Legislature(2011 - 2012)SENATE FINANCE 532
04/11/2012 01:00 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB25 | |
| SB192 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| = | SB 25 | ||
| = | SB 192 | ||
| + | HB 302 | TELECONFERENCED | |
| + | HB 366 | TELECONFERENCED | |
| += | HCR 23 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
April 11, 2012
5:56 p.m.
5:56:38 PM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 5:56 p.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lesil McGuire, Vice-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
None
ALSO PRESENT
Darwin Peterson, Staff, Senate Finance Committee; Janak
Mayer, Manager, Upstream and Gas, PFC Energy;
Representative Les Gara; Gerald Kepes, Partner, PFC Energy;
Senator Hollis French; Senator Tom Wagoner; Senator Linda
Menard.
SUMMARY
SB 25 AIDEA SUSTAINABLE ENERGY PROGRAM
CSSB 25(FIN) was REPORTED out of committee with a
"do pass" recommendation and with the previously
published zero fiscal note: FN2 (CED), one new
fiscal impact note from the Senate Finance
Committee, and one forthcoming zero (EDC) fiscal
note.
SB 192 OIL AND GAS PRODUCTION TAX RATES
SB 192 was REPORTED out of committee with a "do
pass" recommendation and with new fiscal impact
notes from the Department of Natural Resources,
the Department of Administration, and the
Department of Revenue.
HB 302 CONTRIBUTIONS FROM PFD: UNIV/AUDITS
HB 302 was SCHEDULED but not HEARD.
HB 366 DISASTER PLANNING AND SERVICES
HB 366 was SCHEDULED but not HEARD.
HCR 23 ALASKA ARCTIC POLICY COMMISSION
HCR 23 was SCHEDULED but not HEARD.
SENATE BILL NO. 25
"An Act relating to participation by the Alaska
Industrial Development and Export Authority in energy
projects."
5:57:52 PM
Co-Chair Hoffman MOVED to ADOPT the proposed committee
substitute for SB 25, Work Draft 27-LS0290\S.
Co-Chair Stedman OBJECTED for purpose of discussion.
DARWIN PETERSON, STAFF, SENATE FINANCE COMMITTEE, explained
the changes for CS SB 25 version S. He stated that Sections
3,4, and 5 had been added to the bill, and would exclude
the value of the lease hold interest on AIDEA owned
properties for the purpose of determining the full and true
value by the state only if the local government chooses to
exempt that property form the taxation. He furthered that
AIDEA owned 5 major properties in Alaska that were leased
to private operators: the aircraft maintenance facility at
the Ted Stevens International Airport, the Skagway Ore
Terminal, the Ketchikan Shipyard, the Red Dog Road and
Port, and the Snettisham Hydroelectric Dam and Power
Station. He said the full and true value determination was
important to municipal governments in a number of ways; it
determined the magnitude of the required local contribution
component of state education aid, it impacted the required
local share for school construction and major maintenance,
it effected the amount of federal impact aid to which
municipal school districts were entitled, and it limited
property taxing capacity. He relayed that the exemption of
the Red Dog Road and Port from the determination of the
full and true value had allowed the Northwest Arctic
Borough to avoid a loss of education funding estimated at
$1 million annually. He concluded that the legislation
would treat the rest of the AIDEA owned properties equally,
giving the municipalities the choice of imposing property
taxes or opting for the reduction in the local education
contribution.
Mr. Peterson discussed further changes in the bill:
Section 6 The following changes were made to new
section 6/old section 3:
1. No changes
Section 7 The following changes were made to new
section 7/old section 4:
1. No changes.
Deletion Section 5 (page 4 lines 1-15 of the X
version) was removed from the bill:
1. The subsequent sections were renumbered
accordingly.
Section 8 The language in section 8 retains the
language found in section 6 of the X version with the
following changes:
1. Replaced "energy project" with "qualified energy
development" on page 6, line 28 and page 7, line 23.
Section 9 The language in section 9 retains the
language found in section 7 of the X version with the
following change:
1. Replaced "energy project" with "qualified energy
development" on page 8, line 20.
Section 10 The language in section 10 retains the
language found in section 8 of the X version with no
changes.
