Legislature(2011 - 2012)SENATE FINANCE 532
04/06/2012 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB192 | |
| Department of Revenue | |
| Alaska Oil and Gas Association | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 192 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 192
"An Act relating to the oil and gas production tax;
and providing for an effective date."
9:07:10 AM
Co-Chair Hoffman MOVED to ADOPT the proposed committee
substitute for SB 192, Work Draft 27-LS1305\U (Bullock,
4/5/12).
Co-Chair Stedman OBJECTED for discussion.
DARWIN PETERSON, STAFF, SENATOR BERT STEDMAN, outlined the
three changes in the new CS. He explained that there had
been concern that the prior draft of Alaska Statute
43.55.0119(g), which included tax rates for the three
different types of production, would have allowed producers
to access the intermediate tax level if any production in a
field was above the target volume decline curve; as a
result the language had been redrafted to clarify that all
existing production below the target volume would be taxed
at the high progressivity rate (page 4, lines 19 through
25). He pointed to page 5, lines 8 through 13 that defined
what production was incremental above the target volume
decline rate; the language had been redrafted to make it
clear that any production above the target volume would be
taxed at the intermediate progressivity rate, but that all
remaining production below the target rate would still be
taxed at the higher rate.
Mr. Peterson addressed the third change that began on page
6, line 31. New language had been inserted to specify that
a company involved in a merger or acquisition of another
company could not use the other company's production to
increase its production above the target volume decline
rate.
Co-Chair Stedman REMOVED his OBJECTION. There being NO
further OBJECTION, Work Draft 27-LS1305\U was ADOPTED. He
apologized for any confusion that had resulted from
language included in the prior bill version.
^DEPARTMENT OF REVENUE
9:10:39 AM
BRIAN BUTCHER, COMMISSIONER, DEPARTMENT OF REVENUE (DOR),
thanked committee consultant PFC Energy for a positive
working relationship. He provided a PowerPoint presentation
titled "Comments on CSSB 192(FIN) Work Draft 27-LS1305\O"
and noted that the majority of the presentation was not
impacted by the CS introduced that morning (copy on file).
He relayed the department's intent to touch on the impact
that each piece of the legislation would have.
Co-Chair Stedman explained that an email had been sent out
the prior day to DOR and other presenters when the drafting
glitch had been identified. Commissioner Butcher responded
that DOR had taken the email into account; the only update
that was not reflected in the presentation was related to
language that would not allow an acquisition to be
beneficial [to a producer].
Commissioner Butcher addressed questions DOR had considered
related to its version of an oil tax bill (slide 3):
· Does this bill make Alaska more competitive?
· Does this bill make Alaska more appealing to
potential investors?
· Does this bill make our tax structure less
complicated & more understandable to investors?
· Are these changes meaningful enough to compete for
investment capital?
9:13:20 AM
Commissioner Butcher relayed that the presentation focused
on items listed on slide 4 titled "CSSB 192(FIN) Changes
from Current Law":
· Change to progressivity calculation
o For currently producing fields
o For production from currently producing fields
exceeding a production target
o For new fields
· Change to minimum tax
· Change to lease expenditure allocation
· Petroleum information management system
Commissioner Butcher moved to slide 5: "Impact of Change to
Progressivity on Production Tax Liability." The tax was
company specific particularly in relation to lease
expenditures. In general the system was kept neutral at
$100 per barrel and taxes were increased at lower prices
due to the gross minimum tax floor provisions in the
legislation; however, there were companies that would see
tax increases at $100 per barrel and under. The tax was a
small reduction for many companies above $100 per barrel.
He reiterated that tax changes would impact all companies
differently.
Commissioner Butcher pointed to slide 6: "Comments on
Change to Progressivity." Currently companies were allowed
to use their lease expenditures to reduce their production
tax value, which reduced their progressive tax rate. The
bill did not factor lease expenditures into the
progressivity calculation. He explained that companies with
higher lease expenditures could find the bill less
attractive because they would no longer be able to use the
expenditures to reduce their progressive tax; however,
companies with lower lease expenditures could find the bill
more attractive because they would benefit from lower
progressive tax. He would provide detail later in the
presentation on the difference between a company spending a
significant amount on development versus a company spending
a smaller amount.
Commissioner Butcher informed the committee that the gross
progressive tax could reduce the incentive to invest and
reward companies in a harvest mode with low lease
expenditures; however, certain progressivity aspects
related to production on new fields and new production from
existing fields could help balance things out.
9:15:50 AM
Co-Chair Stedman inquired whether DOR planned to provide
more detail on information in the presentation.
Commissioner Butcher responded in the affirmative.
Commissioner Butcher addressed slide 7: "Comments on the
Minimum Tax." The bill would create a substantial tax
increase at lower prices, generally at $60 per barrel and
below. The minimum tax would impact companies when prices
were below their current amount. He elaborated that state
revenues from oil would be less than half their current
level if oil prices dropped to $60 per barrel or lower; a
tax increase would only have a minimal benefit to the state
and substantial budget decisions would be necessary as a
result of the low oil price.
Co-Chair Stedman requested that Commissioner Butcher go
into depth on the items included in the presentation.
Commissioner Butcher explained that the presentation would
provide more substantive detail on following slides.
Co-Chair Stedman asked Commissioner Butcher to continue
with the presentation, but reiterated the need to discuss
the items in further detail.
