Legislature(2005 - 2006)HOUSE FINANCE 519
04/29/2006 09:00 AM House FINANCE
| Audio | Topic |
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| Start | |
| SB305 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 305 | TELECONFERENCED | |
CS FOR SENATE BILL NO. 305(FIN) am
An Act repealing the oil production tax and the gas
production tax and providing for a production tax on
oil and gas; relating to the calculation of the gross
value at the point of production of oil and gas and to
the determination of the value of oil and gas for
purposes of the production tax on oil and gas;
providing for tax credits against the production tax on
oil and gas; relating to the relationship of the
production tax on oil and gas to other taxes, to the
dates those tax payments and surcharges are due, to
interest on overpayments of the tax, and to the
treatment of the tax in a producer's settlement with
the royalty owners; relating to flared gas, and to oil
and gas used in the operation of a lease or property
under the production tax; relating to the prevailing
value of oil and gas under the production tax; relating
to surcharges on oil; relating to statements or other
information required to be filed with or furnished to
the Department of Revenue, to the penalty for failure
to file certain reports for the tax, to the powers of
the Department of Revenue, and to the disclosure of
certain information required to be furnished to the
Department of Revenue as applicable to the
administration of the tax; relating to criminal
penalties for violating conditions governing access to
and use of confidential information relating to the
tax, and to the deposit of tax money collected by the
Department of Revenue; amending the definitions of
'gas,' 'oil,' and certain other terms for purposes of
the production tax, and as the definition of the term
'gas' applies in the Alaska Stranded Gas Development
Act, and adding further definitions; making conforming
amendments; and providing for an effective date.
9:20:06 AM
DR. PEDRO VAN MEURS, CONSULTANT, OFFICE OF THE GOVERNOR,
provided a handout to the Committee, "Petroleum Production
Tax (PPT) Issues". (Copy on File).
Dr. Van Meurs noted concern the Senate Finance Committee
(SFC) had adopted the 25/20 tax rate. Prior to PPT
discussions, extensive analysis on the heavy oil had been
undertaken. He encouraged a focus on heavy oil and that
the Administration has provided extensive research on it.
Two distinct forms of oil exist, heavy & light. The concern
with the North Slope is the huge gradation of oil. The
value of oil diminishes with a decreased Alaska Petroleum
Institute (API) and the cost of production increases
depending upon it. Cost becomes greater with weight.
Alaska has oil with many qualities; heavy is not just one
type of crude. Gradation starts from 25 to 10 API.
Dr. Van Meurs spoke to the 25% tax credit, pointing out that
it is important to Alaska to stimulate heavy oil production.
The economic future of the State is linked to heavy oil
production.
9:26:07 AM
Dr. Van Meurs noted that he had counseled the Governor not
to support a 25% tax credit because:
· High cost/low value crude oil and the likehood that the
crude could be economic would rapidly diminish and the
probability of a loss in carry-forward increased.
· Higher costs and then credits become proportionately
higher. Page 3 indicates the 22.5%, 25% & the 20%
system and how that applies. The revenues on the
22.5% and the 25%, @ $40/bbl becomes less because of
high tax credits; lower prices provide a tax loss with
carry forward of capital costs.
Dr. Van Meurs emphasized that Alaska cannot afford such high
tax credits; he urged that the 20% tax credit be adopted.
9:29:28 AM
Dr. Van Meurs noted the importance of the tax credit
consideration, faced with the fact that crude @ $10-$15/bbl,
there would be capital investment.
9:30:12 AM
Dr. Van Meurs discussed the progressive feature as listed on
Slide 4. The starting oil price for that feature nominally
would erode in real value over time. It could affect
seriously heavy oil development towards lower API gravities
if prices are established too low. The price indicates also
that it could be useful to determine the actual gross value
at the point of production rather than using West Texas
Instrument (WTI) or Alaska North Slope (ANS).
9:35:15 AM
Dr. Van Meurs referenced Slide 5, showing the level of
activity and tax rate. There is some relationship between
competitiveness in Alaska and the rest of the world. It
indicates that the higher the tax rate, the less Alaska is
attractive to the industry. As long as oil prices remain
high @ the $40-$50/bbl range, it does not matter; however,
when prices decline to $35/bbl, it becomes very important.
He added that the net back received from Alaskan oil is $5
dollars less per gallon.
9:38:03 AM
Dr. Van Meurs pointed out that Alaska oil production is in
decline and urged consideration to bring forward oil
deposits. He reiterated differences between heavy and light
oils. Higher tax rates mean less activity. A $1 billion
dollar investment is not enough to stop the decline; Alaska
needs to double that investment. Dr. Van Meurs urged
caution be taken in consideration of the tax rates.
