Legislature(2023 - 2024)SENATE FINANCE 532
02/02/2023 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Order of Operations – Alaska's Oil Tax Regime | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
February 2, 2023
9:03 a.m.
9:03:38 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:03 a.m.
MEMBERS PRESENT
Senator Donny Olson, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Jesse Kiehl
Senator Kelly Merrick
Senator David Wilson
MEMBERS ABSENT
Senator Lyman Hoffman, Co-Chair
ALSO PRESENT
Dan Stickel, Chief Economist, Economic Research Group, Tax
Division, Department of Revenue.
SUMMARY
PRESENTATION: ORDER OF OPERATIONS ALASKA'S OIL TAX REGIME
Co-Chair Stedman discussed the agenda. He relayed that the
committee would hear a presentation on the order of
operations, focusing on how the oil monies flowed through
and were allocated out of the oil basins. He mentioned the
Revenue Source Book (RSB), which detailed state sources of
revenue (copy on file). He highlighted that the
presentation would be a high-level overview. He thought
that the high-level overview would be informative to new
legislators and staff. He hoped to also discuss some of the
component parts of the RSB.
9:07:32 AM
^PRESENTATION: ORDER OF OPERATIONS ALASKA'S OIL TAX
REGIME
9:07:54 AM
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, introduced himself and
discussed his background. He was a graduate of the
University of Alaska and had joined the Department of
Revenue in 2004 as a non-petroleum economist. He mentioned
that he moved into petroleum taxes during the transition
from The Economic Limit Factor (ELF) to the Production
Profit Tax (PPT) in 2006, which then turned to Alaska's
Clear and Equitable Share (ACES) in 2007, and finally the
current regime in 2013 under SB 21.
Co-Chair Stedman asked whether Mr. Stickel had been
involved in the RSB.
Mr. Stickel affirmed that he had been involved in producing
the RSB for almost two decades.
9:09:14 AM
Mr. Stickel discussed a presentation entitled "Order of
Operations Presentation" (copy on file). He relayed that
the purpose of the presentation was to produce a high-level
overview of how the current tax system worked for the North
Slope, as a refresher for the committee and an introduction
for those who were new to the conversation.
9:09:47 AM
Mr. Stickel looked at 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 noted that there were numerous acronyms in the
oil and gas industry as well as in tax statue.
9:10:13 AM
Mr. Stickel spoke to slide 3, "Agenda":
• Oil and Gas Revenue Sources
o How production tax fits in
o FY 2021 FY 2025 oil and gas revenues
• Production Tax Calculation "Order of Operations"
o Detailed walk-through of each step of tax
calculation for FY 2024
o Defining commonly used terms
o Focus on North Slope oil
o FY 2021 FY 2025 comparison
Mr. Stickel shared that the purpose of the presentation was
to explain the nuts and bolts of the tax regime and not to
discuss policy. He reiterated that the focus would be on
North Slope oil.
9:10:57 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 Fall 2022 Revenue
Sources Book and other revenue forecasts.
• This presentation is solely for illustrative general
purposes.
Not an official statement as to any particular tax
liability, interpretation, or treatment.
Not tax advice or guidance.
• Some numbers may differ due to rounding.
Mr. Stickel added a disclaimer that the presentation took a
complex tax system and distilled the information into
easily understandable pieces. He added that that the data
used was aggregate and was not necessarily the same as the
numbers in the detail specific modeling used in the RSB. He
said when looking at actual taxes the company specific
calculation was based on company tax filings and were
subject to audit. He noted that he was an economist and not
an auditor, and any information he provided should not be
interpreted as an official tax interpretation or tax
advice.
Co-Chair Stedman asked Mr. Stickel to discuss severance
tax.
Mr. Stickel relayed that a severance tax was any tax levied
by a sovereign on the severing of resources within the
jurisdiction of a sovereign. He said that severance taxes
were common to produce oil and gas; in Alaska we refer to
the severance tax as a production tax.
Co-Chair Stedman asked more focus on the aggregated data
that was used to set policy versus the individual company
data. He expressed curiosity about why different companies
would have different reactions to proposed policy.
