Legislature(2019 - 2020)SENATE FINANCE 532
02/12/2020 09:00 AM Senate FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| Order of Operations – Oil Tax Regime | |
| 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
February 12, 2020
9:00 a.m.
9:00:44 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:00 a.m.
MEMBERS PRESENT
Senator Natasha von Imhof, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Lyman Hoffman
Senator Donny Olson
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Dan Stickel, Chief Economist, Economic Research Group, Tax
Division, Department of Revenue; Conor Bell, Petroleum
Economist, Department of Revenue; Senator Cathy Giessel.
SUMMARY
^ORDER OF OPERATIONS OIL TAX REGIME
9:03:07 AM
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, discussed, "Alaska Oil and
Gas Production Tax Calculation ('Order of Operations')"
(copy on file).
Co-Chair Stedman stressed that the meeting was only 90
minutes.
Mr. Stickel highlighted slide 2, "Acronyms":
? ANS Alaska North Slope
? ANWR Arctic National Wildlife Refuge
? Avg Average
? Bbl Barrel
? CBRF Constitutional Budget Reserve Fund
? CIT Corporate Income Tax
? DOR Department of Revenue
? FY Fiscal Year
? GVPP Gross Value at Point of Production
? GVR Gross Value Reduction
? NPR-A National Petroleum Reserve Alaska
? OCS Outer Continental Shelf
? PTV Production Tax Value
? SB21 Senate Bill 21, passed in 2013
? TAPS Trans Alaska Pipeline System
? Ths - Thousands
Mr. Stickel addressed slide 3, "Overview":
?Oil and Gas Revenue Sources how production tax fits
in
o FY 2018 FY 2022 oil and gas revenues
?Production Tax Calculation "Order of Operations"
o Detailed walk-through of each step of tax
calculation
o Defining commonly used terms
o Focus on North Slope oil
o FY 2018 FY 2022 comparison
Mr. Stickel looked at 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 Fall 2019 Revenue
Sources Book and other revenue forecasts.
? The numbers on some slides may not appear to add up
due to rounding.
? 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.
Mr. Stickel discussed slide 5, "Oil and Gas Revenue
Sources":
? Royalty based on gross value of production
o Plus bonuses, rents, and interest
o Paid to Owner of the land: State, Federal, or
Private
o Usually 12.5 percent or 16.67 percent in
Alaska, but rates vary
? Corporate Income Tax based on net income
o Paid to State (9.4 percent top rate)
o Paid to Federal (21 percent top rate, used to
be 35 percent)
o Only C-corporations* pay this tax
? Property Tax based on value of oil and gas
property
o Paid to State (2 percent 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
Mr. Stickel pointed to slide 6, "Oil and Gas Revenue
Sources: Five-Year Comparison of State Revenue."
9:11:25 AM
Co-Chair von Imhof noted that royalties were paid when
wells were producing.
Mr. Stickel agreed. He stated that the royalty number
included a small amount in bonuses and rent.
Co-Chair von Imhof surmised that wells must be producing in
order to provide royalty income to the state, and non-
producing wells did not provide income to the state.
Mr. Stickel agreed. He stated that the producer would pay
the bonus at the acquisition of the lease.
Mr. Stickel looked at slide 7, "Fiscal System: Overall":
Order of Operations
Royalties (State, Federal, or Private)
Property Tax
Production Tax
State Corporate Income Tax
Federal Corporate Income Tax
Mr. Stickel addressed slide 8, "Production Tax 'Order of
Operations': FY 2021."
9:15:59 AM
Mr. Stickel discussed slide 9, "Production Tax 'Order of
Operations': FY 2021":
1. Royalty and Taxable Barrels
Co-Chair Stedman noted that shifting the downstream was in
order to move the oil to the next sale point.
Mr. Stickel agreed.
Mr. Stickel looked at slide 10, "Production Tax 'Order of
Operations': FY 2021":
2. Gross Value At Point of Production (GVPP)
Senator Hoffman queried the direction of the $9.78 per
barrel has been going in the last decade.
Mr. Stickel replied that there was a general upward
direction.
