Legislature(2023 - 2024)SENATE FINANCE 532
05/01/2023 01:30 PM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB114 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 114 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
May 1, 2023
1:39 p.m.
1:39:01 PM
CALL TO ORDER
Co-Chair Olson called the Senate Finance Committee meeting
to order at 1:39 p.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Donny Olson, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Jesse Kiehl
Senator Kelly Merrick
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Kara Moriarty, President and Chief Executive Officer,
Alaska Oil and Gas Association; Rich Ruggiero, CEO,
In3nergy; Robin O. Brena, Managing Attorney, Brena, Bell,
and Walker.
PRESENT VIA TELECONFERENCE
Mark Myers, Former Commissioner, Department of Natural
Resources, International Energy and Natural Resources
Consultant.
SUMMARY
SB 114 OIL and GAS PRODUCTION TAX; INCOME TAX
SB 114 was HEARD and HELD in committee for
further consideration.
SENATE BILL NO. 114
"An Act establishing an income tax on certain entities
producing or transporting oil or gas in the state;
relating to the oil and gas production tax; and
providing for an effective date."
1:39:30 PM
KARA MORIARTY, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
ALASKA OIL AND GAS ASSOCIATION, (AOGA) introduced herself.
RICH RUGGIERO, CEO, IN3NERGY, began with slide 10 of the
presentation, "SB 114 Senate Finance May 1, 2023" (copy on
file):
SB114 aims to "level the playing field" among
producers, targeting in particular corporate filing
status. But a fiscal system should also be able to
properly differentiate between:
•Existing vs new producers
•Existing vs new fields
•Single project vs multi projects
•TAPS financial interest vs no TAPS financial
interest
•New field developer vs aging field harvester
•Large vs Mid vs Small producer
•Part of the complexity of the Alaska petroleum tax
system is it has tried to address many differences and
nuances, often creating unintended consequences that
have to be addressed again in the future
1:40:33 PM
Mr. Ruggiero addressed slide 11, "Same Playing Field, Same
Facts":
•In order to make an informed decision on SB114 the
legislature needs to ensure that they:
•Understand the terminology of AS43.55 and order
of operations
•Insist statements of 'fact' are backed with
independent data
•Be aware things are not taken out of context and
improperly referenced
•We have reviewed the recently submitted public
comments, as well as past ballot initiative public
data, and believe there are some misconceptions that
should be cleared up:
•Alaska has been receiving its 1/3 share of the
wealth
•Alaska's overall percentage state take is among
the highest in the US
•Producers deducting from income money they spent
is not a giveaway or loophole, but something that
is fundamental to almost all petroleum fiscal
systems and business taxation in general
Mr. Ruggiero pointed to slide 12, "For the Maximum Benefit
of the People":
"The legislature shall provide for the utilization,
development, and conservation of all natural resources
belonging to the state, including land and water, for
the maximum benefit of its people"
•This is a common government stewardship role for
natural resources
•Constitutional or stewardship obligations are often
quoted as reason to raise taxes
•Alaska needs to have a common, transparent
understanding of what "maximum benefit" is to ensure
suggested changes, like SB114, work toward that end
•The definition of maximum benefit always boils down
to a balance issue between short term needs and long
term growth
•The challenge is always to try and find that sweet
spot
•Where state needs are met, state goals are
achieved, and producers have a sustainable
business climate to operate within
Mr. Ruggiero pointed to slide 13, "Achieving Alaska's 1/3
'Fair Share'":
• The most often quoted definition of fair share comes
from the writing of Governor Hammond, wherein he notes
that at the time of the approval for TAPS the
producers, Alaska and the federal government agreed to
an even split of the resultant "wealth", giving 1/3 to
each party
• This split has often been misrepresented as an
agreement to a 1/3 split of revenue, but instead it is
a split of "wealth", or profit
• It is impossible to give producers just a 1/3 split
of gross revenue, as that amount would not even cover
costs to operate and royalties
If "share" is on gross (versus net) then there would
be no producers in Alaska
Mr. Ruggiero addressed slide 14, "Achieving Alaska's 1/3
Share":
This graphic suggests that in the long run Alaska
has received its 1/3 share of the oil wealth
With a $403 billion total wellhead value (net) of
Alaska production, the states portion of $141 billion
represents a 35 percent share
The remainder of the $527 covered expenses, federal
taxes and producer share
1:44:37 PM
Mr. Ruggiero looked at slide 15, "Tax Decrease Greater Than
Oil Price":
It has been incorrectly presented that during a time
period the percent decrease in oil taxes paid was
greater than that decrease in oil price, caused by per
barrel credits
The difference in percentages had nothing to do with
credits, as at the low price the preliminary net tax
was less than the gross min tax
Costs do move up and down with oil price, although
with a time lag
The seeming disproportionate drop in taxes paid is
because the $43/bbl case has low PTV ($3/bbl) due to
heavy cost burden
Mr. Ruggiero addressed slide 16, "Takeaways":
There needs to be a transparent understanding of
what it means to steward the state's natural resource
for the maximum benefit of the people
There are many statements being made that are not
supported by facts
If the statements being made are true and that
Alaska has truly been too generous, not taken its fair
share of the wealth and offered too many giveaways and
incentives, then why aren't oil companies knocking
down the doors to get their own overly generous share
of the pie?
