Legislature(2019 - 2020)SENATE FINANCE 532
03/22/2019 09:00 AM Senate FINANCE
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| Audio | Topic |
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| Start | |
| Presentation: Severance Tax - Order of Operations | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
March 22, 2019
9:02 a.m.
9:02:04 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Natasha von Imhof, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Lyman Hoffman
Senator Peter Micciche
Senator Donny Olson
Senator Mike Shower
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Senator Cathy Giessel; Senator Chris Birch; Senator Mia
Costello; Bruce Tangeman, Commissioner, Department of
Revenue; Dan Stickel, Chief Economist, Economic Research
Group, Tax Division, Department of Revenue.
PRESENT VIA TELECONFERENCE
Colleen Glover, Director, Tax Division, Department of
Revenue.
SUMMARY
PRESENTATION: SEVERANCE TAX - ORDER OF OPERATIONS
Co-Chair Stedman informed that the committee would consider
the order of operations dealing with oil production tax and
would receive a tax audit update.
Co-Chair Stedman asked for the presenters to stay on topic.
He stated that the purpose of the meeting was to walk
through the mechanical operations of the severance tax. He
reminded that the state's oil revenue came from four major
categories: royalties, severance tax, income tax, and
property tax. The severance tax was considered to be
complex. He emphasized that the state's oil and gas tax
structure was very complex. He thought it would not be
possible to conclude if the state's tax structure was high
or low, as the analysis was not comparative.
Co-Chair Stedman continued his opening remarks. He
mentioned that cost structures around the world had changed
when the price of oil dropped; including in Alaska and
significantly in the Permian Basin in East Texas, in North
Dakota, and other areas. He cautioned that the severance
tax information should not be compared without additional
analysis. He asked that people take the presentation with a
grain of salt.
^PRESENTATION: SEVERANCE TAX - ORDER OF OPERATIONS
9:06:27 AM
BRUCE TANGEMAN, COMMISSIONER, DEPARTMENT OF REVENUE,
reiterated that Alaska had one of the most complex oil and
gas tax structures in the world. He relayed that the
presentation would give a glimpse of a small piece of the
audit process. He affirmed that he was not going to talk
about oil policy or comparisons, rather to explain how the
state's tax structure worked. He recalled that since 2011
or 2012 the State of North Dakota thought its break-even
point was in the 70s, and now it was in the 30s. He
commented that the world had changed quite a bit,
especially with regard to shale.
9:07:57 AM
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, discussed the presentation
"Alaska Oil and Gas Production Tax Calculation ("Order of
Operations")" (copy on file).
Mr. Stickel turned to slide 2, "Acronyms used in this
presentation":
?ANS Alaska North Slope
?Avg -Average
?Bbl Barrel
?CBRF Constitutional Budget Reserve Fund
?CIT Corporate Income Tax
?DOR Department of Revenue
?GVPP Gross Value at Point of Production
?GVR Gross Value Reduction
?Min Minimum
?NPR-A National Petroleum Reserve Alaska
?PTV Production Tax Value
?Ths Thousands
?FY Fiscal Year
Mr. Stickel acknowledged that there was a great deal of
jargon used in oil and gas industry, and in production tax
policy in particular.
Co-Chair Stedman was optimistic that the presentation would
be shorter than what was expected. He asked the testifiers
to avoid using acronyms in order for people to follow
along.
Mr. Stickel agreed.
Mr. Stickel discussed slide 3, "Overview":
?Oil and Gas revenue sources how production tax fits
in
o FY 2017 FY 2021 oil and gas revenues
?Production tax calculation "order of operations"
o Detailed walk-through of each step of tax
calculation
o Defining commonly used jargon
o Focus on North Slope oil
o FY 2017 FY 2021 comparison
Mr. Stickel affirmed that the purpose of the presentation
was to explain the production tax and how it fit into the
overall oil and gas fiscal system. He noted that North
Slope oil was the main revenue source to the state from the
petroleum industry.
9:10:06 AM
Mr. Stickel referenced slide 4, "Disclaimer":
?Alaska's severance tax is one of the most complex in
the world, and portions are subject to interpretation
and dispute
?These numbers are rough approximations based on
public data as presented in the spring 2019 forecasts
and other revenue forecasts.
?We are economists, not auditors. This presentation is
not an official statement of the Department as to any
particular tax liability, interpretation, or
treatment. This is not tax advice or guidance. This
presentation is solely for illustrative general
purposes.
Co-Chair Stedman asked for the testifiers to address the
aggregation issue. He referenced the Revenue Sources Book
(copy on file), which was published the Department of
Revenue (DOR) in the fall and updated in the spring. He
asked Mr. Stickel to discuss aggregated numbers.
