Legislature(2015 - 2016)HOUSE FINANCE 519
02/17/2015 09:00 AM House FINANCE
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| Audio | Topic |
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| Start | |
| Enalytica Presentation: Impact of Oil & Gas Production Tax Credits at Low Oil Prices | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 17, 2015
9:02 a.m.
9:02:44 AM
CALL TO ORDER
Co-Chair Thompson called the House Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Janak Mayer, Partner, Enalytica; Nikos Tsafos, Partner,
Enalytica.
SUMMARY
^ENALYTICA PRESENTATION: IMPACT OF OIL & GAS PRODUCTION TAX
CREDITS AT LOW OIL PRICES
9:03:40 AM
JANAK MAYER, PARTNER, ENALYTICA, introduced himself and
referenced his experience in providing advice and testimony
on oil and gas production taxes and on Alaska' liquefied
natural gas project (AKLNG). He relayed that he would be
discussing Alaska's tax system and tax credits in the
current low oil price environment. He indicated that there
were two papers that accompanied the presentation. One
paper provided a general background of the oil market and
the drivers of low oil prices. The second handout
specifically addressed tax credits in the current
environment. He stated that the presentation was an
overview of the contents of both handouts. He turned the
meeting over to his colleague to talk about the macro-level
oil price picture.
NIKOS TSAFOS, PARTNER, ENALYTICA, introduced himself and
provided his background over the previous ten years as an
oil and gas consultant. He explained that he spent most of
his time advising companies in natural gas. He furthered
that he had spent time studying the global energy system
including oil markets. He introduced the PowerPoint
presentation, "Impact of Oil and Gas Production Tax Credits
at Low Oil Prices."
9:06:03 AM
Mr. Tsafos began with slide 2: "Oil in 2015: Market
Fundamentals." He noted that the price of oil had gone from
about $115 per barrel of oil in the previous summer to
about $55 to $60 per barrel of oil. He stated that he would
be explaining the change in the market but would not try to
predict the market's future. His intent was to place
legislators in the shoes of someone working at either an
oil company, a bank, or a consulting firm that was
attempting to interpret market activity. He wanted to
discuss what kind of data points were evaluated. He
referred to the three charts on the slide. The chart on the
left-hand side showed two numbers. The first reflected the
growth in U.S. production relative to January 2010 (shown
in red). The red line indicated that the U.S. was producing
significantly more oil. Basically, relative to January
2010, the U.S. added about 4.5 million to 5 million barrels
of oil per day in production. He reported that as a
reference the world market produced about 90 million
barrels per day. Normally a large increase in production
would lead to a reduction in market price. Although the U.S
was adding production, something else was happening
elsewhere in the world to remove supply from the market. He
was not referring to deliberate action by OPEC. Instead, he
was referring to physical disruptions to supply. He pointed
to the second line (depicted in green) that displayed
unplanned outages. The green line showed a drastic increase
in outages in early 2011 that correlated to the beginning
of the civil war in Libya. Libyan production was disrupted,
resumed, then was followed by the start of the Syrian civil
war. Syrian oil was taken off the market as a result of the
war. Once the market stabilized the U.S. and its allies
tightened sanctions on Iran resulting in Iranian production
being taken off-line. The green and red lines were almost
moving in tandem. He pointed out that whenever the U.S. was
adding production somewhere else in the world production
was being taken off of the market.
Mr. Tsafos moved to the middle chart on slide 2. He stated
that the green line depicted actual oil production, whereas
the red line showed the yearly average. He pointed to a
small amount of growth in 2012 and an insignificant amount
of growth from 2012 to 2013. He suggested that while the
U.S. oil production was growing to 5 million barrels per
day, the world was not seeing the benefit because of the
changes in production in other places.
Mr. Tsafos turned his attention back to the chart on the
left side of slide 2. By the middle of 2014 outages
(represented by the green line) were declining
significantly. He suggested that as U.S. production was
increasing, other production, such as Libyan production,
was also coming back online. Next, he explained that the
red line on the middle chart showed the growth in the
yearly average in oil production and highlighted the
significant growth from 2013 to 2014 adding $1.6 million
barrels of oil per day. He reemphasized the large amount of
growth in oil production.
Co-Chair Thompson acknowledged that Representative Gara had
joined the meeting.
Mr. Tsafos moved on to discuss demand. He drew the
committee's attention to the third chart on the right on
slide 2 which showed demand expectations. He relayed that a
number of analysts and observers published their forecasts
predicting the world market. He mentioned that the
International Energy Agency (IEA), the energy entity of the
Organization for Economic Co-operation and Development
(OECD), published a monthly report on oil markets available
to the public. The U.S. Energy Information Administration
and the Organization of the Petroleum Exporting Countries
(OPEC) also published monthly reports on oil markets as
well as some banks and consultants. Enalytica chose to
review the IEA report because it was the most widely read
oil market report. In terms of representing a consensus, he
felt IEA's report was the best to review. He explained that
the green line on the chart showed IEA's forecast for
growth in oil demand and how it changed over time. He
detailed that in January 2014 and February 2014 IEA said
that the oil market would grow by 1.4 percent. In March
2014 IEA reported a growth in oil production of 1.5
percent. In April IEA reported a decrease to 1.4 percent.
In May and June IEA predicted that growth would return to
1.5 percent. In the summer of 2014 there was a sudden and
drastic reduction to .7 percent growth in oil production.
He reported that IEA's expectation for 2015 was similar. In
the middle of 2014 IEA predicted that the growth in oil
production would be about 1.5 percent. Six months later,
IEA reduced its estimate to 1.0 percent. He maintained that
there were several reasons for the change, some had to do
with the global economy. A reduction in growth from 1.5
percent to 1.0 percent equated to a decrement of about 900
thousand barrels of oil. He continued that removing half a
percentage point of growth in 2015 equated to another
reduction of 450 thousand barrels of oil. He summarized
that supply suddenly grew by 1.6 million barrels while
demand dropped by 1.4 million barrels per day of demand
expectation for the following one and a half to two years.
He concluded that the crash in oil prices was due to
changes in supply and demand and questioned why OPEC did
not step in to stabilize prices.
Co-Chair Thompson announced that Representative Guttenberg
had joined the meeting.
9:14:49 AM
Mr. Tsafos slide 3: "Oil in 2015: Role of OPEC." He
reported that OPEC met in November 2014 and decided not to
take any action removing an OPEC-enforced floor. As a
result, the analysis of the oil market changed.
Mr. Tsafos wanted to present a history of OPEC in order to
provide context. He pointed to the top graph on slide 3
which represented the market share of OPEC (OPEC production
divided by global production). The bottom graph showed the
quotas assigned to OPEC members. The Organization of the
Petroleum Exporting Countries managed the market by setting
a production quota for each member. He explained that a
decrease in quotas represented an agreement to cut
production. Conversely, an increase in quotas signified an
agreement to increase production. He pointed out the
different colors on the chart identifying the parties that
agreed to the quotas. He highlighted that green represented
all of OPEC and that the agreement to the quota was an
exception rather than the rule. He elaborated that
sometimes Iran, Iraq and Kuwait (as in 1990 when the two
countries were at war), Iraq and Iran, or Iraq and other
countries were excluded.