9:17:31 AM
Commissioner Butcher directed attention to slide 8 titled
"Petroleum Information Management System (PIMS)":
· Requires the Department to have the information
management system in place by January 1, 2014
· Competes with core mission of the Tax Division,
which is to assess and collect taxes
· Competes with daily staff goals of interacting with
taxpayers, forecasting revenues, and auditing tax
returns
· Will likely delay the completion of those core
duties and result in slower responses to legislative
policy questions
Commissioner Butcher noted that DOR had been criticized for
not providing the legislature information quickly enough
without catching up on its audits; the bill would task the
department with rewriting regulations, implementing a new
tax, implementing a new Public Information Management
System that would likely cost millions of dollars, and
adding a number of positions at the same time that DOR was
working to put a $35 million tax database system in place
to improve the prior system. He discussed that much of the
requested information in the management system was already
gathered by the Department of Natural Resources (DNR), the
Alaska Oil and Gas Conservation Commission (AOGCC),
Department of Labor and Workforce Development (DLWD), and
DOR. He elaborated that most of the DOR information was
confidential and the bill would require it to gather all of
the information from other departments. He opined that the
process would be much more difficult for the Tax Division
given all of its other responsibilities and challenges.
Commissioner Butcher read additional points related to PIMS
on slide 9:
· Millions of data elements would have to be manually
uploaded to the system, in various formats including
electronic copies of Excel spreadsheets, PDFs, Word
documents, and in hard copy format
· Determination would have to be made as to the
confidentiality of each item for uploading to the
system, which would take thousands of employee hours
· Department currently has only begun long-awaited Tax
Revenue Management System (TRMS) project, which is
expected to take 3 - 5 years to complete
· PIMS would likely delay the implementation of that
important tax-specific project
· Would require significant funding and additional
staff resources for the Department
Commissioner Butcher stated that from the department's
perspective, spending millions of dollars to compile
information that was already available to various
departments did not seem to be a wise use of state
resources.
9:20:05 AM
BRUCE TANGEMAN, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
pointed out that some of the graphs in the printed version
of the presentation included too many lines; DOR would
provide corrected copies after the meeting.
Commissioner Butcher looked at slide 10 titled "Effective
Tax Rates" that included a line chart showing the effective
Production Tax Rate (post-credits). The current law,
Alaska's Clear and Equitable Share (ACES) was shown in
black ranging from $40 and $200; the governor's proposed
bill CSHB 110(FIN) was included for a frame of reference in
red; and CSSB 192(FIN) was depicted in blue. The chart
showed that from $60 per barrel and below the bill would
result in a significant tax increase (shown in blue); from
the $60 to $110 tax would be the same as current law; a tax
decrease was seen at increased prices that had not been
reached historically.
Co-Chair Stedman asked for verification that the
presentation dealt with effective tax rates. Commissioner
Butcher replied in the affirmative.
Co-Chair Stedman queried why detail on marginal tax rates
had not been included in the presentation. He pointed out
that the legislation made a substantial shift away from the
marginal tax concern and potential exposure the state would
have associated with any federal financial help related to
capital expenditures (up to and over 100 percent) that
could incentivize behavior that was not in Alaska's
interest.
Mr. Tangeman responded that the related graphs DOR had seen
showed a slight improvement on the marginal side, but not
to the extent that would have resulted from the bracketing
system under CSHB 110(FIN).
9:23:10 AM
Co-Chair Stedman asked whether DOR believed that going from
a 90 percent marginal tax rate to a 45 percent marginal tax
rate was barely measurable. Mr. Tangeman replied that DOR
would be happy to share the graphs with the committee, but
he was not prepared to go into detail on the issue at the
time.
Co-Chair Stedman reminded DOR that the [oil tax] subject
was not new and that it should be careful with its
testimony. Members did not find it "humorous" to be told
that such a significant change [in the marginal tax rate]
was inconsequential. He asked for accuracy in the
discussion.
Commissioner Butcher responded that DOR was not saying the
difference was inconsequential. The department was happy to
provide the data to the committee, but had not had time to
gather the information for the meeting, given that the CS
had come out the prior afternoon. The presentation used
effective tax rates because DOR had been told that the rate
provided a more well-rounded view.
Co-Chair Stedman clarified that the effective rate was the
primary issue; at high prices the marginal rate was a
challenge within the current system. He asked the
department to choose its words carefully because he did not
agree with the inference that reducing the marginal tax
rate from 90 percent down to 45 percent was
inconsequential.
Commissioner Butcher answered that DOR had misspoken if it
had described the reduction as insignificant.
9:25:09 AM
Co-Chair Stedman discussed that the committee had heard a
substantial amount of testimony that the current fiscal
system was good for a harvest mode environment and that the
problem existed when oil prices were above $100. He pointed
to the effective tax rate proposed in CSSB 192(FIN) that
included a floor at the $40 per barrel price (represented
by the blue line on slide 10). He stated that the
legislation had roughly a $50 million impact on the state-
take at the $100 per barrel price; whereas, CSHB 110(FIN)
had a $1.1 billion impact on the state. He wondered what
data was available that would assure the committee that the
impact to the state should be changed from $50 million to
$1.1 billion at the $100 per barrel price when consultants
had expressed that the change was not needed.
Commissioner Butcher responded that he disagreed with the
consultants. He stressed that Alaska had the nation's
highest tax rate and one of the highest in any OECD
[Organization for Economic Co-operation and Development]
country; DOR believed it was a disincentive that was seen
in the lack of production, development, and investment in
Alaska. He opined that the difference was more than a
dollar amount; it impacted how companies evaluated Alaska
and how it changed their investment decisions.
9:28:08 AM
Co-Chair Stedman believed that the companies would speak
for themselves, but recalled that their concern was related
to oil prices above $100 per barrel. The concern had been
one of the reasons the committee had spent a substantial
amount of time on the issue of prices over $100 and how to
fix the state's increasing share that became exaggerated at
around $200 per barrel.