9:20:16 AM
Senator Olson wondered whether some of the ships leaving
Valdez were below capacity.
Mr. Stickel replied that the shippers were optimizing the
marine shipping.
Senator Olson surmised that the answer was possibly yes.
Mr. Stickel agreed to follow up on the inquiry.
Co-Chair Stedman felt that there were less shipments. He
noted that the Trans-Alaska Pipeline System (TAPS) ran at
full capacity, but was slower.
Mr. Stickel agreed.
Mr. Stickel addressed slide 11, "Production Tax 'Order of
Operations': FY 2021":
3. Lease Expenditures
9:23:18 AM
Mr. Stickel thought the slide gave a measure of the tax
impact of the lease expenditures. He pointed out a forecast
$4.6 billion in deductible lease expenditures.
Senator Bishop was interested in seeing what was allowable
for deductible lease expenditures.
Co-Chair Stedman stated that Mr. Stickel was correct in
referencing IRS guidelines.
9:25:49 AM
Co-Chair von Imhof commented on the $1.3 billion in non-
deductible lease expenditures carried forward. She asked
about the $4.6 billion.
Mr. Stickel clarified overall lease expenditures forecast
was a significant increase from prior years.
Co-Chair Stedman asked Mr. Stickel to explain why the $1.3
billion could not be deducted.
Mr. Stickel explained that production tax value was
essentially the net income of the company.
Co-Chair von Imhof remarked that there would be a large
cost initially, but there could be an amortization
schedule. She felt that it was a normal course of business
to make improvements on assets.
Mr. Stickel agreed.
Co-Chair Stedman felt that there must be allowance for
deduction of expenditures, but the question was the timing.
9:30:36 AM
Senator Wielechowski queried the types of deductions in
other oil producing states.
Mr. Stickel was not prepared to speak to the other tax
regimes.
Senator Wielechowski recalled the number being zero,
because the other states had a gross royalty and tax
number.
Mr. Stickel replied that it was addressed in the prior
year, and believed there was some nuance to the issue. He
agreed to provide that information.
Co-Chair Stedman stated that the consultants could address
that issue.
Senator Wielechowski remarked that the number was down in
2020.
Mr. Stickel felt that the number was probably correct. He
stressed that the goal of the presentation was about how
the system worked.
Senator Wielechowski asked about the capital investments.
Mr. Stickel replied that capital expenditures dropped off
with the oil price crash, and bottomed out at $1.7 billion
in FY 18.
Mr. Stickel recapped slide 11.
9:35:29 AM
Mr. Stickel looked at slide 12, "Production Tax 'Order of
Operations': FY 2021":
4. Production Tax Value (PTV)
Mr. Stickel addressed slide 13, "Production Tax 'Order of
Operations': FY 2021":
5. Gross Minimum Tax
Co-Chair Stedman noted that the starting points were
different on the two taxes.
Mr. Stickel agreed, and explained the two taxes.
Mr. Stickel looked at slide 14, "Gross Value Reduction:
? Gross Value Reduction (GVR) is an incentive program
for new fields.
? Available for the first seven years of production
and ends early if ANS prices average over $70 per
barrel for any three years.
? Allows companies to exclude 20 percent or 30 percent
of the gross value from the net production tax
calculation.
? In lieu of sliding scale Non-GVR Per-Taxable Barrel
Credit, qualifying production receives a flat $5 GVR
Per-Taxable-
Barrel Credit.
? The $5 GVR Per-Taxable-Barrel Credit can be applied
to reduce tax liability below the minimum tax floor,
assuming that the producer does not apply any sliding
scale Non-GVR Per-Taxable Barrel Credits.
Senator Bishop wondered whether the GVR was adjusted in
2016 or 2017.
Co-Chair Stedman stated that the information could be
provided at a later time.
Mr. Stickel highlighted slide 15, "Production Tax 'Order of
Operations': FY 2021":
6. Net Tax and Gross Value Reduction (GVR)
9:40:55 AM
Mr. Stickel discussed slide 16, "Production Tax 'Order of
Operations': FY 2021":
7. Tax Credits against Liability
Senator Wielechowski requested the aggregated per barrel
credits provided at each of the legacy fields and the
aggregated lease expenditures at each of the legacy fields.
