Legislature(2011 - 2012)HOUSE FINANCE 519
03/15/2011 08:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB110 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 110 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
March 15, 2011
8:03 a.m.
8:03:29 AM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 8:03 a.m.
MEMBERS PRESENT
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas Jr., Co-Chair
Representative Anna Fairclough, Vice-Chair
Representative Mia Costello
Representative Mike Doogan
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Reggie Joule
Representative Mark Neuman
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Representative Mike Hawker; Senator Cathy Giessel; Roger
Marks, Legislative Consultant, Legislative Budget and Audit
Committee.
SUMMARY
HB 110 PRODUCTION TAX ON OIL AND GAS
HB 110 was HEARD and HELD in committee for
further consideration.
HOUSE BILL NO. 110
"An Act relating to the interest rate applicable to
certain amounts due for fees, taxes, and payments made
and property delivered to the Department of Revenue;
relating to the oil and gas production tax rate;
relating to monthly installment payments of estimated
oil and gas production tax; relating to oil and gas
production tax credits for certain expenditures,
including qualified capital credits for exploration,
development, and production; relating to the
limitation on assessment of oil and gas production
taxes; relating to the determination of oil and gas
production tax values; making conforming amendments;
and providing for an effective date."
8:03:59 AM
ROGER MARKS, LEGISLATIVE CONSULTANT, LEGISLATIVE BUDGET AND
AUDIT COMMITTEE, offered a synopsis of his experience as a
petroleum economist. He introduced a PowerPoint
presentation, "Evaluation of ACES with HB 110 Proposal,
Roger Marks, Logsdon & Associates, March 15, 2011" (copy on
file).
Mr. Marks explained that he had been asked to present an
evaluation of Alaska Clear and Equitable Share (ACES) as a
foundation for the need for HB 110. He noted that since
ACES passed in 2007, there had been updated information on
its performance.
Mr. Marks informed the committee that his basic conclusion
was that the progressivity structure within ACES was
dysfunctional; at high prices it generated very high taxes,
which was making Alaska uncompetitive in international
markets and having harmful effects in the state. He thought
that progressivity itself was a fine concept and a
straightforward philosophy when income was lower and there
was a lower ability to pay as well as a lower tax rate.
However, there was a problem with ACES and the structure of
progressivity with higher income, higher ability to pay,
and a higher tax rate.
Mr. Marks noted that the progressivity structure predated
ACES. The structure was put in place with the petroleum
production tax (PPT) in 2006; ACES made progressivity more
aggressive, but the same problematic structure carried
over. He stated that he had been concerned about the issue
since 2006 when PPT passed. He pointed out that he had
published on the issue the previous fall in the Oil and Gas
Financial Journal.
Mr. Marks reviewed the four planned topics of his
presentation (Slide 2):
I. How ACES Operates / Problems it Creates
II. International Competitiveness
III. Current Evidence of Problems from ACES
IV. Proposal to Fix ACES (HB 110)
8:08:04 AM
Mr. Marks provided a summary of how ACES worked ("Tax Rate
under ACES," Slide 3):
· Base rate of 25% of net value (after deducting all
costs)
· Progressivity element when net value per barrel
exceeds $30/bbl:
o (Net value per barrel value -$30) X .004
· If oil market price is $90/bbl:
o Net value per barrel is $58/bbl
o Progressivity = ($58 -$30) X .004 = 11.2%
o Total tax rate = 25% + 11.2 = 36.2%
o 36.2% X $58 X 0.875 (non-royalty) = $18.37/bbl
o APPLIES TO ENTIRE NET VALUE
Mr. Marks detailed that ACES was the oil and gas production
or severance tax, and was based on net income. He defined
"net income" as starting out with the "market value," or
the Alaska North Slope (ANS) price listed in the newspaper
each morning (currently over $100). The "net value" was
derived when all the costs were subtracted, including
transportation, operating, and capital costs. There was a
base rate of 25 percent of net income. Costs were around
$32 per barrel (from the Department of Revenue (DOR) latest
Revenue Sources Book on the taxable amount of barrels).
Mr. Marks continued that progressivity was triggered when
the net value per barrel exceeded $30 per barrel. The
progressivity equation took the net value per barrel minus
$30, and multiplied the result by 0.004. The $30 was
referred to as the "trigger" (where progressivity started)
and 0.004 was referred to as the "slope" (the rate that
progressivity increased as value went up). When net value
reached $92.50, the slope would drop from 0.004 to 0.001.
For example, if the price of oil was $90 per barrel, and
the cost for tax was $32 per barrel, the net value would be
$58 per barrel. The progressivity would be $58 minus $30
times 0.004, or 11.2 percent. The total tax rate would be
the base rate (25 percent) plus 11.2 percent, or 36.2
percent.
8:09:57 AM
Mr. Marks continued that the 36.2 percent applied to the
entire net value with $58; the number would be multiplied
times the non-royalty amount, since taxes would not be paid
on the royalty portion, which would be $18.37 per barrel as
the severance tax before credits.
Mr. Marks stressed that the 36.2 percent tax rate applied
to the entire net value, the entire $58, not just the
portion of the $58 above the $30.
Mr. Marks directed attention to a line graph on Slide 4
("ACES Severance Tax Rate"). The bottom axis depicts the
net value ($/bbl) and the side axis the ACES severance tax
rate. At $30, the line shows the flat 25 percent rate; at
the $30 trigger, the amount increases at a rate of 0.004.
The slope goes down to 0.001 at $92.50.
Mr. Marks reminded the committee that the main credit was
20 percent of the capital costs, which he would cover later
in the presentation.
Mr. Marks underlined that when triggered, progressivity
would apply to the entire net value, an attribute unique to
Alaska. He stated that progressivity worked differently in
Alaska than in most other places where progressivity was
used (whether connected to oil or non-oil). One example of
how progressivity usually worked was the Internal Revenue
Service (IRS) 2010 U.S. tax rates for single taxpayers
(Slide 5). He described the system as "bracketed." The
incremental tax rate only applied to the incremental value.
2010 U.S. Tax Rate for Single Taxpayer
· First $8,375 10%
· Next $25,625 15%
· Next $48,400 25%
· Next $89,450 28%
· Next $201,800 33%
· Anything over $373,650 35%
Mr. Marks stressed that no matter how much money a taxpayer
made in the bracketed system, the first $8,375 would only
pay at the 10 percent rate. That was how progressivity
usually worked; however, it worked very differently under
ACES. Under ACES, when progressivity was triggered, it went
back and grabbed the tax for the very first dollar of value
and every single dollar of value and dragged it up.
Mr. Marks directed attention to Slide 6, "What Happens to
the First Dollar of Value under ACES" with a bar graph
depicting what happens to the first dollar of value under
ACES. He maintained that up to $30 per barrel, the tax rate
was 25 percent; as the net value went up, the tax rate for
the very first dollar was dragged up as well. He underlined
that he had considered several different progressivity
systems, both oil and non-oil; Alaska was the only place
with the described mechanism.
Mr. Marks added that the tax rate was not only dragged up
on the first dollar of value; it happened to every
subsequent dollar as well. Going from $89 to $90 of net
value dragged the value up from the first dollar to the
eighty-ninth dollar. Every time the value went up, the tax
was drawn up on more and more dollars. The mechanism was
depicted through something called the "marginal tax rate."
8:13:46 AM
Mr. Marks pointed to a graph on Slide 7, "Marginal Tax Rate
under ACES (All States and Federal Taxes and Royalties):
How Much Gov't Gets When Price Goes Up $1." He maintained
that the marginal tax rate reflected how much of each
dollar went to the government when the value of oil went up
one dollar. The line on the graph illustrated the marginal
tax rate under ACES, and showed the rate for Alaska with
all the taxes, including royalties, property tax, state and
federal corporate income tax, and the severance tax.
Mr. Marks pointed out that at $90 per barrel, the marginal
tax rate was 80 percent; when the value of oil went to $89
to $90 per barrel, the producers only got $0.20 and the
other $0.80 went to government. At $120 per barrel, the
marginal tax rate was 93 percent; when the price went from
$120 to $121 per barrel, the producers only got $0.07 of
the dollar, and the government got the other $0.93. Because
at $92.50 the float dropped from 0.4 to 0.1 and the tax
rate was dragged up, the marginal tax rate would drop to 80
percent, and then would start increasing at a slower rate.
The increase in the marginal tax rate was entirely due to
the severance tax (to the ACES progressivity). The royalty,
property, and corporate income taxes were a flat rate.