Co-Chair Thompson announced Representative Wilson's arrival
to the meeting.
Vice-Chair Saddler asked what "ex" stood for in the legend
at the bottom of the chart. Mr. Tsafos clarified that "ex"
meant except.
9:17:54 AM
Mr. Tsafos continued by noting the shades of grey on both
charts on slide 3. He explained that the shades identified
three broad OPEC behaviors. He reported that OPEC was
formed in 1960 but did not institute quotas until 1982
which explained why the chart on the bottom covered a
shorter period of time than the chart on the top. Until
1982, OPEC had other ways of attempting to manage the
market. There was a period of time beginning in about 1970
when OPEC tried to set oil prices artificially high,
especially after the Arab embargo of 1973. The chief way of
setting prices high was to cut production and the way to
keep production high was to ration supply. Since OPEC
wanted to keep prices high it had to cut its own
production. In OPEC's efforts to keep the market
artificially high, more production entered the market
including that of Alaska. Once the market share went from
about 50 percent to about 30 percent producers started
getting upset. In 1986, Saudi Arabia retorted by producing
more which resulted in the oil price crash in 1986.
Mr. Tsafos continued to outline OPEC's history. He
specified that from 1986 to the late 1990s OPEC followed
the market. He detailed that oil was a long-term business;
it took a long time to discover oil, plan the oil
development, and actually develop the oil. Long-term
businesses typically lead to cycles. The chief role for
OPEC, because it had spare capacity, was to convert a long-
term cyclical business into a short-term, less cyclical
business. He reported that the reason OPEC had significant
spare capacity was because so much of it was built in the
1950s, 1960s, and 1970s prior to the nationalization of the
oil industry in OPEC countries and due to the decline in
production in the 1980s. He referred back to the top chart
that showed the "follow market" period where OPEC's market
share recovered. The same trend was seen in the market
quotas where quotas continued to increase until they
reached a stabilization point, effectively producing more
to keep the market stable. He continued that the following
phase in OPEC behavior was stabilization, an effort to
actively manage the market.
9:22:02 AM
Mr. Tsafos directed attention to the lower chart pointing
to April 1998 where the green line rose. He explained that
a meeting occurred where OPEC decided to increase
production just as the Asian financial crisis started which
lead to the following price crash. Oil Producing and
Exporting Countries (OPEC) quickly realized its mistake and
responded by cutting back on production. Eventually, OPEC
decided to halt changing quotas each month.
Mr. Tsafos informed the committee that OPEC increased
supply as needed to stabilize and follow the market from
2002 to the present financial crisis. In 2008 a financial
crisis followed; Lehman Brothers closed in September and
the price of oil dropped from $147 per barrel to about $40
per barrel in December. OPEC had successive cuts, as shown
in the grey stabilization area on the lower chart, in which
the blue line drops off then stabilizes as depicted in
yellow. The production quota jumped one more time to
approximately 30 million barrels per day and has remained
the same. He suggested that OPEC did not control oil
prices. Oil Producing and Exporting Countries took a huge
hit to its market share when it succeeded in controlling
market prices.
Mr. Tsafos summarized that OPEC tried to stabilize the oil
market with a short-term disruption; one time it failed in
the late 1980s, and another time it succeeded after the
price crash in 2008. He continued that for a large part of
its history, OPEC has been a follower of the market adding
liquidity when needed. More recently, with significant new
oil entering the market, OPEC allowed prices to drop to
protect its own market share and surmised that the market
shares of active producers such as Texas and North Dakota
would be damaged instead. However, he suggested that OPEC's
logic was complicated because of the method in which oil
was produced in the U.S.
9:25:21 AM
Mr. Tsafos advanced to slide 4: "Oil in 2015: US Lower 48."
He indicated that the growth in U.S. Oil production created
a fundamental shift in the oil market putting downward
pressure on pricing. He also asserted that oil price
forecasting became more difficult. He explained that prior
to the U.S. discovery of tight oil the forecasting of oil
pricing consisted of two exercises; the first was to
identify, model, and monitor a group of projects to
determine the marginal or the most expensive barrel of oil.
For the previous 5 to 6 years the most expensive barrel of
oil came from either Canadian oil sands or deep water
production. He suggested that if the floor for a project
was set at $70, $80, or $90 and prices went below the
floor, producers would not continue to invest resulting in
less supply and higher prices. He continued to explain that
modeling projects in these areas made it easy to determine
the marginal barrel price within just a few weeks. He
stated that it was very easy to determine whether the
projects were moving forward.
Mr. Tsafos reported that the second exercise in oil
forecasting was to determine the breakeven price of
countries. It was important to know what a country needed
to balance its budget or to balance its trade accounts. The
logic was that if prices went below the breakeven point for
a country, the country would step in to stop any loses. He
opined that it was not difficult to determine the breakeven
price for a country. The needed figures could be determined
by taking the expenses and the production amount and
multiplying those by the price.
9:28:35 AM
Mr. Tsafos relayed that when the U.S. entered the oil
market it complicated it in three ways. He referred to the
three words on slide 4; scalable, diffuse, and variable. He
first addressed the word "scalable" citing the example of
the Eagle Ford Shale Development. In about 2010 the
development went from producing almost 0 to 1.5 million
barrels of oil per day, a rare occurrence. In the history
of the oil market such an increase in production has
happened twice outside of the U.S.; in Libya and in the
North Sea of the United Kingdom. It also occurred in
Alaska. He pointed out that it had occurred in two other
areas in the U.S. including the Permian Basin Oil Field in
Texas and in the Bakken Oil Field in North Dakota. In both
cases the production did not start from zero like the Eagle
Ford field, but the magnitude of growth was 1 million
barrels of oil per day over a period of 2 to 3 years. He
explained that in conventional oil adding 1.5 million
barrels of oil per year took a much longer period of time.
It also demonstrated how quickly the U.S. producing system
could respond to high prices. Prices increased and
producers responded by redeploying capital and resources,
such as oil rigs and people, and drilling fervently.
Significant production resulted. He reminded committee
members that the chief benefit of OPEC for the oil market
was to turn a long-term business into a short-term
business. A business that decided to drill one day, began
drilling within a month, and produced oil within the
following 6 to 9 months was an example of a short-term
business. Drilling could continue as long as the price
remained attractive making production scalable.
Mr. Tsafos moved on to address the next item that he
believed made forecasting the most difficult, "diffuse." He
cited that there were three producers that produced the
majority of oil in Alaska. There was also a hand full of
smaller companies that were either producing small
quantities or exploring in Alaska. Therefore, there were
about 6 or 7 companies that determined what was going to
happen in Alaska. He suggested that producers could cut
back production, increase expenditures, or decrease
expenditures.