Mr. Stickel agreed to provide that information, to the best
of their ability.
Co-Chair Stedman felt that the information might be
difficult to obtain.
Mr. Stickel would provide the level of detail available.
Mr. Stickel addressed slide 17, "Production Tax 'Order of
Operations': FY 2021":
8. Adjustments and Total Tax Paid
9:45:39 AM
Co-Chair Stedman noted that there was a request to always
provide the net, so there could be an appropriate
discussion of the different taxes.
Mr. Stickel displayed slide 18, "Order of Operations: Five-
Year Comparison."
Co-Chair Stedman wanted the data set to begin with 2010.
Mr. Stickel agreed to provide that information.
Co-Chair von Imhof wondered why the minimum tax was
different.
Mr. Stickel replied that the primary driving factor was the
change in price as well as the change in company
investment.
Co-Chair Stedman felt that they were close to the tipping
point.
Mr. Stickel agreed.
Senator Wielechowski noted that there was a gross of around
15 or 16 percent. He wondered how it compared to the
history, because he felt that it was the lowest in history.
Co-Chair Stedman felt that the history should be to at
least 2010.
9:52:51 AM
CONOR BELL, PETROLEUM ECONOMIST, DEPARTMENT OF REVENUE,
pointed to slide 21, "Distribution of Cash Flows: North
Slope Oil":
?Share of net cash flows after transportation costs
and lease expenditures that go to government vs
company
?Modeled two ways
o Typical non-GVR production
o All North Slope production and spending
Co-Chair Stedman stressed that there was an attempt to
reduce the foundation, because the public had so much
different information in the public.
Mr. Bell highlighted slide 22, "Distribution of Cash Flows:
North Slope Oil Typical Non-GVR Production":
? Charts shown are produced using DOR "Snapshot" model
? Assumes a single company with all deductible costs
? Simplifying assumptions such as non-GVR oil only;
North Slope only; etc.
? Transportation costs, production, and lease
expenditures, and other assumptions from Fall 2019
forecast for FY 2021
? Prices are expressed in nominal terms
9:55:13 AM
Mr. Bell discussed slide 23, "Distribution of Cash Flows
from One Barrel of Typical Non-GVR Production, FY 2021":
Co-Chair Stedman wondered whether the federal law was
considered.
Mr. Bell replied in the affirmative.
Co-Chair Stedman wondered whether there were modifications
to the potential subchapter new members to the oil basin
and the impact on the tax.
Mr. Bell replied that it was not taken into account.
Senator Wielechowski requested an aggregated account of the
legacy fields.
Co-Chair Stedman felt that the consultants could address
that issue.
Mr. Stickel remarked that slide 23 looked at a typical
barrel of production from non-GVR eligible fields.
Co-Chair Stedman surmised that it included a 21 percent tax
rate.
Mr. Stickel agreed.
Co-Chair Stedman noted that it was also the 2021
expenditures.
Mr. Stickel indicated in the affirmative.
Mr. Bell highlighted slide 24, "Government Take at Range of
Prices from Typical Non-GVR Production."
Co-Chair Stedman remarked that the fixed components
impacted the oil price. He wanted further explanation on
that issue from the consultants.
10:00:02 AM
Mr. Bell displayed slide 25, "Distribution of Cash Flows:
North Slope Oil Using All Slope-wide Production and Costs":
? Charts shown are produced using DOR "Snapshot" model
? Assumes two companies with all costs (one GVR, one
non-GVR)
? Simplifying assumptions such as oil only; North
Slope only; etc.
? Transportation costs, production, and lease
expenditures, and other assumptions from Fall 2019
forecast for FY 2021
? Prices are expressed in nominal terms
10:00:27 AM
Co-Chair Stedman wondered whether there was an attempt to
use even non-producing field expenditures in the chart.
Mr. Bell replied in the affirmative.
Co-Chair Stedman remarked that it was interesting
information.