Mr. Ruggiero looked at slide 18, "Today Very Different Than
the Past":
The headwinds facing producers today are not the
normal cyclical issues of the past: e.g. oil embargo,
global politics, war, economic crashes, pandemics, etc
The current global green movement is a major
fundamental shift of direction leading to a much
riskier and uncertain future
Mr. Ruggiero highlighted slide 19, "What is Different Now
vs. the Past?"
Late 70s
Much of the world closed to oil investment
Coming off the heels of the oil embargo
Alaska offered world class resources and energy
security
• Dollars readily available
• Energy Security
Mid 2000s
Countries competing for investors
Several new prolific basins
Emerging life cycle players
Private equity funding
• Barrels readily available
• Fiscal system versus fiscal system
• Technology opening new resources
• Differing expectations of investors
Today
Many calling for the end of fossil fuels
Financial institutions refusing to fund
Green movement has great momentum
Peak oil
Dwindling Investors
Balance sheet funding
Short cycle vs long cycle
Mr. Ruggiero pointed to slide 20, "What is Different Now
vs. the Past?"
Prior presentations on Alaska's competitive position,
at best are a starting point but by no means
indicative of where Alaska stands today and what
Alaska needs to do to be competitive and attract
investment
The 1/3, 1/3, 1/3 sharing concept does not make Alaska
competitive Today, Alaska (long lead time, high cost,
environmentally sensitive) needs a COMPELLING fiscal
system, not just a competitive fiscal system, to
attract much needed investment Every other regime is
trying to figure out how to navigate the new 'green'
world
1:51:29 PM
Senator Bishop asked about the WTI be folded into the Brent
"basket."
Mr. Ruggiero replied that he could not provide an informed
position.
Senator Kiehl looked at slide 10, and wondered whether
there was enough information to build a tax system for all.
Mr. Ruggiero replied that there was an examination of the
impact of alternative energy.
Senator Kiehl wanted to ensure that there was enough
information to run the scenarios and make the predictions.
Mr. Ruggiero pointed to slide 21, "Confronting Climate
Change":
• When will climate change mitigation efforts diminish
demand for oil?
• Projects with long lead times and extended
periods of production, like most in Alaska, are
at high risk of not proceeding
• Developments with quick cycle times, like shale
developments, are now much more desirable
• Oil company reaction to the green movement covers a
wide range
• Remain steadfast
• Retool
• What is the timing of technology development and
approvals for critical non fossil fuel alternatives
(and their significant impact on fossil fuel demand):
•e.g. airplanes, electronics, medical equipment,
pharmaceuticals
1:55:12 PM
Mr. Ruggiero looked at slide 22, "Takeaways":
• We used to think the world would reach peak oil
production and decline because of diminished
resources, but today peak oil will likely be
determined by the push for greener renewable energy
• In a transition away from fossil fuels, what is
Alaska's overall plan of how to respond and achieve
maximum value for its resources?
• Finite and undetermined period of time for oil
revenues
• The state needs producer partners in this
transition
• What long term plan necessities is the state
considering?
• New developments
• Future power and heat
• Field abandonment
• Facility abandonment
• Changes to shipping rules
• Refinery shutdowns
• Carbon taxes
• Etc.
The past is no longer a good indicator of the future.