Mr. Stickel cited that DOR was statutorily prohibited from
disclosing any information that would allow members of the
public or the legislature any knowledge of tax returns
related to specific a company or field. For the purposes of
the presentation information from multiple companies and
multiple fields had been aggregated. He noted that each
field and company had a unique production profile and plans
as how the state fit in to their overall corporate
business. He thought it was the case that some companies
would have a higher cost structure, some a lower cost
structure, and policy would affect companies differently.
9:14:39 AM
Co-Chair Stedman interjected that it was challenging for
policy makers to hit a spot, policy wise, that fit all
parties. He reiterated that there were multiple companies
with different structures and cost exposures. He asserted
that the legislature could not craft policy that met the
needs of corporations unless those corporations came
forward and voluntarily provided the information to support
their desires related to tax policy.
Co-Chair Stedman mentioned the first bullet on slide 4,"
Disclaimer:
• Alaskas 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 2022 Revenue
Sources Book and other revenue forecasts.
• This presentation is solely for illustrative general
purposes.
• Not an official statement as to any particular tax
liability, interpretation, or treatment.
• Not tax advice or guidance.
• Some numbers may differ due to rounding.
Co-Chair Stedman stressed that the state had multiple
consultants testify that Alaska had the most complex
severance tax in the world. He discussed the various tax
evolutions over the past several decades. He thought that
simplification of the structure would be nice but was not
currently the case.
9:17:17 AM
Mr. Stickel turned to 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% or 16.67% 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)
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 explained that the slide gave an overview of
the four major oil and gas revenue sources to the state.
Co-Chair Stedman summarized that when looking at oil basin
revenue the four components needed to be added together. He
noted that some of the revenue that went to boroughs was
considered when determining revenue to the state. He
discussed various royalty rates and said that they were not
dissimilar to property tax.
9:20:02 AM
Mr. Stickel considered slide 6, "Oil and Gas Revenue
Sources: Five-Year Comparison of State Revenue," which
showed a table that showed a comparison of five years of
state revenue from oil and gas with data from the Fall 2022
RSB. He relayed that the slide contained historical figures
for FY21 and FY22, partially complete numbers for the
current fiscal year, and forecasted numbers for FY24 and
FY25. He noted that the property tax share shown did not
include the amount that went to municipalities, which was
approximately $450 million for the current year. He noted
in FY 21 the state had negative revenue for corporate tax
due to Covid-19 relief provisions. The department was
expecting robust growth in tax revenue for the next several
years.
Mr. Stickel noted that the royalties shown on slide 6 also
included bonuses, rents, and royalties. The final two oil
and gas revenue sources were any settlements based on
assessments or disputes of prior year production tax,
royalties, or other mineral taxes or levies dedicated to
the CBR. He said that the federal government shared half of
any revues from the National Petroleum Reserve (NPR), which
would eventually include the Willow project.
9:23:02 AM
Senator Kiehl asked Mr. Stickel to discuss the decisions
made regarding the corporate income tax refunds.
Mr. Stickel explained that the state followed "rolling
conformity" regarding federal income tax code. The state
adopted by reference many provisions of federal income tax
code; when the federal government made a change to
corporate income taxes the state automatically adopted
those changes unless the legislature chose to opt out. The
Coronavirus Aid, Relief, and Economic Security (CARES) Act
included a relief provision that allowed for companies to
carry back net operating losses from 2018, 2019, 2020 up to
5 years, and receive a refund for prior year taxes paid.
Through rolling conformity, the state had immediately
adopted the provision into state law. He said that the
action generated significant refunds paid to corporations
by the state in 2021 and 2022.
Senator Kiehl thought it was valuable for Alaskans to know
that other taxpayers in the state had not enjoyed such
refunds.
9:24:48 AM
Co-Chair Stedman commented on the subject matter of the tax
change that would allow for a lookback and restating of
taxes. He noted that the practice had been nationwide and
had not been limited to the oil industry. He asked Mr.
Stickel corporate income tax and C corporations and the
funds expected from that revenue stream.
9:27:17 AM
Mr. Stickel explained that the corporate income tax applied
to C corporations. Currently, two-thirds of production came
from C corporations, less than one-third of the production
came from companies not subject to the corporate income
tax. If there was an assumption that corporate income tax
forecasted for C corporations would scale up with
production, then expanding the corporate income tax to all
oil and gas companies would generate over $100 million of
incremental revenue each year; the exact number would
depend on the specific detail of each company added to the
tax calculation.