Mr. Marks continued that the high marginal tax rates
provided limited upside potential for producers or
investors, who would not make that much money when the
price of oil went up. He argued that that was a problem
when investors or producers were evaluating where to do a
project, because they have to forecast oil prices. There
was a great deal of uncertainty around oil prices. He
pointed to a line graph on Slide 8 ("Hypothetical Expected
Price Outlook"), which he felt was a reasonable example of
how oil companies would look at the possibilities of oil
prices. He said that the entire area under the curved line
represented 100 percent. In the example on the graph, the
most likely price was $100 per barrel; but there was only a
20 percent chance of that. However, when considering future
oil prices, most people would think that there were a lot
more things that could happen to make oil prices go up than
down, which caused the curve to be skewed to the right.
Mr. Marks stated that it was possible to find very serious
oil price forecasts that went up to $200 per barrel by the
year 2020. He believed that was how investors looked at the
possibility of oil prices. Producers and investors who were
evaluating the economics of a project would consider a
range of outcomes. The results would revolve around the
average price, not the high mean. With the distribution
depicted on the graph, the average would be towards the
high-price side, or about $140 per barrel. What happened in
the high-price area could have a big impact on the results,
even with a relatively low probability; if a great deal of
money could be made when the high side occurred, a project
could be worth developing, but if the high side was
suppressed (like under ACES), the project might not be
worth developing.
8:17:35 AM
Representative Gara did not think the companies paid the
marginal tax rates. He asked for a list of actual tax rates
paid by companies. Mr. Marks replied that he would be
showing the effective tax rates under the production tax
under ACES, which was what companies actually paid. He
pointed to Slide 4, illustrating the actual tax rate under
ACES.
Representative Gara directed attention to Slide 6 with
progressivity triggered at $30 per barrel. He clarified
that progressivity triggered at $30 of profit. Mr. Marks
responded net value.
Representative Hawker referred back to a DOR presentation
to the House Finance Committee (March 14, 2011, 8 AM). He
compared Slide 18 from the DOR presentation ("Nominal
Production Tax Rates") to Mr. Marks's Slide 4 ("ACES
Severance Tax Rate"). He asked whether the two were
similar. Mr. Marks agreed that for ACES the tax happened to
be both the nominal tax rate and the effective rate. Under
HB 110, the meaning of nominal and effective rates would be
different. He called the nominal rate a "mushy" concept;
the word nominal had to be used because it meant a name
only, because something else was going on. Nominal rates
generally meant that something else was going on and it was
not what should be focused on. He said he would address the
issue later in his presentation.
8:20:11 AM
Co-Chair Thomas noted that the concern in rural districts
was the price of diesel oil, currently at $4.50 to $6.00
per gallon. He asked whether the tax break proposed in HB
110 would show up in the villages as a drop in oil prices
if ACES were dropped 20 or 30 percent. He had problems with
changing practices if there were no measurable benefits to
Alaskans. Mr. Marks responded that the price paid for
petroleum products was determined separately from the tax
rate. He stated that the price of petroleum products would
not change because of a change in the tax rate; the
perceived need for change in the tax rate had to do with
making the production of oil more rational for the
producers.
Representative Doogan asked for a breakdown of Slide 7 by
each of its components. Mr. Marks responded that he could
not do so off the top of his head, but would be happy to
get the information later.
Representative Doogan questioned Mr. Marks's inability to
tell the committee what the slide said, even though he had
made the slide. Mr. Marks answered that the important part
of the presentation had to do with Alaska international
competitiveness and looking at the entire fiscal take
compared to the entire fiscal take of other jurisdictions.
He maintained that was the reason for the entire fiscal
picture in the slide. He added that the increase in
marginal tax rates illustrated was 100 percent attributable
to the severance tax, but he did not have the breakdown
available. He offered to get the information.
Representative Doogan stated that the committee would
decide what was important about the presentation and what
was not. He wanted the requested information as soon as
possible.
Co-Chair Stoltze thought the breakdowns had been shown in
slides the previous day.
Representative Hawker believed that Mr. Marks was taking
the committee member questions very literally. He suggested
speaking to the components in approximations.
8:23:22 AM
Mr. Marks replied that he preferred to be careful and get a
precise answer. He said he could get the information within
an hour of adjournment.
Representative Costello referenced Slide 4. She believed
the discussion was based on the assumption that companies
were motivated to invest and risk more as the price of oil
went up. She referred to material by Scott Goldsmith
regarding what motivated companies. She queried the
particular price per barrel of Alaskan oil that was more
competitive on a world scale. Mr. Marks replied that with
the high marginal tax rates, the higher the price of oil,
the greater the schism between Alaska and the rest of the
world. He believed that the higher the price of oil got,
the more relatively uncompetitive Alaska would be. He
believed the question was related to international
competitiveness with other investment opportunities that
producers had. He stated that ACES created higher tax rates
at high prices relative to the rest of the world. He
believed that the higher the prices got, the more
uncompetitive Alaska would be and the less oil it would
get. He claimed he had empirical evidence to demonstrate
his claim and that the evidence would be presented later in
the meeting.
Co-Chair Stoltze acknowledged the presence of Senator Cathy
Giessel.
Mr. Marks continued that there were many factors affecting
a jurisdiction's international competitiveness, including
resource potential, costs, fiscal stability, and political
stability. He claimed that a major factor was the fiscal
piece, which could often exceed costs. The fiscal aspect of
jurisdiction had significant impact on relative
competitiveness.
Mr. Marks directed attention to a bar graph comparing the
marginal tax rates of Alaska under ACES with other
industrialized petroleum jurisdictions ("International
Marginal Tax Rates @ $100/bbl Market Price Tax and Royalty
Regimes," Slide 10). He explained that the jurisdictions
covered in the slide were ones that track taxes through
statutes: the U.S. Gulf of Mexico (GOM), United Kingdom
(UK), Alberta, Thailand, Australia, Brazil, and Norway. He
noted that except for Thailand, all the countries had about
the same amount or more oil than Alaska; Thailand produced
about 350,000 barrels per day. The listed countries could
be called the "tax and royalty regimes" and could be
juxtaposed with the "production-sharing contract regimes"
prevailing in the Middle East, Africa, and the former
Soviet Republic, where fiscal terms were administrated by
contract (often entailing fiscal stability provisions). The
later list of countries had greater resource potential and
lower costs, but he did not believe the terms of the
production-sharing contracts in the countries were
transparent.
8:27:44 AM
Mr. Marks noted that the figures included all taxes and all
royalties. He pointed out that none of the regimes on the
graph (except for Alaska) had progressivity. The marginal
tax rates displayed at $100 per barrel were also the
marginal tax rates at $50 or $60 per barrel, and they were
also the effective tax rates at $50 and $60 per barrel. At
$100 per barrel, Alaska's marginal tax rate was 83 percent,
the highest of all the listed regimes. He believed that the
highest marginal tax rate meant the most limits on upside
potential relative to anywhere else. He believed the
second-place country, Norway, had to be taken with a grain
of salt, because most of the equity production there was
owned by Statoil, which was owned by the government; to a
large extent, the Norwegian government paid taxes to
itself. The next highest country was Brazil at 63 percent,
a full 20 percentage points less than Alaska. There was
some interest in Texas and North Dakota; both had marginal
tax rates in the mid-50s percentages.
Mr. Marks wanted to address the worth of the differences in
the marginal tax rates. He planned to present two case
studies that showed palpable results of how the differences
in tax rates manifested themselves and how much money the
investors earned in the different jurisdictions due to tax
rates. Before addressing the differences in marginal tax
rates, he intended to look at what had happened in Alaska
in 2008.
Mr. Marks directed attention to a pie graph on Slide 11,
"Where $100/bbl ($25B) Went in 2008." Since oil prices were
very high in 2008 (averaging about $100 per barrel), it
would illuminate what happened at high prices. The pie
chart depicted how the $100 per barrel was divided in 2008,
given the amount of production and the costs. The $100 per
barrel oil was worth about $25 billion in gross value of
the oil. The first $24 per barrel (about $6 billion) went
to costs (the costs to produce the oil and transport it to
market; the number represented the cash costs and not the
sunk investments). The next $56 per barrel ($14 billion)
went to government: the state received $11 billion, of
which $7 billion was the severance tax; the federal
government received $3 billion. He noted that the taxes
that went to the government amounted to more than twice the
amount of the costs. The producers got $20 per barrel
(about $5 billion). Some would say $5 billion was a lot of
money; others would disagree.
Mr. Marks wanted to show two analyses of what the producers
would have made in other places.
8:30:54 AM
Mr. Marks turned to the first case study on the next slide,
"After-Tax Income that Would Have Been Earned in Alaska in
2008 With Rates from Other Tax & Royalty Regimes
($billions)" (Slide 12):
Gulf of Mexico $10.3
U.K. $9.0
Alberta $8.2
Thailand $8.2
Australia $6.9
Brazil $6.6
Alaska $5.0
Norway $4.1
Mr. Marks pointed out that the producers would have made
twice as much in the Gulf of Mexico than they made in
Alaska; working down the list, with the exception of
Norway, producers would have made considerably more with
the tax rates available in other regimes.