9:31:48 AM
Mr. Tsafos continued by relaying that in Texas, two-thirds
of the oil production was produced by 32 companies. Several
other companies made up the difference in oil production in
the state. Other places such as North Dakota had different
competitive landscapes. In trying to determine what British
Petroleum (BP), Conoco Phillips, and Exxon Mobile might do,
there was a basic framework in considering each of these
companies. However, there were oil companies such as the 32
in Texas that had to be considered. He observed that some
companies had to repay debt and were more concerned with
going bankrupt than yielding a certain percentage of return
on investment. Some companies were obligated to drill to
avoid losing acreage. There were others that potentially
hedged 50 percent to 60 percent of their output for the
following 1 to 1.5 years. He purported that what made
forecasting difficult was that the production profile was
the result of many different players with different
incentives, diverse financial capabilities, varying
ambitions, and different constraints. He surmised that
making sense of the oil production system was significantly
more difficult. Not only was it more complicated for an
analyst, it was also more difficult for a country such as
Saudi Arabia. He explained that it was much harder to
determine a country's breakeven price. He also speculated
that a company might have to reevaluate its breakeven price
more frequently because of the quickly changing market.
Mr. Tsafos discussed variability, the third and least
understood factor that contributed to the challenge of
forecasting. He stated that no two wells were alike
surmising that one well could be vastly more productive
than another. He mentioned a factor of 30. He expounded
that two wells located side-by-side could have very
different breakeven prices. For example, one could have a
breakeven price of $20 per barrel and the other with a
breakeven price of $130 per barrel. In some instances
variability was due to geology. A company might reduce its
investment and drilling activity due to the difference in
variability. He maintained that variability accounted for
what happened with gas. He reported that after Lehman
Brothers filed for bankruptcy the price of gas collapsed
from $13 to about $4 in the Lower 48. He reported that the
rig count, a proxy for the amount of drilling taking place,
was reduced by 50 percent due to a lack of drilling funds
while production remained flat. He pointed out that there
might be a 50 percent reduction in activity without
impacting production due to significant variability. He
speculated that reducing the activity of 30 bad wells might
be equal to reducing or stopping the activity of 1 good
well. The reason this mattered was because, although prices
might be declining and producers might be short on funding
for capital expenditures, producers could substantially
reduce activity before greatly impacting production.
9:35:50 AM
Mr. Tsafos asserted that one of the things he paid
attention to when evaluating a system was the number of
players, financial objectives, and financial constraints.
He relayed that three years prior the price of natural gas
declined. At the time the general view was that the
breakeven price for gas in the U.S. was about $4. There was
a build-up of concern when prices dropped below $4. The
price went to $4 then to $3.50 at which point it was
thought that $3.50 was the breakeven price. As the price
continued to drop so did the breakeven price. The true
breakeven price was about $1.50 at which time cuts started
being implemented. Trying to make sense of the market
became even more difficult with so many people and factors
involved. He reported that currently there was a process of
price discovery. He indicated that Saudi Arabia was trying
to figure out the breakeven price of oil. The country had
two choices; it could dictate the price such as $50, $60,
$70, or $80 and see how supply and demand reacted, or it
could step back to see where the price settled. He wanted
to provide an understanding about how the state got to
where it was presently, why prices collapsed, and why the
market was becoming truly uncertain and potentially
volatile. He contended that in the past there were many
assumptions consultants used to interpret the market that
were no longer applicable. He summarized his portion of the
presentation by saying that he understood even less than
previously about the oil prices.
9:39:05 AM
Representative Guttenberg commented that Enalytica was not
the first consultant to admit to not knowing what would
happen to oil prices.
Vice-Chair Saddler asked if there had been any structural
changes in the world energy market that would affect the
price of oil.
Mr. Tsafos replied that, in the grand scheme of things,
there had been a general substitution away from oil towards
other fuels. In the U.S., oil made up a smaller percentage
of energy use in America following World War II. He
attributed the change to switching from oil to something
else. There were still parts of the Northeast that used oil
for residential and commercial use. He also reported some
use in the power sector and in industry. He conveyed that
there was also shifting in the transportation system,
mostly in the U.S. towards biofuels. He also claimed a
broad improvement in efficiency, chiefly in car mileage. In
reviewing the history of miles per gallon in the U.S. the
number had decreased for a period of time indicating that
cars were becoming less efficient. He relayed that with the
first oil embargo in 1973 a huge shift occurred [in car
mileage efficiency] jumping up for about 15 years then
leveling off. Over the past 5 to 10 years there were a
number of increases. Since 2005 or 2006 there were some
behavioral changes in American consumers in which vehicle
ownership decreased partly because in urban areas having a
car was less useful. Also, consumers responded to increased
fuel prices. He noted that in the U.S. market as vehicle
ownership went down motorcycle ownership went up in similar
numbers. He commented that although there were changes in
consumer behavior, he was unclear whether the drop in
prices would reverse behavior.
Mr. Tsafos illuminated that Europe was further ahead than
the U.S. in terms of efficiencies, partly because of very
high taxation of gasoline. The reversal of behavioral
trends was more challenging because price differences were
not as striking as in the U.S. In looking at the rest of
the world the price the consumer paid at the pump was
determined more by policy and regulation than by global
markets. He highlighted that the consumer in Saudi Arabia
was not seeing much of a difference in the price at the
pump because the price is not determined with the price of
crude oil and global markets. He pointed out that there was
a large amount of consumption in the world in which the
price was not changing. A drop in the price of oil would
not necessarily lead to a change in consumption or
consumption behavior.
9:44:33 AM
Mr. Tsafos conveyed that in short periods of time the
amount of switching from oil to natural gas use was
limited. For example, if a person lived in Anchorage and
had natural gas in the home it would be unlikely that they
would check the price of oil and gas to determine whether
to heat their home with gas or oil, switching back and
forth. However, industrial users did switch back and forth.
He suggested that the amount of short-term switching back
and forth was limited. As a result of the price
differentials, there will be a small amount of demand pick-
up for consumers that had the ability to switch. The real
question was whether the price drop be sustained. If the
price drop remained at $50 per barrel of oil for the
following 5 years consumers would make different decisions.
He provided examples of choices that might be considered.
Representative Gara commented that Mr. Tsafos had addressed
the percentage of oil in comparison to other energy
sources. He understood that one of the factors affecting
price was demand. He asked about the current U.S. demand
for oil. He wanted to know if the demand for oil had gone
down or remained stable. Mr. Tsafos responded that in the
U.S. demand had decreased primarily due to substitution of
oil with other things rather than consuming less energy. He
cited that approximately 80 percent of the drop in demand
was because of fuel substitution while the remaining 20
percent was due to a decrease in energy use. The world
continued to grow.
Representative Gara clarified that it was the worldwide
demand for oil that continued to grow. Mr. Tsafos responded
affirmatively. He added that OECD demand had peaked and was
in decline. The growth stemmed from non-OECD countries.
Co-Chair Thompson asked if demand would begin to climb due
to the drastic reduction in the price of gasoline. Mr.
Tsafos responded that a brief uptick was possible. However,
he offered that the uptick would be limited because of the
change in technology. He explained that if a consumer
decided to drive twice as much because gasoline was
cheaper, that decision would have less of an impact on
demand because cars were more efficient than five years
prior. A person might have a change in behavior but
technology would limit how much that behavior translated
into demand growth.
Representative Pruitt commented that Mr. Tsafos had helped
him understand why reports about the oil industry varied so
much. He surmised that most people did not understand. He
asked about the conventional wisdom concerning how much of
the market share Saudi Arabia had to have before it would
be willing to adjust its current strategy.