Section 11 The language in section 9 retains the
language found in section 9 of the X version with no
changes.
Section 12 The language in section 9 retains the
language found in section 10 of the X version with the
following change:
1. Deleted the word "energy" preceding "loan" on page
9, line 17.
Section 13 The language in section 13 retains the
language found in section 11 of the X version with the
following changes:
1. Deleted the word "energy" preceding "loan" on page
9, line 19.
2. Deleted the word "energy" preceding "loan" on page
9, line 28.
3. Deleted the word "energy" preceding "loan" on page
10, line 12.
Section 14 The language in section 14 retains the
language found in section 12 of the X version with the
following change:
1. Deleted the word "energy" preceding "loan" on page
10, line 11.
Section 15 The language in section 15 retains the
language found in section 13 of the X version with no
changes.
Section 16 The language in section 14 retains the
language found in section 14 of the X version with the
following changes:
1. Replaced "energy projects" with "qualified energy
development" on page 11, line 9-10.
2. Replaced "energy projects" with "qualified energy
development" on page 12, line 2.
3. Replaced "energy projects" with "qualified energy
development" on page 12, line 3.
4. Replaced "energy projects" with "qualified energy
development" on page 12, line 7-8.
5. Replaced "energy projects" with "qualified energy
development" on page 12, line 13-14.
6. Replaced "energy projects" with "qualified energy
development" on page 12, line 17.
7. Inserted New Subsection (8) granting AIDEA the
power to pay off the principal and interest on bonds
issued by a municipal public utility and retain the
payments from the utility in a sinking fund.
8. Replaced "energy projects" with "qualified energy
development" on page 13, line 1.
9. Replaced "energy projects" with "qualified energy
development" on page 13, line 8-9.
Sect. 16 (Cont.)
10. Replaced "energy project" with "qualified energy
development" on page 13, line 11-12.
11. Replaced "energy project" with "qualified energy
development" on page 13, line 14-15.
Section 17 Section 17 retains the language previously
found in section 15 of the X version with the
following changes:
1. Replaced "energy project" with "qualified energy
development" on page 13 line 19.
2. Inserted "conservation" preceding "storage" on page
13, line 21.
3. Removed the conversion of natural gas, coal or
biomass to liquids (page 11, line 8), the processing,
refining, or upgrading of oil (page 11, line 9) and
enhanced oil recovery or carbon sequestration (page
11, line 11) from the definition of "qualified energy
development."
New Sect. 18 Added a new section 16 repealing Sections
2 and 8 of ch. 10, SLA 2010 (the language exempting an
integrated transportation and port facility owned by
the authority from taxation and the sunset of the
exemption.)
Section 19 Section 19 retains the language previously
found 16 of the X version.
6:02:31 PM
Co-Chair Stedman WITHDREW his OBJECTION. There being no
further objection Work Draft 27-LS0290\S was ADOPTED.
Senator McGuire remarked that the changes in the bill
correctly reflected the current financial climate. She
relayed interest in partnering with venture capitalists
across the globe. She hoped that the legislation would
contribute to the diversification of the state's economy.
6:04:13 PM
Co-Chair Stedman clarified that the legislation created a
stable energy and transmission supply development program
intended to generate more energy and electricity for the
state.
Co-Chair Stedman noted the two fiscal notes: FN2 (DCCED);
NEW FN (SFIN). He added that a new fiscal note from the
Department of Education and Early Childhood Development
that reflected the changes made in Sections 3, 4, and 5 was
forthcoming.
Co-Chair Hoffman MOVED to report CS SS SB 25 (FIN) out of
committee with individual recommendations and the
accompanying fiscal notes. There being NO OBJECTION, it was
so ordered.
CSSB 25(FIN) was REPORTED out of committee with a "do pass"
recommendation and with the previously published zero
fiscal note: FN2 (CED), one new fiscal impact note from the
Senate Finance Committee, and one forthcoming zero (EDC)
fiscal note.
6:05:36 PM
AT EASE
6:07:56 PM
RECONVENED
SENATE BILL NO. 192
"An Act relating to the oil and gas production tax;
and providing for an effective date."