Co-Chair Hoffman believed that it would be more helpful if
the chart's Y axis (slide 10) used dollars instead of
percentages. The chart showed the tax rate going up 100
percent [at the $40 level], but when the number was looked
at in dollars the graph would not be as drastic. He offered
that under the scenario cash to the companies at $40 would
be a reduction of $194 million and at $100 the amount was
negligible; however, at $150 per barrel cash to companies
represented approximately two-thirds of one billion
dollars; at $170 per barrel companies would receive over $1
billion; at $200 companies would receive $1.75 billion. He
believed companies would be looking at the numbers when
developing investment models. The committee believed that
the state should have protection at the low price end if
substantial changes were made at the high end of the tax
formula. When $194 million was compared to the potential of
another $1 billion at the $170 price per barrel it was
significant. He addressed that the probability of $170 per
barrel oil was low, but consultants had also said that the
probability of $40 per barrel oil was very low as well. He
opined that the finance committees would be "scrambling"
anyway if the price of oil dropped to $40. He reiterated
that if the state gave on the high price end that it should
have some protections on the low price end.
9:31:57 AM
Co-Chair Stedman noted that at the $140 per barrel
(indicated by a green line on slide 10) the difference
between ACES and CSSB 192(FIN) was $765 million [ACES was
$765 million higher]; the difference between ACES and CSHB
110(FIN) was $2.784 billion [ACES was $2.784 billion
higher]; the difference between CSSB 192(FIN) and CSHB
110(FIN) was $2 billion [CSSB 192(FIN) was $2 billion
higher]. He emphasized that the amounts were significant.
Commissioner Butcher replied to Co-Chair Hoffman's earlier
question. He explained that looking at the dollar amount
was worthwhile; however, the reason the chart used
percentages was that keeping the transportation operating
and capital expenditures constant the percentages would
apply for any year and in any scenario. The chart provided
more of a snapshot into the future than it would if current
dollars were used.
Co-Chair Hoffman surmised that the presentation appeared to
be geared towards providing shock value.
9:33:31 AM
Co-Chair Stedman pointed to the bend in the CSSB 192(FIN)
line (blue) where the goal was to keep the percentage of
profit evenly split and staying constant at prices above
approximately $120 per barrel ($130 shown on the chart). He
asked DOR to explain why the CSSB 192(FIN) line flattened
out; it flattened out intentionally to hold the split
constant and to get away from the marginal tax impact the
state was facing at high rates; he believed the chart
looked accurate related to that point. He opined that the
chart looked dramatic, but the number was somewhere around
$300 million more to the state than under current law at
$40 per barrel. He observed that there was an increase to
the state at a $40 per barrel price of approximately $300
million, but at prices of $120 the state was giving up
approximately $277 million. He speculated that the
probability of hitting $40 per barrel and remaining there
without significant state and industry involvement would be
minimal. He could not imagine running at $40 oil without a
substantial modification to the current structure in order
to keep the industry alive and vibrant and the state
functioning.
9:36:12 AM
Mr. Tangeman commented that in the recent past, $40 per
barrel to $140 per barrel swings had occurred in a short
amount of time. He noted that the occurrence was not
unheard of; DOR was projecting relatively flat prices into
the near future, but price swings had happened and they
would have a serious impact on the budget.
Co-Chair Stedman agreed, but the swings had not been at
sustained levels for quite some time. He referred to a
"price shock upward" at $145 per barrel that had occurred
in the past.
Co-Chair Hoffman agreed that [major price fluctuations] had
occurred in the past. He reiterated an earlier statement
that consultants believed the occurrence would be a low
probability.
Senator Thomas thanked DOR for its presentation. He read
from a proposal by consultant PFC Energy:
"Consistent with DOR methodology these revenue numbers
do not include payments for tax credits which are not
claimed against current production as these are
accounted for separately in the budget. In 3013 DOR
forecasts a potential liability of $400 million for
these credits."
Senator Thomas understood that PFC Energy's proposal used
credits that had been claimed, but not anticipated claims.
He asked for clarification on whether the DOR chart on
slide 10 included anticipated credits.
Commissioner Butcher answered that DOR excluded the $400
million in credits that did not result in a tax liability
for the companies; the credits were accounted for but were
not included in how the effective tax rates would work on
companies currently paying taxes because there were
companies that currently had no production and were not
paying taxes.
9:38:47 AM
Senator Thomas commented that at one time there had been
predictions of oil prices at $150 per barrel, which had
seemed hard to imagine when oil was at $30 or $40 per
barrel. He reflected that oil prices had been at $30 per
barrel in the relatively recent past and currently Alaska
North Slope (ANS) prices were at $120 per barrel. He noted
that it was always good to be prepared for the future,
which was hard to predict.
Commissioner Butcher replied that DOR had wanted to show a
per-barrel price range from approximately $40 to $200. He
acknowledged that it was not likely oil prices would reach
the end of the spectrum in either direction, but the goal
had been to keep the numbers in a realm that was reasonable
for the future.
Senator Thomas surmised that a 10 percent to 15 percent
increase in the price of oil over the next few years would
be reasonable. Commissioner Butcher agreed that the
increase would be reasonable, but noted that the price of
oil had never coincided with a normal inflation rate. He
referred to a time when oil had gone from $30 per barrel to
$15 per barrel over an extended period.
9:40:47 AM
Commissioner Butcher moved to slide 11 titled "Effective
Tax Rates - Impact of Producing 25% Over Target (i.e. 1/5
of Production at Lower Rate." The slide showed how a
currently producing company's effective tax rate would be
impacted if it were to increase its production to 25
percent over the target. Current law (ACES) was represented
in black; CSSB 192(FIN) was shown in blue; and the dotted
blue line showed what a company would pay under CSSB
192(FIN) if it produced 25 percent over target.
Co-Chair Stedman discussed that production was currently
about 600,000 barrels per day and that an increase of 25
percent would bring the total to 750,000. There had not
been a significant amount of time spent looking at the
capital costs to get to 750,000 barrels per day; there had
been discussion that it would take $3 billion to $5 billion
per year (the equivalent to the Oooguruk and Nikaitchuq oil
fields) to level out. He did not know how much it would
take to get to the 750,000 amount, but he supposed they
could inquire and try to determine an answer.
