Legislature(2011 - 2012)SENATE FINANCE 532
04/03/2012 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SCR24 | |
| SB159 | |
| SB151 | |
| SB226 | |
| SB179 | |
| SB210 | |
| HB129 | |
| HB245 | |
| SB192 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 192 | TELECONFERENCED | |
| += | SCR 24 | TELECONFERENCED | |
| + | HB 129 | TELECONFERENCED | |
| + | HB 245 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 159 | TELECONFERENCED | |
| += | SB 151 | TELECONFERENCED | |
| += | SB 226 | TELECONFERENCED | |
| += | SB 179 | TELECONFERENCED | |
| += | SB 210 | TELECONFERENCED | |
SENATE BILL NO. 192
"An Act relating to the oil and gas production tax;
and providing for an effective date."
Co-Chair Stedman stated that there would be a short
presentation by PFC Energy and that the committee would
adopt a committee substitute (CS) for SB 192. He furthered
that PFC Energy would be brought back for further
discussion regarding a component that had not been included
in the CS. He noted that the committee would also be
discussing how it would balance the schedule between the
Finance Committee, PFC Energy, and the industry so that
there was ample time to analyze the information. He
observed that there were differences in some of the
modeling, cost assumptions, as well as other aspects.
Co-Chair Stedman asked for a brief description of PFC
Energy. He pointed out that PFC Energy was hired by the
Legislative Budget and Audit Committee, a joint House and
Senate committee that handled consultants.
9:54:56 AM
TONY REINSCH, SENIOR DIRECTOR, UPSTREAM & GAS, PFC ENERGY,
explained that PFC Energy was an above ground risk and
analytical consultant to the oil and gas sector. He
detailed that PFC Energy advised international oil
companies, governments, regulators, and national oil
companies on issues of policy finance economics.
9:55:23 AM
JANAK MAYER, MANAGER, UPSTREAM & GAS, PFC ENERGY, began a
PowerPoint presentation titled "Discussion Slides: Alaska
Senate Finance Committee" (copy on file) and explained
slide 2 titled "Difficulties in Existing Fiscal Structure":
· The incorporation of progressivity into the Profit-
Based Production Tax (Net) in ACES creates three
significant problems
· Large-scale gas production at low gas prices
could in the future significantly reduce
production tax revenue from existing oil
production
· Resolving this problem within the framework
of ACES requires significant complexity
· Approach to decoupling in CSSB 192 requires
ability to split costs between oil and gas
production, creating high degree of
administrative burden, and limiting capacity
of state to effectively audit
· Combination of high credits with high tax rates
can produce excessive levels of support for
certain spending, and weak incentives for cost
control
· Effective After-Tax rate of Government
support for exploration can be over 100% at
high price levels
· Options for incentivizing new production are
limited, and relatively complex
· Proposed incentives within existing
framework focus on either allowances to
reduce Production Tax Value, or revenue
exclusions (tax holiday)
9:58:25 AM
Mr. Mayer discussed slide 3 titled "Summary of Progressive
Severance Tax (Gross) Structure":
· A Progressive Severance Tax (Gross) option would
instead remove progressivity from the Profit-
Based Production Tax (Net), instead levying this
tax at the flat, base rate of 25%
· To retain an element of progressivity, a new
Progressive Severance Tax (Gross) would then be
added to the system. The tax would:
· Be non-deductible for Profit-Based
Production Tax purposes
· Be levied on gross production (net of
royalties)
· Be levied solely on oil
· The tax would use a progressivity structure
not dissimilar to that under the current
system, with progressivity coefficients that
apply at different thresholds.
· The proposed Progressive Severance Tax would use
the following parameters:
· No severance tax below $65 Gross Value at
Point of Production (GVPP)
· Progressivity of .25% commencing at a
threshold of $65 GVPP
· At $125 GVPP, a tax rate of 15% is reached.