9:48:57 AM
Mr. Tsafos responded that if he was Saudi Arabia he would
be looking at three things. First, he would be looking at
the trajectory of U.S. oil production. He referred to the
red line on slide 4. He indicated that he would be paying
attention each month to whether the market in the U.S. was
stable, growing, or dropping.
Mr. Tsafos highlighted that he would also be looking at
investment decisions regarding new conventional oil.
Investments in deep water, the Gulf of Mexico, Brazil, or
unconventional oil in Canada were important to be watching.
For instance, if companies were canceling plans or delaying
investments he would know that the current prices were
lower than what companies needed to incentivize production.
Mr. Tsafos reported that the third item that he would be
paying attention to was the broad spending patterns by
companies. He would observe how much companies were cutting
back on capital expenditures. He would have a better sense
of how much people were buying, whether the prices were
stable, and whether there was a level of comfort. He
concluded that in observing the three items he would have a
better sense of how the future supply of oil would be
impacted. He mentioned that there were many other things he
would also be looking at that he would not be covering in
his presentation. Broadly speaking, he wanted to know if
new supply was being held back. The clearest indication
would be the U.S., the investment in new mega projects, and
generally how much the industry was spending to develop new
oil.
Representative Edgmon discussed natural gas pricing. He
relayed that he understood natural gas pricing had not
moved in tandem with worldwide oil prices but that someday
it might have spot market prices or better correlate with
the price of oil. He asked how long-term contracts would be
affected for the building of a very large pipeline. He
wanted to know what he should take from Mr. Tsafos'
commentary in terms of the behavior of big companies and
some small companies to build a mega project tied around
long-term prices of liquefied natural gas. (LNG).
9:52:40 AM
Mr. Tsafos responded that Alaska was fortunate that its
partners were large companies with deep pockets. He
reported that the pre-feed phase of the AKLNG project would
cost approximately $500 million, and the FEED phase would
cost between $.5 billion and $2 billion. He speculated that
it was important to have sound partners that could afford
to invest in a viable project during a time when prices
were falling and cuts were being made.
Mr. Tsafos highlighted that Alaska's partners were well
aware that the business of natural gas was a commodity
business. He offered that it was important to know whether
money could be made over a 20-year to 25-year period and to
determine the boundary of possible outcomes. The result of
the current price drop had widened the range of outcomes.
He used the example of the previous price of oil being $80
to $120 per barrel of oil versus $50 to $120 per barrel of
oil. The price difference impacted the AKLNG project
adversely. Currently, he noted that the project had a price
tag of $45 billion to $65 billion. He concluded that if the
cost of the project was $65 billion and the price of oil
was $50 per barrel, the project would be very difficult and
would make cost containment a large priority. It would also
make managing and mitigating other risks, such as property
taxes and fiscal systems, very important. He stated that in
the current environment, the price drop had been too brief
to completely reshape expectations. He believed that the
price had overshot downward but anticipated it would rise
again. He did not think anyone was panicking about the
viability of the project at present.
Mr. Tsafos emphasized that how gas was sold in the global
market and what kind of price exposure and volatility the
state was willing to take were important considerations.
One of the questions that was previously considered was
whether the state wanted the price of natural gas tied to
the price of oil like it had been historically in Asia or
priced differently such as the Henry Hub price. In other
words, he recommended that the state consider whether it
wanted all of its income to be tied to the price of oil or
subject to two different price systems and volatilities.
Mr. Mayer added that if everything with the AKLNG project
went as planned, producing its first barrel of LNG for sale
to buyers in Asia in 2024 or 2025, it would earn its return
on investment between 2025 and 2045. He asserted that he
was not concerned with the current price of oil or the
price of oil in two years when considering the economic
fundamentals of the project or its viability. He was
looking at whether the capital invested in the project
would be repaid over the span of time between 2025 and
2045.
9:57:15 AM
Mr. Mayer reviewed slide 5: "Tax Credits and SB 21: Two
Types of Credits." The second part of the presentation
focused on how the low price environment was effecting
state finances, how much tax revenue was being generated,
and what the state was spending on tax credits. He
highlighted two numbers he would be discussing; the first
was the total production tax revenue that the state
received from the production tax system estimated to be
about $524 million, and the forecast amount of tax credits
estimated to be $625 million. He relayed that the point had
been made that it was concerning that the amount of tax
credits was larger than the amount of tax revenues. Through
the overall production tax system the state was spending
rather than receiving income. He offered that his
presentation would look in detail at causes, concerns,
fundamental problems, and how to address any problems.
Mr. Meyer clarified that he was currently only discussing
the production tax system, one component of the State of
Alaska's fiscal system. The state also generated revenue
from oil and gas production, royalties, corporate income
taxes, property taxes, and a range of other things. He
estimated that the forecast for FY 15 was $2.5 billion in
total revenues from the oil and gas fiscal system, $2.0
billion of which was in unrestricted revenue ($1 billion
from royalties, $.5 billion from the production tax, and
the remainder from other components of the system).
Mr. Mayer indicated that the core of the presentation would
focus on analyzing the difference between the production
tax revenues of $524 million and the tax credits of $625
million and whether the enactment of SB 21 [legislation
passed in 2013 establishing the current oil and gas tax
structure] was the reason for the decrement.
10:01:04 AM
Representative Gara wanted to clarify a term. He asked if
Mr. Mayer was talking about credits in which the state
reimbursed a portion of a company's spending. He noted that
the tax rate changed with the price of oil. He relayed that
some people called it a credit but had nothing to do with
spending.
Co-Chair Thompson suggested that Mr. Mayer would be
addressing the topic as part of his presentation.
Representative Gara interjected that he wanted to know what
credit Mr. Mayer was talking about.
Mr. Mayer began with the first question whether the state
was subsidizing companies through its tax system to produce
its oil. He distinguished that there were two flows of
money and indicated they were shown on the chart on slide
5. He explained that there were two categories of credits.
The first type of credit was claimed by companies that had
a tax liability that reduced the amount of tax paid. The
second type of credit was claimed by companies that did not
have any tax liability and that were allowed to be
reimbursed in cash by the state. He furthered that the two
types of companies were very different. He explained that
companies with tax liability tended to be the companies
such as BP, Exxon Mobile, and Conoco Phillips that had
significant production from existing established assets and
generated significant revenue from those assets. Companies
that did not have a liability tended to be smaller
producers, companies that did not have current production
but were currently investing while making a cash loss.
Mr. Mayer offered that the numbers in the first three lines
of the chart reflected companies in the first category that
had a tax liability. He acknowledged that, overwhelmingly,
the credits taken against a company's tax liability were
credits that were a fundamental part of the tax system. He
provided an example. He suggested that if just the 35
percent tax rate currently in statute was applied to
current production figures the state would receive
approximately $1.2 billion in revenue. After applying the
tax credit of $1 per barrel, integral to the tax system,
the revenue decreased by $750 million to a total revenue of
$523 million. He suggested that it was better to think of
the $1 per barrel tax credit as a fundamental component of
the tax system and that it did exactly what progressivity
did under Alaska's Clear and Equitable Share (ACES).