9:42:17 AM
AT EASE
9:42:58 AM
RECONVENED
9:43:08 AM
Co-Chair Stedman referred to comments in the press that it
would be nice to reach production of 1 million barrels per
day. He surmised that everyone would like to see that level
of production, but maintaining production at 600,000 would
surprise many people and reaching 750,000 barrels per day
would be monumental.
Commissioner Butcher answered that slide 11 showed a
conceptual percentage; it did not show that production was
currently at 600,000 barrels per day and what would occur
at 750,000. The slide showed what it would look like for
any company (regardless of production levels) to increase
production and how the lower tax rate would factor into the
entire amount of tax the company would pay.
Co-Chair Stedman remarked that BP accounted for roughly
half of the production in Prudhoe Bay.
Mr. Tangeman thought it would be interesting to hear the
perspectives of the companies when they presented to the
committee. The department agreed that significant
investment would need to take place in order to extract the
resource and it felt that the net system under ACES was an
incentive (tax credits were a separate issue that effected
the tax), but DOR believed shifting to gross on the
progressivity portion of the tax was likely a disincentive
to investment at a time when the state would need
significant investment to extract the harder to access
hydrocarbons. The oil would not be easy to reach and
included heavy, viscous, shale oils that would be more
capital intensive.
9:45:03 AM
Co-Chair Stedman relayed that the topic would be discussed
later, given that there were varying views related to
simplifying the tax code to incentivize heavy, viscous, and
shale oils, and cost allocation issues. He remarked that it
was nice to see the impact of the 25 percent increase
(shown on slide 11), but the committee had focused on the
cash flows and net present value over the incremental
production of a 10,000 barrel field; how to move the tax
code to enhance the rate of return and cash flows to enable
companies to reach or get closer to their hurdle rates so
they would begin new projects. He observed that the slide
did not address the same focus. He believed that the slide
addressed a piece of the equation, but to get to get to the
core of the issue it was necessary to measure companies'
cash flows and rates of return. He noted the committee
would ask the industry the questions. He appreciated that
the slide referenced the effect of full credits.
Commissioner Butcher discussed that slides 12 and 13 showed
how the legislation and gross [tax] issue would impact
high-cost and low-cost producers in relation to
economically challenged projects that would have higher
costs such as, heavy or shale oil, and developments located
farther from infrastructure. Slide 12 titled "Effective Tax
Rates - High-Cost Producer" included an estimate of $20 per
barrel for operating expenses and $25 per barrel for
capital expenditures. Slide 13 titled "Effective Tax Rates
- Low-Cost Producer" included data related to companies in
harvest mode that would be doing what they needed to
continue producing at their current rate. He explained that
there would be a considerable tax increase under the bill
for high-cost companies dealing with more challenged and
expensive fields (slide 12).
9:48:22 AM
Co-Chair Stedman replied that the committee had seen an
analysis showing that present value numbers would increase
under the legislation in a high-cost scenario. He expounded
that the high-cost producers' economics had improved over
the lifecycle of their investments in other projections the
committee had seen. He furthered that the committee had
seen numerous presentations with varying degrees of
progressivity and its impact on rate of return and net
present values in order to determine what to include in the
bill. He asked to see how the lifecycle economics worked
according to DOR; if the numbers were not improved over
ACES, the system would not be improved. He wanted to work
with DOR on the issues because he believed that its data
conceptually did not fit with other data presented to the
committee.
Commissioner Butcher responded that DOR would be happy to
provide the data. He noted that the presentation took into
account far fewer variables than looking at the lifecycle
of a field.
Mr. Tangeman pointed out that the black line (current ACES
system) took the deduction of all qualified capital and
operating expenditures into account; the blue line (CSSB
192(FIN)) that reflected a net system for the base and a
gross system for the progressivity, did not allow companies
to take as many capital and operating lease expenditures
against their taxes.
9:51:01 AM
Co-Chair Stedman observed that in certain circumstances
progressivity on the gross tax in a high-cost environment
was somewhat of a disadvantage; however, it put downward
pressure on the expenditure side from the producer. He
referred to concerns with the current ACES tax system
related to the high-cost expenditure side including,
exposure to the state for all of the credits and the
mechanics of the high tax structure and how it worked. The
goal was to fix the problem.
Mr. Tangeman agreed that the tax credits used to construct
the ACES line (shown in black on slide 12) could be
adjusted in any tax regime. He noted that working with the
tax credit system within the existing infrastructure the
black line could be adjusted however a person wanted.
Commissioner Butcher discussed that slide 13 "Effective Tax
Rates - Low-Cost Producer" showed the effective production
tax rate (post credits) using per barrel operating expenses
of $10 and capital expenses of $3 for a low-cost producer
or a producer in harvest mode. He pointed out that there
was a substantial tax reduction for the producers.
9:53:09 AM
Co-Chair Stedman remarked that one of the goals was to
bring the tax rate down at prices above $100 per barrel. He
relayed that one of the fundamental points the committee
had heard repeatedly was that there was a lack of a need
for incentive at prices below $100 per barrel in the legacy
fields. He queried how DOR justified moving approximately
$1.1 billion to the industry when consultants had told the
committee that it was not justified.
Commissioner Butcher respectfully disagreed with the
opinions of the consultants. He stressed that Alaska had
one of the highest tax rates of any OECD country. Companies
that did not do business in the state had talked about
Alaska's high tax rate. He stated that even under the
proposed CSHB 110(FIN) Alaska would have the highest tax
rate in North America. He emphasized that billions of
dollars in increased investment was needed to increase
production. He asserted that maybe there was a "sweet spot"
between ACES and CSHB 110(FIN) where taxes were reduced and
investment was increased. He relayed that the governor had
said he was willing to work on whatever scenario was
feasible. The department had not heard from companies
subsequent to the release of the most recent version of
CSSB 192(FIN); therefore, it did not know what they would
say. The department's quick snapshot of the bill was that
it discouraged investment of higher-cost, more challenged
projects and encouraged harvest mode, which was the
opposite direction the administration had been going with
the governor's bill.
