Legislature(2023 - 2024)BUTROVICH 205
03/31/2023 03:30 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Presentation(s): Cook Inlet Update | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 31, 2023
3:31 p.m.
MEMBERS PRESENT
Senator Click Bishop, Co-Chair
Senator Cathy Giessel, Co-Chair
Senator James Kaufman
Senator Forrest Dunbar
Senator Matt Claman
MEMBERS ABSENT
Senator Bill Wielechowski, Vice Chair
Senator Scott Kawasaki
COMMITTEE CALENDAR
PRESENTATION(S): COOK INLET UPDATE
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
DAN STICKEL, Chief Economist
Tax Division
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Delivered the Cook Inlet update.
ACTION NARRATIVE
3:31:58 PM
CO-CHAIR CATHY GIESSEL called the Senate Resources Standing
Committee meeting to order at 3:31 p.m. Present at the call to
order were Senators Dunbar, Claman, Kaufman, Co-Chair Bishop,
and Co-Chair Giessel.
^PRESENTATION(S): COOK INLET UPDATE
PRESENTATION(S): COOK INLET UPDATE
3:32:38 PM
CO-CHAIR GIESSEL announced the committee would hear an update on
oil and gas issues in Cook Inlet. She explained this was in
response to the questions about the tax structure that came up
during the February update from the Department of Natural
Resources (DNR) about the availability of gas in Cook Inlet.
She welcomed Dan Stickel to the witness table and noted that
Colleen Glover was available online to answer questions.
3:33:34 PM
DAN STICKEL, Chief Economist, Tax Division, Department of
Revenue, Juneau, Alaska, introduced himself and began the Cook
Inlet Update presentation on slide 2 that consisted of a list of
acronyms that are commonly used in oil and gas. He advanced to
slide 3 and reviewed the following agenda:
Oil and Gas Revenue Sources
o Petroleum Revenue by Land Type
o Production tax with January 1, 2022 changes
o FY 2021 FY 2025 Cook Inlet oil and gas revenues
Cook Inlet Oil and Gas Prices and Production
Non-North Slope Lease Expenditures
Non-North Slope Tax Credits
Cook Inlet Production Tax "Order of Operations"
Cook Inlet Distribution of Profits
Cook Inlet Incentives
3:35:42 PM
MR. STICKEL advanced to slide 4 and issued a disclaimer:
Disclaimer
Alaska's severance tax is one of the most complex
in the world and portions are subject to
interpretation and dispute
These numbers are rough approximations based on
public data, as presented in the Spring 2023
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
3:36:25 PM
MR. STICKEL advanced to slide 5 and described the four primary
sources of oil and gas revenue in Cook Inlet:
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% in Cook Inlet, 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 (so 2% combined total)
Production Tax based on "production tax value"
o Paid to State calculation to follow
3:38:08 PM
CO-CHAIR BISHOP wondered whether the 10 percent royalty rate was
negotiated pre-statehood.
MR. STICKEL explained that 10 percent was a weighted average
royalty rate in Cook Inlet for production on state land. He
offered to follow up with the details; some leases pay the full
12.5 percent while other leases pay a reduced royalty rate.
3:38:58 PM
CO-CHAIR GIESSEL asked how many companies working in Cook Inlet
might be subject to the corporate income tax.
MR. STICKEL replied that there was one major producer, several
smaller producers, and minor working interest owners. He said he
would follow up with details and the specific number.
3:39:32 PM
SENATOR CLAMAN asked whether the state property tax was based
solely on oil and gas properties.
MR. STICKEL replied that's correct; the state property tax on
oil and gas property is 20 mills.
SENATOR CLAMAN asked how a local or municipal tax fits with the
2 percent state tax.
MR. STICKEL explained that the local tax is allowed as a tax
credit against the state tax, so a company would pay the 20
mills or 2 percent regardless of what the local tax may be.
SENATOR CLAMAN posed the hypothetical example of a 5 percent
local tax, and asked whether the entire amount would go to the
local government.
MR. STICKEL replied that it was beyond his area of expertise,
but he believes that 5 percent would be above the limit for
local governments to tax.
SENATOR CLAMAN asked who gets the revenue that is higher than
two percent but below the limit.
