Legislature(2007 - 2008)SENATE FINANCE 532
11/06/2007 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB2001 | TELECONFERENCED | |
SENATE BILL NO. 2001
"An Act relating to the production tax on oil and gas and
to conservation surcharges on oil; relating to the issuance
of advisory bulletins and the disclosure of certain
information relating to the production tax and the sharing
between agencies of certain information relating to the
production tax and to oil and gas or gas only leases;
amending the State Personnel Act to place in the exempt
service certain state oil and gas auditors and their
immediate supervisors; establishing an oil and gas tax
credit fund and authorizing payment from that fund;
providing for retroactive application of certain statutory
and regulatory provisions relating to the production tax on
oil and gas and conservation surcharges on oil; making
conforming amendments; and providing for an effective
date."
Understanding Alaska's Current Production Tax - How and
Where Does the Cash Flow?
9:17:34 AM
STEVE PORTER, LEGISLATIVE CONSULTANT, LEGISLATIVE BUDGET AND
AUDIT COMMITTEE, LEGISLATIVE AFFAIRS AGENCY, outlined his work
experience in the oil and gas industry. He worked in both the
private sector as well as in government.
Mr. Porter emphasized that models are not designed as specific
solutions to problems, but provide an order of magnitude for
understanding of issues and the relative relationship between
the elements of the models. He added that the model is only as
good as the quality of the data input. He further pointed out
that accuracy begins to diminish as the model is used to project
further in the future.
9:21:19 AM
Mr. Porter addressed the model page 1 of handout titled "PPT Tax
Calculation".
Mr. Porter referenced the DOR Spring Resource Book, which
contained a broad statement of how PPT works. There are four
main elements: value - costs x tax - credits. He emphasized
that these four elements will be a part of future discussion
regarding their effect on the revenue stream.
9:23:03 AM
Mr. Porter addressed pricing and referenced the spring forecast,
which was $54.72 per barrel of oil; the current projections from
DOR is $71.65. Future projections are raised by $15 to $20
dollars in out years. The long-term forecast, 2013 - 2014, is
still closer to $40 per barrel. These are only projections.
9:24:38 AM
Senator Elton questioned why the Department of Revenue's numbers
differed from Mr. Porter's. He asked if this was because Mr.
Porter was using a higher price per barrel cost projection. Mr.
Porter did not know what the Department used for assumptions.
9:26:00 AM
Co-Chair Stedman directed attention to the calculations in the
regarding Alaska North Slope (ANS) well head value. He pointed
out that the ANS well head price is he $14.9 billion.
Mr. Porter clarified that the department uses the ANS West Coast
price for their calculations, which is the production tax value.
He explained that he was addressing the total gross value before
deducting transportation costs.
Mr. Porter pointed out, with regards to futures projections, it
is important to understand why the Department of Revenue over
estimates on volume and under estimates price. He explained the
Department of Revenue is very conservative on price. The
Department does not raise their projections as quickly as the
price rises. Therefore, revenues projections are often lower
than actual when there is a fast rising price, resulting in a
"surplus". The Department also lags behind as price drops, but
not as bad. The Department of Revenue generally over estimates
volume. Volume estimates do not take into account problems. The
Department also has a tendency to move production dates.
9:29:10 AM
Mr. Porter noted that the gross value calculated on the chart
does include transportation costs. Later in chart (line 25) the
itemized cost is deducted out.
Senator Huggins asked about royalty tax and the different rates,
commenting that it was his understanding that there is a range
from 12.5%-16%
9:30:11 AM
Mr. Porter responded by saying the older leases such as Prudhoe
Bay and Kuparuk are at the 12.5% rate. He went on to say that
newer leases operate under a higher royalty rate. He explained
that there are also net profit share leases, which have a very
specific calculation increasing the royalty rate. He explained
that the vast majority of leases are 12.5; a blended late may be
closer to +13 percent.
9:31:09 AM
Senator Huggins emphasized that when analyzing the tax
structure, it is important to consider the impact on those with
a higher royalty rate. Mr. Porter concurred and underlined the
point by mentioning Pioneer's Oooguruk unit had a substantially
higher number of net profit share leases.