9:55:31 AM
Co-Chair Stedman believed that according to testimony it
was more accurate to say that current tax regime was
affected if a producer was operating under harvest mode. He
did not think there had been any testimony from the
committee's consultants that CSSB 192(FIN) encouraged
harvest mode.
Commissioner Butcher explained that under harvest mode the
bill was better than current law.
Co-Chair Stedman agreed. He added that there were
significant differences between Alaska that was "subsurface
owned and commons" and any other area in North America.
Alaska had different cost environments and other;
therefore, it was not possible to compare Alaska's tax
structure directly with those of other states. He remarked
that Prudhoe Bay was one of the most prolific oil basins in
the world; there had been testimony that the field was
among the world's top 10 oil fields. He opined that the
comparison was too narrow. He did not believe that the
state had ever limited its comparisons to North America and
he did not think it was appropriate.
Commissioner Butcher clarified he had not been referring to
the issue addressed by Co-Chair Stedman; however, he did
believe there was value in North America comparisons
because most the companies doing business in Alaska had a
North American focus. He noted that PFC Energy had
discussed that Norway was the only other OECD location
above Alaska and at $140 per barrel it dropped below the
state. He expressed that [the tax rate] was a disincentive
to business in the state and that it was important to focus
on the current system rather than on high oil prices that
may never be seen; the high costs of doing business in the
state were another component that played into the state's
competitiveness with other areas.
9:58:25 AM
Co-Chair Stedman noted that ACES and PPT (Petroleum
Production Tax) had been intentionally modeled against
Norway's fiscal regime. He added that it was not by
happenstance that the state tracked the Norway system so
closely.
Co-Chair Hoffman wondered whether Commissioner Butcher had
been referring to the administration when he stated that
"we" have not discussed the current bill version with the
oil companies. Commissioner Butcher responded that he had
only been referring to himself and Mr. Tangeman; DOR had
only worked on the current version internally.
Co-Chair Stedman surmised that based on the chart on slide
13 the current bill enhanced the economics for low-cost
producers. Commissioner Butcher answered in the
affirmative.
Co-Chair Stedman thought there was a peak spread around
$130 per barrel (slide 13) and that the economics improved
and got closer together above and below $130 per barrel
relative to the ununitized fields in CSHB 110(FIN).
Commissioner Butcher responded in the affirmative.
Co-Chair Stedman that CSSB 192(FIN) did not address the
ununitized fields included in CSHB 110(FIN). He believed
that CSSB 192(FIN) incentives would get close to the
unitized fields and what the existing producers in the
basin would pay under CSHB 110(FIN). He restated that the
CSSB 192(FIN) incentives came close to where CSHB 110(FIN)
was without incentives.
10:00:55 AM
Commissioner Butcher concluded with slide 14: "Summary of
DOR Comments on CSSB 192 (FIN)." The department believed
that the changes in CSSB 192(FIN) moved in the wrong
direction by discouraging higher investment on more
challenged projects and encouraging harvest mode; and made
the state's complicated tax structure more complex with the
change to part net, part gross. He emphasized his concern
about the additional burdens of a multi-million dollar
database that DOR would have to compile. The department had
been working desperately to catch up with the 70-plus
regulations, audits, and other that had come up within the
past 6 years. He relayed that the department was doing the
best it could and everything it needed to do, but it was
opposed to the idea of a new database.
10:02:21 AM
Co-Chair Stedman asked if DOR believed the bill would be
worse than ACES. Commissioner Butcher replied that the bill
was more complicated than ACES because of items that would
need administering and new regulations would need to be put
in place. Additionally, the bill appeared to be worse for
high-cost projects due to the taxes a company would have to
pay.
Co-Chair Stedman asked DOR to follow up with the committee
on the full cycle economics of CSSB 192(FIN), given that
DOR's data was different. He recalled that petroleum
consultant Pedro van Meurs had pointed out the
dysfunctionality of CSHB 110(FIN) related to its cost
allocation issues between different hydrocarbon streams.
Mr. van Meurs had discussed that it was cleaner to stay
away from the cost allocation concept by moving the
progressivity on the gross. He stated that the DOR data
showed a 180-degree difference from at least two
consultants that had reviewed the bill. There had been no
discussion on the decoupling of oil and gas, which would
substantially increase the size of the bill. Under the
current structure the state would lose approximately $2
billion per year if it ran a 4.5 billion cubic feet line.
He asked for the department's opinion on the delinking of
oil and gas. He asked if the items should be linked, which
would mean the state would face a $2 billion loss.
Commissioner Butcher replied in the negative. He had no
doubt that if the price of oil dropped to $40 per barrel
for an extended time period there would be changes and
difficult decisions to be made. Additionally, he believed
that oil and gas would be delinked before a major gas sale.
He relayed that DOR was willing to work on the issue with
the committee, but he felt that CSSB 192(FIN) was not the
only way to decouple oil and gas.
10:05:20 AM
Co-Chair Stedman felt that the state had some risk exposure
with the linkage of oil and gas in the first open season
associated with the Alaska Gasline Inducement Act (AGIA).
The committee was working to get a definitive answer from
the administration on the issue and until told otherwise
the committee would operate under the assumption that the
state had significant financial exposure.
Commissioner Butcher replied that the Department of Law had
relayed that the particular door had been closed. He would
provide the information to the committee.
Senator McGuire wondered how much had centered on the
ability to write-off costs associated with gas from
companies that had been moving toward a gasline under AGIA.
She felt that the linking of oil and gas had provided a
significant advantage for the companies. She opined that
the negotiation of a rate through decoupling was one issue,
but another issue was how cost had factored into companies'
willingness in Pt. Thompson and other areas to explore a
gasline. She requested to hear from DOR, Exxon, BP, and
Conoco Philips on the issues. She discussed that she and
Senator Tom Wagoner had introduced SB 309 in the past to
incentivize drilling in Cook Inlet, which had been done.
