Legislature(2005 - 2006)SENATE FINANCE 532
01/18/2006 03:00 PM Senate RESOURCES
| Audio | Topic |
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| Profit Sharing Production Tax | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
JOINT MEETING
SENATE RESOURCES STANDING COMMITTEE
HOUSE RESOURCES STANDING COMMITTEE
January 18, 2006
3:07 p.m.
MEMBERS PRESENT
SENATE RESOURCES
Senator Thomas Wagoner, Chair
Senator Bert Stedman
Senator Kim Elton
Senator Albert Kookesh
Senator Ben Stevens
Senator Fred Dyson
HOUSE RESOURCES
Representative Jay Ramras, Co-Chair
Representative Ralph Samuels, Co-Chair
Representative Carl Gatto
Representative Paul Seaton
MEMBERS ABSENT
SENATE RESOURCES
Senator Ralph Seekins, Vice Chair
HOUSE RESOURCES
Representative Jim Elkins
Representative Gabrielle LeDoux
Representative Harry Crawford
Representative Mary Kapsner
OTHER LEGISLATORS PRESENT
Representative Berta Gardner
Representative Ethan Berkowitz
Representative Les Gara
Representative Mark Neuman
Representative Jim Holm
Representative Kurt Olson
Representative Mike Hawker
Representative Max Gruenberg.
Senator Gene Therriault
Senator Hollis French
Senator Gary Stevens
COMMITTEE CALENDAR
Overview: Profit Sharing Production Tax
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
Dr. Pedro van Muers, Economist
Consultant to Legislative Budget and Audit Committee
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Presented the overview
Mr. William Corbus, Commissioner
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Introduced Dr. van Muers
ACTION NARRATIVE
CHAIR THOMAS WAGONER called the joint meeting of the Senate and
House Resources Standing Committees to order at 3:17:30 PM.
Present were Representatives Carl Gatto, Paul Seaton, Ralph
Samuels, and Co-Chair Jay Ramras. Also present were Senators
Bert Stedman, Kim Elton, Albert Kookesh, and Chair Tom Wagoner.
^Profit Sharing Production Tax
CHAIR WAGONER announced the purpose for the meeting was to
receive a presentation by Dr. Pedro van Muers and the Governor's
administration on the subject of profit sharing oil-production
tax.
3:17:30 PM
MR. WILLIAM CORBUS, Commissioner, Department of Revenue, made
the introductions. Dr. Pedro van Muers was born in Holland and
holds a PhD in geology and economics. Dr. van Muers is a
petroleum economist who advises only governments. In addition to
advising Alaska on the pipeline and gas tax policy he is also
currently advising Kuwait and Algeria. Dr. van Muers has
appeared before the Alaska State Legislature many times.
DR. PEDRO VAN MUERS expressed pleasure to be involved in the
introductory briefing for the idea of the profit-sharing
production tax. It is an opportunity to provide feedback and
exchange ideas for the purpose of preparation for final
legislation.
3:21:09 PM
There are four main types of payments.
· Royalties
· Production tax (severance tax, ELF)
· Property tax
· State corporate income tax
Additionally there is federal corporate income tax. This
presentation is about proposed changes in the production tax.
The current production tax for oil is 12.25 percent net of
royalty for the first five years of production and 15 percent
thereafter. These percentages are multiplied by the Economic
Limit Factor (ELF), which is between zero and one. The ELF
lowers the production tax rate for smaller fields and fields
with low productivity wells.
3:23:33 PM
The ELF formula is immensely complex. It was developed in 1989
and has served the state well but no longer gives good results.
The ELF tax is extremely sensitive to the number of wells in the
field. A large number of wells bring a zero tax and a small
number of wells bring a higher tax.
3:25:57 PM
This formula leads to an incentive for oil companies to keep
every well producing and to build additional wells just to bring
the tax down.
3:28:30 PM
The ELF formula reflects economic conditions in 1989 when oil
prices were in the $14-$17 per barrel range and the values of
300 barrels of oil a day for well productivity and 150,000
barrels of oil a day for field productivity represented
reasonable economic benchmarks.
Also the formula did not contemplate the subsequent development
of a variety of satellite fields. While the production tax
stimulated the development of a variety of marginal fields, the
benchmarks are now outdated. Therefore, an overhaul of the
production tax is in the interest of the state.
The production tax has serious deficiencies.