Mr. Stickel explained that oil and gas tax was levied for
each separate company. There was a handful of major
taxpayers on the North Slope, and numerous small producers;
each with a different portfolio of fields, exploration, or
development activities. Each company would have a different
cost structure and tax. Proprietary company information was
not allowed to be shared, so the department aggregated
total spending and production for the North Slope to
illustrate the tax calculation for the purposes of revenue
forecasting.
Co-Chair Stedman summarized that Mr. Stickel compiled
monthly data from multiple companies to combine into an
annual calculation. He emphasized that the Revenue Sources
Book was working with rounded numbers rather than exact
dollar amounts.
Mr. Stickel explained that the historical revenue numbers
were "cash in the door" to the treasury. When reporting
company lease expenditures and tax rates, there was an
aggregate calculation.
Mr. Stickel spoke to slide 5, "Oil and Gas Revenue
Sources":
?Royalty - based on gross value of production
o plus bonuses, rents & interest
o Paid to owner of the land: State, Federal, or
private
o Usually 12.5% in Alaska, but rates vary
?Corporate Income Tax based on net income
o Paid to State (9.4% top rate)
o Paid to Federal (21% top rate, used to be 35%)
o Only C-corporations pay this tax *
?Property Tax based on value of oil & gas property
o Paid to State (2% of assessed value or "20
mills"
o Paid to Municipalities credit offsets state
tax paid
?Production Tax based on "production tax value"
o Paid to State calculation to follow
* "C-corporation" is a business term that is used to
distinguish the type of business entity, as defined
under subchapter C of the federal Internal Revenue
Code.
Mr. Stickel clarified that the terms "production tax" and
"severance tax" were sometimes used interchangeably. He
explained that production tax applied to all production
anywhere in the state regardless who the landowner was.
9:14:31 AM
Mr. Stickel showed slide 6, "Oil and Gas Revenue Sources
5 year comparison of state revenue," which showed a table
that enumerated different revenue sources. He pointed out
that the table looked at all state revenue, regardless of
which fund the monies went to. Property tax included only
the state portion and not the municipal portion. The table
illustrated the entire revenue to the state treasury from
the oil and gas industry.
Mr. Stickel discussed settlements to the state's
Constitutional Budget Reserve Fund (CBR), based on
settlements of disputes on past years' taxes and royalties.
Many of the settlements were several years old. Under the
constitution, any mineral assessments or settlements were
deposited to the CBR. He furthered that shared revenue
from the National Petroleum Reserve was a fairly small
revenue source shared with the federal government that was
forecast to grow up to $100 million per year in FY 28.
Senator Wielechowski asked about FY 17 corporate income tax
as listed on the table.
Mr. Stickel explained that in FY 16, FY 17 and FY 18;
corporate income tax had been artificially reduced due to
refunds of prior years' taxes.
Co-Chair Stedman asked for Mr. Stickel to elaborate on the
matter. He reminded that there had been a reduction in oil
price.
Mr. Stickel agreed that there was an aggregated number.
Within corporate income tax law, there was a provision for
a five-year carry back for a net operating loss (NOL). When
there was a very low oil price in 2016 and 2017, companies
with a NOL were able to offset current year corporate
income tax liability as well as carry it back to the five
preceding years for tax refunds. The refunds worked through
the system, oil prices recovered, and major producers were
paying positive tax. He added that the department expected
around $200 million per year to be a more stable long-term
corporate income tax number around current prices.
9:18:04 AM
Co-Chair Stedman asked for further definition of corporate
income tax. He thought corporate income tax was controlled
by federal law rather than the state and was a different
mechanical issue than production tax that was controlled by
the state.
Mr. Stickel explained the corporate income tax applied to C
corporations, which was a term defined under the Internal
Revenue Code. He furthered that corporations that were
involved in oil and gas production or transportation in the
state were subject to oil and gas corporate income tax. The
corporations' worldwide net income was calculated, then the
amount was apportioned to Alaska based on the state's share
of production, sales, and property. He continued that the
9.4 percent was the top marginal tax rate that applied to
corporations' Alaska net income.
Senator Wielechowski thought hypothetically of a company
that made billions of dollars in the State of Alaska, then
had a huge oil spill in the Gulf of Mexico which cost
billions of dollars. He asked if the company could
theoretically pay nothing or very little of corporate
income taxes because of worldwide apportionment.
Commissioner Tangeman could not speak hypothetically
regarding how a tax might be treated. He did not want to
make a hypothetical assumption.
Senator Wielechowski considered FY 20 and looked ahead at
slide 7. He made note of $12.7 billion in production value,
with a gross value of the point of production of $9.8
billion. He asked what the 9.4 percent marginal corporate
income tax rate was based on.