9:28:13 AM
Co-Chair Stedman asked about the aggregate impact to the
state.
Mr. Stickel relayed that the aggregate impact was going to
be approximately $100 million, per year, of potentially
forgone tax revenue.
Co-Chair Stedman wondered how many years the practice had
been applies.
Mr. Stickel stated that historically a much larger portion
of industry activity was made up by C corporations who were
subject to the corporate income tax. He said that over the
last several years the number had dropped and was now
approximately two-thirds, or 70 percent.
Co-Chair Stedman requested that the department provide more
information on the impact. He spoke to the increase of
production, which he believed should be part of the
equation.
9:30:03 AM
Senator Kiehl asked whether there was any difference in
corporate income tax for oil found under state land versus
federal land.
Mr. Stickel stated that all the taxes applied the same for
any production on state land and within the states 3-mile
limit. He said that significant differences in royalty
provisions could be seen depending on where oil was
produced.
9:30:51 AM
Ms. Stickel displayed 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 explained that the royalties came off the top;
the landowner was entitled to compensation of their share
of production before any taxes were applies. The property
tax for upstream property was considered a lease
expenditure for the production tax and was looked at prior
to the production tax. The property tax was deductible
against corporate income taxes. The production tax came
after subtracting royalties and allowing for property taxes
(deductible in the property tax calculation), and before
corporate income taxes. The production tax was a deductible
expense for purposes of calculation the worldwide taxable
income that was the basis for corporate income taxes. The
state corporate income tax became a deduction from the
federal corporate income tax.
Co-Chair Stedman queried the subject of double deductions.
He asked Mr. Stickel to address why it was standard
procedure and the double deductions were allowable. He
noted that the practice was not isolated to Alaska.
Mr. Stickel explained that the expenditures allowed to be
deduction when calculation the net production tax were
standard of fiscal system around the world. He said that
companies were allowed to recoup the costs of operations.
For the corporate tax those expenditures would factor into
the calculation of the worldwide income.
9:34:11 AM
Co-Chair Stedman noted that the subject came up often. He
asked Mr. Stickel to highlight why it was important to
allow deductions of the production tax and the timing of
the deductions.
Mr. Stickel explained that production tax overall was
developed as a net profits tax. The deduction of costs and
establishment of the tax rate and various provisions was
developed together with the deduction of cost being an
integral part of the fiscal system. From a company's
perspective, the ability to recoup costs and make a profit
on their investment was the priority. The ability to
realize credit for any expenditures was important to
companies.
Co-Chair Stedman thought that there could be confusion
around what was considered deductions and what was
considered a credit. He thought the concept was somewhat
abstract. He pondered the benefits of quicker deductions
versus slower deductions.
9:38:01 AM
Co-Chair Stedman commented that when the state went from a
gross tax to a net tax, it allowed the state to accelerate
the deductions and change the rates of return in a
favorable direction for marginal fields as the basin aged.
He commented on the ripple effect of making changes to the
tax structure, and unanticipated effects.
Mr. Stickel agreed that companies were able to recoup costs
through a deduction instead of a credit. The legislature
had taken action to eliminate that capital expenditure
credits and net operating loss credits and had replaced
them with deductions.
9:39:47 AM
Senator Bishop asked whether capital credits could still be
deducted.
Mr. Stickel relayed that for any credits earned prior to
2016-2017 when the changes were made, the company could
still apply the credits against the tax calculation.
Currently if there was a loss, it could be a deduction that
could be carried forward, as opposed to a tax credit that
then must be used against the tax liability.
9:40:56 AM
Mr. Stickel highlighted slide 8, "Production Tax "Order of
Operations": FY 2024," which showed a table based on an
income statement that was included in Appendix E of the
Fall 2022 RSB. He noted that there would be a series of
slides addressing the table piece by piece. He qualified
that the original RSB version had failed to recognize that
2024 would be a leap year, which had been corrected online
and on the slide. He relayed that that slide walked through
an illustration of the years production tax calculation
step-by-step, with a focus on the North Slope oil tax
calculation. The daily production value projection for FY24
was $41 million per day, with an annual value of just under
$15 billion.
Mr. Stickel stated that the next several slides would focus
on taking the just under $15 billion of oil and how it was
split between the various cost centers and how the tax was
applied.