Alaska's Clear and Equitable Share (ACES) went from a 25
percent tax rate and escalated at higher prices. Similarly,
under the current structure the tax credit started from the
top at a 35 percent tax rate and decreased at lower prices.
The way in which it was reduced was through the $1 per
barrel credit. He reiterated that the tax credit was a
fundamental part of the tax system currently in place.
Mr. Mayer attributed the state's reduced oil revenue,
primarily, to lower oil prices. He emphasized that there
was a positive revenue flow particularly from the large oil
producers. He mentioned that there was also $1 billion or
more dollars in state revenues, royalties, and other
sources.
Mr. Mayer moved on to discuss a separate flow of cash. He
spoke of cash that the state paid out from its coffers for
credits purchased from small producers that did not have a
tax liability. He reported that the credits for potential
purchase in FY 15 equaled $625 million. He revealed that
about 50 percent of the credits were from Cook Inlet and
the other 50 percent were from the North Slope. He
furthered that the credits going out were for companies
that did not have a tax liability but were developing and
were essentially cash negative at present. He indicated
that he would be discussing the reasons for the credits in
greater detail. He wanted to clarify that there were two
fundamentally different sets of flows. The state was
receiving substantial revenue from the major producing
companies. He surmised that the question was how the first
flow compared to the entirely separate outflow to companies
without a tax liability. The current tax system provided
credits to incentivize new development of new resources on
the North Slope and in Cook Inlet.
10:06:57 AM
Mr. Mayer continued to slide 6: "Tax Credits and SB 21:
Positive Impact of SB 21 on Revenues." He explained that
the chart showed a comparison between SB 21 and ACES. The
purpose for the contrast was to identify whether what the
legislature did with the implementation of SB 21 made
things fiscally worse for the state. He believed it was
important to understand how the current tax system was
calculated versus how it was calculated under ACES. He
relayed that in reviewing both tax systems he was using the
current scenario of low oil prices and high investment. He
asserted that revenue was not reduced as a result of SB 21.
He highlighted that revenue was significantly increased
under SB 21's tax structure. He elaborated that the intent
of SB 21 was to strike a balance between reducing the
state's take at high prices and better protecting itself at
low prices.
Mr. Mayer conveyed that the basic way in which SB 21
equalized the tax system was by taking a 4 percent gross
floor, a minimum tax level that had to be paid. In times of
high investment and low oil prices the state compared what
the profit-based tax generated versus what the state
generated simply by taking 4 percent of the gross value at
the point of production. If the 4 percent number was
higher, that became the tax rate. The calculation existed
in both the ACES tax system and from that in SB 21. He
noted one significant difference between ACES and SB 21. He
purported that under ACES the state calculated the 4
percent minimum then applied a 20 percent credit for a
company's capital spending. Although a company could not go
below zero it could accrue a liability for future years.
Under SB 21 the capital credit was removed and was
partially replaced with a fixed per barrel credit which
effectively provided a progressive mechanism in the overall
system. It reduced a company's tax rate as prices fell but
only down to a certain level. In other words, the $1 per
barrel credit could not take a company below the 4 percent
per barrel floor. He summarized that the 4 percent floor
went from being something abstract, ineffective, and non-
binding to being a hard floor in most circumstances. He
concluded that the current tax system generated much more
revenue than the ACES tax system would have generated under
the same circumstances. He relayed that the current tax
system generated approximately $600 million in revenue from
the North Slope based on the Department of Revenue Source
Book. He mentioned that Enalytica's estimates (represented
in grey) were numbers reflecting the ACES methodology. The
numbers generated a little over $200 million, a
substantially lower dollar amount due to capital credits in
ACES.
Mr. Mayer moved on to discuss the numbers for FY 16. The
Department of Revenue forecast numbers remained high and
the department forecasted even lower prices than in FY 15.
The total North Slope revenues for FY 16 were estimated at
$286 million under SB 21. Under ACES there was no tax
revenue in FY 16 and there would be a liability against
future tax years of $242 million. In answer to his question
about whether SB 21 made the state's fiscal system worse,
he responded, "No." He stressed that SB 21 improved the
state's circumstances by protecting its bottom line.
10:13:11 AM
Representative Gara referred to Mr. Mayer's statement about
the negative ACES revenue in FY 16. He asked him to confirm
that the number could not go below zero. Mr. Mayer
responded that the negative number would be a liability
being carried forward into the following year.
Representative Gara referred to the $286 million from SB
21. He commented that according to the state's most recent
forecast it was receiving negative revenue in FY 16. He
reiterated that in the most recent forecast the state would
be receiving negative revenue from SB 21 in FY 15 and FY 16
and that the state would cap down at zero under ACES. He
wanted to know why the information was not a part of the
chart.
Mr. Mayer responded emphatically there was not a forecast
of negative revenue in FY 15 and FY 16. He clarified that
what Representative Gara was referring to was a comparison
seen on the previous slide of revenue being $523 million in
FY 15 and $308 million in FY 16. He continued that the
numbers were slightly different because they were statewide
and individual tax payer versus North Slope. He pointed to
the revenue line [Production Tax Revenue] on slide 5 and
the line on spending on other credits to smaller producers
[Credits for Potential Purchase]. He explained that the tax
system accounted for revenues and expenditures. He agreed
that it should be a source of concern to anyone if
expenditures were greater than revenues. However, the
comparison was an even comparison between the two tax
systems looking just at the revenue line [Secretary's note:
unable to decipher what lines Mr. Mayer was referring to].
Representative Gara stated that the state was taking in
less money than it was paying out. He said it was negative.
He continued that ACES would bottom out at zero and carry
the loss forward. He stated that under SB 21 the state was
paying out more money than it was collecting. He did not
understand how the number could be positive when the state
was paying out more money.
Mr. Mayer maintained the importance of really understanding
the numbers. He discussed the number on the second line
[slide 2: Credit Used Against Tax Liability] that he
indicated drove the idea of a net negative which included
expenditures. The numbers on line 2 were derived from
credits that existed for the previous several years and
were applicable in either tax system. The comparison he
referred to was just on the revenue side of the equation.
He clarified that the Department of Revenue accounted for
revenue and tax spending. There were two flows; one inflow
from tax payers and one outflow to companies without a tax
liability. He asserted that the outflows had been embedded
into the system for some time. He suggested that the line
of outflow would be very similar in both circumstances. The
comparison he was referring to was just looking at the
inflows. He agreed that the net of credits, just looking at
a North Slope analysis, would be negative. However, he
asserted that the other would be more strongly negative
because of starting from a base then paying out additional
credits.
10:16:56 AM
Co-Chair Thompson asked Mr. Mayer if slide 6 reflected
production. He wanted to know if he was correct in assuming
that slide 5 had nothing to do with production. He asked
for additional clarification.
Mr. Mayer agreed with Co-Chair Thompson and added that some
of the credits were for exploration but the bulk of them
were for development of newly discovered resources. He
restated that the net credit balance was due to flows to
two very different types of companies and were accounted
for by the state in two different ways; the large producers
were counted on the revenue side and the small producers on
the spending side. The comparison was between the
production tax revenue and then looking at the subsequent
page [slide 6]. The credits for potential purchase applied
to a different type of company and were part of a different
flow.