Mr. Marks emphasized that the issue was not how much money
producers made in Alaska, but how much more they could have
made in other places.
Mr. Marks directed attention to the second case study,
noting that ConocoPhillips isolated Alaska as a separate
segment, so it could be seen how Alaska performed relative
to the rest of the world (Slide 13, "ConocoPhillips
Financial Performance: Alaska vs. Rest of World ($millions)
2008 ($100/bbl) vs. 2009 ($60/bbl)"):
Alaska Rest of
the World
Additional pre-tax income
2009 over 2008 $3,673 $14,707
Additional taxes
2009 over 2008* $2,898 $7,163
Additional after-tax income
2009 over 2008 $775 $7,544
Percentage of additional
pre-tax income retained
after-tax 21% 51%
* Alaska: 80% severance tax / 20% income tax; Rest of
World: 10% severance tax / 90% income tax
Mr. Marks detailed that ConocoPhillips was a true major
international oil company with a major presence in about 30
countries around the world. He emphasized that what the
rest of the world looked like was a good barometer of the
international investment climate compared to Alaska. He
explained that he had considered ConocoPhillips's financial
reporting for Alaska and the rest of the world. First, he
looked at 2008, when oil prices were $100 per barrel. Then,
he looked at 2009, when oil prices were $60 per barrel. He
then looked at what happened to the additional money the
company made in 2008 compared to 2009. In Alaska, the
additional pre-tax income (2009 relative to 2008) was about
$3.7 billion. The comnpany's additional taxes in Alaska in
2008 versus 2009 (when prices were high) were $2.9 billion.
Of that $2.9 billion, about 80 percent was severance tax
and 20 percent was corporate income tax. Their additional
after-tax income in 2009 relative to 2008 was $775 million.
So ConocoPhillips got to keep 21 percent of the additional
pre-tax income after tax.
Mr. Marks then compared the numbers to what had happened in
the rest of the world. In the rest of the world, the prices
were $100 per barrel in 2008 and $60 in 2009. In the rest
of the world, the additional pre-tax income (2009 over
2008) was $14.7 billion, and the additional taxes were $7.2
billion. In the rest of the world, of that additional $7.2
billion, at 10 percent severance tax and 90 percent income
tax, the company's additional after-tax income was $7.5
billion. In the rest of the world, ConocoPhillips got to
keep 51 percent of the additional income; in Alaska they
only got to keep 21 percent of it.
Mr. Marks questioned why any oil producer would want to
invest in Alaska, given the huge disparities between what
the producers got to keep after tax.
8:34:31 AM
Mr. Marks turned to Slide 14, "Oil Severance Tax Rates by
State" (Slide 14):
State Rate (% of gross)
Iowa NONE
New York NONE
Pennsylvania NONE
Ohio 10 cents/bbl
California 0.10%
Indiana 1.00%
Nebraska 3.00%
New Mexico 3.75%
Alabama 4.00%
Kansas 4.30%
Kentucky 4.50%
South Dakota 4.50%
Texas 4.60%
Arkansas 5.00%
Illinois 5.00%
Colorado 5.00%
West Virginia 5.00%
Utah 5.00%
Mississippi 6.00%
Wyoming 6.00%
Michigan 6.60%
Oklahoma 7.00%
Florida 8.00%
North Dakota 11.50%
Louisiana 12.50%
Montana 12.50%
ALASKA @ $90 market (25 % of gross equivalent)
Mr. Marks noted that there were 27 states (including
Alaska) that produced oil. The slide showed a breakdown of
the severance tax rates, which for most states was a
percentage of gross. Since Alaska was based on net, he
converted the net tax to a gross equivalent at $90.
Alaska's tax rate at $90 was 25 percent of gross
equivalent, twice as high as the next highest states,
Montana and Louisiana. About two-thirds of the states have
severance tax rates of 6 percent or less.
Vice-chair Fairclough directed attention to Slide 11
(breaking down costs, producers, and government take). She
asked whether the proportion represented the credits that
Alaska provided to producers or whether the costs were
borne by the producers. Mr. Marks responded that the
government part was net of credits, so the $5 billion to
the producers included the credits that reduced their
taxes.
Vice-chair Fairclough asked whether the costs shown were
actual costs borne by the producers. Mr. Marks responded
that the number represented the costs in terms of breaking
down the $100 per barrel. The $24 per barrel costs were
borne by the producers and were the costs to produce and
deliver the oil to market.
Vice-chair Fairclough wanted a yes or no answer. She
wondered whether the costs were borne by the producers or
by Alaska through credit incentives. Mr. Marks responded
that the costs were costs before credits. The values the
producers and the state made were net of the credits. The
credits were just a transfer payment from one to the other;
the $24 per barrel represented the actual costs incurred
without regard to who paid for them. The $100 per barrel
was reduced by $24 per barrel because of the costs. After
tax, the value of the oil was $76 per barrel, which was
split $56/$20.
8:37:40 AM
Representative Gara pointed to Slide 10 (international
marginal tax rates). He noted that the industry used the
term marginal tax rates when referring to Alaska's tax
rates, as the rate was higher than that the actual tax rate
paid in the state. Slide 10 used the term "marginal tax
rate." He asked whether there was a slide comparing the
actual tax rate companies pay in Alaska compared to what
they pay in the listed regimes. Mr. Marks responded that
the other regimes did not have progressivity, so the slide
showed the effective tax rate (all taxes included). For
Alaska, the marginal tax rate was ever increasing and drew
the effective tax rate up. He offered to provide the
effective tax rate for Alaska versus the other regimes.
Representative Gara pointed to Slide 4 showing the actual
tax rate for ACES (not including royalties) at 50 percent
for $80 per barrel. He directed attention to Slide 10 and
asked whether Alaska would be at 50 percent if only the
ACES portion was counted and actual tax rates were measured
and not marginal tax rates. He wondered whether Alaska
would then be placed below other jurisdictions in the
model. Mr. Marks answered that he had the slide, but it was
not part of the presentation he was giving that day. He
stated that in terms of the effective tax rates, Alaska was
below Norway but above all the other jurisdictions at
prices between $50 and $100 per barrel.
Representative Gara continued that the marginal tax rate
would go up, but the marginal tax rate was the rate on the
last highest dollar, not the rate paid on all the taxes.
Mr. Marks agreed.
Representative Gara continued that Mr. Marks had picked a
price ($100) that had only been matched once in last 100
years. He asked whether there was a chart showing marginal
tax rates at the average price of the last five years. Mr.
Marks pointed to Slide 7 to show the marginal tax rates
from $50 to $150 per barrel. He maintained over the last
five years the marginal tax rate was at $70 or $80 per
barrel.
Representative Gara clarified that he wanted the numbers
compared to the other regimes. Mr. Marks answered that the
marginal tax rate at $50 to $60 to $70 for other regimes
was the same, since they did not have progressivity.
8:41:28 AM
Representative Gara noted that Mr. Marks had chosen certain
countries [for Slide 10]; he did not see Russia, Iraq,
Azerbaijan, Libya, or Venezuela on the list. He asked
whether there were countries that charged actual tax rates
in the 80 and 90 percent range. Mr. Marks answered in the
affirmative.
Representative Gara believed Alaska's tax rates would be
lower than those places. Mr. Marks agreed
Representative Gara asked for the names of the countries
with tax rates in the 80 to 90 percent range. Mr. Marks
answered that the marginal rates were in the mid-80s
percentile for the production-sharing countries, according
to work done for the state by PSC Energy in 2007. He
discounted the production-sharing countries because they
had higher resource potential and lower costs than Alaska.
There was an element of fiscal stability because the
production-sharing contracts were administered by contract.
He opined that Alaska was competing more with the listed
jurisdictions [on Slide 10] for investment than with the
other countries.
Representative Gara asked for examples of the countries
taxed in the 80 and 90 percent range. Mr. Marks replied
that he could not give the information off the top of his
head, but median in the PSC Energy marginal tax rates data
was the mid-80s.
8:43:20 AM
Representative Costello understood that marginal tax rate
was the tax on the next barrel of oil. Mr. Marks replied
that the question was how much of each dollar went to the
government when the net value went up one dollar.
Representative Costello surmised that it was not a look
backward as much as a look forward. She questioned the
value of considering the marginal tax rate versus the
effective tax rate. Mr. Marks answered that he had focused
on the marginal tax rate because it was the best tool to
measure the upside potential. With high marginal tax rates,
there was not that much more money as prices went up. The
problem with ACES was what happened to taxes at high
prices; the marginal tax rate depicted that.
Representative Costello summarized that the effective tax
rate was then not the best indicator of what oil companies
were looking at; they were looking at marginal tax rates.
Mr. Marks answered that companies were looking at both.