6:08:09 PM
Co-Chair Hoffman MOVED to ADOPT Committee Substitute for
Senate Bill 192, Work Draft 27-LS1305\Y (Nauman/Bullock
4/11/12).
Co-Chair Stedman OBJECTED for purpose of discussion.
6:08:57 PM
Mr. Peterson discussed the changes reflected in the
committee substitute (CS). He shared that the first change
was located on Page 5, line 10, subsection (a), which dealt
with the incremental production rate above the producer
targeted decline rate. He stated that the previous trigger
price on progressivity for incremental production was $60;
the same as for existing production, and had been changed
to $75. He added that conforming changes could be found on
Lines 18 and 21. He relayed that the next change could be
found on Page 5, line 23, which extended the lowest
progressivity rate for new production from 7 years to 10
years. He continued that Line 31 reflected the increase in
the progressivity trigger for the price of a barrel of oil
for new production to $90. He concluded that on Page 6,
section 4, the adjustment price for progressivity for the
calculation of the Consumer Price Index (CPI) would include
the $75 trigger price for incremental production and the
$90 trigger price for new production.
6:10:41 PM
Co-Chair Stedman WITHDREW his OBJECTION. There being no
further objection Work Draft 27-LS1305\Y was ADOPTED.
6:11:42 PM
JANAK MAYER, MANAGER, UPSTREAM AND GAS, PFC ENERGY,
introduced the PowerPoint Presentation, "Discussion Slides:
Alaska Senate Finance Committee, April 11, 2012 (copy on
file).
Co-Chair Stedman requested a definition of the term
"upstream" as it would be used in the discussion.
Mr. Mayer explained that "upstream" was a term used in the
oil industry to refer to all activities from the initial
phases of exploration; from the development of projects to
the production of crude oil. Alternately, "downstream"
activities were considered the activities onward, from
crude oil production to refinement.
6:12:48 PM
GERALD KEPES, PARTNER, PFC ENERGY, shared that PFC Energy
was an oil and gas expertise consultancy with global
government entity, national oil company, and private sector
clients.
6:13:39 PM
Mr. Mayer looked at Slide 2: CSSB 192-Approximated Company
Decline-Based Production Targets. He explained that the
decline curve analysis on the slide multiplied the most
recent 2010 Department of Natural Resources analysis by the
working interest of the three main companies: BP,
ConocoPhillips, and ExxonMobil. He stated that the decline
curve in the bill had been based on the methodology; any
production above the green wedge on the graph would receive
the lower level of progressive tax on gross. He added that
any production below that would receive the full 20 percent
capped rate. He spoke of the decline rate and the forward
bending curve, which he believed mirrored one another. He
said that the target, using the equation of a 6 percent
decline rate at 200 thousand barrels per day, would be
established by multiplying the 200 thousand barrels per day
by 94 percent; or 1 minus the 6 percent decline rate.
6:17:43 PM
Co-Chair Stedman interjected that the equation used the
inverse of the year date. Mr. Mayer responded that the
curve forecast forward was to the power of the year date;
determining the decline rate, the inverse would be used. He
furthered:
"Calculating the question: "What is the decline
rate?" It is the exact inverse of that calculation. In
this case taking a fixed number of years, 2011 and
2008, and determining the difference between those two
numbers. We'll put the later number over the first
number and raise it to the inverse of the number of
years and calculate what that effective decline rate
is. It's doing exactly the opposite of what we did
when we forecasted the curve forward, and again it's
the same math that goes with calculation ones
effective interest rate on a mortgage payment."
6:18:52 PM
Co-Chair Stedman explained to the committee that he had
requested that Mr. Mayer present a slide with the
production numbers in order to review the decline curve
calculation. He thought that the formula had been presented
as complicated; he believed it was straight forward. He
suggested likening the formula to compounding interest,
only backwards.