9:40:30 AM
Dr. Van Meurs referenced Slide 6 - the 22.5-25 strategy. A
general strategy of increasing tax rates to 22.5% with a 25%
tax credit, to maintain activity at the same level as a 20-
20 system, increases the State's risk. Under the downside
situation, tax loss carry forward + investment credits equal
47.5% rather than 40%.
9:42:02 AM
Dr. Van Meurs spoke to Slide 7 - the gas gross revenue
exclusion. Generally, governments that face long distance
gas transport to market, fix government takes for gas at 5%-
30% below oil. [Indonesia, Malaysia, Qatar, Oman, Libya,
Trinidad, Venezuela]. There is good reason for establishing
a GRE as proposed. Dr. Van Meurs concluded his testimony.
9:45:41 AM
Representative Joule asked if there were models showing
long-term effects to the State. Dr. Van Meurs advised that
there is a comprehensive model of the gas project and that
there are concerns regarding Alaska relative to gas projects
in other parts of the world. He reminded members that it is
a large capital expenditure & is an unusual risk profile
that could be unprofitable. Dr. Van Meurs urged that it be
considered. He mentioned the stranded gas contract,
pointing out there are producers not part of that
arrangement.
9:50:35 AM
Representative Joule recalled the decision made to treat gas
differently from oil and requested to see the model that
lead to that decision. Dr. Van Meurs said the analysis
could be provided.
9:52:24 AM
Representative Kerttula voiced concern regarding a
distinction between the North Slope and Cook Inlet with
lower tax and the same gas credit. She warned that over the
long run, the State could loose a lot of revenue. She
requested the numbers separating Cook Inlet from the North
Slope.
Dr. Van Meurs responded that to judge the PPT on its own
merits, all possible credits related to gas development,
would be upstream credits and related to production. In the
gas projects, the credits relate primarily to Pt. Thompson
and some new fields. The amount of credits associated with
bringing the gas line forward are limited and included in
the oil information. He acknowledged the importance of
those concerns, indicating that the credit section of the
gas contract had already been presented and that gross
revenue exclusion does not have to be compared to the
credits.
9:56:10 AM
Representative Kerttula explained that was a large
misunderstanding and thought there would be credits against
the gas. Dr. Van Meurs clarified that Point Thompson would
be subject to full credits. Oil and gas would be a 20%
credit and would total about $400 million dollars, which was
included in the oil revenue presentation to the Legislature.
During that presentation Mr. Marks advised that the full
credits were deducted and that the gas revenue would not
subtract any further credits.
9:57:45 AM
Representative Kerttula requested a comparison to the
current system. Dr. Van Meurs said he would provide that.
9:58:24 AM
Representative Kerttula heard comments regarding the lack of
fiscal certainty on the note being written by the oil
section and asked why the State was waiting for that. Dr.
Van Meurs explained that once the Legislature passes the law
of general application on oil and gas, it is then
incorporated as fiscal stability to the contract. The
contract can not be finalized unless the PPT piece is
complete and once that is ready, there will be connecting
language element in the contract.
10:01:14 AM
Representative Kerttula advised that such comments make the
concern regarding the credit on oil more important. Dr. Van
Meurs stated that the credits for Point Thompson would be
the main gas project field & assuming $2 billion dollars @
the 20% credit, equals $400 million dollars. Point Thompson
applies to gas and the investment credit would be allocated
to oil & gas. It is too complex to separate the investment
between oil and gas; it is an important issue and is not
wise to complicate the PPT breakdown.
10:04:40 AM
Representative Weyhrauch inquired why a distinction between
profit tax dollars three times greater for oil than gas.
Dr. Van Meurs understood that the Senate Finance Committee
(SFC) did not recommend a different tax rate; it would be
the same for oil and gas. Given an exclusion, since gas is
a less economic source than oil, excluding only part of the
gross revenue from gas to calculate gas profit, which
creates a lower government take for the gas. That could
make getting the gas difficult.
10:08:43 AM
Representative Kerttula thought it was confusing from the
Senate version that gas is taxed at 7.5% rather than the
22.5% on oil. Dr. Van Meurs pointed out the tight deadline;
he recommended working in parallel. In designing the PPT,
it was not appropriate to outline the details to protect the
State and then the Governor introduced the 20% gas. That is
a modest effect. The Senate version assumes that if a gas
contract moves forward, there will be producers not part of
it and the PPT law will need to include that group.
10:12:18 AM
Dr. Van Meurs responded to Representative Kelly's concern
regarding a $100 run as indicated on Page 3. There will be
a positive difference at $60 dollars, where a higher tax
rate becomes beneficial.
10:13:53 AM
Representative Kelly observed that when tax credits are
weighed, it is higher at a 25% credit than 25% tax. Dr. Van
Meurs emphasized that Alaska cannot afford 25% tax. Studies
indicate less activity at 25% as it is less competitive.