At this point, progressivity is reduced to
0.05%
· Progressivity is capped at 20%
10:00:00 AM
Mr. Mayer spoke to slide 4 titled "Benefits of Progressive
Severance Tax (Gross) Structure":
· By removing progressivity from the Profit-Based
Production Tax (Net), and having the progressive
element of the structure be a Progressive
Severance Tax (Gross), two things become much
easier to achieve
· The issue of gas production reducing
production tax revenue ceases to be a
problem without progressivity in the Profit-
Based Production Tax
· Complex provisions to split costs
between oil and gas production under
CSSB 192 are thus no longer required
· Much of the issue of excessive spending
support ceases to be a problem
· Even with 40% exploration credit,
effective after-tax Government support
for exploration flat at 65%
· Significant incentives can be provided to
new production, by eliminating or reducing
the Progressive Severance Tax (Gross) for
new production
· A wide range of levels of government take can be
achieved using this structure, depending on the
parameters applied
10:02:19 AM
Mr. Mayer turned to slide 5 titled "FY 2013 Revenue
Comparison." He stated that the slide showed a revenue
comparison of how the severance tax option compared to some
of the other alternatives. He related that the red and
yellow lines depicted ACES and CSSB 192 as being very
similar in terms of revenue, but there was a very slight
reduction from ACES in CSSB 192. He stated that the
severance tax option was represented by the light blue line
and that it diverged from ACES and CSSB 192 from around
$100 to $110 per barrel; furthermore, from $130 per barrel
and upwards, the scenario flattened and evened out the
split between the government and producers at around the 72
percent or 73 percent government take level. He pointed out
that the slide compared the severance option to the
placement of a 40 or 50 percent cap on progressivity under
the current system. The 50 percent cap option was
represented by the darker blue line and the 40 percent cap
option was reflected by the green line. He observed that
the chart was based on FY 13 Department of Revenue (DOR)
numbers for production and costs; on that basis, the
severance tax option's split of revenue from production tax
and the split between cash to companies versus revenue to
the state were in between the 40 and 50 percent cap
options.
10:04:14 AM
Mr. Mayer looked at slide 6 titled "FY 2013 Revenue
Comparison." He pointed out that in terms of total state
and government take, the severance tax option was between
the 40 and 50 percent cap options.
Mr. Mayer highlighted slide 7 titled "FY 2013 Revenue
Comparison." He stated that the comparative revenue table
showed that at around the $100 per barrel price level, the
total revenue under the severance tax option was projected
be slightly above that of the Senate Resources Committee
version of CSSB 192; at prices above $100 per barrel (i.e.
a $150 to $200 per barrel) there was a balancing of the
government take "between the two." He referenced the
government take figures on the lower right table and stated
that the severance tax option's government take flattened
out at about 73 percent from the $150 per barrel range and
above.
Co-Chair Stedman pointed out that there were a lot of
numerics in the tables and that although it may take some
time, it would be helpful if the committee had some
comparison material. Mr. Mayer replied that the table in
question was done consistent with DOR methodology and that
it did not include tax credits that were claimed against
current production. He noted that the state was expected to
expend $400 million in FY 13.
10:05:59 AM
Mr. Mayer looked at slide 8 titled "FY 2013 Revenue
Comparison - Adjusted for Credits Not Claimed Against
Current Production." He stated the slide's table examined
the production tax in terms of total state take in order to
include the $400 million tax credit expenditure.
Senator McGuire noted that when the decoupling issue was
discussed, the state projected about $80 million in losses
per year. She inquired if the projected losses were
reflected in the cost chart as a savings that would be
returned to the state. Mr. Mayer replied that the projected
losses were not included in the figures and that the chart
was based solely on FY 13 revenue numbers. He stated that
the projected losses would come to the state as savings in
the event of significant gas production.
Senator McGuire commented that the point was important to
note.