MR. STICKEL offered his understanding that no local governments
were taxing above 20 mils or 2 percent, but if that were to
happen, it would offset the state tax entirely and the state
would not get any property tax. He noted that at least one
municipality was taxing the full 20 mills, and the state wasn't
receiving any property tax revenue from that municipality.
3:41:40 PM
SENATOR DUNBAR asked whether oil and gas properties subject to
this tax were limited to those directly related to production or
if it would include, for example, the Hilcorp building in
Anchorage.
MR. STICKEL replied that the property tax applies to property
that is directly associated with the exploration, production, or
transportation of oil and gas.
SENATOR DUNBAR observed that it would not apply to overhead and
administrative buildings.
MR. STICKEL agreed.
3:42:25 PM
MR. STICKEL turned to slide 6, "State Petroleum Revenue by Land
Type." The chart illustrates that the state's share of petroleum
revenue varies depending on the land type. Production tax,
property tax, and corporate income tax apply throughout the
state and within the three-mile limit offshore, regardless of
who owns the land. It's the royalty rate that is significantly
different depending on who owns the land. He described the
royalty rates in Cook Inlet.
Federal offshore areas: The federal royalty applies and 27
percent is shared back to the state.
State lands: The state receives the entire royalty.
Private land: The royalty is privately negotiated with the
landowner. The state does not receive a direct share of the
royalty revenue, but the state does levy a 5 percent gross tax
on the value of the private landowner's royalty interest as part
of the production tax.
3:44:05 PM
MR. STICKEL turned to slide 7, "Cook Inlet Production Tax:
Before and Starting January 1, 2022." He stated that prior to
January 1, 2022, both oil and gas were subject to a net profits
tax with a 35 percent tax on production tax value. There were no
per barrel taxable credits and no gross minimum tax floor. A
company that produced both oil and gas would allocate its lease
expenditures such that it would have separate tax calculations
for oil and gas.
On and after January 1, 2022, gas became subject to a 13 percent
tax on the gross value at the point of production (GVPP), and
all lease expenditures could be deducted against the net tax for
oil. This change was put in place in 2014 when Senate Bill 138
was enacted in anticipation of a major gas sale that has not
happened. Nevertheless, the tax switched to a gross tax in 2022.
In Cook Inlet there is a separate tax calculation for each field
and separate calculations for oil and gas within each field, so
Cook Inlet is ring-fenced. A tax ceiling applies for both oil
and gas. The tax ceiling for oil is $1/barrel. The ceiling for
gas varies by field. Fields in production before the petroleum
profits tax (PPT) was enacted in April, 2006 have a tax ceiling
based on the gas tax rate for that field in the 12 months prior
to enactment of the PPT. Those rates vary from zero to 24.7
cents per thousand cubic feet (mcf). Fields that came into
production post 4/1/2006 are taxed at the average rate in 2006,
which was 17.7 cents/mcf.
Over time and on average, production has shifted to the lower
production fields. Most recently, the weighted average tax
ceiling is a little under 14 cents/mcf.
Notably, most of the tax credits put in place in 2006, 2007, and
2010 were repealed by 2018. At this point there are few tax
credits, although a few companies are eligible for the small
producer credit that is phasing out.
3:47:39 PM
SENATOR KAUFMAN asked if he said that production had shifted to
the fields that are subject to the lower tax rate.
MR. STICKEL replied that's correct. He added that the average
tax ceiling in 2006 was 17.7 cents/mcf, and the average now is a
little less than 14 cents/mcf.
SENATOR KAUFMAN questioned whether there was cause and effect or
the result of the natural degradation of the higher cost fields.
MR. STICKEL said he didn't have the answer.
SENATOR CLAMAN asked when the law passed that enacted the 13
percent tax on the gross value at the point of production
(GVPP).
MR. STICKEL replied that it was Senate Bill 138 that passed in
2014.
SENATOR CLAMAN observed that it passed in 2014 to take effect
eight years later.
MR. STICKEL agreed and restated that part of the impetus was a
potential major gas sale.
3:49:41 PM
MR. STICKEL turned to the chart on slide 8, "Cook Inlet Oil and
Gas Revenue: Five-Year Comparison." He said DOR does not
separately track oil prices in Cook Inlet. Alaska North Slope
prices are used as a proxy. DNR produces the forecast for oil
production as part of its regular production forecast. For gas
prices, DOR publishes a prevailing value of gas prices in Cook
Inlet. This is based on publicly reported average information.