9:42:57 AM
Co-Chair Stedman recalled some debate surrounding how the
tax revenue would be quantified. The committee had worked
through the issues and agreed to look not only at what was
at the states disposal for funding the operating budget,
but the total revenue for the state, including the oil
basin. He said that the process had led to the income-style
statement at the back of the RSB. He highlighted the column
on the far right of the table on slide 8, which showed the
minimum tax floor and the net tax in two separate
calculations. He felt that the delineation helped the
public understand the two possible directions the state
could take. He appreciated the use of red numbers and
brackets, which made it easier to interpret the projected
numbers.
Co-Chair Stedman thanked the department for continually
evolving the information and for working with the committee
on this complicated issue.
9:46:06 AM
Mr. Stickel looked at slide 9, "Production Tax "Order of
Operations": FY 2024," which showed the table from the
previous slide with a highlighted area showing the
calculation of royalty and taxable barrels. He noted that
any royalty and taxable barrels were deducted regardless of
ownership. He cited that typical a rate was one-eighth, or
a 12.5 percent royalty, and applied to most older fields.
He said that the typical rate for a newer field was one-
sixth, to 16.67 percent. He noted that rates varied across
fields. Any federal and private land royalty was also
deducted from the tax calculation in addition to royalty
for state owned land. He said that any barrels not subject
to tax due to being outside the states 3-mile limit were
also deducted.
Mr. Stickel continued that after subtracting royalties the
taxable barrels were considered. He said 161 million
barrels totaling $13 billion were estimated for FY24.
9:47:47 AM
Mr. Stickel addressed slide 10, "Production Tax "Order of
Operations": FY 2024," which showed the table from the
previous slide with a highlighted area showing the
calculation of gross value at point of production (GVPP),
which was also known as well-head value. Mr. Stickel walked
through how the GVPP was calculated.
9:49:31 AM
Senator Wilson asked about the Trans-Alaska Pipeline System
(TAPS) and the rate of return. He understood that the rate
of return could be changed and wondered whether that had
been considered.
Mr. Stickel was not prepared to speak on the matter and
agreed to get back to the committee with more information.
Co-Chair Stedman asked Mr. Stickel to get back to the
committee and include information about why more through
put in the pipeline was important. He thought that the
Willow field might not have the royalties coming to the
treasury that might be expected but the project still had
benefits to the state.
Mr. Stickel explained that for operation of an oil
pipeline, the per-barrel cost was calculated by taking the
total cost of operating the pipeline (which included the
rate of return) and divided it by the number of barrels
going through the pipeline to arrive at a per barrel
tariff. He furthered that a fixed asset like TAPS, with a
stable operation cost, increasing oil production would be
divided over a higher number of barrels resulting in a
smaller per barrel amount. He concluded that having more
oil in the pipeline reduced the average transportation cost
for all barrels from all fields.
9:51:51 AM
Senator Bishop thought there used to be a footnote in the
RSB that broke down the history of oil production in the
state, per year.
Mr. Stickel agreed to work with Department of Natural
Resources to provide an informational royalties timeline
for the committee.
9:52:57 AM
Mr. Stickel advanced to slide 11, "Production Tax "Order of
Operations": FY 2024," which showed the table from the
previous slide with a highlighted area showing lease
expenditures. He explained that the entire value of a
capital expenditure could be deducted for the year
incurred; capital expenditures were defined by IRS
guideline. He said that anything considered an allowable
expense that was not a capital expenditure would be
considered an operating expenditure. He mentioned allowable
lease expenditures, which were any of the capital or
operating costs in the unit which were directly associated
with producing the oil. He used examples of non-allowable
lease expenditures: financing costs, lease acquisition
costs, dispute resolution costs, dismantlement, removal, or
restoration at the end of field life. He explained that
"deductible lease expenditure" was a term of art developed
by the department and was not found in statute or
regulation. He relayed that the term was used when looking
at the portion of the allowable lease expenditures that
were applied in the tax calculation, in a given year, up to
the gross value of point of production. He furthered that
non-deductible were in the allowable ease expenditures
above and beyond the oil produced. The deductible lease
expenditures would reflect spending by incumbent producers
and non-deductible expenditures was by companies performing
exploration and development with little to no current
production.