· ELF is no longer rational in relation to well productivity
and field production
· ELF is not responding reasonably in the case of field
production decline
· ELF does not provide a reasonable balance under a range of
oil prices
· ELF does not provide a sufficient incentive for re-
investment
The tax has serious deficiencies at this point in time. A graph
showing the Kuparuk Oil Field, the second largest in North
America, shows that the ELF has already declined to zero and
will phase to zero in the next two years.
3:31:07 PM
ELF is declining faster than production in some fields. Kuparuk
is a world-class oil production field but the ELF has already
declined. Dr. van Muers insisted it was ridiculous to have a
world-class oil field that no longer pays a production tax. In
ten years, the only field that will be paying is the Prudhoe Bay
field. Now is the time to start changing the tax structure. Many
fields in the North Slope are in the decline mode. ELF does not
work well during the decline mode. If prices are high there is
no reasonable balance.
3:33:11 PM
[Representative Max Gruenberg and Senator Fred Dyson joined the
meeting.]
The Governor has proposed a profit-sharing production tax (PPT),
which will be a complete replacement of the current ELF-based
version of the production tax on oil and gas. This will be a law
of general application.
The reason for the profit-sharing system is because so many
other nations have been successful with it. Norway, for example
is a lot like Alaska in that they produce oil, forestry
products, and have a fisheries industry. On a per-capita basis
Norway produces roughly half of the amount of oil and gas as
Alaska but Norwegians are 50 percent richer.
3:35:42 PM
The big difference is that with the existing system wealth is
slipping through the fingers of Alaskans and Norwegians hold on
to it. Many nations have proved the effectiveness of the PPT.
The PPT is calculated as a tax rate multiplied by the corporate
cash flow from production in Alaska from oil and gas, with tax
credits to encourage investments. It is a consolidated tax at
the corporate level. The tax rate will apply to the total cash
flow of the company from oil and gas production. There will be
tax credits to encourage production.
3:37:40 PM
It is a fair system that has been implemented in many countries.
The PPT is calculated by taking the gross production revenues
based on wellhead prices, less the producers lease expenditures.
If there is a large amount of cash (high oil prices) then the
share for Alaska is large. If there is a low amount of cash,
then the share is low. It is a fair system for both parties.
[Senator Hollis French joined the meeting.]
3:41:24 PM
There will be tax credits to encourage investments based on a
percentage of the amount of the investment. Losses in any year
can be converted to tax credits by multiplying the amount of the
loss with the tax rate. Tax credits can be transferred and
traded. Explorers and independents will be able to monetize part
of their investments immediately, thereby strongly encouraging
exploration.
Another important purpose of the tax credits is to create a
progressive tax. Progressive taxes can be created in different
ways: tax credits, uplifts, IRR payout systems, sliding scales,
etc. The PPT is proposed to convert losses to tax credits, which
can be traded and transferred. This immensely increases the
attractiveness of new interest investing in Alaska.
3:44:37 PM
There will be features to provide a favorable tax structure for
explorers and independents and encourage exploration and new
entrants to Alaska and it is desirable to attract smaller oil
companies to the state. The easiest way to do that is through
tax credits.
The proposed PPT:
· Is based on actual economics and generates tax when there
are reasonable profits
· Provides a reasonable balance between the state and
producers over a wide range of oil prices
· Strongly encourages investment and re-investment in the
state
· Protects and encourages explorers and independents
The PPT tax rate and the tax credit rates will be proposed in
the near future. General principle is that the overall revenues
to the state must be significantly higher at today's prices. At
low prices, the state revenues will be less than the current
system, which provides a fair adjustment relative to market
conditions. For average prices, companies making low levels of
investment will pay significantly more than the current system,
while strong investors will pay an amount that could be less,
depending on the level of investment. If the price is low,
Alaska shares the burden, if the prices are high; Alaska shares
the benefits with the oil producers.
3:47:47 PM
Also important to note is that at average prices, companies that
make low investments will pay significantly more, but strong
investments may pay less. It depends on how much they invest.
The PPT is a profit-based system. There are two ways in which
profit-based systems are implemented around the world: Based on
taxation systems paid in cash, or based on production-sharing
systems. All the large oil companies work in countries that have
this profit-based system so they are familiar with them.
3:51:47 PM
The enhanced incentives to invest in exploration and development
through the PPT as well as the gas line investment will create a
new environment whereby Alaska will be considered by many
petroleum companies a new core area for petroleum investment and
increased oil and gas production.
3:53:59 PM
Dr. van Muers concluded his presentation by saying the current
ELF-based production tax is completely outdated. It is a
regressive tax and is no longer in the interest of Alaska.
Therefore the Governor proposes that Alaska adopt a profit-based
system that will provide on average for a higher government
take. It is a progressive tax with a strong incentive for
investment and exploration. It will also attract new entrants to
the state.