She believed that the players with the ability to write-off
their costs in Cook Inlet were more prone to invest in the
area. She expressed concern about impacts that would
disincentivize investment in Cook Inlet and areas that led
to the gasline.
Commissioner Butcher replied that he was aware of the
issue, but did not have insight on the role the issue would
play. He noted that there would be a significant amount of
work done on gas fiscals between present day and a major
gas sale in the future. He noted that Governor Parnell
hoped that the FY 13 legislative session could focus on gas
fiscals.
Mr. Tangeman added that Senator McGuire was correct about
the interplay between Cook Inlet, the North Slope, and the
companies involved associated with the various tax
structures (i.e. net versus gross, versus a net and gross
combination). He remarked that an issue was how the change
would impact DOR and the state. He referred to a belief
that the state was "out-gunned"; the private sector could
pay more, gear up more quickly, and had more resources to
throw at problems. The state had been under the same tax
system for 4.5 to 5 years; state employees (auditors and
other) dealing with the ACES tax structure on a daily basis
understood it. He relayed that Repsol had recently
contacted DOR for an explanation of ACES. The state was
currently on equal footing and understood the system as
well or better than the private sector. He opined that an
overhaul of the system may be a step backwards because the
department would have to start over after it had
implemented over 70 regulations; all of the regulations
would have to be analyzed to determine how they would
interplay with each other. He explained that the point of
CSHB 110(FIN) was to work within the current system. He
furthered that there were a multitude of moving parts and
there were various ways to deal with tax credits to achieve
different results. He believed that it was better to deal
with the tax system that was currently in place.
10:11:24 AM
Senator McGuire surmised that the creation of a dual tax
system using gross for progressivity and net for other
would require state employees to assess two different
structures. Mr. Tangeman replied in the affirmative. He
expounded that DOR would figure out and work with a change
to the tax system if a new structure passed the
legislature; however, DOR understood the current system in
greater detail than most companies coming into the state.
Co-Chair Stedman opined that there was a substantial
difference between going from a tax and royalty system to a
concession system (i.e. from PPT to ACES). He believed the
difference was much greater than moving progressivity from
the net and switching it to the gross; the main calculation
was multiplying the amount of oil produced and the portion
of the oil allocated to royalties. He did not agree with
DOR's testimony, excluding the concerns related to the
proposed implementation of a new database; he recognized
that the database represented a piece of complexity.
Co-Chair Hoffman wondered whether a portion of the burden
related to the proposed database or portions of the
legislation could be lifted if effective dates were
postponed.
Commissioner Butcher responded that it would be a benefit;
however, the database was still a significant lift for the
department that had a minimal amount of involvement in the
information.
10:14:38 AM
Mr. Tangeman added DOR had previously provided a schematic
that included the 35 pieces of information required under
CSSB 192 (FIN); DOR, DNR, and AOGCC already collected much
of the information. He expounded that the Tax Revenue
Management System (TRMS) DOR was working to implement would
replace the current antiquated system. He furthered that
PIMS would work with the same dataset. Work on TRMS would
feed into other types of things that would be beneficial to
the public and would get at the same dataset as PIMS, but
with a different output. He felt that DOR could accomplish
the objective of PIMS with TRMS in the future.
Senator Thomas conveyed that the committee had not intended
to create a "huge worthless system"; most of the
committee's concern had originated from a lack of accurate
or conflicting information from different departments. The
goal of the proposed system was to provide a coordination
of activity between departments. He detailed that most
state departments had antiquated systems, which was the
reason money for a system had been appropriated the prior
year. He expounded that it was discouraging to get
different answers from different departments. He hoped that
requiring departments to provide information to DOR for it
to coordinate would automate processes and provide
efficiency that would lead to a better tax understanding
and better auditing performance.
10:18:07 AM
Commissioner Butcher replied that DOR was working to come
up with a cost estimate for the committee. One estimate
from Kathy Forester of AOGCC was approximately $36 million
and 10 to 12 positions. The department did not know whether
that would be the price, but the cost would be substantial;
the more different systems, databases, and forms were
involved the more complex it became.
Mr. Tangeman elaborated that DOR had been coordinating with
AOGCC and the Division of Oil and Gas because it had spent
the past year working on TRMS. The department recognized
that the system in place required companies to provide
information to several different departments in diverse
formats. Ultimately DOR wanted to see all of the
information being sent to one location and divvied out
based on confidentiality, non-confidentiality, and other.
Senator Olson referred to proposed gasline legislation (HB
9) that included a first open season in January 2013. He
was concerned that companies would not bid on an open
season if they did not have a good idea of what the tax
rate would be; especially if the possibility of an LNG
plant used for export was considered for Kenai or other.
Commissioner Butcher answered that two pipelines had
previously had open seasons. There needed to be work done
by the state and companies related to gas fiscals beyond a
coupling. He hoped that the work required would be done
sooner rather than later.
10:20:55 AM
Co-Chair Stedman requested calculations that showed the
deterioration of the economics with the lower tax rate
based on DOR's belief that changes under CSSB 192(FIN)
moved in the wrong direction (slide 14). He was interested
in the full-cycle economics and FY 13 numbers relative to
the current system. He would agree with DOR that the state
would be going in the wrong direction if the numbers showed
that the tax rates were higher than those under ACES;
however, if the calculations showed lower figures he
thought DOR should reevaluate its remarks. He discussed the
goal of encouraging industry to move away from harvest mode
and he wanted specific detail on how the bill encouraged
it.
Commissioner Butcher replied that DOR did not have the
specific details related to the full scale economics, but
it was happy to work with committee aide Darwin Peterson to
accomplish the committee's request. The point on slide 14
was based on the fact that high-cost developments would
benefit less when the tax system moved from net to a
net/gross combination.