Co-Chair Stedman wanted to bifurcate the subject for
further understanding. He explained that corporate income
tax was a different structure than the petroleum profit or
severance tax. The corporate income tax structure was not
controllable by the legislature.
9:22:21 AM
Commissioner Tangeman commented that companies had
different interests in different parts of the world. He
understood Senator Wielechowski's question but did not
think it was appropriate to put a percentage to a
hypothetical company.
Senator Wielechowski thought the state did have a lot of
say on the issue and pointed out that the state had made a
policy choice to use worldwide apportionment. He was trying
to establish what the 9.4 percent income tax was taken
from.
Co-Chair Stedman asked for definition of the apportionment
issue on a broad scale, as well as the alternative. He
considered that there had been a policy decision to use
apportionment. He asked for historical information.
Mr. Stickel stated that the 9.4 percent marginal tax rate
was applied to Alaska net income for corporate income tax
purposes. The Alaska net income was derived by taking the
worldwide net income for a company and apportioning it to
Alaska based on the Alaska's share of the company's
worldwide production, sales, and property. The concept was
known as apportionment methodology. He added that there
were a few years in which the state switched to a separate
accounting methodology, where a company attempted to
calculate its Alaska net income directly. The methodology
had been repealed. He thought it would be easy to fill the
time of a committee hearing discussing the various
provisions of corporate income tax, but that the current
presentation was focused on production tax.
Senator Micciche asked if the apportionment was only for
oil and gas companies, or if it was for any C corporation
companies.
Mr. Stickel answered in the negative. He stated that oil
and gas companies had a different apportionment methodology
than for other companies. Other companies calculated its
United States "water's edge" net income and then
apportioned the amount based on the Alaska share of
property, payroll, and sales.
9:25:53 AM
Mr. Stickel displayed slide 7, "Production Tax "Order of
Operations" FY 2020," which showed a table presenting the
income statement table which could be found in the back of
the Revenue Sources Book. He specified that the following
several slides would address the table. The income
statement started with a forecast price of $66/bbl and a
daily production forecast of 529.5 thousand barrels per
day. He pointed out that FY 20 had 366 days as a leap year,
which was reflected in the calculations. The total expected
value of all oil produced on the North Slope in FY 20 would
be approximately $12.8 billion. The next several slides
would focus on where the money went and how it was taxed.
Mr. Stickel noted that the table was an aggregation and
would not reflect any specific companies' economics or cost
structure. He reminded that the data was only for North
Slope oil, which was the largest source of production tax
revenue in the state.
Co-Chair Stedman explained that the table on the slide
could be found at the back of the Revenue Sources Book,
which could be found on the DOR website. He furthered that
the Senate Finance Committee had requested the format to
help members and the public keep track of the operation and
monies when the state converted to a net profits tax.
Mr. Stickel addressed slide 8, "Production Tax "Order of
Operations" FY 2020," which showed a table highlighting
royalty and taxable barrels. He explained that in
calculating production tax, any royalty barrels were
subtracted regardless of the ownership of the barrels. The
typical rate in the state was one-eighth, which was a 12.5
percent royalty, but the rates varied by unit. In addition
to state royalty, federal and private land was subtracted
from the taxable barrels. Additionally, the state
subtracted any barrels not subject to tax due to being
produced in federal waters beyond the state's three-mile
limit. A portion of the North Star field, and production
from the Liberty field would fall into the category. After
subtracting royalty, there was about 172 million taxable
barrels in FY 20, for a total value of $11.36 billion.
9:30:00 AM
Mr. Stickel highlighted slide 9, "Production Tax "Order of
Operations" FY 2020," which showed a table highlighting
the calculation of gross value at point of production
(GVPP). He mentioned the term "well head value," which was
used interchangeably. He noted that GVPP was an important
term in the production tax calculation. He explained that
to arrive at GVPP, transportation costs (net back costs)
were subtracted from the total taxable value. The sales
value of the oil (on the West Coast) was established when
the oil was delivered, and then the various transportation
items were "netted back" to achieve the value at the
wellhead. Transportation costs per barrel (or "net back)
included marine costs for transport, Trans-Alaska Pipeline
System (TAPS) tariffs, any feeder pipeline tariffs were
subtracted, and a quality bank differential. He estimated
that for FY 20, after subtracting transportation costs,
there was a GVPP of about $9.8 billion.
Co-Chair Stedman thought the net back was sometimes
confusing.
Mr. Stickel Tangeman looked at slide 10, "Production Tax
"Order of Operations" FY 2020," which showed a table
highlighting lease expenditures. The production tax was a
modified form of net profits tax. Companies were allowed to
deduct capital expenditures and operating expenditures in
calculating production tax liability. One major difference
in the production tax (as opposed to an income tax) was
there was not a depreciation schedule for capital
expenditures, and companies were allowed to deduct the
entire amount in the year it was incurred. Operating
expenditures were essentially any allowable expenses that
were not a capital expenditure; such as the ongoing cost of
labor, operating a field, and producing oil once a field
was up and running.