Mr. Tsafos suggested taking the 625 number [slide 5] and
minus 20 or minus 50. He relayed that in the present case
the number would be 224 minus 625 bringing the number to
minus 400. He continued to explain that the basic idea was
that the number would be either minus 100 or minus 400 [Mr.
Tsafos used slides 5 and 6 as references].
Representative Pruitt wondered if SB 21 only applied to the
North Slope. He continued to phrase his question. He wanted
to confirm that when discussing total credits the payout
for Cook Inlet was included. He suggested that the state
had a credit-heavy incentive program for investing in Cook
Inlet. He believed that legislators had to take very
different approaches to two distinct basins when looking at
how they impact the overall state budget and how credits
were applied.
Mr. Mayer affirmed that Representative Pruitt was correct.
He elaborated that of the $625 million in FY 15 in credits
for potential purchase about $300 million went to Cook
Inlet and the remainder went to the North Slope. He pointed
out that in both cases credits went to small producers
bringing new production online. He relayed that on the
North Slope the investment was in future tax revenue.
Whereas, in Cook Inlet the investment was a pure subsidy
for producers because of the tax regime being very
different.
Vice-Chair Saddler suggested hearing the remainder of the
presentation.
10:20:34 AM
Representative Guttenberg understood that the state gave
credits to encourage behavior. He was in favor of
encouraging exploration, development, and production. He
suggested that at times a negative number was not a problem
depending on the forecast. He remembered that during the
oil tax debate it was difficult to compare one set of
behavior of one regime to another. He elaborated that, in
terms of analysis, one regime filed under one tax structure
and the other regime filed under a different tax structure.
He wanted the forms to be significantly the same for the
purpose of making comparisons. He mentioned that the
backlog of audits was an additional barrier. He asked Mr.
Mayer to comment on the difficulty of comparing both
systems. Mr. Mayer asked if he was talking about comparing
the revenue that came from both systems or comparing the
investment and future production that came from both
systems.
Representative Guttenberg proposed leaving the future
production and the credits out of the question. He
expressed the difficulty he was having in determining what
method was best for the state. He wanted to know what was
working and what was not working for the state. He
reiterated that, in the discussions and debates he
participated in, it was difficult to make comparisons based
on the different filing types. He was just referring to
per-barrel production and taxes. He wanted to feel more
confident about the numbers being presented.
10:23:07 AM
Mr. Mayer stated that he would be referring to the numbers
listed in the back of Department of Revenue's Revenue
Source Book where DOR explained, in a general way, how the
tax system worked. Department of Revenue used a
hypothetical scenario in which the tax revenue from the
system came from one monolithic tax payer rather than a
variety of different tax payers which might attribute to
slight distortions in the analysis. However, it provided a
good high-level understanding of how the tax system worked
without getting into confidential tax payer information.
The tax calculations were based on a certain set of
assumptions such as price and investment forecasts from
DOR. He expounded that if higher prices were used and
investments were lower, the numbers would be significantly
different. The resulting income would be much higher under
ACES and much lower under SB 21. The basic idea behind SB
21 was that in times of high prices and low investment the
state would take a more even share of the profits rather
than the lion's share. In times of high investment and low
prices the state was better protected. There were many
different views about the different tax systems. He
recapped that ACES was a good fiscal system in times of
high oil prices and low investment because of the resulting
cash revenue. It was also a tax structure that would lead
to years of red ink at times of low oil prices and high
investment. He suggested that in terms of other credits the
state was starting at a higher floor because in the current
circumstance the SB 21 tax system generated more revenue.
10:26:09 AM
Representative Wilson referred to the prior slide. She
asked if it would be advantageous to introduce legislation
in which the state would be obligated to purchase credits
only if it generated an equal amount of revenue. Mr. Mayer
commented that her question might be addressed further in
his presentation. He reported that previous slides
discussed the revenue side of the equation. The following
few slides would address the credit side of the equation.
Mr. Mayer continued to slide 7: "Tax Credits and SB 21:
Positive Impact of SB 21 on Revenues." The chart showed
credits used against tax liability versus credits for
purchase by the state paid to small producers. The figures
listed were from DOR. He pointed out that the yellow line
[Credits Used Against Tax Liability] fell dramatically in
FY 15 and FY 16. The decrease represented the impact of the
4 percent binding floor. At low oil prices and high
investment the state would be paying out significantly more
without the hard floor. He referred back to the example on
the previous slide. He suggested taking the total tax
before credits of $1.3 billion and multiplying it by $8 per
barrel to total $1.2 billion under Aces. Under SB 21 the
state would only be paying $720 million because of the 4
percent floor that was in place. He continued to explain
that as oil prices fell the 4 percent floor kicked in and
reduced the amount of credits. He suggested that the credit
was significantly less than $8 per barrel due to the floor.
The line was decreasing because prices were low and there
was a hard 4 percent floor. The line rose again in FY 17
because DOR's forecast was based on oil prices in the $100
per barrel range.
He drew attention to the green line on slide 7 that showed
a rise in credits for purchase by the state. He reported
that they were fundamentally capital credits, either
capital credits in the past under ACES, ongoing capital
credits in Cook Inlet, or net operating loss credits. The
credits were, effectively, state support for exploration
and development by small producers on the North Slope or in
Cook Inlet. He reported that more investment was being made
by small companies in the two basins which attributed to
the incline in the number of credits for purchase by the
state.
10:29:24 AM
Mr. Mayer advanced to slide 8: "Tax Credits and SB 21:
Credit Eliminations and Transitional Arrangements." He
asserted that the previous slides addressed revenues and
the following set of slides addressed credits being paid
out to small companies without a tax liability. He intended
to look at other changes resulting from SB 21 legislation
and would be discussing whether the state needed to be
concerned with increasing credits. He reported that SB 21
attempted to limit credits in several ways although those
were not currently in effect. He elaborated that in the
previous tax regime there was an alternative credit for
exploration, a Frontier Basin credit, and a small producer
credit. In FY 14 these credits collectively cost the state
approximately $113 million. The tax system resulting from
SB 21 legislation retained the sunset date of 2016
previously established in ACES. The small producer credit
was limited to a period of 7 years after initial
production. Another notable provision of SB 21 reduced
government support for spending overall. Under ACES, a tax
payer with a liability, based on progressivity combined
with credits, received up to 80 percent support for
government spending. A small producer without a tax
liability claiming credits, received 45 percent support for
government spending under the same tax system. The 45
percent credit was comprised of a capital credit of 20
percent and a net operating credit of 25 percent. Under
ACES, the government would have effectively spent $.45 for
every dollar spent on new development to bring online for
production. Under SB 21, the tax rate and the net operating
loss credit were both 35 percent. This made the job of an
underwriter easier; a large producer could reduce its tax
liability by 35 percent by spending money and writing it
off of taxes, and a small producer without a tax liability
could do the same thing by getting the 35 percent back in
cash from the state treasury. In making the change it
reduced the total level of support for government spending
35 percent. Senate Bill 21 also provided a window of
cushion for small producers by supporting spending at a 45
percent level until January 2016.