9:32:34 AM
Mr. Porter addressed the calculation for net royalty value. He
pointed out that royalty barrels are not taxed. He further
explained that royalty barrels are taken out before the net
value is established. What remains from the calculation are
taxable barrels.
9:33:21 AM
Mr. Porter explained that the ANS wellhead price is determined
post deduction of transportation costs.
9:34:14 AM
Senator Thomas asked for a summary of transportation costs. Mr.
Porter pointed to the list on the chart noting the downstream
costs and added that there are also upstream costs. He deferred
to the Administration for further clarification.
9:35:05 AM
Mr. Porter explained that the number under other deductions and
adjustments was manipulated to reflect a .50 cent change from
the spring forecast number.
9:36:02 AM
Mr. Porter explained that the numbers, with relationship to the
value equation should remain consistent throughout the
discussion for all proposals before the legislature.
He addressed the cost portion of the handout. He acknowledged
there has been some debate as to how to manage the cost but
clarified that his presentation would focus on what the costs
are and how they impact the overall tax.
Mr. Porter explained that under PPT operating and capital costs
are subtracted out after value is captured. The total operating
and capital costs are projected to be $4.3 billion. He observed
that $4.3 billion was the number that concerned the Department
of Revenue because it represents a significant increase in
costs. He said the Committee will need to deal with the issue
very specifically to understand why the costs went up and how
the increase will impact tax.
9:37:58 AM
Co-Chair Stedman reminded the Committee that Econ One would give
a presentation and will address the operating and capital cost
increases.
9:38:29 AM
Senator Huggins indicated that the costs are unknown because
allowable costs have not been established. He maintained that
the numbers representing costs are those of the producers, not
necessarily what the state would allow.
9:39:09 AM
Mr. Porter affirmed. He indicated that one important and
substantial element within the legislation is collection of
data. The collection of data will provide the state information
that will help in understanding current and future costs.
Mr. Porter explained the variables that went into the revenue
projection for the original PPT. He made clear that the
department underestimated price, overestimated production and
underestimated costs. Mr. Porter maintained that price was the
most significant variable in the inaccuracy of the revenue
projection equation.
9:41:11 AM
Senator Elton reiterated the assessment by Mr. Porter regarding
revenue projections. He asked if Mr. Porter was suggesting that
the department's latest presentation was also a miscalculation.
9:42:02 AM
Mr. Porter did not know what the Department had presented. He
emphasized that though numbers are important in a model, it is
necessary to look for an understanding of the order of magnitude
in relative relationship, not for an answer. He pointed out that
he used the current numbers that he was given by the modelers
and was confused why the numbers differed.
Co-Chair Stedman stated that the intention of the meeting was to
provide understanding of the flow of the dollars through the
system, not so much the exact variables. He reiterated that Econ
One, Legislative Budget and Audit consultants, are currently
working with the Administration. When the projections are
looked at in detail the legislative consultants along with the
Department of Revenue will be in sync on the numbers. He
maintained that the purpose of the meeting was to lay some
ground work to understand the interlinking of variables and to
understand the magnitude of impact in manipulating any one
piece.
Mr. Porter observed that the intent of law and intent of
gathering information is to be closer to those numbers. He
pointed out that the Department of Revenue, statistically, comes
closer to the right price projection than the national modelers.
He further clarified that though the modelers had some level of
accuracy in price projection the reasons were incorrect. He
pointed out that the other two variables in forecasting
projections, production and costs are more easily determined
than price. With regards to production, he said, this is a
"fairly tight" number, but further acknowledged that with older
fields the number is a bit more difficult to determine due to
the amount of "down time" and an aging facility. Costs can be
more easily determined through a clear understanding, by the tax
payer, of what is deductable. He maintained that the more
definition that is provided to determine costs, the more
accurate the calculation of costs will be.