10:07:12 AM
Mr. Mayer discussed slide 9 titled "Impact of Rising
Operating Costs." He shared that the slide showed an
important impact that came from shifting progressivity from
the net to the gross; the impact was a question of what the
shift looked like in different cost environments compared
to the existing system. He noted that DOR projected that in
FY 13, the cost per barrel of oil produced would be $11.70.
He observed that the chart compared the difference in
revenue under ACES and the severance tax option; anything
above the zero line represented an increase in revenue
compared to ACES, while anything below the line was a
decrease in revenue. The slide showed that at the $70 per
barrel price level and at $12 per barrel operating costs,
the revenue between ACES and the severance tax option were
identical; the two options also generated the same revenue
at the $60 per barrel level and the same cost per barrel
level. He stated that revenue increased below the $60 per
barrel level in all of the instances because of the impact
of the higher floor that was in CSSB 192. He related that
in the $12 per barrel cost scenario, the severance tax
option had reduced revenue at the $100 per barrel tax level
when compared to ACES; in comparison, it had relatively
similar revenue compared to CSSB 192 at the $100 to $130
per barrel level, but had significant reductions in revenue
past $130 per barrel as the split between producers and the
state was capped.
10:09:05 AM
Mr. Mayer stated that when looking at what would happen
under significantly higher operating cost assumptions, it
was important to understand that the progressive severance
option saw an increased take at price levels in the $70 to
$140 per barrel range. He explained that at $12 per barrel
operating costs and at a $100 per barrel price, production
tax rates under ACES were probably around 35 percent. He
furthered that if the operating costs were at a higher rate
of $24 per barrel, the tax rate under ACES could drop to 28
percent; the drop in the rate was a result of a reduction
in the production tax value (PTV) after the costs had been
deducted. He related that in some of the higher cost per
barrel cases, the progressivity that was put in place on
the gross (through the progressive severance option) may be
higher than the progressivity experienced under ACES when
production costs were particularly high; this was a result
of the progressive option being calibrated to the $12 per
barrel level.
Mr. Mayer reiterated that a $12 per barrel operating cost
was the current average on the North Slope. He noted that
from a producer perspective, the progressivity at higher
cost levels may be viewed as problem; however, on the other
hand it was important to consider the current system's lack
of cost control incentive. He furthered that particularly
at high marginal tax rates and when there was the ability
to deduct costs from progressivity, the effective support
from the state for new capital and operating expenditures
could be very high; in that sense, it was a significant
incentive for controlling costs in the future. He concluded
that part of the discussion going forward would be about
the two sides of the progressive option's progressivity at
higher operating costs.
10:11:55 AM
Mr. Mayer discussed slide 10 titled "Data on Operating
Costs." He stated that the top right chart depicted the
historical average costs for Prudhoe Bay, Kuparuk, and the
North Slope; in recent years, operating costs in the areas
were between $10 and $12 per barrel. He noted that in 2010,
Prudhoe Bay had a slightly higher operating cost of $12 per
barrel compared to Kuparuk's cost of around $10 per barrel
and that the North Slope average was a bit over $10 per
barrel. He pointed out that based on FY 13 numbers, the
North Slope average was projected to rise to $11.70 per
barrel. He directed the committee's attention to the chart
on the upper left portion of the slide that showed a longer
time period. He related that ConocoPhillips was unique
because it reported Alaska separately as a region in its
financial reporting. ConocoPhillip's 10-K reports [required
annual report to the U.S. Securities and Exchange
Commission] showed an operating cost of about $12.50 per
barrel in 2011 and costs below the $10 per barrel mark for
prior years. He spoke to the chart in the lower middle
portion of the slide. He related that the DOR forecast for
average operating costs on the North Slope predicted a cost
around the $12 per barrel mark until around 2017, at which
point the costs were expected to continue to rise every
year.
Mr. Mayer explained that the levels of averages on slide 10
could disguise some of the granularity that existed (e.g.