New scenarios need to be evaluated and new plans
agreed
Mr. Ruggiero addressed slide 24, "Can't Change One Part
Without Impacting the Whole":
• Government take is but one piece
• Alaska has an overly complex system for
administering energy taxation
• Numerous allowed and disallowed costs
• Price triggers versus profit triggers
• Net tax system but with a gross tax floor
• Many different degrees of differentiation
• Over the last decade, $100s of Billions spent in
countries and states with higher government take than
Alaska. So clearly, rate alone is not the determinant
issue
• Most people and policy makers don't understand how
the Alaska system works and compares in total to other
regimes
Mr. Ruggiero discussed slide 25, "Takeaways":
Historically, tax system terms other than the
headline rate have driven producer investment
decisions
• The uncertainty surrounding future demand has
created an elevated level of risk
• Producers will very likely give preference to
regimes that offer the rapid recovery of capital along
with uplift to compensate for the time value of money
• Producers evaluate projects based on their out of
pocket costs, not just those allowed by a regime's tax
code. Therefore their economics will be nowhere as
good as you are calculating for them
2:00:32 PM
Mr. Ruggiero pointed to slide 27, "What is Driving this
Legislation?"
ndfall profits ignores the offsetting asset write
downs during 2 downturns in the 2010 2020 period;
producing oil at a loss
• "New, lower federal corporate tax rate ignores
lowered for all US operations/operators. Also ignores
changes in taxation outside the US
"Closing loopholes" There are no loopholes, only
persons or companies paying their taxes based on how
the tax code is written. State knew of Hilcorp
corporate status before their purchases
"We're just reducing government subsidies [the tax
credits] ignores that each aspect of the fiscal policy
is part of a multifaceted system that is all part of
an overall package; any change disrupts the balance of
the overall system
"Level the playing field but instead of improving
terms for new players, which would greatly help in
bringing on new oil, SB114 appears to worsen terms for
legacy players
"It's just a small rate change. We're still lower
than many countries with investment." Incorrectly
boils regime differences down to a single factor,
government take
Mr. Ruggiero pointed to slide 28, "SB 114 Attempting One-
off Changes to A Complex Integrated Tax System":
• Alaska remains, and will remain for some time,
highly dependent on petroleum revenues
• Therefore, what are Alaska's goals for oil and gas
production in the state?
• Is it simply to generate revenue now?
• What about the future?
• Does SB114 move the state closer to any agreed long
term goals?
• SB114 appears to be short term revenue stop gap
solution
• Historically each time a one off change has been
made, unintended consequences have arisen
• To be expected with a complex system of
interconnected parts
Mr. Ruggiero looked at slide 30, "Attracting New
Producers":
• Section 1 looks to be specifically targeting one
company to force them to pay Alaska corporate income
tax
• Justified as 'leveling the playing field'
• Which producer is being harmed by the 'uneven'
playing field?
• How will a level field improve production or
incentivize investment?
• Revitalizing old mature fields is very different to
developing new fields
• Some of Alaska's legacy fields are over 40
years old
• Mature field, or old field, operations are
different to new field operations
• A 'level' playing field always inherently helps some
operations and penalizes others
• Old versus new
• Conventional versus unconventional
• High unit cost versus low unit cost
• Unclear how SB114 in this regard will attract new
players or capital
Mr. Ruggiero pointed to slide 31, "Dangers of Wrong
Changes":
• Numerous state agencies knew of the different form
of incorporation when the sale and purchase of North
Slope assets was approved
• Private investment was attracted to the state under
one set of economic circumstances, which will be
negatively altered if SB114 passes
• If this should somehow impact the producer, it is
the only operator with critically important Cook Inlet
operations as well
• As Alaska's fields mature, unit costs go up and
margins grow smaller. Instead of attracting the right
kind of investors, this move could stop other needed
mature field experts from coming to Alaska
• In a period of growing shareholder activism,
privately held companies offer Alaska a producing
partner not under those same pressures
Mr. Ruggiero discussed slide 32, "Takeaways":
• LLCs and S Corporations are the preferred structure
for single owner or several member owned companies.
These companies are smaller, nimbler and have fewer
resources
• SB114 sends a negative message to small, independent
oil and gas companies that may be considering
investing in Alaska. In particular, the Cook Inlet
basin, where all natural gas producers are S
Corporations
• Smaller, privately owned companies have begun
investing in Alaska as they are generally less
susceptible to pressure from activists
• Smaller privately owned companies typically have
more efficient management structures that allow them
to make quick capital allocation and investment
decisions
• Being less susceptible to pressure from activist
groups these smaller entities can better align with
Alaska's long term interests
2:05:50 PM
Mr. Ruggiero looked at slide 34, "Reducing the Credits":
• ACES was a 25 percent base tax with positive
progressivity and numerous investment incentives
• MAPA is a 35 percent base tax with negative
progressivity and a reduced number of incentives
• The per barrel credits were not a "giveaway" but
part of the core value of a package of terms to hit an
overall effective tax rate
• During hearings on SB21 an extremely large number of
modeling runs were made and presented covering a very
wide range of possible prices
• Even though forecasts at the time did not predict
the very high and low prices experienced since 2013,
the modeling did cover the full range
Mr. Ruggiero addressed slide 35, "High Level Look at
Credits":
• In3nergy (2019) "The long term DOR forecast is for
prices to remain in the range of $70 per barrel .