6:19:48 PM
Mr. Mayer stated that the remaining slides in the
presentation focused on the economics of how changes in the
rates applied to new development and incremental
production. He pointed to Slide 3: ACES ($34/bbl Capex New
Development.) Mr. Mayer referred to previous discussions
about the cost of new development and the concerns voiced
that moving to the gross would increase the sensitivity of
the tax both in terms of OPEX and CAPEX. He noted concerns
that due to the high cost of development, new developments
should be incentivized as well as development in legacy
fields. He shared that he had run projections for new
development using capital expenses at $34 per barrel. He
relayed that the result of the projections looked
challenging for industry; they were net present value (NPV)
negative at $100 per barrel and faced high rates of
government take under ACES. The government take under ACES
ranged from 77 percent over the lifecycle at $100 per
barrel, to as high as 84 percent at levels above $200 per
barrel. He stated that under the structure of shifting the
tax to the gross, high-cost fields could look even worse
for industry because of the sensitivity when the tax was
done on the net. He stressed that if the new rate were to
be considered the high-cost would have to be compensated
for and significantly lower rates should be applied to new
development.
6:23:14 PM
Mr. Mayer looked at slide 4: CS SB 192 20% Max Rate
($34/bbl Capex New Development.) He explained that under
this scenario the levels of government take were lower, but
the economics were worse because the instance of the tax in
those first years would be high during a time of ongoing
drilling costs. He warned that a higher tax during the
crucial first economic metric years would cause the
economic impact to deteriorate.
6:24:49 PM
Mr. Mayer discussed slide 5: CSSB 192 5 percent Max Rate
for 7 years ($34/bbl Capex New Development.) He said that
dropping the max rate to 5 percent for 7 years could
marginally improve the economics. He pointed out the
scenario still presented challenges of being NPV negative
at a 10 percent discount rate.
6:25:23 PM
Mr. Mayer looked at slide 6: CSSB 192 5 percent Max Rate
for 10 years ($34/bbl Capex New Development.) He relayed
that to further stimulate the economics within the
structure, progressivity on new development could be
completely removed, or the 5 percent rate period could be
extended. He shared that the CS extended the 5 percent rate
from 7 to 10 years, which dropped the rates of government
take to 70 percent at the highest price levels and reduced
the NPV from negative 50 to negative 34.
6:26:26 PM
Mr. Mayer discussed slide 7: CSSB 192 5 percent Max Rate,
$90 Threshold, for 10 yrs ($34/bbl Capex New Development.)
He explained that the price levels at which progressivity
kicked in could be adjusted. He relayed that the CS
increased the price level to $90 in the first 5 year
period. He stated that progressivity would begin at the $90
threshold and would continue at the 0.5 rate until reached
the 5 percent maximum.
6:26:57 PM
Senator Ellis queried how much the big three oil companies
would pay at the top rate in 2025 under the legislation.
He asked if it would be close to 227,000 barrels.
Mr. Mayer agreed to provide the information at a later
date.
6:27:41 PM
Senator McGuire wondered whether it would be worthwhile to
eliminate the 10 year cap. She queried what the rate would
revert to after 10 years. She understood that it would
depend on the decline curve at the time.
Mr. Mayer replied that under the CS the rate would be the
full 20 percent maximum.
Senator McGuire recommended that the rate be reduced to the
incremental level. She worried that a rate increase in 10
years would affect initial investment decisions.
6:28:55 PM
Co-Chair Stedman requested an explanation on the impact of
the timing of the cash-flow as the scenario moved from 7 to
10 years.
Mr. Mayer responded that many things could be done to
further improve the equation. He shared that the easiest
solution would be to remove the time limit altogether, or
to extend it further. He stated that what happened in the
first 10 years would be most crucial. He relayed that
extending the time period further would be easier than
changing the rate after 10 years.
6:30:29 PM
Senator McGuire stressed that industry should not be
penalized with a less attractive rate after 10 years.
6:31:41 PM
Co-Chair Stedman requested an approximation of the
sensitivity using a $30 and $28 CAPEX, and with incremental
dollars at $100 NPV.
Mr. Mayer divulged that a $17 dollar per barrel scenario
had been run while working with the profile of capital cost
and production represented in the presentation. He shared
that the result had been NPV positive, with a 16 to 17
percent rate of return. He added that that was the level
that would be required to pass the threshold hurdle rate,
but would probably not "set the world ablaze" in terms of
competitiveness for capital on an international basis. He
furthered that as capital costs went up the NPV and rates
of return lowered. He cautioned that the undertaking was
highly stylized, and that the actual spending and
production profiles of anything being currently considered
were well north of $17. He stressed that the numbers
reflected in the slides were not necessarily indicative of
the projects being considered by any of the companies. He
reminded the committee that the intent of the analyses was
to provide indicative ideas of sensitivities about how the
numbers reflected the different rates of government take.