DOR does not have an exquisite gas price forecast for modeling
purposes. The assumption is that gas prices will increase over
time with inflation.
He relayed that the numbers for Cook Inlet gas production
reflect total gas offtakes. He noted that offtake is the gas
used in operations, and it represents a significant share of
production. It is not subject to either royalty or tax, but for
consistency it is reported by the Alaska Oil and Gas
Conservation Commission (AOGCC). There is also a separate
forecasted gas production that comes from DNR. The agency
evaluates the various producing properties and potential new
developments and those are the forecast numbers on the chart.
MR. STICKEL reviewed the state revenue coming directly from Cook
Inlet.
Property tax is fairly steady at $15 million.
Corporate income tax applies to select companies doing business
in Cook Inlet. This year the state expects to receive $10
million in corporate income tax, and it's expected to remain
about the same for the next two years.
Production tax has been a fairly small revenue stream for the
last several years. Companies have been able to apply credits to
offset nearly all their production tax. The exceptions are the
hazardous release surcharge and the tax on private landowner
royalty interests. Those credits will largely be used up this
year and DOR expects more revenue in FY2024 and FY2025.
Royalty is the largest stream of revenue that the state receives
from Cook Inlet oil and gas production. The chart shows $69
million in 2023 and $60 million in FY2024. These numbers
represent total royalty revenue, which includes the restricted
portion that goes to the permanent fund and school fund.
3:53:23 PM
SENATOR DUNBAR asked what caused the substantial increase in
corporate income tax from $4 million in FY2021 to $13 million in
FY2022.
MR. STICKEL answered that FY2021 reflects some of the negative
impacts of low oil prices and the Covid-19 pandemic in 2020. It
was a challenging year and some companies experienced losses.
SENATOR DUNBAR summarized that it wasn't a law change; a market
and price change caused the drop in FY2021. The expectation for
this year and the next two years is for that revenue to be low
double digit and high single digit.
MR. STICKEL clarified that there was a compounding federal
factor. The CARES Act provided that any corporation that had a
net operating loss in tax years 2018-2020 could carry that loss
back for up to five years and receive a refund on taxes already
paid.
MR. STICKEL added that the federal tax code is adopted by
reference as the starting point for the corporate income tax,
which is why the federal changes affect the state income tax.
3:55:38 PM
MR. STICKEL advanced to the line chart on slide 9, "Cook Inlet
Oil and Gas Prices." He restated that Cook Inlet oil prices are
not specifically forecast, but they do closely track North Slope
prices. The chart shows a ten-year history of DOR's Spring
forecasts for North Slope oil prices, which is used as a proxy
for Cook Inlet prices. The price of Cook Inlet gas has increased
steadily each year and the forecast for future prices applies
inflation, which continues the trend.
3:56:19 PM
MR. STICKEL advanced to slide 10, "Cook Inlet Oil and Gas
Production." He relayed that Cook Inlet is a mature basin. It
was Alaska's first oil and gas basin, and production began in
the 1950s. It peaked in the 1970s with a one-time high of over
23,000 bbl/day. For many years gas was exported from Cook Inlet,
but that has ceased. Discussions now center on potential
concerns about the gas supply in the basin. More recently Cook
Inlet has seen an increase in oil production. This coincided
with higher oil prices, generous tax credits, and Hilcorp's
entry into Cook Inlet. The latest DNR production forecast is for
some new projects leading to a fairly stable production outlook
for both oil and gas for the next decade.
CO-CHAIR GIESSEL commented on the uptick in production that
resulted from the Cook Inlet Recovery Act. She also noted that
the state was unable to pay the cash credits it gave out.
3:58:08 PM
MR. STICKEL said that's a good segue to slide 11, "Non-North
Slope Lease Expenditures." The line graph illustrates the idea
that high oil prices, low taxes, and generous subsidies result
in investment. This is what happened in the 2012-2015 timeframe.
The Cook Inlet Recovery Act put generous tax credits in place in
2020. This helped draw Hilcorp into Cook Inlet in 2012; the
chart shows the corresponding increase in capital spend in Cook
Inlet to $600-650 million/year. House Bill 247 repealed those
tax credits in 2016 and investment started to drop. By 2018,
most of those tax credits were repealed. He said it's difficult
to assign cause and effect of the tax incentives because the
repeal of the credits coincided with lower oil prices.