With this in mind, it is unlikely, but not impossible,
to envision that the contemplated reduction in tax
credits would severely hamper any planned or possible
spending."
At $70 per barrel our modeling suggested roughly
only $5 per barrel of credits being needed to reach
the gross minimum tax floor, so a change from $8 to $5
should not have an impact or be problematic
• The minute you change oil price, transportation
cost, OPEX or CAPEX, the resulting economics and
impacts will change
• Much like our modeling, the fiscal note initially of
SB114 impacts shows the possible impacts for one set
of price and costs. It doesn't take much of a change
to either price or costs to change the position to no
real impact or possibly a substantially large impact
Mr. Ruggiero looked at slide 36, "Takeaways":
• The sliding per barrel credits are part of an
integrated package
• Credits and deductions are standard global
mechanisms in fiscal systems
• Per barrel credits are not giveaways
• OPEX and CAPEX deductions are not giveaways
• The large credit level below $80 was to offset the
regressive impact of royalty and the gross minimum tax
• If passed, the reduced credits will impact each
taxpayer differently, thus influence future
investments differently
• At the current cost structure there is a 'sweet
spot' for the use of maximum credits around $80. As
prices fall, the lack of taxable income negates the
need for credits
2:12:12 PM
AT EASE
2:13:04 PM
RECONVENED
ROBIN O. BRENA, MANAGING ATTORNEY, BRENA, BELL, AND WALKER,
discussed the presentation, "Comments to Senate Finance
Senate Bill 114 By Robin O. Brena" (copy on file). He
looked at slide 2, "Speaker Introduction":
Robin O. Brena is a lifelong Alaskan. He is the
founder and managing attorney of the law firm Brena,
Bell and Walker, P.C. (BB and W ). BB and W has been
named a Fortune 500 "Go To" law firm, an INTL
"Client's Choice Construction Law Firm of the Year in
Alaska," and a Global Law Experts "Commercial
Litigation Law Firm of the Year."
Robin has decades of experience litigating complex,
multi-party oil and gas, taxation, and regulatory
matters on behalf of major oil companies,
municipalities, public utilities, and Alaskans. He has
successfully litigated several cases in which greater
than one billion dollars was at issue.
Robin has a B.A. degree from New College, an M.B.A.
degree from the Atkinson Graduate School of
Management, a J.D. degree from Willamette University
College of Law, and an L.L.M. degree from the
University of Miami School of Law.
Robin has been repeatedly named as one of the "Top
Attorneys in Alaska"; as one of Alaska's "Super
Lawyers" in the areas of oil and gas, public
utilities, and business litigation; as the Leading
Complex Civil Law Trial Attorney of the Year (Alaska);
as a Lifetime Charter Member of "Best Attorneys of
America"; as one of America's Top 100 Attorneys
(Alaska); and as a Lawyer of Distinction for
excellence in Oil and Gas law.
Robin is licensed to practice law in the State of
Alaska and the State of Texas, as well as to practice
before the U.S. Supreme Court, the D.C. and Ninth
Circuit Court of Appeals, and the U.S. Tax Court. He
has taught and guest lectured at UAA and Willamette
College of Law. He was also the Chairman of the Oil
and Gas Subcommittee for Governor Walker's transition
team.