Heavy oil can cost up to $20 to $30 dollars a barrel to
develop. A high cost of development can make heavy oil
difficult to bring up. He foresaw a negative affect to
heavy oils, but less on the light; those differences are not
immaterial. He cautioned against raising the tax rate as
tax credits carry a negative risk to the State.
10:20:37 AM
Representative Kelly referenced safety net risks at higher
prices. Dr. Van Meurs replied there is a down side to tax
credit & background analysis has modeled minimum amounts.
He would not recommend such an approach because minimum
taxes around the world must be comparable if the price
increases. A typical minimum tax could be recovered, an
effect not important for the State. An additional
consideration is that Alaska has been well protected on the
down side. Royalty & property taxes already exist and
Alaska also carries a State corporate income tax. If prices
go down, corporate taxes stay in place.
10:26:43 AM
Representative Kelly mentioned the issue of profit/taxation
and why the State should let go of a system already in
place. Dr. Van Meurs did not comment on the "correct"
numbers, noting that the PPT was not determined by
international standards. An international experience
indicates that there is more investment in a profit-based
system than a gross value system. A net profit share is
more difficult to administer than a gross profit share.
Representative Kelly spoke against the math in the current
GRE. He pointed out the effective date in the claw-back &
the impact on the long-term investment strategy of the oil
companies. Dr. Van Meurs recommended a 2 for 1 system. He
felt that companies should be rewarded for their willingness
to move forward. The effective date is only a matter of
money, impacting the cash flow this year. He maintained
that there will be significant impact this year either way
and urged the Committee to get organized. Dr. Van Meurs
advised that is why the Administration's bill does not
include retroactivity.
10:34:24 AM
Representative Kelly inquired about a severe worldwide
retroactive indication. Dr. Van Meurs responded that
Algeria just passed a PPT-style profit based tax, waiting
more than a year to implement. The real international
practice is passing a new fiscal system and making it
applicable after the law is passed.
10:36:07 AM
Co-Chair Chenault believed there were countries structuring
their gas taxation in order to get into the U.S. market; he
asked why that market is different. Dr. Van Meurs corrected
that other nations are structuring their taxation system to
reach the world market, including the U.S. market and
referenced the Tobago design system. The value of gas has
been studied, becoming the base for a fiscal design for long
distance transportation of gas.
10:38:33 AM
Co-Chair Chenault referenced the tax rate activity. He
noted the exclusion of the 22.5/25 comparison and asked if
that would be regressive, progressive or neutral.
Dr. Van Meurs offered to provide such an analysis. The
available chart provides a competitiveness rating, a more
attractive fiscal system on Slide 5. It demonstrates
current activity in Alaska and the proposed PPT system,
which is the reason to move toward a profit based system.
The figures mean nothing more than general competitiveness
among the fiscal systems.
10:43:09 AM
Representative Kerttula asked about the U-Shape on Slide 5.
Dr. Van Meurs replied that represents regressive fiscal
systems & low prices, where the government take becomes
less, while at higher prices, the take becomes more
progressive.
10:43:57 AM
Co-Chair Meyer asked what the anticipated price for oil was
for the next five years. Dr. Van Meurs replied forecasting
is difficult and that it is important to study the projects,
comparing price. Projects must be acceptable to a whole
range of ideas because the world is complex. Most oil
companies use several forecasts. Dr. Van Meurs estimated a
price of $35 dollars per barrel for long term, a consensus
number among many companies.
Co-Chair Meyer inquired if current prices were sustainable.
Dr. Van Meurs replied "action creates reaction". If prices
increase, activities react to the high prices that result in
counter-force and that brings prices back down.
Co-Chair Meyer thought events in the Middle East could cause
prices to continue to increase and felt that warrants the
progressivity factor. Dr. Van Meurs contributed to the
Stranded Gas Development Act (SGDA), in which progressivity
was an important feature; however, he emphasized that PPT is
already a progressive system by including tax credits. He
reiterated caution about the heavy oil condition in Alaska.
10:52:38 AM
Representative Weyhrauch asked about the original concern
regarding a threshold oil/gas tax policy rate. He asked if
a tax rate model had been prepared by the Administration.
Dr. Van Meurs advised that the State has prepared two broad
models, a revenue system prepared by the Department of
Revenue and the investment style model. The PPT bill
applies to both oil and gas; it was never intended to be
separated.
10:55:09 AM
Dr. Van Meurs said his recommendation is to have a $73
million allowance, given that most Cook Inlet producers are
smaller. He explained that the gas regime could be changed
in the beginning. The purpose is to be able to present both
a gas and oil bill, not negatively impacting Cook Inlet.
Models were well established, running the gas line
economics. He offered to provide the impact of that GRE
information to the Legislature.
CS SB 305(FIN) am was HELD in Committee for further
consideration.
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