9:55:53 AM
Mr. Stickel directed attention to the bottom of the slide,
"Net New Lease Expenditures Earned and Carried Forward,"
which were any of the non-deductible expenditures that
turned into carry forward lease expenditures that could
be used to reduce future year taxes assuming the company
had sufficient production and gross value in the future
year.
9:56:30 AM
Senator Kiehl thought it sounded like there was a
significant difference in how the tax system treated a new
entrant as opposed to a long-time producer. He asked Mr.
Stickel to address comparisons between the two.
Mr. Stickel relayed that for a current producer with
production elsewhere on the slope, the company would
recognize the benefit of any spending the same year that
they spent the money. A new company that received the carry
forward lease expenditure would potentially receive
benefits for that spending some time in the future. He
agreed that in this way the system did offer a greater
benefit to long-time producers.
Senator Kiehl recalled that the state had tried to level
out the situation by paying the credits in cash, which had
proved unsustainable. He wondered what other levers might
help to equalize the treatment between new explorers and
long-time producers.
Mr. Stickel thought there were many levers, and one could
consider all the elements of the tax calculation. He spoke
of various levers that could be deployed wherein the
expenditures could increase (uplift) or decrease (degrade)
as directed by tax policy.
9:59:18 AM
Co-Chair Stedman asked Mr. Stickel to address uplift as
it pertained to the lease expenditures.
Mr. Stickel used the example of a company that spent $100
million and did not have a tax liability to apply. With 10
percent uplift, by the end of the year the $100 million
would become worth $110 million against the next years
taxes.
Senator Kiehl mentioned the possibility of limiting
production for lease expenditures to be applicable to the
field it was spent in. He thought this might make the tax
application more equal between new explorers and older
producers.
Mr. Stickel thought there would be different options to
consider. He mentioned ring fencing and noted that there
was currently a ring fence on the North Slope, which meant
that the expenditure that was earned on the slope could be
applied against any production anywhere within the North
Slope. He said that expanding the practice could be one
option the state could consider.
Co-Chair Stedman asked Mr. Stickel to define ring fence.
Mr. Stickel explained that for accounting purposes, a ring
fence signified what geography was contemplated when
calculating the tax. He stated that there was a North
Slope-wide ring fence, which meant that a company would
look at all production and spending on the slope to
calculate their North Slope tax. He furthered that a
company that did business in multiple areas of the state
would not include Cook Inlet production in their North
Slope ring fence tax. He said that ring fencing could be
done on a field specific basis.
10:02:34 AM
Co-Chair Stedman mentioned the challenge of a development
within a ring fence and the occasion of a new entrant
outside the ring fence. He mentioned numerous discussions
around the economic advantages and disadvantages
surrounding ring fencing, particularly on the North Slope.
He reminded that all the mechanisms being discussed changed
the cash flow. He said that ring fencing was a tool that
could be a double-edged sword. He reiterated that all the
mechanisms discussed affected timing and flow of cash.
10:04:44 AM
Senator Kiehl pointed out that lease expenditures
constituted one of the bigger numbers on the slide. He
asked how much transparency there was regarding what
Alaskans could see regarding deductions on the North Slope.
He asked if the state was comparable with what the public
could see in other jurisdictions.
Mr. Stickel explained that taxpayer confidentiality had its
limitations. Information specific to a single taxpayer
could not be released. He noted that Appendix D of the RSB
provided as much information as possible. He mentioned
information on the ten-year forecast, which broke down
information on and off the North Slope. He said that the
department had provided information breaking out the 10-
year history and 10-year forecast between the total
allowable and total deductible lease expenditures. He
asserted that the department was as transparent as possible
given the limitations of statute.
Co-Chair Stedman wanted to separate operating from capital
- what was deductible and what was not. He noted that the
states had adopted the federal definition of operating and
capital costs. He noted a list of exclusions in the tax
code. He thought that the more the state could rely on
federal definitions the smoother the relationship between
sovereign entities and industry.
10:08:07 AM
Senator Kiehl wondered about comparable levels of
confidentiality and disclosure in other states or oil
provinces.
Mr. Stickel thought the state's tax confidentiality was
standard across states. He continued that Alaska was unique
when it came to a net-profits bases tax system. Many other
states were not collecting information about lease
expenditures. He said that the collection and reporting of
information was greater in Alaska than in other states.