Commissioner Butcher noted that Department of Law (DOL) had
brought up potential constitutional issue related to equal
taxing of different companies. The department of Law would
follow up with Legislative Legal Services and Mr. Peterson
on the issue. He mentioned that there were several
technical tweaks related to new field definitions that DOR
would talk to the committee about.
Co-Chair Stedman had not heard the concern about a
potential constitutional issue and requested that the
departments get the information to his office.
Co-Chair Hoffman pointed to slide 3 and queried whether the
bill made Alaska more appealing to potential investors if
the price of oil was $170 per barrel. Commissioner Butcher
responded in the affirmative, but noted that the price of
oil had never reached $170 per barrel. The price could get
that high at some point, but he did not believe decisions
should be focused on the possibility.
10:24:33 AM
Co-Chair Hoffman answered that world history had not
predicted $145 per barrel four years earlier. Commissioner
Butcher responded in the affirmative. He recalled that the
price had dropped to $37 per barrel following the price
spike.
Co-Chair Hoffman asked at what price level the bill became
appealing.
Commissioner Butcher replied that it was up to the oil
companies to provide the answer. He expounded that because
the information was proprietary, companies would not
provide what specifically in their economic model they
based decisions on. According to information provided to
the department the number had been more conservative ($70,
$80, or $90 per barrel). Companies were aware of what would
happen if oil reached $170 per barrel, but he did not
believe that they made investment decisions based on the
figure as opposed to a price around $70, which according to
history was more likely to be seen.
10:25:38 AM
Co-Chair Hoffman believed that it was all relative and it
was hard to know what the price of oil would be. He asked
whether DOR believed that overall the current bill version
would not make Alaska more appealing to investors.
Commissioner Butcher deferred the answer to the oil
companies.
Co-Chair Hoffman pointed out that DOR had included the
remark in its presentation. He observed that DOR had voiced
that CSHB 110(FIN) would be an improvement, but it did not
want to say yes or no to the current bill.
Commissioner Butcher responded that the questions on slide
3 had been considered by the department and the
administration as it worked on a bill. The department
believed that oil companies had agreed with CSHB 110(FIN)
because they had come up with commitments based on a
material change that would positively affect investment
decisions and a discussion of dollar amounts. He did not
know how oil companies felt about CSSB 192(FIN).
Co-Chair Stedman remarked that oil companies had expressed
interest, but he did not believe that they had made
commitments. He understood that it took all three major oil
companies to agree; it was not much of a commitment until
the companies signed a letter of agreement. He requested
that a commitment should be delivered to his office if one
existed.
Mr. Tangeman responded that not all investments on the
North Slope would require the agreement from all three
major oil companies. He believed that there were some areas
that only required that two companies provide approval.
10:27:50 AM
Co-Chair Stedman noted that prior testimony had indicated
that it would take $3 billion to $5 billion per year and
not $5 billion over seven to ten years. He stressed that
that $5 billion could barely be seen in the analysis,
unless there were multiple consecutive years driving the
production curve up.
Commissioner Butcher agreed. There had been $5 billion, $9
billion, and other figures discussed, but he did believe
the state would know until a bill passed. He continued that
the question related to whether the legislature passed a
bill that was viewed positively by the industry or not. He
stated that a tax reduction bill that resulted in no new
investment or development did not achieve the desired goal.
Co-Chair Hoffman queried whether DOR could answer whether
the bill made Alaska more competitive (item 1, slide 3).
Commissioner Butcher replied that he could see the problems
a potential investor would have with the bill because of
the initial complexity. He could not speak for the industry
related to the specific economics of the legislation.
Co-Chair Stedman pointed out that at $100 per barrel the
bill moved approximately $277 million across the table [to
the industry] in FY 13 figures; whereas, CSHB 110(FIN)
moved $2 billion. He elaborated that there was more money
to the industry in the tax change than in the incremental
drilling; he wanted to see economics that showed that it
was not true. He believed the drive was more for a tax
change than the benefit of the incremental drilling in the
bottom line dollars. He requested an analysis showing that
the initial review of the numbers was incorrect. He
concluded that it would take a substantial amount of
enhanced oil recovery to make a $2 billion per year net
swing to the state's treasury; oil companies would receive
$8 billion to $10 billion before they started turning the
oil.
10:30:43 AM
AT EASE
10:38:25 AM
RECONVENED
^ALASKA OIL AND GAS ASSOCIATION
10:38:44 AM
KARA MORIARTY, EXECUTIVE DIRECTOR, ALASKA OIL AND GAS
ASSOCIATION (AOGA), spoke from a prepared statement (copy
on file):
On behalf of the member companies of the Alaska Oil
and Gas Association, who account for the majority of
oil and gas exploration, production, transportation,
refining and marketing in this state, I would like to
offer the following comments regarding work-draft "0"
of a Senate Finance CS for Senate Bill 192. Despite
the diversity of our membership, my comments reflect a
100% consensus among them.
On March 16 we testified to you about the Senate
Resources version of the Bill. At that time we told
you that, unless one is satisfied to see North Slope
oil production continue to decline at about 6% a year
or more, meaningful changes need to be made to the
present ACES tax. We pointed out a number of measures
that the Resources CS could have taken but didn't, as
well as a number of things that it proposed to do that
would be counterproductive.
Despite all the time and effort that have gone into
work-draft "0", we have to say that this new CS also
falls short of the meaningful tax change that is
called for in order to meet the challenge of stopping
decline, much less the even harder goal of getting
back to a million barrels a day flowing through the
TAPS oil pipeline.
The CS does indeed provide a slightly less onerous tax
treatment for new fields and increases in production.
But we would remind you that two very new fields -
Oooguruk and Nikaitchuq -are each expected to peak at
around 20,000 barrels a day. This year the North Slope
at a 6% decline will decline by roughly 40,000 barrels
a day, as much as these two new fields combined. In
other words, to offset the decline, two new fields
like Oooguruk and Nikaitchuq would need to come into
production each year. These slight improvements are
not likely to generate even this level of development.