MR. STICKEL remarked that operating costs have remained fairly
stable over the last decade. The chart shows a drop in both
capital and operating costs in FY2021, which is attributed to
the Covid-19 pandemic. A small rebound in both capital and
operating expenditures is expected in FY2024 with a few new
projects, but the general expectation is for stable investment
at the lower levels seen in the last few years.
4:00:16 PM
SENATOR KAUFMAN referenced the previous slide and asked if it
would be safe to assume that the policy creating a beneficial
environment is linked to, if not proof of, the change in the
production trend line.
MR. STICKEL said the incentives in the Cook Inlet Recovery Act
certainly were effective in increasing investment, but it's more
difficult to say what investment would have been absent the
credits because oil prices also increased.
4:01:42 PM
MR. STICKEL advanced to slide 12, "Non-North Slope Tax Credits."
He explained that the "non-North Slope" category honors
confidentiality by aggregating Cook Inlet information and a
small amount of the credits or spending for the Middle Earth
area. The bar chart shows a ten-year history and ten-year
forecast. The orange bars reflect credits against liability.
These include capital expenditure credits, net operating loss
credits, well lease expenditure credits (all of which have been
repealed), and the small producer credit that is phasing out
through 2025.
The blue bars reflect credits that are available for purchase.
These include capital expenditure credits, net operating loss
credits, well lease expenditure credits, exploration credits,
gas storage facility credits, LNG storage facility credits, and
refinery investment credits under the corporate income tax code.
Those credits have been repealed or sunset, but some were still
available for purchase. DOR is forecasting a $312 million
appropriation in FY2023 for tax credits for purchase. This
represents a DOR Spring forecast estimate of $252 million, which
is based on 10 percent of the estimate for production tax levied
before credits for the entire state. There is also a $60 million
supplemental appropriation in the FY2023 budget. He noted that
the blue bar for FY2023 shows the estimated $166 million in non-
North Slope credits. DOR estimates a remaining $56 million in
credits statewide in FY2024, $47 million of which is non-North
Slope.
4:04:31 PM
MR. STICKEL explained that slides 13 and 14 address the
committee's request to provide information about the non-North
Slope tax credits and how effective the purchased tax credits
have been. He spoke to the following:
Non-North Slope Tax Credits: Key Statistics
FY 2007 through FY 2022, $0.1 billion of credits
applied against production tax liabilities
FY 2007 through CY 2022, $1.6 billion of credits
earned and eligible for state purchase
o $1.4 billion purchased through end of CY 2022
o $88 million transferred to other companies
though end of CY 2022
o $149 million outstanding as of end of CY 2022
Legislative action has eliminated most Cook Inlet
credits:
o Qualified Capital Expenditure Credit, Well
Lease Expenditure Credit, Net Operating Loss
Credit all repealed January 1, 2018
o Eligibility for In-State Refinery and LNG
Storage Facility Credits ended January 1, 2020
o Small Producer Credit remains: applicable to
tax liability only, phasing out completely by
2024
Non-North Slope Tax Credits: Correlation with Company
Activity
For the $1.4 billion of credits purchased through
CY 2022:
o Non-North Slope lease expenditures for
companies receiving the credits totaled $5.7
billion through CY 2022
square4 Credit support averaged 24% of lease
expenditures
o $1.1 billion to companies with production by
the end of CY 2022 (includes production by
acquiring companies)
square4 Total Non-North Slope production through CY
2022 of 180 million BOE
square4 Credits to producers equate to $6.14/ BOE or
$1.02/ mcf
o $261 million to companies without regular
production
Credits per unit of production and as a share of
lease expenditures will decrease over time due to
additional production and spending
4:07:44 PM
MR. STICKEL stated that slides 15-17 are also in response to a
committee request. That was to provide an illustration of the
production tax calculation for Cook Inlet, similar to the order
of operations that DOR often has presented in the past for the
North Slope. The calculations are based on the forecast data for
FY2024. Slide 15 looks at the oil tax calculation, slide 16
looks at the gas tax calculation, and slide 17 looks at the
final tax after credits.