Mr. Stickel stated there was two important terms to define
when considering lease expenditures: allowable lease
expenditures, and deductible lease expenditures. He
specified that allowable lease expenditures were generally
any cost in the unit directly associated with producing the
oil and was defined in statute. Deductible lease
expenditures were developed solely for presentation
purposes and was not in statute. Deductible lease
expenditures were the share of allowable lease expenditures
that was applied in the tax calculation in a given year. A
company could apply lease expenditures up to the GVPP, and
the amount became the deductible lease expenditures. Any
lease expenditures beyond GVPP were considered non-
deductible lease expenditures and could be carried forward
by the company to apply in a future year.
9:34:55 AM
Co-Chair Stedman thought there were some companies that had
production that could be deducted, and others that may not
have oil production and would not be in the severance tax
calculation and would carry forward.
Mr. Stickel answered in the affirmative and noted that the
lease expenditures listed on the summary were an
aggregation of all the different companies doing business
on the North Slope. There were some companies that were
able to apply all lease expenditures, some companies that
had no production carried forward all lease expenditures,
and some companies with some production and able to deduct
some expenditures and carry some excess lease expenditures
forward. All the information was aggregated in the slide.
Co-Chair von Imhof looked at non-deductible lease
expenditures that were carried forward and asked if the
legislature had addressed the matter in 2017 and put a
finite amount of time on the carry-forwards.
Mr. Stickel stated that the legislature had made changes as
to how the lease expenditures were treated. Prior to 2018,
the lease expenditures became a tax credit. Beginning in
2018, the lease expenditures became a carry-forward. There
was a phase-out provision where the lease expenditures
started to deteriorate in 8 or 11 years, depending upon the
status of the lease.
Co-Chair von Imhof asked about the allowed full deductions
of capital expenditures in the year the expenditures
occurred; and not allowing depreciation in future years.
She thought the policy was a significant accounting choice
for capital. She assumed that by not allowing capital to be
depreciated over time, net income would be higher in years
of production.
Mr. Stickel stated that the impact of allowing immediate
reduction would be to reduce net income in early years and
increase net income in later years. He thought allowance of
immediate deduction generally was seen as a benefit to
companies.
Co-Chair Stedman thought the two expenditure items were
included in corporate income tax, and would be subject to
amortization and depreciation schedules. Severance tax
allowed for immediate deduction, which he thought was
standard around the world. It was standard to allow write-
offs. He stated that the practice was not abnormal, and the
tax percentage was set in Alaska and elsewhere, given the
immediate deductions.
9:39:17 AM
Senator Shower addressed deductibles. He asked if the items
being considered were all state-affiliated, or if the items
were mixed with federal items.
Mr. Stickel explained that the state deferred to federal
definitions for capital expenditures.
Commissioner Tangeman added that capital expenditures that
occurred in Alaska were being discussed.
Senator Shower asked if there was a mix of federal and
state regulations at play when discussing deductible
operating and capital expenditures.
Mr. Stickel stated that the department estimated $4.7
billion of deductible lease expenditures in FY 20. Some of
the definitions of what qualified as a capital expenditure
versus an operating expenditure relied on federal
definitions.
Co-Chair Stedman emphasized that severance tax was totally
different than corporate income tax. He noted there were
decades of Internal Revenue Service rulings on the subject
of operating and capital expenditures.
Senator Wielechowski discussed depreciation, and thought he
heard Mr. Stickel say that depreciation was allowed at 100
percent in the year an expense was incurred.
Mr. Stickel answered in the affirmative.
Co-Chair Stedman wanted more clarity.
9:42:55 AM
Senator Wielechowski thought in other industries in the
state, such as an apartment building; an owner did not get
100 percent deduction in the first year, but over many
years. He asked if there was any other industry in the
state that had the ability to deduct 100 percent in the
year the cost was incurred.
Mr. Stickel did not want to speculate and offered to
provide the information at a later time.
Co-Chair Stedman answered Senator Wielechowski's question
in the negative. He did not know of any other industry that
had a severance tax. He reminded that severance tax and
income tax were separate. He stated that there was no
instance of deductibility of expenditures not being allowed
in severance tax.
Senator Wielechowski asked if there was any other state
that allowed for 100 percent deductions on expenses for
calculation of severance taxes.
Mr. Stickel offered to provide the information to the
committee.
Senator Wielechowski asked if there was any other state
that had a net severance tax.