Under ACES and the progressivity structure, when the
marginal tax rate went up as prices went up, the effective
tax rate was dragged up as well. The effective tax rate was
what companies paid the actual tax on, but the marginal tax
rate was the metric showing upside potential; that was why
he focused on it.
Representative Costello asked whether the marginal tax rate
could make Alaska less competitive. Mr. Marks turned to
Slide 8 (Hypothetical Expected Price Outlook) and said that
was his judgment, because in evaluating projects, what
happens on the upside can have a huge impact on the
viability of a project; there could be a significant impact
if the upside potential was suppressed because of high
marginal tax rates.
Representative Edgmon directed attention to Slide 11 (pie
chart illustrating where 2008 money went). He asked whether
the $6 billion listed under "Costs" included tariff costs
that the owners of Alyeska paid themselves. Mr. Marks
responded that the tariff was included; there were some
costs, but it was mostly the tariff.
Representative Edgmon asked how the $6 billion number was
related to the $11 billion that went to the state.
8:47:03 AM
Mr. Marks responded that there was a relationship between
the two. What was paid to the state was based on the net
after costs, and the money going to the government was
generated based on what happened after the costs were
deducted.
Representative Edgmon surmised that the $6 billion was
related to the $11 billion; it was also related to the $3
billion, but the situation was not as "cut-and-dried" as
the slide might suggest. The costs were investments that
the companies had and profit they accrued. Mr. Marks
responded that he was correct; producers retained a very
small piece (the profit component TAPS tariff). He thought
perhaps $1 or so went to the producer category; other than
that, it was cash outlays incurred to produce and ship the
oil.
Representative Neuman turned to Slide 10 (International
Marginal Tax Rates). He wanted clarity regarding effective,
marginal, and nominal taxes. He queried the different types
of taxes used internationally, such as those used by Norway
and Alberta (countries not charging 100 percent of the tax
base until after expenditures were fully amortized). He
thought the systems were potentially very different. He
requested a description of the differences. Mr. Marks
answered that each of the countries had unique features
related to taxation. He said that most of the oil would
come from developments occurring in the North Slope (such
as Prudhoe and Kuparuk fields). The fields were already
developed and a lot of the capital had already been
incurred. Companies would need to incur more capital costs
if they wanted to develop. All of the countries listed on
the slide had their own ways of dealing with what happened
with capital expenditures and their own features to
incentivize development. Alaska had credits (a company can
deduct costs) as incurred. In many Alberta fields, there
was only a 5 percent royalty for the first year. In
Australia, a company could deduct $1.50 when it incurred
$1.00 for exploration.
8:51:05 AM
Mr. Marks continued that in Norway, a company could deduct
$1.20 for every dollar of capital incurred and a company
would not owe taxes until investment was recovered. The
various countries were different in that they had different
features, but the slide showed the end result of what
happened after the taxes were taken when looking at what
happens on the upside for already developed fields.
Representative Neuman surmised that Alaska's system of
taxation was unique compared to other countries because of
progressivity. Mr. Marks replied that all the systems were
unique, but Alaska was unique for the reasons stated.
Representative Doogan asked whether most of the world's oil
was produced in countries of the sort listed on the chart
or in countries not listed on the chart. Mr. Marks answered
that most of the oil was produced in countries not on the
chart. His judgment was that the countries listed [on Slide
10] were the ones Alaska competed with most directly, given
Alaska's resource potential, costs, and the way it
administered taxes through statute.
Representative Doogan stated that he was not happy that
only a small segment of the world's oil-producing countries
were listed.
Representative Wilson directed attention to Slide 14 (Oil
Severance Tax Rates by State) and noticed that the gross
was listed rather than the net. She asked how the credits
worked within the systems. Mr. Marks answered that he had
not looked at how every state's credit structure worked.
Representative Wilson thought that listing Alaska on the
slide in relation to one piece made it look like Alaska was
way above. She thought it would be easier to judge Alaska's
comparative position without looking at the tax structures.
She asked for a comparative analysis of at least part of
the states listed, such as North Dakota and Texas. Mr.
Marks responded that he could provide a summary of the
information.
Co-Chair Stoltze noted that there would be opportunity to
come back to the committee with more refined answers.
8:54:22 AM
Representative Guttenberg addressed Slide 14. He thought
Alaska was unique as far as who owned the oil; the state
owned all the subsurface. He asked how much private
property owners took in other states such as Texas. He
wondered how the numbers on the slide would be affected by
factoring in private property. Mr. Marks responded that
most of the states had royalties, either public or private.
The royalty rates varied up to 30 percent; many of the
royalties in Texas were private. In Texas, there could be
an effective tax rate in the mid-50s when coupling the 30
percent royalty and a tax rate of 4.6 percent. There could
be marginal tax rates in the mid-50s.
Representative Guttenberg pointed to Slide 10. He thought
the countries left off the list were in many cases the ones
Alaska was competing with, because Alaska's producers were
exploring in those places as well. He thought the chart
would be different if it showed the places with which
Alaska was actually competing. He did not think Mr. Marks
was saying that the marginal tax rate was the only
influential factor in making an investment decision. Mr.
Marks responded certainly not; there was the resource base,
costs, as well as the issue of political and fiscal
stability. He noted that he had included the countries
listed for a reason. A higher fiscal take could be
commanded when there was a spectacular resource base with
lower costs (as there were in the countries that were not
included) than with a lower base and higher costs. He
stated that he did not include the jurisdictions because
the comparison was "apples to oranges." Countries,
investors, and producers would put up with a lot (high
taxes, political instability) to get to huge resource, as
in Venezuela, Libya, or Iraq. He did not believe it was
appropriate to compare Alaska with those places, as
investors would not pay so much for the kind of resource
base Alaska has.
8:57:35 AM
Mr. Marks argued that some of the jurisdictions on the
list, such as Brazil, were some of the most prospective
places in the world. Brazil had huge discoveries offshore
and was one of the hottest places in the world to develop
oil and gas; he noted that it administered taxes by
statute.
Representative Guttenberg emphasized that his point was
that there were a lot more factors besides the tax rate
affecting what happened in Alaska and other jurisdictions.
Representative Gara noted that when companies decided to
invest, they took into consideration the danger of a
location. For example, ConocoPhillips had invested in Libya
and Venezuela, but had to remove employees. He wondered
whether political stability should be considered in a
comparison; he thought Alaska would rank highly in that
regard. Mr. Marks responded that political stability was a
factor in where companies invested. He did not know how
much weight investors placed in political stability; he
thought that producers would risk a lot if a good return
was likely.
Representative Gara turned to Slide 13 (ConocoPhillips
Financial Performance 2008 and 2009). He had thought
ConocoPhillips had a world-wide loss in one of the years
because they wrote off assets in Venezuela when
nationalized. Mr. Marks replied that that had not been in
2008 and 2009, unless it showed up as an extraordinary loss
outside the regular income statement.
Representative Gara discussed ConocoPhillips's income; he
had looked at the company's Securities and Exchange
Commission (SEC) filings and noted it took in approximately
$7.5 billion in Alaska profits during the four years under
ACES (2007 to 2010). He asked whether Mr. Marks believed
the company would have invested in Alaska more if it taken
in higher profits.
9:01:33 AM
Mr. Marks responded that ConocoPhillips was both an oil
company and a gas company. Most companies were one or the
other; oil and gas were worth very different figures
currently. In Alaska, about 94 percent of ConocoPhillips's
assets were oil (North Slope, Beluga River, and Cook
Inlet). In the lower 48, the company was about 30 percent
oil, and worldwide it was about 50 percent oil and 50
percent gas. He thought ConocoPhillips was relatively more
profitable in Alaska, but that only reflected the fact that
it had more oil in Alaska. Worldwide, oil was competing
against oil; the issue was what the company was making
worldwide on oil and not what the company was making in
Alaska.
Representative Gara pointed to the $7.5 billion profits
taken in Alaska during the four years. He wondered whether
the company would have been investing more in Alaska if it
had made higher profits. Mr. Marks answered that when
prices were high, ConocoPhillips kept 20 percent of the
increased value in Alaska; in the rest of the world, it
kept 50 percent of the increased value. Therefore,
investment in other locations was more attractive.
Vice-chair Fairclough queried working conditions in Brazil,
Libya, and Algeria, and labor-cost comparisons. She
wondered whether permitting processes and transportation
were more expensive in Alaska than in other areas. Mr.
Marks replied in the affirmative; regulatory hurdles were
another factor contributing to international
competitiveness.
Vice-chair Fairclough referred to a conversation that had
occurred during the ACES process. She thought many things
impacted a company's decision-making process. She believed
ConocoPhillips was being picked on because the company had
broken out the Alaska numbers. She commended the company
for doing so and for all it had done for Alaska. She
thought perhaps the state should do more for the company
and help it be more competitive.