2:15:48 PM
Mr. Brena looked at slide 3, "The Legislature's
Constitution Duty":
Article VIII Section 2:
The legislature shall provide for the
utilization, development, and conservation of all
natural resources belonging to the State,
including land and waters, for the maximum
benefit of its people
2:23:17 PM
Mr. Brena addressed slide 4, "Primary Mechanisms to Realize
the Maximum Benefit for Alaskan's Oil":
.notdef Corporate Income Taxes
.notdef Royalties
.notdef Production Taxes
Mr. Brena discussed slide 5, "Corporate Income Taxes
Underperform":
.notdef Since 1977 when production for the Alaska North
Slope began, all the major producers in Alaska have
operated as publicly traded C Corporations
.notdef As a publicly traded C Corporation, BP paid
corporate income tax in Alaska
.notdef When BP sold its Alaskan interests to Hilcorp the
income associated with BP's former interests was no
longer subject to corporate income tax in Alaska
simply because Hilcorp does not operate as a C
Corporation
.notdef All major producers in Alaska should continue to be
subject to paying corporate income tax in Alaska
Mr. Brena addressed slide 6, "Royalties and Production
Taxes Underperform":
.notdef Other States
.notdef Texas: 29.6 percent of Gross (NC)
.notdef North Dakota: 28.7 percent of Gross (NC)
.notdef Alaska Before SB21: 27 percent of Gross (1977 2014)
.notdef Alaska Since SB21: 16.5 18 percent of Gross (2015
2022)
.notdef $4.5B total production taxes
.notdef $5.6B total per barrel credits
Mr. Brena highlighted slide 7, "Royalties Underperform":
.notdef Typical Royalties
25 percent: Texas/Arkansas/Private
20-25 percent: Louisiana/Colorado/New Mexico
16.7-20: North Dakota/Wyoming/Utah/Fed Offshore
.notdef Alaska's Royalties
12.5 percent: Alaska
2:29:14 PM
Mr. Brena discussed slide 8, "Production Taxes
Underperform."
Mr. Brena highlighted slide 9, "Prudhoe Bay Unit
Underperforms (2018)."
2:38:20 PM
Mr. Brena displayed slide 10, "Production Tax Credits
Underperform."
Mr. Brena pointed to slide 11, "Production Tax Credits
Underperform (O and G Jobs)."
2:44:45 PM
Mr. Brena discussed slide 12, Reasons for
Underperformance":
.notdef Lack of Legislative Oversight
.notdef Lack of Transparency
.notdef Unnecessary Complexity
.notdef Corporate Tax Structure Not Kept Current
.notdef Royalty Too Low
.notdef Production Tax Rates Too Low
.notdef Unnecessary and Excessive Credits
.notdef Legal Duty / Sufficient Economics / Benefits
Should Exceed Credits
.notdef Credits Tied to Actual Investment
.notdef Giving Production Credits to Fields in
Production for Decades Without Credits
.notdef Underestimating Our Current Oil Wealth"
Mr. Brena addressed slide 13, "Economic Impacts of Senate
Bill 114":
.notdef The Source of Additional State Revenues is Critical
to Alaska's Economy
.notdef Senate Bill 114 Will Help Alaska's Economy
.notdef It will retain a higher portion of our oil
wealth in Alaska that would otherwise leave
Alaska.
.notdef This will add new money into Alaska's economy
that will have a multiplier impact.
.notdef Many Other Potential Sources of Revenue Will Hurt
Alaska's Economy
.notdef Income taxes and sales taxes primarily
reallocate money already in Alaska's economy.
.notdef This reallocation from the private to the
public sector will hurt Alaska's economy.
.notdef The Alaskan Economy Will be Much Better Off if the
State Funds its Budget Deficit by Retaining More of
our Oil Wealth in Alaska than by Taxing Alaskans.
2:51:46 PM
AT EASE
2:52:42 PM
RECONVENED
2:52:56 PM
MARK MYERS, FORMER COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES, INTERNATIONAL ENERGY AND NATURAL RESOURCES
CONSULTANT (via teleconference), provided his professional
background. He stated that the objective of his testimony
was to provide a balanced perspective.
2:57:34 PM
Mr. Myers continued with his testimony. He remarked that
the companies had created a system to show how they have
managed their net profits to the government. He warned
against modeling that had been paid for by vested
interests, and urged to look for biases in the approach.
3:02:22 PM
Mr. Myers continued with his testimony. He remarked that
there would be a significant decline of the use of oil
worldwide. There would be less future investment in Alaska.
He noted that the transformation would be more significant
than the shale revolution.
Mr. Myers continued with his testimony. He recommended that
SB 21 should not be credited for the new fields.
3:09:39 PM
Senator Bishop wondered about the WTI being folded into
Brent, and its impact on ANS prices. He also asked about
polymers.
Mr. Myers replied that Brent was a lighter crude oil than
ANS, and noted that Brent often had a higher value, so it
could have overall a positive impact. He stated that
polymers were helpful in water zones in the recovery of the
oil.
3:13:05 PM
Co-Chair Olson stated that public testimony would be
postponed to another day.
SB 114 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
3:13:39 PM
The meeting was adjourned at 3:13 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 114 Public Testimony Presentation.2023-04-28.pdf |
SFIN 5/1/2023 1:30:00 PM |
SB 114 |