Mr. Stickel stated he was prepared to speak to how Alaska's
production tax worked.
Co-Chair Stedman affirmed that the department could return
to speak to a rough outline of tax structures in other
states. He stated that Alaska was the only state in the
union that owned sub-surface rights of the land. He would
be surprised if there was another severance tax in a state
that did not own sub-surface rights.
Co-Chair von Imhof thought one of the issues of Alaska's
uniqueness and the construct of the tax system was due to
the state's uniqueness and higher costs. She mentioned the
ConocoPhillips form 10K, which had listed the average cost
per barrel in various areas in the world and showed Alaska
was the highest. She thought in order to get businesses to
come to the state, the state's tax system must be equal to
costs.
Co-Chair Stedman asked members to refrain from comparison
and acknowledged the high-cost environment in the state.
Co-Chair Stedman asked to direct conversation back to the
topic at hand.
9:47:13 AM
Senator Wielechowski lamented confidentiality laws that
prevented the knowledge of profits per barrel, rates of
return per barrel, and costs per barrel. He emphasized that
he had been asking for the information for 12 years. He
asked if it was possible to get the information and stated
he was willing to sign a confidentiality agreement.
Co-Chair Stedman stated that the legislature received
aggregated information from consultants. The committee had
an inability to look at each individual company. Multiple
consultants looked at the data and produced figures, and
thought the state had substantially more information than
previously under a gross tax system. He thought it was
possible to extrapolate information on average from the
figures that were available. He reiterated that state
consultants were in communication with the industry as well
as the Department of Natural Resources and DOR to ensure
that calculations were accurate.
Co-Chair Stedman thought the state understood the range and
magnitude of profitability in order to set policy. He
stated that there were audits that would be discussed later
in the meeting. Severance taxes and royalties were
constantly checked for accuracy. He emphasized that while
the data was aggregated, it was not fictitious. He would
not sign a confidentiality agreement but would set policy
using publicly available information.
9:51:23 AM
Mr. Stickel showed slide 11, "Production Tax "Order of
Operations" FY 2020," which showed a table highlighting
production tax value (PTV). He explained that PTV was
simply the gross value minus deductible lease expenditures.
Aside from the capital expenditure immediate deduction,
there was a measure of net profit. He stated that PTV was
an important number in tax calculation. He furthered that
each company calculated its own PTV based on all its North
Slope activity, including all producing fields as well as
any exploration and development costs. Each company would
have a unique PTV, and a unique PTV per barrel. He
summarized that PTV was essentially the tax base for the
production tax. Any analysis of productive tax rates, PTV
was used as the base.
Co-Chair Stedman wanted the public to recognize that PTV
was the pile of profit. The amount was gross value less
expenditures.
Mr. Stickel agreed, and noted that the PTV was before
deducting any taxes.
Mr. Stickel turned to slide 12, "Production Tax "Order of
Operations" FY 2020," which showed a table highlighting
gross minimum tax. He explained that there were two
calculations done side by side: a net profits tax and a
minimum tax that was a tax floor calculation. The minimum
tax rate when annual oil prices were greater than $25/bbl
was 4 percent of gross value. For FY 20, the minimum tax
was 4 percent multiplied times the gross value of $9.8
billion, or about $394 million in aggregate.
Mr. Stickel noted that there were two columns for the
production tax calculation; one which showed the minimum
tax, and one showed the net tax. A company took the higher
of the minimum tax or the net tax and apply credits against
the amount.
Co-Chair Stedman asked if Mr. Stickel's explanation was
clear. He had requested a column format for the inclusion
of the information in the Revenue Sources Book. He thought
there was a significant difference in the calculations when
there were low oil prices.
9:55:26 AM
Mr. Stickel discussed slide 13, "Production Tax "Order of
Operations" FY 2020," which showed a table highlighting
net tax calculation and gross value reduction (GVR). The
statutory net tax before credits was 35 percent of the PTV,
which was the net profit after deducting the costs of
operation. For companies with qualifying new production, it
was possible to reduce PTV for tax calculation by at the
GVR process. The GVR was a new development incentive that
allowed companies to exclude 20 or 30 percent of gross
value from its PTV calculation. The GVR was an incentive
that expired after seven years of production or any three
years at greater than $70/bbl oil price. He noted that the
amount was relatively small amount currently. The 35
percent tax rate was applied to the PTV net of any GVR. For
FY 20, the statutory production tax before credits came to
approximately $1.76 billion. The state would take the
higher of the minimum tax or the net tax.
Senator Micciche asked for Mr. Stickel to explain when the
minimum tax would kick in versus the net tax.