3:54:32 PM
SENATOR WAGONER advised Dr. van Muers that the total production
in Cook Inlet (16 platforms) is between 24,000 and 26,000
barrels per day. He asked how to model the PPT to encourage
additional work in the aging fields.
DR. VAN MUERS responded that only a few fields pay production
tax in Cook Inlet so the burden is modest. The PPT will not put
a stronger burden on the operators. The PPT will enable the
producers to take a new look at the oil and gas fields and
realize there are new opportunities for investment through using
tax credits.
REPRESENTATIVE GARDNER asked the moment it would have been
prudent to change the outdated ELF tax structure.
DR. VAN MUERS admitted when ELF was designed it was innovative.
It is most important to note that the current moment is the time
to change the tax system. The economic equation has changed so
dramatically that Alaska must move to the PPT structure.
3:59:44 PM
SENATOR STEDMAN asked Dr. van Muers whether the current splits
between the oil companies and the governments were particularly
dynamic to the point where governments were modifying the PPT.
DR. VAN MUERS responded there are two things going on around the
world. A large number of countries have relatively strong
progressive systems. For example Russia, Angola, Azerbaijan, and
areas where the major oil companies have major investments. What
is happening today as result of higher oil prices is the
progressive systems are now clicking in and the government take
is going up significantly. Many other countries today have
adjusted their systems in view of the higher oil prices. He said
everybody else is doing it and that it is the international way.
If Alaska were to put a similar system in place it would remain
competitive with the other countries.
4:02:46 PM
SENATOR DYSON asked whether the PPT would encourage major
companies to invest more here, and what would happen to state's
take if oil prices decrease dramatically.
DR. VAN MUERS said the major oil companies are significantly
investing in Alaska and they would increase that investment. If
oil prices went down, the PPT would be down to zero. Implicit in
the PPT is if there are no profits, there are no taxes.
4:05:30 PM
SENATOR DYSON asked whether it was fair to imply the major oil
companies would support the PPT.
DR. VAN MUERS admitted there was no agreement at this point in
time but discussions were being continued.
SENATOR ELTON asked whether the proposal was going to be
presented to the Legislature inside or outside the gas pipeline
contract.
DR. VAN MUERS explained it would be presented as a law of
general application.
4:08:26 PM
REPRESENTATIVE RAMRAS expressed concern over creating an
adversarial relationship with the oil companies. He said British
Petroleum has taken punitive measures in the past with ELF.
DR. VAN MUERS agreed. He said the PPT would encourage the
industry to invest in Alaska on a large scale. Competition for
investment dollars is very strong around the world.
4:12:20 PM
REPRESENTATIVE SEATON asked whether trade-able credits could be
applied against royalty payments, corporate tax, production tax,
and property tax.
DR. VAN MUERS said it could be applied to the production tax. It
would not be creditable against royalty or property tax. It
could become creditable to the state corporate income tax.
4:14:55 PM
REPRESENTATIVE SEATON asked whether the Norway 78 percent tax
rate corresponded with Britain's 50 percent tax rate.
DR. VAN MUERS said no. Each nation has its own government take.
Norway has been traditionally high and Britain has a low
government take. Each region is competitive to its own
environment.
4:17:26 PM
REPRESENTATIVE SEATON said Britain has recently increased its
take 40-50 percent. He asked whether that was a PPT or a total
government take.
DR. VAN MUERS said it is a total government take. Britain has a
low government take by international standards. They have a
corporate income tax of 30 percent and also a special surtax
that used to be 10 percent and is now 20 percent.
(Representative Ethan Berkowitz joined the meeting.)
SENATOR OLSON asked what system that Alberta (Canada) is using.
DR. VAN MUERS responded they are using many different systems
and at several stages. It is the same overall philosophy as the
PPT just engineered differently.
4:20:11 PM
REPRESENTATIVE NEUMAN asked at what point would the state break
even.
DR. VAN MUERS advised they were still working on the detail
figures but that it depends on a number of different indices and
assumptions.
4:22:18 PM
SENATOR FRENCH asked whether the administration was going to
file a bill.
DR. VAN MUERS replied yes.
4:24:55 PM
REPRESENTATIVE GARA asked the level at which Alaska would
envision lowering taxes for the oil companies.
DR. VAN MUERS advised he would have detailed studies to present
with the final proposal. The final figures are not fully
developed at this time.
There being no further business to come before the committee,
Chair Wagoner adjourned the meeting at 4:28:06 PM.
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