9:06:22 AM
Representative Doogan wondered how much money the other two
major oil companies made in Alaska during the same time
period and whether the results would be higher than what
ConocoPhillips had made. Mr. Marks believed ConocoPhillips
had about 40 percent of the North Slope production; the
other two companies would have about 30 percent each.
Co-Chair Stoltze noted that there would be a meeting at
1:30 with Commissioner Butcher.
Mr. Marks informed the committee that when ACES passed in
2007, there was a lot of activity on the North Slope that
was not going anywhere. The entrenched activity had paid
the tax and the state was making lots of money. The
question was why Alaska needed to reevaluate the issue. He
noted that there was some analysis about how ACES was
performing; DOR showed that investment was up. There was
mixed data about whether employment had gone up. He
asserted that people had not focused on the most important
thing: what was actually happening to production.
Mr. Marks pointed to a bar graph on Slide 16, "A History of
DNR Forecasts of Total Production between 2010 and 2020."
He noted that both DNR and DOR independently put out
production forecasts, and the results were similar. When
DOR put out forecasts, it looked ten years out and was
always considering a different ten years. When DNR did
forecasts, it went to 2020 or beyond. The DNR forecast
could provide an outlook about what had changed for the
same set of years. Slide 16 showed DNR's forecast since
2000 for the period between 2010 and 2020, to see how its
outlook for production had changed. The DNR forecast came
out about once every other year; since 2002, there had been
six forecasts (the last one in November 2009). In 2002, DNR
was forecasting that between 2010 and 2020 there would be a
total of 2.6 billion barrels produced. In 2003, the outlook
went up; in 2004, the outlook went up; in 2006 the outlook
went up to 3.2 billion barrels. In 2006, DNR believed 3.2
billion barrels would be produced from the North Slope
between 2010 and 2020. Then PPT passed in 2006, and the
direction reversed.
9:11:05 AM
Mr. Marks continued that DNR's last forecast (November
2009) was for about 2.4 billion barrels. Prices were going
up during the period, as they were at the other period, but
at the pivotal point, the outlook started going down. The
difference between when before PPT passed with the
dysfunctional progressivity structure and today was that
the outlook had gone from 3.2 billion barrels over the ten
years to 2.4 billion barrels (a 25 percent loss; a loss of
800 million barrels total, or 200,000 barrels per day for
ten years).
Mr. Marks turned to Slide 17 "Department of Natural
Resources ANS Production Forecast Before & After PPT
(bbls/day)" with a blue line representing the May 2006
forecast (last forecast before PPT) and a red line
indicating the current forecast (November 2009). He
emphasized that five years prior, DNR was forecasting that
in 2011 there would be 900,000 barrels per day produced;
now the forecast was for 600,000 barrels per day, or a loss
of 300,000 barrels per day.
Mr. Marks noted that the production gap (the area between
the line curves) represented 800 million barrels, or
200,000 barrels per day for the ten-year period. He
stressed that the situation was not the result of some
fields not coming on as some had thought; the numbers
represented less oil coming out of the same fields.
Mr. Marks did not think the reduction was completely
attributable to ACES, but he believed ACES was a major
contributing factor. He referred to a track record of
producers announcing that projects and development had been
deferred explicitly because of the tax. When the 900,000
barrel per day forecast had been made five years prior, the
price forecast for 2011 was $50 per barrel; the price was
actually $90 per barrel or more. People might think that as
prices went up, companies would want to produce more oil;
however, because of the progressivity structure in ACES, he
believed there was an increasing schism between Alaska and
the rest of the world. Alaska had become relatively less
competitive as prices went up, resulting in less investment
and less production.
Mr. Marks directed attention to a bar graph on Slide 18,
"Oil Production Forecast 2010-2050." The graph illustrated
that DNR production forecast going out to 2050 showed that
about 85 percent of the oil would come from core, existing
fields (Prudhoe Bay, Kuparuk, Alpine). The fields would
have a combination of in-field drills, hundreds of
individual pockets of oil that did not drain to the rest of
the field and had to be drilled explicitly, and about 85
percent of the oil would come from the existing core
fields.
Mr. Marks pointed out that two-thirds of the 800 million
barrel production gap between 2006 and 2011 was from the
existing fields. About 530 million barrels (132,000 barrels
per day) was from the existing fields.
9:14:28 AM
Mr. Marks turned to (Slide 20) "Investment: The Big
Picture":
· Production requires capital investment
· At the corporate level Alaska competes for capital
with other jurisdictions
o Capital is finite
o Capital is fluid
o Capital will go to where it gets the best deal
Mr. Marks emphasized that given the comparative
international rates showed earlier, he did not think the
drop in production was a surprise, as production required
capital investment and at the corporate level, Alaska
competed for capital with other jurisdictions, and there
was only so much capital to invest. In the age of
globalization, the capital was fluid. He questioned where
the capital would go.
Mr. Marks maintained that the basic cornerstone of all
economic theory was the simple principal that more money
was better than less money. Two notions come out of that:
first, companies will do what gets them the most money, and
second, companies will change their behavior if structures
are changed to give them either more money or less money.
The credit structure makes things less expensive, and
induces investment. He compared the oil credits with the
film credits given by the state for films made in Alaska.
Mr. Marks maintained that on the flip side, structures can
be created that make people do less of something. For
example, increasing the cigarette tax can get people to
smoke less. He believed the structure created through ACES
would cause companies to invest in places in the world with
more advantageous structures, because they could make more
money.
Mr. Marks noted argument that there was still a decline
rate under the ELF structure, under which some fields had a
very low tax rate. However, it was not known what would
have happened during the ELF years if there had been tax
rates of 30 to 50 percent. During the ELF years, literally
billions of dollars were invested in gas capacity on the
North Slope; about 25 percent of the oil coming out of the
North Slope was the direct result of the investments. He
wondered whether the investments would have occurred with
tax rates at 30 to 50 percent relative to what they were
under the low ELF years.
Mr. Marks noted that DOR analysis had shown that capital
spending was up after ACES; he wanted to consider the
context of that spending (Slide 23, "Context of Spending"):
· Core fields down*
· Non-core fields up* (Nikaitchuq and Pt. Thomson)
o A small share of potential reserves
· No other new fields on the horizon
· Gold-plating
*Department of Revenue "Oil and Gas Production Tax Status
Report to the Legislature," January 18, 2011, p. 8.
Mr. Marks introduced the concept of "gold-plating," which
he defined as a company spending more than it normally
would because someone else was picking up the tab. The way
ACES worked (with high marginal tax rates), less money was
spent by a company after taxes because state government was
picking up a big part of the tab. He claimed that the
concept of gold-plating was complicated, but important to
understand because of what was going on in the state.
9:17:56 AM
Mr. Marks returned to Slide 7 (Marginal Tax Rates Under
ACES). He explained that the marginal tax rate was how much
the government received as the price went up. The reason
the marginal tax rate went up under ACES was that the tax
was drawn up on more and more dollars of value as value
went up. He pointed out that going the other direction, or
right to left on the graph (representing the net value
going down either because prices went down or more money
was spent) would make the exact opposite occur. Instead of
drawing up the tax value for all the previous dollars of
value, going from right to left when spending money would
make the tax rate from all the previous dollars of value
get drawn down. Going from left to right, the marginal tax
rate was what the government got as prices went up; going
from right to left and costs went up, the government gave
up money as the producer spent it. As a result, when
producers spend money, it has not cost them that much after
tax because the government has paid a lot of the cost in
reduced taxes.
Mr. Marks directed attention to a slide with details about
gold plating (Slide 24, "Gold Plating: Spending more
because someone else is picking up the tab"). He noted that
the information was the same as on Slide 3 related to ACES.
The beginning point on the first column is $90 (ANS market
price); there are $32 in costs for $58 in net value. Given
a tax rate of 36.2 percent and capital costs at $13 per
barrel at 20 percent ($2.60), the severance tax would be
$15.77, and an income tax of $17.31; the bottom line is
income of $24.91 per barrel after tax.
Mr. Marks pointed to the second column, what would happen
when an extra dollar is spent. The capital cost goes from
$13 to $14, and four things happen. First, the net value
goes from $58 to $57. Second, the tax rate goes down,
because the net value has gone down (from $36.20 to
$35.80). Three, because the net value has gone down, there
is a lower tax rate to a lower net value. Four, because an
extra dollar is spent, the credit has gone up. The bottom
line is that, even though an extra dollar is spent, the
reduction in income is only $0.17. The purchase only cost
the producer $0.17 after tax; the other $0.83 has been
picked up by the government in reduced taxes (about 90
percent of the $0.83 is the state).
Mr. Marks emphasized that the reason for the change was
that at high marginal tax rates at high prices, a dollar
spent meant a big drop in the tax rate that applied to
reduced value, resulting in a big drop in tax. The
mechanism would be exacerbated more at high prices.