Mr. Stickel explained that the minimum tax would prevail
primarily in times of low oil prices, as it was based on
gross value instead of net value. In a situation where
price was low or costs were high, a company may have a very
small or zero PTV; and it would be subject to the minimum
tax and ensure the state received some tax revenue even at
low oil prices.
Co-Chair Stedman stated that the minimum tax was 4 percent
of the wellhead value.
Mr. Stickel agreed.
9:58:32 AM
Senator Wielechowski observed that the GVR was $128 million
on the slide. He asked which fields or projects the
reduction applied to.
Mr. Stickel specified that the $128 million reduction
represented an aggregated number for those companies with a
positive PTV that were operating GVR-eligible fields.
Senator Wielechowski wondered which fields were considered
GVR-eligible and wondered if the fields were considered
"new oil."
Mr. Stickel answered in the affirmative. He stated that a
field qualified for up to seven years of production. He
gave examples of Point Thomson, Ugaruk, Nakaitchuq as GVR-
eligible fields.
Co-Chair Stedman added that the state had highly profitable
old fields as well as marginal new fields. The mechanism
was to ensure that new fields were not disadvantaged.
Commissioner Tangeman answered in the affirmative. He
thought there were good examples of the gross value
reduction. He mentioned Prudhoe Bay and TAPS. He thought
the further east and west from the trunk line, the more
costly it was to transport oil.
10:01:01 AM
Mr. Stickel referenced slide 14, "Production Tax "Order of
Operations" FY 2020," which showed a table highlighting
tax credits against liability. The per-taxable-barrel
credits were the largest value of tax credits and included
two different credits: the 024 "i" and "j" credits. The
024j credits were per-taxable barrel credits for non GVR-
eligible production on a sliding scale ranging from zero
when wellhead values were over $150/bbl, and up to $8 per
barrel wellhead values were less than $80/bbl. At current
and upcoming forecast prices, the company would generate
the $8 per barrel credit. The credit could not be used to
reduce the tax floor of the minimum tax, and companies
claiming the credit could not pay below the minimum tax.
Mr. Stickel continued to address slide 14. He explained
that the 024i credit was a credit for GVR-eligible
production, which were newer fields. The fields received a
flat $5 per barrel of taxable production credit. The credit
could be used to reduce tax below the minimum tax if the
company did not take the sliding scale credit. Any per-
barrel credits used in the year generated could not be
forwarded or transferred; which was also true of the small
producer credit. He used the example of FY 20, which had a
little over $1.3 billion in per-taxable-barrel credits
generated; and there was a little over $1.2 billion were
actually applied in the tax calculation. Other credits
included small producer credits as well as some prior year
credits.
Senator Wielechowski asked if there was a breakdown of how
many of the per-taxable-barrel credits 024j versus 024i.
Mr. Stickel stated that the credits were aggregated for
presentation.
Senator Wielechowski asked for a breakdown of the credits.
Co-Chair Stedman estimated that there was about $140
million on the $5 024i credit, using a percentage of barrel
split that was in the Revenue Sources book for FY 20. He
thought most of the amount was of the $8 024j credit.
Senator Wielechowski asked if it was possible to have a
negative tax rate on a field using the 024i tax credit.
Mr. Stickel stated that a company may use the $5/bbl credit
to bring the tax below a minimum tax if it did not use the
sliding scale credit. The tax due would not be less than
zero.
Co-Chair Stedman stated that a small producer could not
apply a severance tax to a negative number, zero was the
bottom.
Mr. Stickel stated if not taking the sliding-scale credit,
a company could use credits to reduce its tax down to zero
but not below. For a company taking sliding-scale credits,
it could use credits to reduce to the minimum tax but not
below.
10:06:30 AM
Senator Wielechowski thought a big producer with a very
expensive field could also reduce to the minimum tax. He
asked if a company could drive its tax rate down to zero,
and then use any amount below zero as a carry-forward.
Mr. Stickel answered in the negative. If per-barrel taxable
credits were not applied in the year they were earned, the
credits were forfeit.
Co-Chair Stedman recalled that previous legislation had
stripped some credits and further hardened the tax floor.
Senator Shower asked federal and state interaction, and
assumed the slide showed just state taxes.
Mr. Stickel answered "yes."
Senator Wielechowski recalled a provision that allowed a
reduction in the tax rate or GVR allowance on fields that
had royalty higher than 12.5 percent. He wondered how the
magnitude was affecting the state's production tax.
Co-Chair Stedman asked Mr. Stickel to explain the 20
percent and 30 percent GVR.
Mr. Stickel stated that there were two different categories
of GVR, which was subtracted from production tax
calculations. A qualifying new field would get a 20 percent
GVR, and 20 percent of the gross value was excluded from
the production tax calculation. A higher 30 percent GVR was
available if the unit was comprised of entirely state-
issued leases of greater than 12.5 percent royalty.
