Legislature(2011 - 2012)SENATE FINANCE 532
04/09/2012 01:00 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB163 | |
| SB192 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 163 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| = | SB 192 | ||
SENATE BILL NO. 192
"An Act relating to the oil and gas production tax;
and providing for an effective date."
JANAK MAYER, MANAGER, UPSTREAM AND GAS, PFC ENERGY,
discussed a PowerPoint presentation titled "Discussion
Slides: Alaska Senate Finance Committee, April 9, 2012 (copy
on file).
1:47:21 PM
Mr. Mayer announced that the information in the
presentation was in response to questions from the
committee on CSSB 192 and previous testimony. He explained
Slide 2, titled "Cost Sensitivity-From April 3 Testimony
and Discussion - Impact of Rising Revenue Costs." The slide
graphed the "Revenue Difference Between ACES and
Progressive Severance Tax Options under Different Opex/bbl
Assumptions" for the producer, proposed in CSSB 192. He
determined that the impact of the tax systems varied
depending on the level of costs the producer incurred. He
noted that the chart, originally presented on April 3, 2012
was slightly outdated since the committee recently
increased progressivity from .25 to .27. The impact
increased taxes for the producer at the $80/bbl. to
$100/bbl. (price per barrel) range as a result of the
change. He pointed out that the cost sensitivity was
calculated on opex (Operating Expenditure). Capital
expenses (capex) were not factored in because of the
impacts of the capital credit for the producer and that
typically, high cost capital expenditure was associated
with new production. New production received reduced tax
rates under CSSB 192. Cost sensitivity was relative to
opex. He reminded the committee that the system was
calibrated to be revenue neutral at $100/bbl. at average
operating costs of $12/bbl. as forecast by the Department
of Revenue (DOR) for FY 2013. He related BP's (British
Petroleum) previous testimony that the consequence of the
revenue neutral structure meant the producer incurred a
higher tax burden in CSSB 192 than under ACES if the per
barrel costs were higher than the average operating costs.
He concurred with BP's point of view. He recapped that if
opex rose as production declined and opex costs were not
variable on a cost per barrel basis the result was a tax
increase.
1:52:24 PM
Mr. Mayer pointed out that the effect was a direct result
of the committee's desire to structure a tax with more
incentive for cost control and less state support for
spending at high levels of progressivity "because of the
interaction of high progressivity with full capital
deductibility" under ACES. He exemplified a scenario under
ACES where progressivity was triggered and the producer
incurred a production tax rate of 40 percent, each dollar
of operating or capital costs can be deducted from the
production tax liability. Since the production tax per
barrel also decreased the result was to move "further down
the curve of progressivity." He emphasized that under ACES
the costs were fully deductible from the 25 percent
production tax but under CSSB 192 progressivity was no
longer taxed on the net. The ability to reduce
progressivity as costs escalated was lost. He believed that
conclusion was the fundamental difference between ACES and
CSSB 192. He reiterated that CSSB192 created a tax
structure that reduced "excessive support" for rising costs
and incentivized cost control. He stressed that the direct
consequence of increasing incentives for cost control was
higher taxes for producers with higher costs.
Mr. Mayer indicated that CSSB 192 did offer a substantial
form of mitigation, which was the reduced rate of
progressive tax on the gross for new production in new
areas and on incremental production above the decline
curve. Also, companies producing in a completely new area
incurred only a 5 percent tax for seven years which
diminished the impact on costs. He warned that the seven
year cycle limited the impact of lower taxes on higher
operating costs overall. He reminded the committee that new
production incurred the highest operating costs. In order
to achieve cost sensitivity it was imperative that recently
completed developments like Oooguruk was included under new
production due to high costs well above the $12 fixed rate
designated in CSSB 192. The effect reduced taxes for the
first seven years. He cautioned that the reduction was
offset by the full tax rate kicking in after the 7 year
period. He suggested that extension or elimination of the
seven year period could mitigate the impact. Similarly,
mitigation was possible by reducing or excluding
progressivity and simply charge the base tax. The same
scenario applied to high cost incremental (new production)
production from existing fields.
1:58:23 PM
Mr. Mayer addressed the conclusion of the DOR testimony on
CSSB 192 that sensitivity to higher costs encouraged a
"further retreat to harvest mode" since companies would
"face lower tax rates due to lower costs that dis-
incentivized harvest production." He disagreed with the
conclusion. He reasoned that as production falls operating
costs were likely to stay flat and costs per barrel rose.
"Harvest mode did not imply low costs per barrel."
Mr. Mayer refuted DOR's assumption that tax incentives for
existing production under CSSB 192 were not as strongly
supported as under ACES. New capex, which created new
production and was taxed at a lower rate, acted as an
offset. He revealed that DOR's testimony ignored that
interaction. Lastly, he contended that production volume
and the resulting revenue generated was more significant
than the tax rate. It would take an "extraordinary
reduction in tax" to incentivize a producer to deliberately
produce less revenue, especially if costs were not
decreased.
Mr. Mayer addressed Slide 3, "FY 2013 v Lifecycle Analysis
- Impact of Costs & 7 year Time Limit." The slide
reproduced slides from previous presentations from April 4,
2012 and April 5, 2012 that related to government take for
new development under CSSB 192. He clarified that the
slides contained seemingly conflicting data on government
take. The FY 2013 data showed government take in the mid-
sixties percent and the lifecycle slide in the mid-
seventies percent. He explained that one analysis was based
on FY 2013 and the later benchmarking data was done as a
life cycle analysis. The April 4th analysis was based on FY
2013 outcomes factoring in revenue neutrality at $100/bbl.