Co-Chair Stedman thought that Alaska was distinctly
different since the state owned the subsurface rights. He
thought Alaska was more like Alberta, Canada. He did not
believe that other state would ever replicate Alaskas tax
structure because they did not have the subsurface rights.
He warned that this matter was significant to account for
when making comparisons between states.
10:10:17 AM
Mr. Stickel looked at slide 12, "Production Tax "Order of
Operations": FY 2024," which showed the table from the
previous slide with a highlighted area showing the
calculation of production tax value (PTV). He defined that
production tax value was gross value at point of
production, less deductible lease expenditures. Each
company calculated its own PTV based on all North Slope
activity, including all fields and developments on the
slope. The PTV was essentially a tax base for the
production taxes. The PVT was also what DOR would reference
when considering effective tax rates and how the profit was
distributed between federal government, state government,
and producers.
Mr. Stickel cited that for FY 24, DOR estimated a
production tax value of $44.10 per barrel, with a total
production tax value of $7.1 billion.
10:11:50 AM
Mr. Stickel showed slide 13, "Production Tax "Order of
Operations": FY 2024," which showed the table from the
previous slide with a highlighted area showing Gross
Minimum Tax Floor. For illustrative purposes, the tax was
shown as two parallel tax calculations shown side by side,
with the tax due being the higher of the two. The minimum
tax floor was 4 percent of gross value at point of
production anytime the annual oil price was greater than
$25 per barrel. He related the slide showed a minimum tax
floor of $460 million for FY24.
10:13:25 AM
Senator Bishop asked whether the state hit the minimum tax
floor in FY21.
Mr. Stickel relayed that there were some companies that
were paying the minimum tax in FY21. He added that the
total receipts had been just above the minimum.
Co-Chair Stedman offered a footnote that the presentation
dealt with consolidated data.
Mr. Stickel added that generally companies moved off the
minimum tax when oil reached the range between $50/bbl. and
$70/bbl.
10:14:40 AM
Mr. Stickel referenced slide 14, "Production Tax "Order of
Operations": FY 2024," which showed the table from the
previous slide with a highlighted area showing Net Tax and
Gross Value Reduction (GVR). He explained that the GVR was
an incentive for new development. The GVR allowed a company
to exclude either 20 percent or 30 percent of the gross
value, for qualifying fields, from their production tax
value calculation, which reduced the tax base for their net
tax calculation. The 20 percent applied for qualifying new
fields and the 30 percent GVR was for fields comprised of
exclusively state-issued leases with greater than a 12.5
percent royalty.
Mr. Stickel continued that another provision of the GVR was
that any eligible field received a flat $5 per barrel tax
credit, which could be applied to reduce tax liability
below the minimum tax if companies did not also take
sliding scale credits. He noted that the GVR was temporary
and expired after 7 years of production or after any 3
years where ANS averaged greater than $70/bbl.
10:17:11 AM
Senator Kiehl asked whether Mr. Stickel could provide a
sense of how broad or narrow the new oil definition was.
Mr. Stickel responded that the definition would apply to
qualifying new producing areas, or ne fields, and there was
a provision for the expansion of an existing area. He said
that any of the major new developments on the slope had the
potential to qualify for the GVR.
Senator Kiehl surmised that the GVR could then apply to
legacy fields.
Mr. Stickel relayed that a new producing area within a
legacy field, or potentially an expansion of an existing
producing area, could qualify.
10:18:24 AM
Mr. Stickel continued to address slide 14. He said that the
department was estimating a reduction of $146 million in
production tax value in FY24. He furthered that the net tax
would be based on the tax value, after the gross value
reduction, multiplied by the 30 percent statutory tax rate,
which resulted in a tax (before credits) of approximately
$2.4 billion in FY24. The net tax calculation was compared
to the minimum tax floor and then the higher number was
used as the production tax before application of credits.
10:19:28 AM
Mr. Stickel turned to slide 15, "Production Tax "Order of
Operations": FY 2024," which showed the table from the
previous slide with a highlighted area showing tax credits
against liability. In current statute there were two
primary credits, or per taxable barrel credits. He shared
that one credit was for GVR eligible oil and another for
all other oil. He said that most credits were in the non-
GVR category. He noted that GVR was a temporary benefit
and as time progressed fields currently receiving the
benefits would age out of the benefit as new fields would
potentially qualify for the GVR. He relayed that for non-
GVR production there was a sliding scale per-taxable-barrel
credit. The sliding scale credit was $8 per taxable barrel
when the well head value of the oil was less than $80/bbl.
