANT, TAX DIVISION, DEPARTMENT OF
REVENUE, clarified how the tax works.
3:19:10 PM
Ms. Wilson read question 3:
3. Provide information on the decline of oil field
production over next 50 years by field.
She referred to the chart and table, "10-year ANS Decline
Rates by Field" (copy on file) to answer the question.
Representative Hawker recalled, "No decline after 99". He
suggested that the chart should scare every member.
3:21:16 PM
Ms. Wilson read questions 4 and 5:
4. I've been told that the incentives for the Major
Producers are not the same as it would be for the new
explorers. If that is so, what other incentives could we
offer to make "wildcatters" interested in Alaska?
The Governor's bill was specifically designed to entice
new entrants, particularly "wildcatters" to Alaska. The
Governor's bill provides a 20% tax credit for exploration
and capital investments, which could be immediately
monetized by the explorer. In addition, current statute
AS 43.55.025 provides a 40% credit for certain
exploration expenditures. The Governor believes that
these incentives are very adequate to promote new
exploration.
5. Transition provisions should be allowed because no
oil has been produced from those capital investments.
But were those investments made at prices less than
$25/bbl and so would be recovered much more quickly at
$60/bbl? How is this accounted for in the clawback
provision?
The transitional deduction (or "clawback") accounts for
recent investments by, in effect, allowing depreciation
expense to be recognized in the calculation of the net
profits generated by those assets. From an accounting
standpoint, depreciation expense is recognized on a
systematic basis over the life of the asset. The asset
is considered to generate net income evenly over the life
of the asset. A windfall in one year does not change the
asset's ability to generate income later in its useful
life.
3:22:55 PM
Representative Hawker asked about questions 1 and 5.
Accounting depreciation is not the relevant measure of the
underlying economics. This is an unusual circumstance and
the investor has already recovered their capital
investments. Ms. Wilson responded that if you look at it
from an economic standpoint that may be true. However, new
investment is trying to allow representation of those
assets.
Mr. Dickinson said it is a matter of incentive. You don't
want to have a situation where people think they should wait
a year to invest. Representative Hawker suggested making an
effective date.
3:26:15 PM
Representative Kelly said it is fairness issue driven by
Kuparuk. It is a fallback. He wondered what the value of
the Kuparuk ELF is and what the net clawback is.
Mr. Dickinson reworded it to say what would happen if the
PPT had been in place for 5 years already. Representative
Kelly noted that some believe that we waited too long to
change ELF. He spoke in favor of the 2-for-1. Mr.
Dickinson said roughly $1 billion clawback and less tax
would be paid. Representative Kelly thought there would be
some balance between the two numbers.
3:30:21 PM
Ms. Wilson read question 6:
6. How much severance tax (dollars) did Alaska lose
because the Kuparuk Tax went below the legacy field tax
rate in 1998-99?
She referred to the attachment on "Production Value by
Field" (copy on file).
In response to a question by Representative Kelly, Mr.
Dickinson mentioned looking at the rate of decline.
3:31:43 PM
Ms. Wilson read question 7:
7. How might we smooth the progressivity curve to
eliminate or moderate the steep increase at $110?
The elimination of the steep increase can be accomplished
by changing the values at page 4 line 18, AS
43.55.011(g)(2) to reflect the desired price/index
ceiling. If the index of 125 at $110 is removed, and the
progressivity tops out at $110, then the top surcharge
rate would be 18% applied to gross value.
Representative Weyhrauch asked about the tax rate on oil
relative to other natural resources in the state. Ms.
Wilson said she could not answer that question.
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