Mr. Bell looked at slide 26, "Distribution of Cash Flows
from One Barrel, Using All Slope-wide Production and Costs,
FY 2021":
Producer: 34.3 percent
Federal: 9.1 percent
State/Muni 56.6 percent
Lease expenditures ex-property tax
Transportation
Mr. Bell highlighted slide 27, "Government Take at Range of
Prices from All Slope-wide Production and Costs."
Co-Chair Stedman wondered whether the difference between
the two columns was the "subject to no state income tax."
Mr. Bell replied in the affirmative.
Co-Chair Stedman wondered whether there was an inclusion of
all expenditures or only deductible expenditures.
Mr. Bell replied that all expenditures were included.
Co-Chair Stedman surmised that there was an addition of the
$1 billion.
Mr. Bell replied that the $1.3 billion of the lease
expenditures were included in the slide.
Mr. Bell discussed slide 28, "Impact of Corporate Structure
on Cash Flows, an Illustration Using Slope-wide Production
and Costs, FY 21":
Assuming All Production Subject to State Corporate
Income Tax
Producer 34.3 percent
Federal 9.1 percent
State/Muni 56.6 percent
Assuming No production Subject to State Corporate
Income Tax
Producer 36.7 percent
Federal 9.8 percent
State/Muni 53.5 percent
Co-Chair Stedman requested the slide, but in dollar form.
Mr. Bell agreed to provide that information.
Co-Chair Stedman asked for a column to replicate the per
barrel cost.
Mr. Bell replied in the affirmative.
10:05:31 AM
Mr. Bell addressed slide 29, "FY 2021 Tax Calculation,
Assuming Varying Non-GVR Per-Taxable-Barrel Credit Rates."
Co-Chair Stedman requested a breakdown of $5 per barrel.
Mr. Bell agreed to provide that information.
Co-Chair Stedman asked that the information be taken down
by the per barrel deduction.
Co-Chair von Imhof recalled a graph that showed the price
forecast and crossover point. She wanted aper barrel credit
on a number line, and where it affected the numbers.
Mr. Bell replied that the next slide might speak to the
question.
10:11:10 AM
Mr. Bell highlighted slide 30, "FY 2021 Production Tax
Sensitivity, Assuming Varying Non-GVR Per-Taxable-Barrel
Credit Rates."
Co-Chair von Imhof noted that the slide was helpful,
because of the sensitivity analysis.
Co-Chair Stedman stated that he would provide a table
addressing Co-Chair von Imhof's concerns.
Mr. Stickel stated that the forecast did not quite reach
$100 per barrel. He noted that there was a response to the
committee that would examine the expected crossover point
of gross and net tax.
Co-Chair Stedman understood that there were several moving
components.
10:14:21 AM
Senator Wielechowski requested a reasoning behind the
calculations.
Co-Chair Stedman asked for percentages to be included in
that analysis.
10:15:52 AM
Mr. Stickel agreed to provide that information.
Mr. Bell looked at slide 31, "'Count the Cash': Petroleum
Net Fiscal Impact, valuing carry-forward expenditures at
net tax rate."
Senator Wielechowski wondered whether the number was
applied in the difference.
Mr. Bell replied that it applied the 35 percent tax value.
Co-Chair Stedman wanted to understand the net cash position
and the potential impact on the net cash of credits coming
against the treasury.
Mr. Bell discussed slide 32, "'Count the Cash': Petroleum
Net Fiscal Impact assuming no value to carry-forward
expenditures."
Co-Chair Stedman stressed that the slide may not come
against in 2021, but would at the point of production.
10:20:12 AM
Mr. Bell pointed to slide 33, "State Petroleum Revenue by
Land Type."
Senator Hoffman wondered whether there was a timeframe for
the consultants addressing the committee.
Co-Chair Stedman replied in the negative, but felt that
there would be some discussions probably in March.
ADJOURNMENT
10:22:48 AM
The meeting was adjourned at 10:22 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 021220 SFIN - DOR Oil Gas Production Tax Order of Operations.pdf |
SFIN 2/12/2020 9:00:00 AM |
Oil and Gas Production Tax |