BP's costs may reflect something different than what was
shown for ConocoPhillips). He opined that although Prudhoe
Bay and Kuparuk's costs were probably similar for both
companies, BP's other assets might have higher operating
costs. He added that new producers could have higher cost
assets that would involve higher operating costs (i.e. $16
to $18 per barrel). He pointed out that new production,
which would have a higher cost structure, could have lower
rates of progressivity applied to it. He offered that the
committee may also want to have the lower rate of
progressivity apply to higher cost projects that had been
brought on line in the recent past.
10:14:46 AM
Mr. Mayer spoke to slide 11 titled "Impact of Inflation":
· Under ACES, thresholds and coefficients for
progressivity are specified in nominal terms,
without indexation
· As a result, when economics over the long-
term rather than just 2013 are examined, we
see the effects of 'bracket creep' or
'stealth tax'
· In real terms, as prices increase,
thresholds for progressivity decrease, and
the higher take that comes with
progressivity occurs at lower and lower
price levels
· Similarly, unless progressive severance
thresholds are indexed to inflation, progressive
severance will apply at steadily lower thresholds
over time
· Indexing thresholds will also go some way to
addressing the cost sensitivity issue
Mr. Mayer noted that it was particularly important to put
in place indexation for inflation in reference to the two
prior slide's information regarding the impact of costs
when progressivity was levied on the gross rather than the
net. As long as the real costs did not also rise, the
indexing would result in progressivity rising along with it
if costs rose in nominal terms. He added that cost rising
in real terms was another question related to the issue of
incentives for cost control.
10:16:19 AM
Mr. Mayer discussed slide 12 titled "Incentives for New
Production":
· Significant incentives can be provided to new
production, by eliminating or reducing the
Progressive Severance Tax (Gross) on any
combination of:
· Production from new areas
· Production from new plans of development
(determined through the regulatory process
to be for "new production")
· Production above a fixed decline rate
· One possibility for a reduced rate of Progressive
Severance Tax is:
· No severance tax below $65 Gross Value at
Point of Production (GVPP)
· Progressivity of .05% commencing at a
threshold of $65 GVPP
· Progressivity capped at 5%
Mr. Mayer stated that based on some of the numbers, the
slide's example of a possible way to reduce progressivity
would result in a significant improvement in the economics
for some projects and would have levels of government take
around the mid-60 percentage range instead of the mid-70
percentage range.
10:17:23 AM
Mr. Mayer highlighted another consideration related to
incentivizing new production. He explained that production
from new areas was straight forward; however, the impact of
new areas would be minimal because in the near term most of
the new production would come from existing areas. He
stated it was important to think about how incentivizing
production above a fixed decline rate would work.
Mr. Mayer spoke to slide 13 titled "Production Above a
Decline-Fixed v Annual Calculation." He pointed out that
the slide's two charts used DOR revenue production forecast
data and that data was looked at in two different ways. He
noted that the slide was an exercise and that it was
important to pretend that the production was reflective of
one producer rather than multiple producers. The charts
depicted what the production from a single producer would
look like if production above a decline rate was determined
in two different ways. The left chart assumed there was a
determined rolling average decline; the option would use
the recent average decline to determine how much new
production there was in the current year when compared to
the prior year. He stated that based on the slide's
production curve, the rolling average method resulted in
very little production being classified as new production.
He stated that there two reasons for the lack of new
development classification under the rolling average
option: (1) only the previous year was examined to
determine a production level above the decline rate and (2)
in any years in which incremental new production existed,
the rolling average went from a decline to an incline and
as a result, it became difficult to produce additional
production above the high threshold.
10:19:46 AM
Mr. Mayer continued to speak to slide 13 and offered that
the chart on the right depicted the scenario with a simpler
and more "effective" method by selecting a specific point
in time and projecting what production would look like
going forward based on the decline rate; there would be a
significant "wedge" of new production if anything above the
decline rate would be incentivized with a lower taxation
rate. If the goal was to incentivize production above the 6
percent decline, the strategy provided was useful and would
allow companies to work towards a lower tax rate in a way
that a year-by-year process would not allow.