Currently no fields met the definition.
10:09:17 AM
Mr. Stickel spoke to slide 15, "Production Tax "Order of
Operations" FY 2020," which showed a table highlighting
adjustments and total tax paid. There were some other items
that were added or subtracted from the calculation to
arrive at the total production tax revenue received by the
state's general fund. There was $43 million in additional
revenue for FY 20 that the department was looking at. The
funds represented any prior year tax payments or refunds,
any revenue from the private landowner royalty tax,
hazardous release surcharge, revenue from North Slope gas
production, and total Cook Inlet tax liability. The items
added up to about $43 million. The total production tax
revenue for FY 20 was about $524.7.
Co-Chair Stedman asked about the non-deductible carry
forward listed on the bottom of the slide.
Mr. Stickel noted that for FY 20, there was an estimated
$524.7 million in cash into the GF from the production tax
system; and an additional $800 million of lease
expenditures (largely for explorers and developers) that
would be carried forward and potentially used to offset
future years' production tax liabilities.
Co-Chair Stedman thought that the credits would be used
over time until they were timed out as referenced earlier.
Mr. Stickel answered in the affirmative.
Co-Chair Stedman asked Mr. Stickel to remind the public how
long the $800 million of carry-forward would flow forward
and phase out if the company did not have production to
deduct the expenditure.
Mr. Stickel stated that depending upon production status of
the property where the lease expenditures were incurred,
the carry-forwards would begin to decrease by one-tenth of
its value each year after the 8th or 11th year after the
expenses were incurred.
10:11:57 AM
Mr. Stickel showed slide 16, "Order of Operations 5 year
comparison," which showed a table showing an analysis
showing a five year spread. The table was an expanded view
of the previous slides' analysis to show five years. There
was two years of history, the current year, and two years
of forecast represented. He pointed out that in FY 17, the
state received about $160 million in production tax for the
North Slope, on a PTV of about $2.1 billion.
Mr. Stickel reported that in the current year, around $700
million in production tax revenue was expected on a PTV of
around $6 billion. He remarked that FY 17 was interesting,
as all taxpayers had paid the minimum tax or below due to
the low price of oil. The total tax after credits was below
the minimum tax floor based on companies' specific
calculations. Some companies paid at the minimum tax, and
some companies were able to take the tax below the minimum
to zero. He noted that from FY 18 and beyond, there was a
mix where some companies were paying above the minimum tax
in each year, and the total tax after credits exceeded the
minimum tax.
Mr. Stickel continued to address slide 16. He addressed the
total non-deductible lease expenditures were listed at the
bottom. He commented on increased spending on new fields,
with investments in major fields that would yield future
production. For FY 17 through FY 19, there was a little
more than $300 million per year of lease expenditures that
were not deductible against the production tax liability.
In FY 20, lease expenditures would be about $800 million;
and in FY 21 the amount was forecast to increase to about
$1.4 billion. Prior to 2018, the excess lease expenditures
turned into a tax credit, and beginning with calendar year
2018 the expenditures were a carry-forward lease
expenditure.
Senator Wielechowski asked about total tax after credits
and asked about the significance of the line below called
"other items/adjustments."
Mr. Stickel went back to slide 15, which aggregated a
number of different items that were not included in the
income statement to net out to the total production tax
revenue forecast. The items included prior year tax
payments, refunds that affected the general fund, private
landowner royal taxes, hazardous release surcharges, North
Slope gas taxes, and any Cook Inlet tax liability.
Co-Chair Stedman had asked the department to show any other
deductions to give further clarity to the budget.
10:16:14 AM
Senator Wielechowski asked about slide 15, and the $43.4
million in 'Other items/adjustments' listed. He asked if
the amount was considered part of the production tax.
Mr. Stickel stated that the items were all parts of the
production tax and were aggregated in one line for
presentation purposes.
Senator Wielechowski requested a list of what was included
in the aggregated number.
Senator Wielechowski asked for a list that encompassed all
years.
Mr. Stickel stated that the numbers were aggregated to try
and condense the table as much as possible.
Co-Chair Stedman had wanted the table on one page.
Senator Wielechowski asked about effective tax rate on
slide 15. He asked if the amount was based off PTV, or
taxable barrels.
Mr. Stickel stated that when doing effective tax rate
analysis, he considered PTV to be the tax base. The
effective tax rate for the North Slope production was in
the 8 percent to 9 percent range for FY 20. He noted that
there was a slide in the addendum that addressed the
question.
Mr. Tangeman showed slide 17, "Thank you."
Mr. Stickel showed slide 18, "Addendum - Follow-up
Questions from 3-18-19 Senate Finance Hearing." He
explained that the main body of the presentation was
concluded, but there were responses to several follow-up
questions from a previous committee hearing when the
commissioner had presented the revenue forecast.