The April 5th data was based on benchmarking, which was
always based on lifecycles. A lifecycle analysis used
generic new development costs as opposed to North Slope
average costs for FY 2013 which moved the government take
upward. In addition, the FY 2013 data included the new
production cap of 5 percent, which drove government take
down.
Mr. Mayer stated that the lifecycle analysis included the
higher tax rate on new production after the 7 year, 5
percent cap expired, which increased government take.
2:04:23 PM
Co-Chair Stedman surmised that one analysis was run using
life cycle new production data and the other was run on FY
2013 blended numbers. Mr. Mayer agreed.
Mr. Mayer discussed the slide 4:
Some Goals Are Mutually Exclusive
•Achieve decoupling
•Reduce high levels of support for spending, and poor
incentives for cost control
•Minimize complexity, including need for separate cost
accounting
•Reduce government take on new/incremental production
•No increases on any taxpayers
•Revenue neutral at $100+ /bbl.
•More even split between state and companies above
$100/$120/bbl.
He stated that the fundamental issue was that all goals
cannot be achieved in any single tax structure.
Mr. Mayer turned to slide 5:
Some Goals Are Mutually Exclusive
ACES with a 40% Cap
•Achieve decoupling
•Reduce high levels of support for spending, and poor
incentives for cost control
•Minimize complexity, including need for separate cost
accounting
•Reduce government take on new/incremental production
•No increases on any taxpayers
•Revenue neutral at $100+ /bbl
•More even split between state and companies above
$100/$120 / bbl
[Items in Bold were achievable goals.]
Mr. Mayer moved to slide 6:
Some Goals Are Mutually Exclusive
ACES with a 40% Cap & SB 305-Style Decoupling
•Achieve decoupling
•Reduce high levels of support for spending, and poor
incentives for cost control
•Minimize complexity, including need for separate cost
accounting
•Reduce government take on new/incremental production
•No increases on any taxpayers
•Revenue neutral at $100+ /bbl
•More even split between state and companies above
$100/$120/bbl.
[Items in Bold were achievable goals.]
Mr. Mayer directed attention to slide 7:
Some Goals Are Mutually Exclusive
HB110
•Achieve decoupling
•Reduce high levels of support for spending, and poor
incentives for cost control
•Minimize complexity, including need for separate cost
accounting
•Reduce government take on new/incremental production
•No increases on any taxpayers
•Revenue neutral at $100+ /bbl
•More even split between state and companies above
$100/$120 / bbl
[Items in Bold were achievable goals.]
2:11:04 PM
Mr. Mayer addressed slide 8:
Some Goals Are Mutually Exclusive
CSSB192
•Achieve decoupling
•Reduce high levels of support for spending, and poor
incentives for cost control
•Minimize complexity, including need for separate cost
accounting
•Reduce government take on new/incremental production
•No increases on any taxpayers
•Revenue neutral at $100+ /bbl
•More even split between state and companies above
$100/$120 / bbl
[Items in Bold were achievable goals.]
Mr. Mayer pointed out that CSSB 192 accomplished all of the
goals except for one; no increased taxes. He believed that
the committee must consider "fundamental tradeoffs" to
achieve all of the goals. He summarized the ways to
mitigate increased taxes: eliminate progressivity on new
and incremental production, raise the progressivity
threshold, or compromise on the goal of revenue neutrality
at $100/bbl.
Mr. Mayer discussed Slide 9 titled, "Regime Competiveness:
Relative Government Take." He spoke to previous testimony
that suggested that ACES was a good system at $100/bbl. but
at higher prices was problematic or that 75 percent levels
of government take was a desirable goal. He shared that PFC
Energy held the position that approximately 75 percent
government take under ACES at $100/bbl. depicted in the
ranking on slide 9, was very high by world standards. He
noted the ranking was higher than any oil producer in the
Lower 48 states. The Lower 48 states were faced with much
lower costs, which increased its competiveness with Alaska.
He observed that Norway's government take was higher but
maintained a National Oil company. Norway provided active
equity participation through Petoro, which ensured ongoing
investment in its oil sector. He explained that instead of
setting a target rate for a desired outcome, PFC Energy
recommended incentivizing production. He detailed that new
investment was typically accompanied by high production
costs. Flexibility in government take must be built into a
tax regime in order to incentivize production. He
reiterated the ways to accomplish reduced government take
on new production.
2:17:18 PM
Senator Thomas asked for clarification regarding the chart
on slide 2. Mr. Mayer responded that the chart illustrated
the difference between ACES and CSSB 192 at different price
levels and opex assumptions. The horizontal axis was set at
zero. Any point below the zero line represented a revenue
or tax decrease. Conversely, every point above the zero
line represented a tax increase compared to ACES.
Senator Thomas asked for a clarification on the second goal
on slide 8, "Reduce high levels of support for spending…"
Mr. Mayer interpreted the goal as high levels of support
from the state to industry.
Co-Chair Stedman exemplified that the state cannot
subsidize capital expenditures at levels close to or above
100 percent. Mr. Mayer agreed.
2:21:47 PM
SB 192 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 163 - CSSB 163(FIN) version D.pdf |
SFIN 4/9/2012 1:00:00 PM |
SB 163 |
| SB 192 April 9 PFC Energy Alaska Senate Finance.pdf |
SFIN 4/9/2012 1:00:00 PM |
SB 192 |