10:33:23 AM
Mr. Mayer slide 9: "Cook Inlet Credits." He indicated that
SB 21 did not make any changes to the tax structure as it
applied to the Cook Inlet basin. He added that of the $625
million in total credits being paid out to small producers
without a tax liability, about $300 million was paid to
Cook Inlet producers in FY 15. He continued that unlike
North Slope producers, producers in Cook Inlet did not pay
a profit-based production tax. Instead, they paid a low-
fixed rate tax on gas similar to the Economic Limit Factor
(ELF) system, paid virtually no taxes on oil, and had some
concession royalty arrangements. He confirmed that all of
the tax credits under ACES carried forward in SB 21 along
with some additional special tax credits. The special tax
credits included a 40 percent credit on capital spending on
wells beyond the 20 percent capital credit and 25 percent
carry forward loss credit under ACES. He pointed out that
there was a very large government subsidy for small
producers. He purported that the subsidy for Cook Inlet
producers for capital expenditures was close to 50 percent
based on total capital spending and the total number of
credits in the basin. He relayed that Cook Inlet production
provided gas to Southcentral Alaska and that there had been
a substantial turn-around in what was the decline of Cook
Inlet, most likely, due to some of the credits. He opined
that the state should do a full cost benefit analysis in
the future that examined other ways to achieve the same
benefit at a lower cost to the state. He specified that
Alaska's Oil and Gas Competiveness Review Board was
scheduled to provide recommendations on the future of the
Cook Inlet tax system in January 2017. He cited that the
special treatment of the basin expired in 2022. He
furthered that half of the credit outflow of $600 million
or more in FY 15 went to Cook Inlet. He suggested that it
was not unlike the North Slope in investment in future tax
revenue from the tax system, it was a subsidy for producers
because of the state's concern about having more Cook Inlet
gas.
Mr. Mayer scrolled to slide 10: "Conclusions." He recounted
that there had been an oil price drop as a result of excess
supply because of increased output in the Lower 48, reduced
outages from places such as Libya and Syria, bearish
demand, and Oil Producing and Exporting Countries (OPEC)
acknowledging reality. He added that large producers were
paying hefty sums, but in the current low-oil-price
environment they were not enough to offset the credits paid
to small producers on the North Slope and in Cook Inlet. He
pointed out that SB 21 placed a more secure floor on state
revenues in the current environment of low prices and high
investment. The legislation also eliminated a number of
credits. He suggested that the Cook Inlet tax system needed
to be reevaluated in the future.
10:37:43 AM
Representative Munoz asked whether the ACES credits would
be completely purchased by FY 16. Mr. Mayer responded that
there were no additional ACES capital credits. The credits
stopped when the ACES tax system was replaced by SB 21's
regime. He conveyed that there was an inflated level of net
operating loss or carried-forward annual loss credits in
early 2016. He also reported carry-over credits such as the
small producer tax credit and the Frontier Basin credit
that were scheduled to stop in early 2016. He mentioned
that there was one exception having to do with the small
producer tax. If a producer generated less than 50 thousand
barrels of oil per day, their credit would be limited to a
flat $50 million credit against any tax liability and could
be claimed for up to 7 years after they started initial
production.
Representative Munoz asked if the combined 45 percent tax
credit for the small producer lead to new production under
ACES. Mr. Mayer responded that the small producer tax
credit was introduced when ACES was targeting small
producers to offset the prior system, the ELF system. He
added that SB 21 also tried to provide benefits to small
producers in other ways. He believed that the overall tax
system had to be evaluated to determine what it did to
incentivize investment.
Representative Munoz restated her question about whether
the credits on the North Slope incentivized new oil
production by small producers. Mr. Mayer explained that the
larger credits more directly targeted new development, such
as the capital credits and the net operating loss credits.
The two credits together provided substantial state support
to all companies including small producers. He asserted
that the credits had a major impact in bringing in a number
of projects that would not have been viable otherwise due
to the capital constraints of a small producer. Implicitly
the state was a silent partner. The state provided a credit
up front and took in cash at the end, similar to bringing
in a working interest partner. The credits fell from 45
percent to 35 percent under SB 21, the change being applied
over a period of 2 years to allow for adjustment.
10:41:58 AM
Representative Munoz asked if the viable projects lead to
new production. She asked for a yes or no answer. Mr. Mayer
stated, "Absolutely, over the last several years we have
seen a number of small producers bring online new projects
in both the North Slope and the Cook Inlet." He added that
he would have to review precise timelines in order to fully
answer her questions. He asserted that he had seen a number
of small projects come online.
Vice-Chair Saddler asked about the potential long-term
effects on Alaskan oil production revenues if the North
Slope tax credits were eliminated and everything else
remained the same. Mr. Mayer asked Vice-Chair Saddler to
clarify whether he was talking specifically about the
credits provided to small producers that did not have a tax
liability or if he was also referring to the implicit
credits within the tax system in the form of $1 per barrel.
Vice-Chair Saddler replied, "The first, a good question."
Mr. Mayer responded that particularly on the North Slope
the credits were both an investment in future production
and in future tax revenues. He emphasized that the credits
existed to provide the same benefits to a small producer
that did not have a tax liability as a large producer that
did have a tax liability. For example, when a large
producer with a tax liability spent $1 billion, it was able
to write-off that $1 billion against taxes at a 35 percent
tax rate. He concluded that 35 percent of the spending was
essentially provided by the state through lower taxes. The
35 percent net loss credit provided the same benefit to the
small producer. In both cases he suggested it was the basic
idea of a profit-based tax system; the state was taking
less money either through less taxes or through a cash
outlay. The state was directly investing in both future
production and future tax revenue. He stressed the
importance of keeping the tax rate percentage equal. He
added that the situation in Cook Inlet was somewhat
different because there was no profit-based tax in place
currently. The Cook Inlet credits were a direct subsidy. He
detailed that there may be good reasons for a subsidy such
as providing security of gas supply to Anchorage and to
Southcentral Alaska. He identified a distinction between
credit outlays as an investment in future production tax
revenue (a question of timing of the flows) and direct
subsidies that had nothing to do with future revenue and
everything to do with securing gas supply.
10:45:31 AM
Representative Gara opined that much of the presentation
was incredibly biased in favor of SB 21. He asked about the
4 percent floor. He wondered if the floor applied to any
post 2002 production units. He also asked if a 4 percent
floor applied to any of the fields such as Oooguruk,
Nikaichuq, and Point Thomson, from 2002 forward and for any
future fields. Mr. Mayer would have to verify the taxes. He
stated that the only thing he could think of that applied
specifically was the gross value reduction. He wondered if
the gross value reduction was what Representative Gara was
referring to.
Representative Gara responded that for gross value
reduction fields, which he purported had lower taxes, the 4
percent floor did not apply. Mr. Mayer informed the
committee that he had not thought it through in detail
because it was a small portion of the total tax.
Representative Gara interjected that it was a growing
portion. Mr. Mayer believed that the fundamental
distinction Representative Gara was trying to make was that
the non-gross value reduction fields had a sliding $0 to $8
per barrel credit. He commented that because the credit
inclined up to $8 it needed to be limited on the downside.