10:19:19 AM
Mr. Stickel looked at slide 20, "Follow-ups from Senate
Finance 3-18-19":
?Provide FY20 effective tax rate
?At $66 ANS, estimated average effective production
tax rate for non-GVR oil is 8%.
Mr. Stickel stated that the slide was in response to
Senator Wielechowski's question about the effective tax
rate. The effective tax rate was estimated based on
aggregated data for non-GVR-eligible production; and was
the tax after per-barrel credits divided by the production
tax value in the year. There was a chart included to show
how the effective tax rate changed with different prices.
Co-Chair Stedman reminded that as oil prices went up
precipitously, so did capital expenditures and other market
forces. He thought the chart depicted general trends of
future price changes.
Mr. Stickel agreed.
Senator Micciche asked if the effective tax rate and the
state government take for oil production was the same
thing.
Mr. Stickel answered in the negative. The effective tax
rate was only the production tax itself and the share of
production tax value. Total government revenue from the oil
industry would include corporate income tax, property tax,
and royalties.
Mr. Stickel addressed slide 21, "Follow-ups from Senate
Finance 3-18-19":
?Provide current Point Thomson feeder pipeline tariff
? As of 1/1/2019, oil produced in Point Thomson is
subject to the following feeder pipeline tariffs
o $19.490/barrel from the Point Thomson Pipeline*
o $1.720/barrel from the Badami Pipeline
o $1.300/barrel from the Endicott Badami
Connection
o Total feeder tariff charge of $22.510/barrel
for moving
Point Thomson production from the unit boundary
to the Trans-Alaska Pipeline (TAPS)
* This Point Thomson Pipeline tariff is currently in
dispute, the value presented here is the initial
Federal Energy Regulatory Commission (FERC) filing
that has been disputed
Mr. Stickel showed slide 22, "Follow-ups from Senate
Finance 3-18-19":
?Provide additional clarification of when pipeline
costs are included in netback vs lease expenditures
? Distinction is "point of production" specifically
where processed crude passes through the LACT meter
? "Gathering lines" bring unprocessed oil / gas /
water to a production facility (upstream of "point of
production")
o Deductible as lease expenditures in production
tax value calculation
? "Feeder pipelines" bring processed crude to TAPS
(downstream of "point of production")
o Tariffs are regulated by RCA or FERC
o Deductible as netback costs in gross value
calculation
LACT = Lease Automated Custody Transfer; TAPS = Trans-
Alaska Pipeline System; RCA = Regulatory Commission of
Alaska;
FERC = Federal Energy Regulatory Commission
10:22:36 AM
Mr. Stickel addressed slide 23, "Follow-ups from Senate
Finance 3-18-19":
?Provide estimated amount of credits that were
purchased and later adjusted on audit
? For all of the audits performed through tax year
2014, the certificates have already been cashed out.
? A thorough due diligence review has been completed
on all 2015 2017 credit applications.
COLLEEN GLOVER, DIRECTOR, TAX DIVISION, DEPARTMENT OF
REVENUE (via teleconference), explained that the slide was
a snapshot of the credits that were audited for the 2006
and 2014 tax years. The amount that was disallowed was
about $67 million, about $5 million of which upheld in
audit. The net difference of $61 million was either paid
back to the state, or other credits were used to apply to
the amount.
Mr. Stickel referenced slide 24, "Follow-ups from Senate
Finance 3-18-19":
Provide additional clarification of difference
between capital (QCE) credits and per-barrel credits
?Two main differences: incentive and monetization
?Incentive: QCE credits provided an incentive for
spending; per-barrel credits provide an incentive for
production
? Monetization: QCE credits could be applied against
tax liability, carried forward, transferred, or sold
to the state; per-barrel credits can only be used
against liability in the year earned, and are limited
by a company's liability before credits and minimum
tax floor
QCE = Qualified Capital Expenditure
Mr. Stickel noted that capital expenditure credits were
included in the previous tax regime prior to enactment of
SB 21 [oil and gas tax legislation passed in 2013]; and
per-taxable-barrel credits were currently used.
Co-Chair Stedman asked about the clarification slides that
addressed questions form the committee. He encouraged
members to work with the department if more detail was
needed.
ADJOURNMENT
10:26:16 AM
The meeting was adjourned at 10:26 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 032219 2 OGP Credit Audit Update.DOR.3.21.2019.pdf |
SFIN 3/22/2019 9:00:00 AM |
Credit Audit Update |
| 032219 Order of Operations-DOR.3.21.2019.pdf |
SFIN 3/22/2019 9:00:00 AM |
Severance Tax |