Speaking to the chart on slide 15, he relayed that DOR is
forecasting about 8,000 bbl/day of oil production in Cook Inlet
with an average wellhead price of $63.39/bbl. The equivalent
value is about $0.5 million/day or about $185 million/year. The
average royalty rate in Cook Inlet is about 10 percent. This
leaves $166 million gross value at the point of production
(GVPP), which is the basis for the tax calculation. Because all
lease expenditures in Cook Inlet can be deducted against the oil
tax calculation, the chart shows that a company is able to apply
lease expenditures and bring their production tax value to zero.
He noted that the $250 million in non-deductible lease
expenditures are essentially foregone in this aggregate
calculation. There is no tax credit for those expenditures and
no provision to carry forward annual losses. The 35 percent net
profits tax rate applies to the production tax value, but the
PTV is zero so the result is zero. The tax ceiling on oil is
$1.00/bbl of taxable production; for 2,615 thousand barrels, the
tax ceiling calculates to $2.6 million. The lesser of the
production tax before ceiling and the ceiling tax is used, so
the oil production tax in Cook Inlet is essentially zero.
4:10:13 PM
SENATOR CLAMAN asked how long the production tax in Cook Inlet
had been essentially zero.
MR. STICKEL replied that the tax ceiling was zero from 2006
until the legislature raised it with House Bill 247 in 2016, so
the tax ceiling went to $1.00/bbl in 2017. With the 2022 tax
changes allowing all lease expenditures against oil, the
effective tax on oil is zero.
4:11:19 PM
MR. STICKEL stated that slide 16 looks at the Cook Inlet
production tax calculation for gas. For FY2024 DOR is
forecasting a price of $8.06 per thousand cubic feet (mcf); 196
million cubic feet per day (mmcf) of production; a daily
production value of $1.6 million; and an annual value of $577
million. Gas used in operations is not subject to tax or royalty
so those amounts are deducted from the calculation. He described
the calculation for tax purposes. The gross value at the point
of production (GVPP) is $424 million; the 13 percent tax rate is
applied; the production tax value before the ceiling is $55
million; the weighted average tax ceiling is $7.2 million; and
the $7.2 million is the gas production tax.
SENATOR DUNBAR referenced slide 15 and made the observation it
can't be a coincidence that the deductible operating and capital
expenditures exactly match the gross value at the point of
production. He asked, "Would they actually be higher but for
something?"
MR. STICKEL replied that the aggregate calculation assumed that
the producer would offset their entire GVPP with the lease
expenditures of $166 million. This does not include the $250
million of additional non-deductible lease expenditures that are
essentially foregone in the tax calculation. So the total lease
expenditures DOR is forecasting is the sum of the $250 million
and $165 million which is a little over $400 million.
SENATOR DUNBAR asked whether the two-thirds/one-third split for
operating and capital was for the sake of convenience or the
actual breakdown.
MR. STICKEL replied that is the actual ratio; slide 15 prorates
the total operating and total capital to $166 million.
4:14:14 PM
MR. STICKEL stated that slide 17 looks at the total oil and gas
taxes in Cook Inlet. For FY2024 DOR expects a total tax value
before credits of $7.2 million; $2.4 million of tax credits
against liability for small producers; other adjustments such as
the hazardous release surcharge and the tax on private landowner
royalty interests add $0.2 million; so the total production tax
paid to the state is forecast to be $5 million in FY2024.
MR. STICKEL restated that this was an aggregate calculation for
illustrative purposes. The actual taxes in Cook Inlet are levied
separately for each field. A full ringfencing is in place in
Cook Inlet so some companies would have higher or lower taxes
than the aggregated estimate.
4:15:34 PM
CO-CHAIR GIESSEL asked how it happened that Cook Inlet was
excluded from the legislation going through the process that
levies an income tax on S Corporations.
MR. STICKEL noted that she was referring to SB 114, which
extends the corporate income tax to non-C corporations or pass-
through entities statewide. He said it would affect production
on the North Slope, Cook Inlet, and everywhere else in the
state.
CO-CHAIR GIESSEL asked whether the bill had an income threshold.
MR. STICKEL said that's correct. SB 114 proposes a 9.4 percent
tax for companies that have income greater than $4 million.
4:17:25 PM
SENATOR DUNBAR returned to the chart on slide 10 and asked
whether DOR's forecast of substantially lower oil and gas
production in the coming years was based on the current tax
structure.
MR. STICKEL replied that's correct.