Mr. Marks turned to a graph depicting "Gold Plating:
Percentage of Capital Cost Paid by Producers After-Tax
under ACES (with 20% capital credit)" (Slide 25). He noted
that the flip side was that the state would pay what the
producers did not pay. At $90, the producers would only
incur 17 percent of the cost when spending a dollar; the
state would pay the other 83 percent. At $120, the producer
would incur only 3 percent of costs; the government would
pay the other 97 percent.
Mr. Marks illustrated what happens to the numbers under
ACES through the metaphor of a company buying a truck on
the North Slope. The company wants to buy a Ford F-150 at
$20,000. At $100 per barrel, they incur 10 percent of the
cost, so the $20,000 would only cost them $2000 after tax.
The company could buy a Ford F-350 at $30,000, and could
reason that the government was paying for 90 percent, so
the better truck would only cost them an extra $1000. So
the company could buy a Ford F-350 only though it only
needed a Ford F-150; it puts out $30,000, but its taxes are
reduced $27,000. The mechanism could apply to anything, not
just the truck; it could apply to compressors, pumps, or
valves. The company may even pay itself more money. Under
the tax structure with the high marginal tax rates, there
was an incentive for a producer to pay more for something
than it normally would or buy things that were not needed,
because someone else was paying. He noted that producers
may not know that they were gold-plating. A receipt for the
Ford F-350 might come across the desk of an auditor, but he
did not believe an auditor would deny the claim and say the
producer only needed a Ford F-150.
9:23:57 AM
Mr. Marks listed the "Implications of Gold-Plating" (Slide
26):
· Gold-plating is not efficient spending (spending to
produce barrels)
· Gold-plating happens because of high marginal tax
rates at high prices under ACES
· Gold-plating may explain a lot of spending without the
commensurate increase in production
Mr. Marks argued that gold-plating was not in the state's
best interests because the state was contributing to the
spending through deductions and credit.
Representative Doogan pointed to Slide 16 (related to the
history of forecasts). He asked whether the numbers
forecasted happened. He believed the amount of oil had been
going down steadily during the years represented on the bar
graph. Mr. Marks replied that generally the forecasts have
been too high because of unanticipated things that went
wrong, such as brief shutdowns.
Representative Doogan asked what good it did to look at a
sheet of wrong forecasts. Mr. Marks responded that the
forecast history showed what the outlook was; be believed
it represented the most intelligent view available of what
would be happening. He knew the forecasts would be wrong
(like any forecast), but experts in the field would have a
better recent perspective of what would happen. The graph
showed what experts believed the outlook was.
Representative Doogan understood, but since the outlook was
wrong and always showed declining production, he did not
understand the purpose. Mr. Marks answered that the chart
showed that what the experts thought would unfold was going
up before PPT passed and what they believed would happen
after PPT was declining. He noted that the experts have
access to the company's development plans and information
about the resource base.
9:27:00 AM
Representative Doogan asked why he should care what people
thought was going to happen when he already knew what
actually happened.
Representative Costello asked whether tax credits could
mask unattractive tax rates. Mr. Marks responded that one
significant element that contributed to gold-plating was
the credit. He added that he would address the issue in
more depth later in the presentation. He stated that the
credit was a contributing factor.
Representative Gara referred to an earlier question about
the profits of the other oil companies. He noted that BP
had reported (with a caveat) roughly $8.4 billion in profit
in Alaska for the last four years under ACES. The caveat
was related to a petroleum newsletter that had reported
that BP was able to write of $1.5 billion of its Alaska
profits for the Gulf oil spill. He underlined that BP did
report its Alaska profits, and the profits were higher than
ConocoPhillips.
Representative Gara directed attention to Slide 25 (related
to gold-plating). He stated that Mr. Marks was the first
person he had heard criticize the "flagship" part of ACES-
that the state would contribute to the cost of capital
expenditures. He clarified that the state paid for two
kinds of capital expenditures under ACES. First, a company
could deduct the cost of capital expenditures; the higher
the tax rate, the more the state would pay. For example, in
years when the company's tax rate was 50 percent because
the price of oil was $90 per barrel, the state would pay
the other 50 percent. Second, a company could get 20
percent for the capital credit (unless the field was one
that got 40 percent). He asked whether the state was the
biggest investor in capital expenditures on the North Slope
under ACES in most cases at higher prices.
9:30:52 AM
Mr. Marks pointed out that the taxes listed included the
federal income tax deduction. He noted that the government
was the major contributor.
Representative Gara questioned whether granting companies a
high credit and deduction if they agreed to invest inside
the state of Alaska was a good thing. Mr. Marks thought it
was good, but could be excessive when it got to the point
that spending money after tax did not cost a company much.
A company could either pay too much or pay for things that
were not necessary and spend money that was not productive
(producing barrels of oil because the state was bankrolling
the operation).
Representative Gara stated that he could be talked into
amending the tax credit system if the focus was on
exploration wells, for example, instead of unnecessary
equipment. He was concerned about lowering the tax, because
companies that were already taking $8 billion over four
years in profits could take the money out of the state to
other places with more attractive regimes. However, a tax
credit could be good because the money would have to be
spent in the state. He thought a credit system that
required spending the money in the state was an advantage
over reducing tax credits, if the goal was in-state
investment.
Mr. Marks responded that producers wanted to make money. He
thought there should be a tax system that would allow them
to make money as a result of investment. He did not think
credits would be successful towards getting more oil if a
large share of the profits were taxed away compared to what
would happen if companies invested elsewhere.
9:33:13 AM
Vice-chair Fairclough directed attention to Slide 23
(Context of Spending). She believed that during past
discussions regarding ACES there had been an amendment to
freeze or disallow credits on legacy fields for a period of
time. Mr. Marks could not recall exactly; he did remember a
proposal related to different tax treatment for legacy and
non-legacy fields.
Vice-chair Fairclough recalled disallowing cost recovery on
legacy fields for a period of 18 months to two years. Mr.
Marks responded that what passed was a ceiling on operating
costs based on past operating costs (the "standard
deduction"); the practice had been grandfathered out in
2009.
Vice-chair Fairclough wondered whether reinvestment could
be expected with the ability to recover costs in legacy
fields. Mr. Marks replied that the deduction was standard;
producers might not have been able to recover all costs,
but many of them. He believed the big issue in terms of
incentivizing investment was what happened to taxes at high
rates related to the rest of the world. He reiterated his
belief that it was possible for Alaska to become less
competitive and have less production at higher prices.
Vice-chair Fairclough thought that companies might invest
more without any change because of the ability to take the
credits and recover costs. She was intrigued by Mr. Marks's
analysis of the way tax credits were currently being used.
She wondered whether anything else was going on. She
surmised that it was a global economy and Alaska was still
not competitive when considering the overall take. Mr.
Marks responded that he believed that was the most
important thing to look at.
9:36:52 AM
Mr. Marks turned to the subject of fixing ACES, beginning
with "Fair Share: Economic Aspect" (Slide 28):
· Maximizing benefit to people
o Long-term benefit
o Linked to maximizing long-term production
o Production maximized by continual investment
· In designing a tax need to be mindful of how Alaska
stacks up internationally
· What is "fair" is what you can get in a competitive
environment
Mr. Marks noted that the concept of "fair share" was a
complicated subject and people had different opinions about
what it meant. He spoke about the subject as an economist
in terms of international competitiveness. The state
constitution stipulates maximizing the benefit of resource
development to the people; he assumed most people believed
that meant the long-term benefit. He believed maximizing
long-term benefit was linked to maximizing long-term
production, so that future generations could avail
themselves of the resources. He thought production was
maximized by continual investment and that it was important
to be competitive. He believed it was important to compare
Alaska internationally when designing a tax structure. As
an economist, he thought "fair share" was what could be
gotten in a competitive environment.
Mr. Marks provided the analogy of a loaf of bread. The fair
share of resource revenues was similar to the fair price
for a loaf of bread: If bread sells everywhere in town for
$1.00 per loaf, a seller believing they are entitled to get
$2.00 per loaf may not end up selling much bread. He noted
precedence for countries that believed they were entitled
to a much larger share of revenues than the rest of the
world (such as Bolivia and Pakistan). The countries had
terrific endowments of natural resources and thought for
generations that they were entitled to more than what the
world was willing to give. The rest of the world has
subsequently disregarded the two countries and gotten the
resources elsewhere.
9:39:32 AM
Mr. Marks addressed the subject of how not to fix ACES. He
indicated a graph on Slide 29, "Cash Flow Impact: Credits
vs. ACES Severance Tax." He detailed that the graph
depicted the tax per barrel for ACES on the upper (red)
line and the credits on the lower (blue) line. He noted
that the credits were 20 percent and the capital costs were
about $12 or $13 per barrel, so the credits were about
$2.50 per barrel, whether the price was $50 or $150 per
barrel. He maintained that the table showed that the tax
dwarfed the credits. He believed the problem was that the
taxes were too high, not that credits were too low. He
thought there was a strong credit structure coupled with
the ability to deduct costs. He maintained that the graph
depicted that the too-high-taxes problem could not be fixed
by altering the credits and that the tax needed to be
looked at directly.