9:45:40 AM
Co-Chair Stedman noted the Departments presentation from the
previous meeting used FY 2009 numbers. He reiterated that the
purpose of Mr. Porter's presentation is to provide a brief
summary of "how things flow through". He further noted that the
details will be presented for discussion by Econ One which will
provide the same model and the same derivatives.
Mr. Porter explained that the reason the Department changed to
FY 09 numbers after using FY 08 numbers is to provide a clean
analysis free of partial years as well as other issues unique to
FY 08. He stressed the importance of understanding that the
numbers changed because the numbers used at the start of Special
Session were the FY 08 and currently the FY 09 numbers are being
used.
9:47:20 AM
Mr. Porter addressed the production tax value and noted that it
is important in all future equations. He pointed out that the
ACES proposal and PPT use the same number. He explained that it
is the number used to get the per barrel calculation that is
applied against the progressivity and is used to calculate the
tax. The net tax is calculated against the equation of value -
costs = net. The tax rate is applied against the net.
Establishing net is the first step of the tax equation.
9:48:12 AM
Mr. Porter discussed the progressivity portion of the handout.
He explained that the progressivity trigger point of $40 is not
the West Texas intermediate or ANS wellhead price is $40. The
trigger of $40 represents cash flow: cash flow per barrel. The
price is determined by the equation: Production tax value
divide by the total taxable barrels = per barrel cash flow.
Every barrel of oil produced on the North Slope receives $40 of
cash flow before the progressivity tax is applied. He stressed
the importance of this when looking at the relative relationship
with the costs of oil on the North Slope. In-fill drilling is
very profitable and productive and costs are low. As a result,
the $40 cash flow kicks in sooner than Westsak, which has higher
costs.
9:50:21 AM
Co-Chair Stedman asked Mr. Porter to explain the columns on
right hand side of the handout. Mr. Porter said the columns
track the cash flow as the different pieces of the tax are
calculated. When there is a deduction, cost or credit, the right
column illustrates the resulting allocation to the State, the
federal government and the producer.
9:52:41 AM
Mr. Porter explained that the elements of the progressivity tax
are the trigger, which is the start point. The next number is
the rate per price Index Dollar at .25% (ACES is set at .20%).
The slope of the line illustrates how quickly the remaining cash
flow, shared at 50/50, will be reached. The current PPT cap is
set at 47.5% because the of 22.5% tax and 25% maximum
progressivity. The ACES proposal has a 25% tax with a 25%
maximum on progressivity, hence the 50%.
Mr. Porter addressed the per barrel tax value and reiterated the
equation: total production tax value divided by total barrels
equals the per barrel cash flow. He referenced the numbers on
the chart. The result of a price forecast at $71.65 and current
production projections, there is a $46.05 per barrel cash flow.
With the trigger at $40, the progressivity tax rate (1.51%)
would be applied on $6.05 of cash flow. He concluded the
section by underlining that the 1.51% is a tax on the net, which
equates to $160,480,575.00 as shown in the revenue column and
deducted from the producer column.
9:55:51 AM
Mr. Porter went on to say that by adding the base tax, plus
progressivity, the result is approximately $2.5 billion. This
amount is subtracted from the production tax value. The amount
that remains represents the Pre-Credit Adjusted Revenue.
Mr. Porter referred again to the formula saying that the Value -
costs x tax, portion has been addressed.
The next part of the presentation addressed exclusions and
credits. There is a 30% per barrel exclusion, against total
taxable barrels. He noted that this represents approximately
$69 million.
Senator Stedman recalled a number of $30 million from Resources,
but thought the 30% exclusion represented $70 million.
Mr. Porter pointed out that the presentation is not designed to
get into details of each of the credits, but stated he could
provide detail if it was the desire of the Committee.
He continued his presentation with the Credits section noting
that the projections used are from Department of Revenue. He
stated that the capital credits are 20% of the capital
expenditures. The capital expenditures are outlined. Every
dollar of capital costs is deductable with the addition of a
credit. He emphasized that the 20% credit is of substantial
value to the explorer and the producer providing an incentive to
spend capital in the state of Alaska and reinvest in the state.