Each of the fields Representative Gara mentioned had a flat
rate of $5 per barrel. Depending on how the rate was
applied, Representative Gara could be correct that the 4
percent minimum would not apply. He was unclear. He added
that it did not make a substantial difference to the
numbers but that Representative Gara's point was good.
Representative Gara commented that the impact would be
larger in the future. He referred to slide 8 and suggested
that there was a false comparison. He reread the list of
small producer-focused credits that were scheduled to
sunset in 2016. He argued that under ACES or SB 21 the
legislature could review and extend the sunset in 2016. He
insinuated that Mr. Mayer was making the assumption that
the legislature would come back and erase the credits in
2016 because of the passing of SB 21. He also inferred that
if ACES had remained the tax regime the legislature would
have made the opposite decision. He did not think it was
fair to lead committee members to think that there would
have been a different result in 2016. He wanted to know why
Mr. Mayer was making such an assumption.
Mr. Mayer responded that he had prefaced his remarks at the
time by saying that SB 21 did not directly tackle the issue
of reducing smaller producer-focused credits. The
legislation left the sunset date intact and did not
introduce any new language or provision to impose a new
sunset. He relayed that it was a very conscious decision,
after substantial discussion, to allow the credits to
sunset as part of the new tax system.
Representative Gara commented that in 2016 when something
sunset the legislature would review it under either tax
system. Mr. Mayer responded that he hoped that a review
would occur several years prior to 2016. He used the
example of Cook Inlet where the credits sunset in 2022 and
were scheduled to be reviewed in 2017. He inferred that the
review of the tax credits happened when looking at SB 21.
Representative Gara responded that was not the way in which
sunsets were reviewed in Alaska's legislature. He cited
that review happened in the year of the sunset. He
reiterated that he thought there was a false comparison. He
remarked that there were legislators that thought SB 21 was
a good system and there were legislators that thought
making changes and improvements to ACES was a better idea.
He emphasized that no legislators wanted ACES to remain the
same. He contended that Enalytica was comparing SB 21 to a
system that no one favored. He suggested making a
comparison to a system proposed by others.
Mr. Mayer stated that at the start of his presentation he
had prefaced that his purpose in presenting the numbers was
not in any way to reopen the debate of SB 21 versus ACES.
His aim was to examine whether SB 21 had had a negative
impact on the state. He affirmed that it was important to
go through the numbers to demonstrate how and why SB 21 had
improved the state's situation. He did not set out to
determine if it had been the best tax system, to look at
alternatives, or to make comparisons. Instead, his goal was
to answer the question as to whether the system had made
things worse. He argued that the answer was "no".
10:50:52 AM
Representative Kawasaki referred to slide 6. He indicated
that one of the selling points of SB 21 was that producers
would increase investment and that under ACES producers
would invest less in Alaska. He believed that all things
were not the same. He agreed with Representative Gara that
nobody was in favor of moving forward with ACES as the tax
system. He commented that the investment amount under ACES
should have been lower and there should have been a low
investment category at times of low prices rather than what
was reflected on the slide. He also referred to
Representative Munoz's comment about the credits on the
North Slope and whether they improved oil production. He
mentioned the Indirect Expenditures Report generated by the
Legislative Finance Division. The report discussed the
capital expenditures and whether they actually went to
production. He also referred to Mr. Mayer's comments about
upfront capital actually producing more oil in future
years. He cited that in both the expenditure report and the
independent audit that was conducted the credits did not
produce the expected results. Instead, the companies used
the investment such as maintenance, renewal, and
renovation. He asked Mr. Mayer to comment.
Mr. Mayer responded to Representative Kawasaki' first point
that the aim of the presentation was to show a side-by-side
comparison. He did not want to impose a value judgement
which was why he was presenting an equal comparison. He
addressed Representative Kawasaki' question about capital
credits and other credits that implicitly provided support
for spending such as the net operating loss credit. He
suggested that under the former system there was a wide
range of means of government support for spending. He
relayed that the highest government for spending under ACES
was not only occurred through tax credits but also through
the interaction of tax credits and progressivity. He
reminded the committee that an existing producer did not
receive an outflow of credits directly from the treasury.
The biggest benefit came from being able to write off
expenses against taxes. Under ACES a large producer could
write off 80 percent of expenses, a very high level of
government support for spending. He asserted that when
examining the potential of a project the credits against
tax liability provided significant support for spending on
things that did not need to provide a stand-alone business
case as to why a project was economic. He pointed out that
the tax system encouraged financing from recurrent cash
flow without the sanctioning of an investment committee.
Under the previous tax regime the credits were an implicit
part of a whole. The basic bargain of the system was high
taxes upfront and high taxes at the end. The system worked
particularly well for the small producer with capital
constraints and finance concerns. The system did not help
the large producer that did not want capital help upfront
and measured things based on long-term cash flow.
10:55:49 AM
Representative Wilson wanted to discuss Cook Inlet. She
remarked that she was tired of Fairbanks paying for all of
the taxes on the North Slope. She asked about the subsidies
and whether they were being paid from the state treasury or
coming out of a company's tax liability. Mr. Mayer
indicated that the answer to her question was not clear
cut. There was a small component of tax credits claimed
against a very small liability. The bulk of credits were
credits for potential purchase. He restated that of the
$625 million figure about $300 million was being paid out
to Cook Inlet producers.
Representative Wilson asked if there was any comparison
between how the state was subsidizing Cook Inlet versus the
North Slope. She was concerned with the amount of subsidy
for Cook Inlet to produce gas and helping only one part of
the state. She restated her question about a comparison and
added that she wanted to know how much the state gained
financially for the two basins. Mr. Mayer explained that it
was difficult to perform an apples-to-apples comparison
because the aims of the two basins were different. The aim
of the North Slope was to spend money upfront as an
investment in future tax revenue. The goal of the Cook
Inlet was to spend money in order to incentivize more gas
for Southcentral Alaska. He suggested that a really good
cost benefit analysis of the credit system in Cook Inlet
would provide better information than a comparison between
the two basins. The analysis would also provide a picture
of what things might look like without a credit system in
Cook Inlet and to identify other means of creating that
benefit. He provided the example of debt financing. He
recounted that there was a report due from the Oil and Gas
Competitive Review Board on the future of Cook Inlet's tax
system.
Representative Wilson relayed that in the past when the
state exported gas, subsidies were provided to areas. She
continued that the gas was subsequently sold out of state
rather than remaining in Alaska. She wanted to know if the
board was going to not only look into the tax credits but
also review their beneficiaries. She wondered if the state
was the only entity to benefit because it sold the gas, or
if other entities benefited within the state. She wanted to
explore the answers to her questions further.
Co-Chair Thompson reviewed the agenda for the following
meeting.
ADJOURNMENT
11:00:37 AM
The meeting was adjourned at 11:00 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HFIN-enalytica, Oil in 2015, January 2015.pdf |
HFIN 2/17/2015 9:00:00 AM |
|
| HFIN-enalytica, Oil prices and tax Credits, February 2015.pdf |
HFIN 2/17/2015 9:00:00 AM |
|
| HFIN-enalytica, Tax Credits, January 2015.pdf |
HFIN 2/17/2015 9:00:00 AM |