Mr. Marks directed attention to details for fixing ACES
outlined in the "Proposal for Fix: Bracketed Tax Structure"
(Slide 30):
· The problem is not progressivity - but the
progressivity structure
· Changing the progressivity structure
o HB 110:
o Bracketed progressivity structure
· Values within structure
Mr. Marks believed the issue was changing the progressivity
structure through a bracketed tax structure similar to the
IRS structure outlined on Slide 5. House Bill 110 would set
up a bracketed tax structure with values detailed on Slide
29, "Proposed Bracket Structure: HB 110":
Proposed Bracket Structure: HB 110
(Existing Units)*
Based on Net Value p/bbl**
$0/bbl -$30.00/bbl 25.0%
Next $12.50/bbl ($30.00 -$42.50/bbl) 27.5%
Next $12.50/bbl ($42.50 -$55.00/bbl) 32.5%
Next $12.50/bbl ($55.00 -$67.50/bbl) 37.5%
Next $12.50/bbl ($67.50 -$80.00/bbl) 42.5%
Next $12.50/bbl ($80.00 -$92.50/bbl) 47.5%
Anything over $92.50/bbl 50.0%
* For other fields outside existing units the tax
rates are 10 percentage points less
** These net values are approximately $30 less than
market values (the ANS West Coast price).
Mr. Marks detailed that HB 110 would establish seven
brackets. The first bracket would be the base tax rate of
25 percent up to $30 per barrel before progressivity would
kick in. Progressivity would then apply in brackets and go
up $12.50 per bracket until the price was $92.50 per
barrel. As the price went from $30 to $92.50 net value, the
tax rate would increase from 25 percent to 50 percent.
Mr. Marks turned to a graph on Slide 32, "Comparison of
Effective Severance Tax Rates (Before Credits)" depicting
the effective tax rates with ACES through the top (blue
dotted) line, the HB 110 bracket for existing fields on the
middle (green dashes) line, and the HB 110 system for new
fields on the bottom (black dashes) line.
Mr. Marks noted that the effective rate was the tax divided
by the net value. He added that ACES was a tax based on the
direct net value. Bracketing would take the total tax
divided by the total net value to get the effective rate
shown.
9:42:49 AM
Mr. Marks directed attention to another line graph on Slide
33, "Marginal Tax Rates (All state & federal taxes and
royalties)." He noted that all taxes were included. Under
HB 110 for existing fields (the middle, green-dashes line),
the lower values would be unaffected as the prices went up;
the lower tax value would not be drawn up as happened under
ACES. The marginal tax rate would therefore be stabilized
and would peak at about 74 percent.
Mr. Marks turned to a bar graph on Slide 34 showing how HB
110 compared with other systems ("International Marginal
Tax Rates @$100/bbl Market Price Tax & Royalty Regimes").
He noted the bar for HB 110 for existing fields (third from
the right). He stressed that Alaska's tax was higher than
all the other regimes, except for Norway.
Mr. Marks moved to a line graph on Slide 35, "Gold-Plating:
HB 110 (Existing Units) vs. ACES." He noted that HB 110
would propose a 40 percent well-lease credit (blue dotted
line) and the graph illustrated the gold-plating effect
using the current 20 percent credit versus the 40 percent
credit; the producers would receive less money with the 40
percent credit.
Mr. Marks turned to "Revenue Losses from Proposal?" (Slide
36):
· Initial revenue losses likely
· DOR's production forecast does not consider
availability of capital
o Very plausible that status quo production
forecast is too high
· Very plausible that with lower taxes there will be
greater investment and production
o Very plausible that production forecast under HB
110 is too low
· Cannot compare revenues between taxes using the same
number of barrels
Mr. Marks emphasized that the severance tax per barrel
would be less with HB 110 and that initial revenue losses
would be likely.
Mr. Marks commented on the production forecasts backing up
the fiscal note. He noted that DOR's production forecast
was basically an engineering model that generated decline
curves and assumed that capital was available to develop
the reserves in the decline curve. He stressed that he did
not intend to second guess the professionalism of the
forecast; he thought it was the best that could be done,
but though the capital availability was a crucial input, it
was absolutely unknowable because of the corporation budget
cycles worked (more than a year out). Production forecasts
would be too high if the capital was not available to
develop the oil in the forecasts and was diverted to other
jurisdictions because of fiscal or other reasons.
Mr. Marks continued that with lower taxes, companies would
produce more if they were making more money producing in
the state. He thought it was very plausible that the
production forecast backing up the HB 110 fiscal note was
too low. In general, he believed it was plausible that the
fiscal note had too many barrels for the status quo and not
enough for HB 110. He did not think the same number of
barrels could be used to compare revenues with and without
the proposal.
9:47:04 AM
Representative Doogan referenced Slide 31 (Proposed Bracket
Structure) asked how the increments in the brackets had
been set up. Mr. Marks responded that he did not know how
the brackets were set up for HB 110, although he knew how
they were set up in HB 17. He recommended asking the
commissioner of DOR.
Representative Doogan referenced Slide 32 (showing the
severance tax rates). He assumed the amount of severance
tax the state would receive was included. He asked how much
the system would cost in real numbers. Mr. Marks responded
that assuming the same production with and without the
bill, the difference in tax per barrel was about $4 per
barrel (at current prices). He offered to get the specific
numbers, but he believed the difference in prices would be
$4 per barrel at $90 per barrel, and $6 per barrel at $100
per barrel.
Representative Doogan wanted to know the total cost to the
state; he had heard in other committees that the total cost
started out at $1.5 billion annually and had gone up to
over $2 billion annually. Mr. Marks believed DOR should be
asked the question. He was happy to provide the numbers of
what would happen to the tax per barrel, but he warned
against using the same number of barrels with and without
the proposal, as it would create an exaggerated sense of
what the revenue picture would be. He said that taking the
number of barrels that people thought would be produced
five years ago and comparing with HB 110, even though the
severance tax per barrel was less, more money would be made
with a lower tax and more barrels than with the higher tax
and less barrels. He cautioned that using the same number
of barrels to compare with and without the proposal would
give an exaggerated sense of the revenue losses.
9:50:55 AM
Representative Doogan wanted an idea of how much the
proposal would cost. Mr. Marks replied that it was
absolutely impossible to forecast the cost, to know how
capital might get re-appropriated to the state, how that
would be spent, and how production would be affected. He
stressed that the state could not know what would happen
under the proposal. The production forecasts assumed
capital would be there, but the capital might not be there.
He reiterated that it was impossible to tell.
Representative Gara asked Commissioner Butcher to bring the
Frasier Report to a future meeting, as he had questions
about it.
Representative Gara noted that although Mr. Marks had
talked about incentivizing, he had not mentioned that 35
percent of any tax reductions would go to the federal
government. He recalled previous discussion about the
fiscal note indicating that HB 110 would reduce revenue by
around $3 billion at $100 per barrel. Assuming that was
accurate, he thought roughly $1.2 billion of the money the
state would get back would go to the federal government and
not to incentivizing anything. Mr. Marks did not know the
exact numbers, but agreed in principle that 30 to 35
percent of any tax reduction in the state would go to the
federal government. However, the other portion would go to
the producers.
9:53:58 AM
Representative Gara understood Mr. Marks's point that under
progressivity, corporate profits got smaller under higher
oil prices. He asked whether oil company profits would
increase with every price increase, as the price of oil
increased from $50 to $51, $100 to $101, or $150 to $151.
Mr. Marks replied that he was right, as long as the
marginal tax rate was under 100 percent.
Representative Gara pointed to Slide 34 (International
Marginal Tax Rates). He stated concerns that Mr. Marks had
only picked countries that taxed less than Alaska and left
out countries that taxed more. He believed the comparison
was incomplete and wanted that remedied. He also thought
that a very high oil price had been used to make a marginal
tax rate argument, when the companies did not pay that
rate, but paid an actual tax rate. He wanted to see the
chart with the actual tax rate paid by oil companies. He
thought companies considered the actual taxes they paid.
Mr. Marks agreed to provide the information. He offered to
get PFC Energy work done for the department in 2007 on the
production-sharing contract regimes. He added that it was
his judgment that it would be unrealistic for Alaska to
assume it could command the same fiscal take as the other
regimes, given the resource base in the nations.
Representative Gara wanted to see a comparison with the
countries and with the actual tax rate, not the marginal
tax rate. Mr. Marks said he would see what he could do.