Mr. Porter explained that the net operating losses (NOL) are a
credit though there are no specific projections in the model. He
explained that there is no analysis because, from the Department
of Revenue standpoint, the operating losses are an in
determinant number. He further stated that the net operating
loss would not be large.
9:59:17 AM
Mr. Porter addressed the Transitional Investment Expenditure
(TIE) noting that the chart illustrates a one year projection
for FY 08. The credit would last for the next 5 years. He
explained that the TIE credits are based on the amount of
capital expended between April 2001 and April 2006. The
applicant could take up to 20% of the amount in a credit in the
future. The requirement to receive the 20% credit is an
investment against 10% of current capital expenditure. He
explained that the $213 million on the chart is a calculation
representing the assumption of 10% of the FY 08 capital
expenditures.
In response to a question by Co-Chair Stedman, Mr. Porter
indicated that the statute says 10% per year, but to capture the
full credit in the 5 years available, because of how the
calculation works, producers would need to spend 2 for 1 to
receive the credit.
Co-Chair Stedman said the Committee would explore the issue
because of price appreciation on capital expenditure and
operating expenditures. He recalled that during work on PPT
there was an expectation of 2 for 1 of additional capital
expenditures, not just inflation push to capture it.
Senator Huggins recalled that there must be production to claim
TIE credits.
10:01:53 AM
Mr. Porter confirmed that there must be production in order to
claim the TIE credits. He further clarified that the TIE
credits are not transferable, but frozen until production is
realized.
Senator Huggins stated that the TIE credits are an incentive to
produce. Mr. Porter concurred.
Mr. Porter said that credits are in AS 43.55.023, AS 43.55.024
and AS 43.55.025. He noted that anytime there is a statutory
reference to these sections, it is a reference to credits. He
also informed that AS 43.55.024 outlines small producer credits
of $12 million. He related that DOR assumes up to 4 producers
may claim the credit, which would represent $48 million. He
said it is an order of magnitude what can be expected in that
category.
10:03:35 AM
Mr. Porter stated that exploration credits are the same way, an
explorer can capture between 20% and 40% in credits depending on
where the exploration takes place. If the well is further than
3 miles of any other well, and further than 25 miles from a
unit, the explorer can acquire a 40% credit on capital
expenditures. He commented that the interesting impact of
having a 20% capital expenditure credit is that the explorer can
not receive both. The explorer can prove the capital expense and
receive the 20% credit or spend the time to apply to the
Department of Natural Resources (DNR) for the exploration AS
43.55.025 credit. He pointed out that because
producers/explorers have an option of applying for capital or
exploration credits, different conclusions can be drawn. For
example, he noted that though a company may be exploring, they
may opt to apply for 40% capital credit rather than a 20%
exploration credit. He concluded that if the capital credits
are a greater amount than exploration credits it should not be
assumed that there is an absence of exploration.
Mr. Porter pointed out that the conclusion of calculations from
the formula result in a percentage of take for the State, the
producers, and the federal government.
Senator Elton asked for an explanation of state take including
the municipal property tax. The state take is less than 39.98
percent with the municipal take subtracted.
10:07:27 AM
Mr. Porter said that was correct when determining what goes into
the Permanent Fund for the municipalities.
10:07:50 AM
Co-Chair Stedman stated that 65.6 million is the current number
for FY 08 in property tax that goes to the state as unrestricted
funds. He pointed out that all property tax is aggregated even
though some goes directly to the boroughs.
Senator Elton asked if the municipalities are getting $300
million.
10:08:47 AM
Co-Chair Stedman responded that there is an analysis that
illustrates how much each borough receives and offered to share
it with Senator Elton after the meeting.
10:10:00 AM
Co-Chair Stedman asked Mr. Porter to make slight modifications
to the handout
10:10:41 AM
In conclusion, Mr. Porter emphasized that models are based on
assumptions of two principals: order of magnitude and relative
relationship.
10:11:12 AM
CS HB 2001 (FIN) am was HELD in Committee for further
consideration.
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