10:21:15 AM
AT EASE
10:24:33 AM
RECONVENED
10:25:01 AM
Co-Chair Hoffman MOVED to ADOPT the proposed committee
substitute for SB 192, Work Draft 27-LS1305\T (Bullock,
4/2/12).
Co-Chair Stedman OBJECTED for the purpose of discussion.
10:25:29 AM
DARWIN PETERSON, STAFF, SENATOR BERT STEDMAN, reviewed the
changes in the new CS for SB 192. He relayed that all
sections (Sections 1, 5, 7, 8, 10, 11, and 12) pertaining
to oil and gas tax decoupling had been removed from the
bill because the process of removing progressivity from a
profits based production tax and applying it to the gross
value was a de facto decoupling. The increased production
allowance (Section 13) was removed, which had proposed a
$10 per barrel reduction in PTV for each barrel of oil
delivered to the Trans-Alaska Pipeline System that was
above the base volume as determined from the prior calendar
year.
10:26:20 AM
Mr. Peterson walked through the bill sections. Section 1
amended the production tax so that progressivity on oil was
calculated on the gross value at the point of production.
The section maintained the 25 percent base tax on the PTV
of oil and gas that was currently included in the ACES
statute. He relayed that Section 2 was identical to Section
6 from the previous bill version. The section repealed AS
43.55.011(f) and set a new minimum tax of 10 percent of the
gross value at the point of production for areas with
historical production of 1 billion barrels of oil to date;
the provision would apply only to the Kuparuk and Prudhoe
legacy fields.
Mr. Peterson explained that Section 3 repealed the existing
progressivity based on the PTV (AS 43.55.011(g)) and
replaced it with a new progressive severance tax on the
gross value. He elaborated that on a monthly basis
progressivity on oil produced in a legacy field would be
calculated as follows: no severance tax below $65 gross
value at the point of production, progressivity of 0.25
percent commencing at $65 gross value at the point of
production at $125 gross value a tax rate of 15 percent was
reached progressivity would be reduced to 0.05 percent, and
progressivity would be capped at 20 percent. He furthered
that the concept had been introduced by PFC Energy on March
30, 2012 and had been referred to as "Severance Tax Option
Number 1."
10:27:51 AM
Mr. Peterson turned to Section 3, page 3 that would
establish a reduced rate for the progressive severance tax
on oil produced outside of the legacy fields. The rate
would be calculated as follows: no severance tax below $65
gross value at the point of production, progressivity of
0.05 percent would commence at a $65 gross value,
progressivity would be capped at 5 percent, and the lower
tax on fields outside Prudhoe and Kuparuk was only
applicable for the first seven years of production (page 3,
line 2).
Mr. Peterson relayed that Section 4 was a conforming
amendment to statute that dealt with the payment of taxes
by a producer; the section included the new progressive
severance tax and the 10 percent minimum tax. Section 5
(page 6) was a conforming amendment that instructed DOR to
adopt regulations to calculate the new progressive
severance tax based on the gross value at the point of
production.
10:29:06 AM
Mr. Peterson shared that Section 6 was identical to Section
12 from the previous bill version. The section amended AS
43.55.160 by adding three subsections to describe the
allocation of lease expenditures to oil or gas production
or exploration in different areas of the state. Section 7
was same as Section 14 of the previous bill version and
would amend AS 43.55.165(h), which dealt with lease
expenditures. The Section required DOR to allocate lease
expenditures between oil and gas production based on the
gross value at the point of production.
Mr. Peterson explained that Section 8 (page 8) was the same
as Section 15 of the previous bill version; it added a new
subsection to AS 43.55.170, which was the section of
statute that dealt with adjustments to lease expenditures.