He thought that any of the lower rates for new development
would be an improvement over ACES however, they did not
necessarily make high cost developments competitive for
capital.
6:34:13 PM
Mr. Mayer noted that all of the slides reflected that
despite having moved the threshold up to $90, the
progressive severance tax on gross still kicked in above
the $60 level. He said that the figures were undiscounted
figures that ranged across the 30 life-cycle of the
project. He furthered that the 10 year limit meant that the
threshold became less sensitive to movement in the case of
new development. Because there was no time limit on the
different rate for the incremental production, moving the
threshold had a greater affect.
6:35:28 PM
Mr. Mayer discussed Slide 8: ACES ($25/bbl Capex
Incremental Development.) He explained that a higher cost
new development, assuming $25 per barrel in capital costs
for an incremental development, would prove NPV positive at
$100 per barrel with an 11 percent rate of return.
6:37:01 PM
Mr. Mayer explained Slide 9: CSSB 192 20 percent Max Rate
($25/bbl Capex Incremental Development.) He stated that the
full 20 percent maximum rate resulted in little change in
the economic metrics, but an overall slight reduction in
government take at high levels could be gleaned. He noted
that the change was not great, and in some cases would be
marginally worse at the given price levels.
6:37:31 PM
Mr. Mayer discussed Slide 10: CSSB 192 10 percent Max Rate
($25/bbl Capex Incremental Development.) He said the
scenario presented a lower tax burden and a higher cash
flow at the tail end of production; the only costs being
operating and maintenance, but a slightly higher tax burden
and lower cash flow in the early years.
6:38:28 PM
Mr. Mayer continued to Slide 11: CSSB 192 10 percent Max
Rate, $70 Threshold ($25/bbl Capex Incremental
Development). He explained that the legislation moved the
threshold to the $75 level at which progressivity at the 10
percent maximum rate kicked in. He shared that the
presentation did not contain a slide for $75, but did for
$70 and $80 [see Slide 12], and the result would logically
fall halfway in between. He noted that slide 11 showed that
when the threshold was moved to $70 the progressive
severance tax on the gross kicked in only above the $70
level. He said that when the threshold moved up to $80,
government take was further reduced. He reiterated that the
hypothetical showed the numbers just approaching the basic
hurdle rate for capital; not necessarily highly competitive
on a broader basis, but an improvement.
6:39:55 PM
Co-Chair Stedman requested that a slide be created
detailing the $75 threshold. Mr. Mayer replied that he
would do so.
Co-Chair Stedman noted the three new fiscal notes: NEW FN
(DOR), NEW FN (DNR), NEW FN (DOA).
Co-Chair Hoffman MOVED to report CS SB 192 (FIN) out of
committee with individual recommendations and the
accompanying fiscal notes. There being NO OBJECTION, it was
so ordered.
SB 192 was REPORTED out of committee with a "do pass"
recommendation and with new fiscal impact notes from the
Department of Natural Resources, the Department of
Administration, and the Department of Revenue.
CS FOR HOUSE BILL NO. 302(FIN) am
"An Act requiring each campus of the University of
Alaska to apply to be included on the contribution
list for contributions from permanent fund dividends;
requiring a university to pay an application fee for
each campus separately listed on the contribution list
for contributions from permanent fund dividends; and
repealing certain audit requirements for entities
receiving contributions from permanent fund
dividends."
HB 302 was SCHEDULED but not HEARD.
HOUSE BILL NO. 366
"An Act establishing an Alaska intrastate mutual aid
system and relating to the duties of the Alaska
division of homeland security and emergency management
and the duties of the Alaska State Emergency Response
Commission."
HB 366 was SCHEDULED but not HEARD.
CS FOR HOUSE CONCURRENT RESOLUTION NO. 23(FIN)
Establishing and relating to the Alaska Arctic Policy
Commission.
HCR 23 was SCHEDULED but not HEARD.
ADJOURNMENT
6:41:18 PM
The meeting was adjourned at 6:41 PM.