The producers of the existing non-legacy fields on the
Slope, and the developers of any new fields that may
be discovered, need as much production as possible
flowing from the legacy fields through the TAPS oil
pipeline in order to keep the costs affordable to ship
their oil from the Slope to its refinery destinations.
Unaffordably high transportation costs could cripple
the economics of any new fields that might be found,
as well as the economics of non-legacy fields
currently in production.
In other words, the North Slope oil province is like a
tree, with the two great legacy fields being its
trunk, and with the other fields being branches rising
out of the trunk. If one peels the bark off all the
way around the trunk and make it unhealthy, all the
other branches will become unhealthy too, no matter
how robust they might have been if the trunk had
stayed strong.
It has been openly acknowledged during the Committee's
hearings that the intent is to keep the tax
essentially the same as the present tax for the legacy
fields at $100 oil, and workdraft "0" reflects that
intent. But that intent is just the opposite of what
we urged you to do in our March 16th testimony on the
Resources CS, and it is the opposite of what we urge
you to do now.
Throughout the Twenty-seventh Legislature, AOGA and
others have been testifying about what is happening
with their businesses on the North Slope, about the
interrelationship between the level of new investment
each year and the rate of decline in ANS production,
and about the effects taxes have on investment
decisions. These explanations are not threats, but
they are not bluffs either. They have been candid
attempts to describe to you how those companies
evaluate their investment opportunities here against
their opportunities elsewhere, and how Alaska's tax
regime can influence the decisions about which
opportunities to take.
Those decisions reflect the expectations of the
companies' respective shareholders that each company
will chose the opportunities that it perceives to be
best, all things considered including taxes. If an
Alaskan opportunity is better than one elsewhere and
there is enough budgeted money only for one of them,
the shareholders expect, and in a very real sense
demand, that the Alaska opportunity be taken. The
reductions in the level of companies' investments in
Alaska since the enactment of ACES are not any kind of
retaliation for ACES' enactment, nor does a company
cut back here to spite its face. The investments are
nothing more, and nothing less, than the result of the
competition of the Alaskan opportunities against
opportunities elsewhere.
Anyone is free to believe that the declining
investments and declining production on the North
Slope are due to something other than these reasons
... but they will be mistaken. Unfortunately, by the
time they are proven to be mistaken, the opportunity
for Alaska to have addressed the situation will have
passed. And there aren't any "do overs."
Without meaningful tax relief for the legacy fields as
well as the other production, the bark will continue
to be peeled off the tree trunk, harming the entire
tree. Work-draft "0" threatens harm for every member
in AOGA.
Thank you, Mr. Chairman and Members of the Senate
Finance Committee, for this opportunity to share our
deep and grave concerns with you about work-draft "0"
of the Finance CS. We respectfully ask you to take
another look at what it would do, and to replace it
with a CS that would provide meaningful tax change to
enable the additional investments the state and its
future need.
In closing, let me repeat that these comments have the
unanimous support of AOGA's members: Apache, BP.
Chevron, Eni petroleum, ExxonMobil, Flint Hills,
Hilcorp, Marathon, Petro Star, Pioneer, Repsol, Shell,
Statoil, Tesoro, XTO Energy, and Alyeska Pipeline
Service Company. Thank you for this opportunity to
share them with you.
10:46:12 AM
Co-Chair Stedman believed that it was challenge to come up
with a universal definition of the words "meaningful" and
"significant." He believed that at $120 per barrel moving
$277 million to the industry was meaningful and
significant; another person's interpretation could be the
$2 billion under CSHB 110(FIN). He asked for help with a
definition.
Ms. Moriarty responded that AOGA represented a diverse
group of oil companies and the term meaningful had a
different implication for each of the companies. She
explained that after AOGA's evaluation none of its members
believed that the bill would improve Alaska's
competitiveness compared to other projects in their
portfolios. The association thought that bracketing
progressivity (included in CSHB 110(FIN)) would bring
Alaska to a more competitive playing field.
Co-Chair Stedman clarified that bracketing was only a
mechanism to shift cash from one side to the other side of
the table.
Ms. Moriarty replied that AOGA viewed bracketing as a more
substantial change in progressivity versus the proposed
structure under CSSB 192(FIN).
Co-Chair Stedman agreed that bracketing did represent a
more substantial change related to the shifting of cash at
a price of $100 to $120 per barrel. The current bill would
shift $2.6 billion at $200 per barrel versus $4.4 billion
under CSHB 110(FIN); there was more shifting of cash to the
industry above $60 per barrel under CSHB 110(FIN). He noted
that CSSB 192(FIN) also included a floor.
10:48:21 AM
Senator Thomas thanked Ms. Moriarty for her presentation.
He believed that the commitment portion of the equation was
very important. He opined that a tax structure could
probably be structured depending on commitments where more
of a business relationship existed and one could expect
that if "y" happened that "x" would take place. He pointed
to discussions related to a number of projects that had
been in place prior to ACES that could have been done going
forward; he surmised the state would probably be in a very
different situation of understanding the terms meaningful
and commitments. He thought it would have been possible to
implement a tax rate that would take effect once a company
committed to expend money on production. He observed that
"it was simply language to put things in place" and
believed that the legislature and other players had "all
fallen short of trying to get a better understanding of
what would take place in the future," which was not helpful
to the process.
Co-Chair Stedman relayed that the scheduled BP presentation
would be heard during the afternoon meeting that day.
SB 192 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Sb 192 040612 CSSB 192 Version U.pdf |
SFIN 4/6/2012 9:00:00 AM |
SB 192 |
| SB 192 DOR 12.04.06 SenFin Overview of SB192 (FIN) Version O.pdf |
SFIN 4/6/2012 9:00:00 AM |
SB 192 |
| SB 192 040612 AOGA Testimony.pdf |
SFIN 4/6/2012 9:00:00 AM |
SB 192 |