The section would require DOR to adopt regulations that
provided for reasonable methods of allocating adjustments
to lease expenditures, payments, and credits between
different categories of oil and gas production.
10:30:06 AM
Mr. Peterson communicated that Section 9 included the
Petroleum Information Management System. The only change
was the placement of the system under the purview of DOR
instead of AOGCC. Section 10 repealed AS 43.55.160(a)(2)
that dealt with the monthly progressivity calculation based
on the production tax value. He expounded that under the
new CS the section was irrelevant given that progressivity
would be taxed on the gross value at the point of
production.
Mr. Peterson discussed that Section 11 was uncodified law
that required DOR to develop a work plan for the Petroleum
Information Management System; the section required that
the system be operational before January 1, 2014. He
concluded with Section 12 that established an effective
date of January 1, 2013.
Co-Chair Stedman REMOVED his OBJECTION. There being NO
FURTHER OBJECTION, Work Draft 27-LS1305\T was ADOPTED.
10:31:36 AM
Co-Chair Stedman noted that the incremental production from
Prudhoe Bay and Kuparuk was not included in the CS; his
office was working with PFC Energy and would meet with them
to work out details related to the item. He had concern
about using the 2013 decline curve versus the curve from
2011 or 2012; he believed the committee needed to take a
look at the item. He shared that his intent was to "get a
CS on the table" in order for the industry offer a more
fine-tuned opinion on the bill.
SB 192 was HEARD and HELD in committee for further
consideration.
Co-Chair Stedman discussed the following meeting's agenda.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Explanation of Changes for HB 129 Version A to Version D.pdf |
SFIN 4/3/2012 9:00:00 AM |
HB 129 |
| Letter of support from AARP.pdf |
SFIN 4/3/2012 9:00:00 AM |
HB 129 |
| HB 129 Sponsor Statement v.2.pdf |
SFIN 4/3/2012 9:00:00 AM |
HB 129 |
| HB 129 - Death Certificate Example v.2.pdf |
SFIN 4/3/2012 9:00:00 AM |
HB 129 |
| HB 245 Background Info.pdf |
SFIN 4/3/2012 9:00:00 AM |
HB 245 |
| HB 245 Sectional Analysis.pdf |
SFIN 4/3/2012 9:00:00 AM |
HB 245 |
| HB 245 Sponsor Statement.pdf |
SFIN 4/3/2012 9:00:00 AM |
HB 245 |
| HB 245 Support Letters.pdf |
SFIN 4/3/2012 9:00:00 AM |
HB 245 |
| SCR24_2ndOrganicAct_1912.PDF |
SFIN 4/3/2012 9:00:00 AM |
SCR 24 |
| SCR24_Alaskas_1stHouseRepresentatives_1913.jpg |
SFIN 4/3/2012 9:00:00 AM |
SCR 24 |
| SCR24_Alaskas_1stSenate_1913.jpg |
SFIN 4/3/2012 9:00:00 AM |
SCR 24 |
| SCR24_HomeRule_forAK.pdf |
SFIN 4/3/2012 9:00:00 AM |
SCR 24 |
| SCR24_SessionLaws_Summary_1913.pdf |
SFIN 4/3/2012 9:00:00 AM |
SCR 24 |
| SCR24_Sponsor_Statement_29March12.pdf |
SFIN 4/3/2012 9:00:00 AM |
SCR 24 |
| SB 192 April 3 Alaska Senate Finance .pdf |
SFIN 4/3/2012 9:00:00 AM |
SB 192 |
| SB 210 work draft Version T.pdf |
SFIN 4/3/2012 9:00:00 AM |
SB 210 |
| CSSB 192 (FIN) ver T.pdf |
SFIN 4/3/2012 9:00:00 AM |
SB 192 |
| Sb 226 - CSSB 226 - v.B.PDF |
SFIN 4/3/2012 9:00:00 AM |
SB 226 |