This decreased in $10 increments of well head value until a
well head value of greater than $150/bbl. was reached, and
the sliding scale credit reduced to zero. He said that the
sliding scale credit could not be used to reduce the tax
below the minimum tax floor and if a company chose to apply
the credit no other credits or deductions could be used to
reduce the minimum tax floor.
Mr. Stickel said that for production that was eligible for
the GVR, a flat $5 per taxable barrel credit, without
sliding scale for GVR oil, was available. He said that if a
company did not take sliding scale credit, they could use
the $5/bbl. credit to reduce tax liability below the
minimum tax floor, potentially to zero. He considered the
per-taxable-barrel credits, which were different than
credits in the past and could not be carried forward or
refunded. There was a small amount of other tax credits
against liability, which was about $.7 million in FY24, and
represented small producer credits. No prior-year credits
were forecasted in FY24 tax calculation.
10:23:04 AM
Senator Bishop asked about the small producer credits and
asked about the per day and annual production levels of the
smaller producers.
Mr. Stickel relayed that the small producer's credit had
been available to companies with less than 100,000 barrels
per day of production. He stated that the credit had been
phased out for new entrants.
Co-Chair Stedman asked for Mr. Stickel to discuss the
function of the sliding per-barrel credit. He asked how
often the credit was calculated.
Mr. Stickel replied that the production tax was an annual
tax that had monthly elements. He said that the sliding
scale per-taxable-scale credit was based on a monthly
calculation. He furthered that at the end of the year when
a company filed its annual tax return, there would be a
true-up calculation through which the company would
reconcile excess per taxable barrel credits that could not
be applied in the monthly installment payment.
10:26:01 AM
Mr. Stickel considered slide 16, "Production Tax "Order of
Operations": FY 2024," which showed the table from the
previous slide with a highlighted area showing adjustments
and total tax paid. He explained that the adjustments
represented prior year tax payment or refunds, private
landowner royalty tax, tax revenue for North Slope gas
production, net tax revenue from production in Cook Inlet,
a conservation surcharge, and any other company specific
issue that cause the illustrative tax calculation to not
match the company specific calculation. He said that the
projected net sum of all these items was $16.9 million,
with a total tax paid to the state of $1,236.9. He said
that all but $8 million of that total went to the General
Fund.
Mr. Stickel added that at the bottom of the slide showed a
forecast of about $882 million in net new lease
expenditures earned and carried forward.
10:28:25 AM
Mr. Stickel displayed slide 17, "Order of Operations: Five
Year Comparison," which showed a table that represented the
same slide as previous slides over a 5-year timespan. He
highlighted that the production tax value ranged from $3.5
billion in FY21, increasing to over $8 billion in FY22 and
FY23. He noted the projection of approximately $7 billion
in FY 24 and over $6 billion in FY25. He said that the
projections correlated to changes in the expected total
production tax revenue received by the state. He relayed
that the net tax was expected to be the higher tax into the
future. He pointed out the total estimated ending balance
of the carried forward lease expenditures at the end of
each fiscal year, which would reflect the potential total
deductions that could offset future year tax calculations.
He furthered that the effective tax rate had also been
added and represented the total tax paid to the state as a
share of production tax value. He said that given the
various tax credits available, the effective tax rate was
lower than the statutory 35 percent tax rate.
Co-Chair Stedman asked Mr. Stickel to get back to the
committee with additional information about royalties,
corporate income tax, and property tax relating to the
government share.
Mr. Stickel agreed to provide the information.
10:31:24 AM
Mr. Stickel reviewed slide 18, "Illustration Assuming a
Single North Slope Taxpayer: FY 2024," that showed a table
with a highlighted area focused on a single producer that
realized the full value of per-taxable-barrel credits. The
slide contemplated what the tax calculation would look like
if there were a single taxpayer for the North Slope. He
pointed to the highlighted section at the bottom of the
slide. It was assumed that if there were only one taxpayer,
the full $8/bbl. sliding scale tax credit could be used
against tax liability. He stated that currently it was
assumed that some smaller companies could not use the full
$8/bbl. tax credit. He said that the assumption projected
$1.19 billion in FY24.