9:56:44 AM
Representative Wilson directed attention to Slide 36
related to revenue losses from the proposal. She understood
that it was difficult to project numbers for taxes into the
future. She asked whether it was possible to go back to the
last two years and consider the actual numbers compared to
what the numbers would have been if HB 110 had been in
effect. Mr. Marks replied that could be done. However, the
producers had announced specific projects that they
deferred because of the tax; the projects would have been
implemented if the tax had not been in place. He believed
using the same number of barrels with ACES and HB 110 would
exaggerate the revenue losses.
Representative Wilson thought that would represent the
worst case scenario. She understood that HB 110 would
represent some kind of loss, but wanted to get an idea of
how much the losses would be. Mr. Marks thought DOR was
going to produce the numbers.
Co-Chair Stoltze noted that the commissioner of DOR nodded.
9:58:55 AM
Co-Chair Thomas asked whether the new tax could be
sunsetted if it did not work and the state returned to the
ACES system. He believed there needed to be pressure on the
producers to change. He asked how to attract the
independent oil companies. He queried a way to give tax
credits to independents and not the big companies. Mr.
Marks replied that Alaska already had good features to
attract independent companies and that independents were
being attracted. There were already very generous credits
on the exploration side (up to 40 percent). In addition,
there was the small-company credit. He stated that in
general, the ACES structure was actually better for
starting fields up than for keeping existing fields going.
However, some independents had explicitly addressed the
concern about the tax structure being a barrier for
investing in Alaska. He believed providing upside potential
would be a big incentive for attracting independents; they
would go to other places where they could get it.
Co-Chair Thomas thought there were disadvantages for
independents related to the delivery of the oil. Mr. Marks
pointed out that there was plenty of space in TAPS, and by
law no one who wanted to ship could be denied the ability
to ship.
10:02:16 AM
Representative Hawker described the two major components of
the tax structure: the front-loaded incentive capital
credits, and out-year taxation on operations and
production. He recalled the ACES debate four years prior
and a presentation offering the premise that the higher the
tax rates were set, the more attractive it would be to
invest capital in the state. He referred to a slide showing
high oil prices and gold-plating and the state paying 90
percent of every dollar of capital investment; he thought
that was "giving away" money. Given the premise (discussed
under ACES) that high tax rates were needed to attract
investment, he asked why there was not a frenzy of
investment on the North Slope. He wondered why industries
were sending people to North Dakota instead. Mr. Marks
replied that he was amazed that there had not been more
investment with the state picking up 90 percent of costs.
He opined that the reason was that the companies could not
make money was because too much was taken through taxes
compared to putting the investment in other places like
Brazil or Kazakhstan. He referred to Slide 13
(ConocoPhillips Financial Performance: Alaska vs. Rest of
the World) showing the higher profits from other places in
the world.
10:05:25 AM
Representative Hawker stated that it was not enough for
Alaska to be an economic province; it also had to be
competitive with the rest of the world. Mr. Marks
acknowledged that producers made a good amount of money in
Alaska, but the issue was how much more companies could
make other places. He believed the companies were going to
other places because they could make more money in those
places.
Representative Neuman recalled Mr. Marks's earlier
statement that what was wrong with ACES was progressivity.
He queried the proposed changes to progressivity. He
pointed to Slide 31 regarding the proposed bracket
structure. He asked about the reduction in base rates with
a cap on exploration. Mr. Marks responded that the whole
idea of bracketing was to pay the incremental tax on the
incremental value and not reaching down to every value and
drawing it up as ACES did. He believed the ACES system was
unique in the world and created a situation in which an
incredible amount of tax was paid on the incremental value
when the value went up. He referred to Slide 33 and
marginal tax rates under HB 110; as value went up, the
lower values would be protected and not drawn up.
Representative Neuman asked for clarification regarding
Slide 31 (the proposed bracket structure for HB 110). Mr.
Marks responded that the first bracket was the base rate.
Between zero and $30 per barrel was 25 percent; if the net
value was $35 per barrel, the company would only pay 27.5
percent on the $5 above the $30, or incremental tax on the
incremental value.
10:08:47 AM
Representative Joule announced that John Baker of Kotzebue
had won the Iditarod, and that he had broken the previous
record.
Representative Joule believed that one of the reasons for a
bill to reduce the tax structure was to increase production
and generate additional revenue through new revenue coming
into the pipeline, even though possibly losing money
through the current people paying taxes. He questioned
whether modifying the tax structure should be based on real
information, such as about the resource available;
otherwise, the decision would be a gamble. He hoped the
state's total revenues would be okay because production
would increase.
10:12:24 AM
Representative Joule stated that he did not grasp what HB
110 was trying to do. He understood that there were
different kinds of fields to take into consideration, such
as unitized and non-unitized fields with different tax
structures. He questioned what needed to happen in
different fields to encourage companies to invest in the
state.
Mr. Marks recalled an earlier presentation to the House
Resources Committee on the history of the oil tax in
Alaska. He noted that since before statehood, there had
been several changes to the production tax; every change
had gone up. He stated that HB 110 was the first time the
legislature had been faced with a proposal to decrease oil
taxes. He understood it was difficult. He had laid out the
rationale of why he believed the state should consider
lowering the tax: give people a structure under which they
can make more money, and they would do so.
Mr. Marks detailed that in 1961, President Kennedy had
proposed a major tax decrease in the country, and there was
anxiety; the tax decrease happened and the economy
rebounded well. The same thing happened with President
Reagan in 1981. He thought the present legislation was
modeled on similar rationale and similar hopes.
Mr. Marks stated that the resource base in Alaska was good.
He referred to a 2007 U.S. Department of Energy study
establishing that there was 10 billion barrels of
economically recoverable oil in the core fields alone
(excluding the OCS, NPR, and ANWR). The question was
whether companies would develop in Alaska or in other
places in the world.
10:15:38 AM
Mr. Marks recommended not distinguishing between unitized
and non-unitized fields for two reasons. First, the current
unitized fields had heavy oil, which was as challenged as
the non-unitized oil. In addition, the small-producer
credit was a very strong incentive to bring in people to
develop the non-unitized fields. He noted that the
administration could have a different view.
Representative Guttenberg referred to personal experience
as a North Slope laborer for 25 years. He liked to look at
things in a solid, pragmatic manner. He referred to the
early years of the pipeline when ELF was in place and taxes
were very low; the industry put a couple billion dollars
into gas facilities. The result of not doing that was
probably a steep decline in production. He described the
process as a "physical thing, like an orgasm; certain
things have to happen." There were things that have to
happen to keep the process going on a day-by-day basis. He
believed that the loss of revenue to the state could be
catastrophic if production kept going down and the pipeline
had to shut down, but there was a liability for the
industry as well. He questioned the value to the liability
if the dismantling, removal, and restoration (DR&R) system
had to kick in, which could cost $50 billion to $70
billion. He thought that calculation was a pragmatic,
physical thing to consider. He wondered how the value would
be calculated. Mr. Marks responded that it was complicated.
He did not think the standards to fix and replace TAPS had
been established, so the cost was an unknown. He believed
there were other ways for industry to transport the oil
(depending on the value of oil) even if TAPS became
obsolete. For example, a smaller pipeline could be built;
oil could be shipped out of Prudhoe Bay if there was less
ice; a pipeline could be built to Fairbanks and oil could
be transported by rail to Valdez, Seward, or Wittier.
10:19:46 AM
Representative Guttenberg did not think industry wanted to
at all consider stranding the facilities on the North
Slope.
Vice-chair Fairclough asked for three things to be provided
to the committee. First, she understood that producers had
been collecting $0.50 per barrel for decommissioning
removal and restoration of the environment for the
pipeline; she wanted to see the documents. Second, she
wanted to hear from the commissioner of the Department of
Labor and Workforce Development about industry job loss and
unemployment in the state. She noted that North Dakota was
a "right-to-work" state, which she believed set Alaska up
differently related to economic competition. When she
considered ACES, she was not only looking at projected
dollars coming into the state, but who was being employed.
Third, she believed Alaskans were heavily invested in
receiving the annual permanent fund dividend; she thought
the permanent fund had investments in the companies being
discussed. She questioned the economics inside the
permanent fund and how the revenue would be replaced.
Co-Chair Stoltze noted that the private sector would be
testifying about jobs issues.
Co-Chair Stoltze noted that the afternoon meeting would be
devoted to DOR Commissioner Bryan Butcher, and that the
following day there would be presentations by DOR and the
Alaska Oil and Gas Conservation Commission. There was
discussion about scheduling for the Anchorage hearings and
other hearing issues related to HB 110, including public
testimony opportunities.
10:26:16 AM
ADJOURNMENT
The meeting was adjourned at 10:26 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 110Marks HFIN Presenttion3 031511PDF.pdf |
HFIN 3/15/2011 8:00:00 AM |
HB 110 |