10:33:12 AM
Senator Bishop went back to slide 17, which showed a
projected total of $1,236.9 total tax paid to the state in
FY24.
Mr. Stickel agreed that for FY 24, the projected total
production tax was approximately $1.2 billion.
Senator Bishop observed that slide 6 showed that the
projected royalty to the three dedicated funds for FY24 was
approximately $1.7 billion.
Mr. Stickel agreed.
Senator Bishop surmised that the total revenue to the
treasury was $3.4 billion.
Mr. Stickel agreed.
Co-Chair Stedman thought it was important to recognize all
the components that comprised state revenue and that that
some of the funds did not end up in the treasury but were
distributed on the local level. He asked Mr. Stickel to
include the amounts that went to boroughs and communities
when he provided total state revenue data to the committee.
Mr. Stickel agreed to provide the information.
Co-Chair Stedman reiterated the importance of providing a
holistic view of the states fiscal picture.
10:35:50 AM
Mr. Stickel referenced slide 19, "State Petroleum Revenue
by Land Type," which showed a table representing the
concept that "all oil is not equal." The table showed how
state petroleum revenues varied by land type. There were
different provisions for royalty depending upon where the
oil was produced. The state received all the royalty for
production on state lands, a share of royalty for
production on federal lands, and no direct revenue for
production over 6 feet offshore.
10:37:19 AM
Mr. Stickel showed slide 20, "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% or 30% 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.
Mr. Stickel reminded that the GVR was part of SB 21, which
passed in 2013.
Co-Chair Stedman addressed the second bullet on the slide,
and asked where the state was in the exclusion of the GVR
timeframe.
Mr. Stickel explained that the GVR was calculated for each
field and each field had its own GVR timeline, the first
potential year being the first year of production. He said
that a schedule was maintained for all qualifying fields.
He added that some fields had graduated from the GVR, and
some fields had been grandfathered in upon inception of the
GVR.
10:39:41 AM
Mr. Stickel reviewed slide 21, "Petroleum Detail: UGF
Relative to Price per Barrel (without POMV), FY 2024,"
which showed a line graph. He noted that slide 21 and slide
22 were a re-hash of slides shown in an earlier
presentation and were intended to reiterate the impact of
different oil taxes on the tax system.
10:41:48 AM
Mr. Stickel showed slide 22, " Petroleum Detail: UGF
Relative to Price per Barrel (without POMV), FY 2024FY
2026 * (*Fall 2022 revenue Sources Book Appendix A-1.)
Co-Chair Stedman asked whether the department held all
things constant but price when conducting the sensitivity
analysis.
Mr. Stickel explained that when doing the sensitivity
analysis, the department held the major assumptions
constant and applied an elasticity assumption to lease
expenditures.
Co-Chair Stedman asked if the elasticity of expenditures
was more applicable to multiple years or withing 12 months.
Mr. Stickel explained that DOR currently assumed an
elasticity of .3, which was derived from academic
literature that suggested a 10 percent increase in price
would correspond to a 3 percent increase in leas
expenditures. He noted that there would be both short-term
and long-term price changes. He said that a sustained
increase or decrease in price relative to the forecast
would be reflected in long-term operating costs.
10:44:01 AM
Senator Kiehl mentioned progressivity. He asked Mr. Stickel
to get back to the committee with nominal effective rates
across price ranges.
Co-Chair Stedman asked for clarification on the question.
Senator Kiehl clarified he wanted the nominal and effective
tax rates for various oil prices.
Mr. Stickel agreed to provide the information.
Co-Chair Stedman thanked the department for presenting. He
noted that the committee had heard from consultants over
the years on the oil tax structure and industry. He advised
that there would be more information and discussion to come
on the matter over the next few months.
Co-Chair Stedman discussed the agenda for the following
week.
ADJOURNMENT
10:47:29 AM
The meeting was adjourned at 10:47 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 020223 Order of Operations SFIN 2023.02.02 rev.pdf |
SFIN 2/2/2023 9:00:00 AM |
|
| 020223 Attachment - Summary of State Competitive Oil and Gas Lease Sales -- 1959 to Present.pdf |
SFIN 2/2/2023 9:00:00 AM |
|
| 020223 DOR Response to SFIN Order of Ops Presentation 02.02.23.pdf |
SFIN 2/2/2023 9:00:00 AM |