4:18:02 PM
MR. STICKEL advanced to slide 18 and relayed that the committee
previously asked DOR to look at how profits in Cook Inlet are
distributed. He described the assumptions that were used in the
analysis.
Cook Inlet Distribution of Profits
Based on Spring 2023 Forecast for FY 2024
Assumes "typical" barrel of oil, mcf of gas, or
BOE of production
Assumes a single taxpayer on state land, 12.5%
royalty
Assumes weighted average tax ceilings for gas
(based on taxable volumes)
Assumes $2.00 per BOE property tax
Assumes 4.25% effective state corporate income
tax, 21% federal corporate income tax
4.25% is based on historical analysis for
companies subject to state corporate income tax
4:19:08 PM
MR. STICKEL advanced to slide 19, "Cook Inlet Distribution of
Profits: Oil (per barrel)." He noted that DOR assumed a wellhead
value of $63.39/bbl and costs of $30.79/barrel, which leaves a
profit of $32.60/bbl/oil/Cook Inlet.
Cook Inlet Distribution of Profits: Oil (per barrel)
similar With state corporate income tax:
similar The state receives about 30 percent of the profit.
similar The municipal property tax is about 3 percent.
similar The federal corporate income tax is about 14 percent.
similar The producer receives a little more than $17.00/bbl or 53
percent of the profit.
similar Without the state corporate income tax:
similar The state receives about 27 percent of the profit.
similar The producer share increases to 55 percent.
similar The assumption for the federal corporate income tax rate
was 21 percent.
similar Using a higher federal income rate would reflect a
more individual income tax rate for a pass-through
entity.
4:20:26 PM
SENATOR KAUFMAN wondered what the distribution of profits would
look like if renewable energy were part of the comparison. He
opined that renewables would return a thin profit to the state.
He asked Mr. Stickel for his perspective since there were calls
for transitioning to 80 percent renewables.
MR. STICKEL advised that state royalty would not apply to most
renewables, although geothermal may be an exception. Renewable
energy projects would not be subject to a production tax or
state property taxes, but municipal property tax might apply and
the state potentially could receive state corporate income tax.
Federal taxes would apply.
SENATOR KAUFMAN commented that it should be an eye opener for
those who are "chomping at the bit" to pursue the transition to
renewables. He opined that this points to the need to find the
sweet spot for taxation versus production.
4:23:04 PM
MR. STICKEL advanced to slide 20 that looks at the distribution
of profits in Cook Inlet for gas with and without state
corporate income tax. He advised that a difference from slide 19
is the lease expenditures share for gas is much higher, so there
is less profit per unit of gas production than per unit of oil
production. He said DOR assumed an average wellhead value of
$8.06/mcf and costs of $5.12, which leaves $2.94/mcf of profit
to be shared between the different entities.
Cook Inlet Distribution of Profits: Gas (per mcf)
similar With state corporate income tax
similar The state receives about 46 percent of the profit.
similar The municipal property tax is about 6 percent.
similar The federal corporate income tax is 10 percent.
similar The producer receives $1.12 or 38 percent of the profit.
similar Without state corporate income tax
similar The state receives about 44 percent of the profit.
similar The producer share increases to about 40 percent.
4:24:31 PM
MR. STICKEL stated that slide 21 combines the last two slides
and looks at all production in Cook Inlet on a barrel of oil
equivalent (BOE) basis. The equivalent assumes that one barrel
of oil is the same as 6,000 cubic feet of gas (mcf).
Cook Inlet Distribution of Profits: Oil and Gas (per BOE)
similar With state corporate income tax
similar The state receives about 40 percent of the profit.
similar The producer receives about 43 percent of the profit.
similar Without state corporate income tax
similar The state receives 38 percent of the profit.
similar The producer share 45 percent of the profit.
SENATOR DUNBAR commented that the difference between an entity
paying corporate income tax and not paying corporate income tax
is a shift of about 2 percentage points from the producer to the
state. His perspective was that the producer was still left with
a fairly healthy profit margin. He asked if that's what the
graphic was intended to illustrate.
MR. STICKEL said that's correct. He restated that this was an
aggregate calculation; it does not show that the economics for
each field and each producer is slightly different.
CO-CHAIR GIESSEL said that's an important distinction.
4:26:30 PM
MR. STICKEL explained that slides 22-24 are in response to the
committee's request to provide information about Cook Inlet
incentives. He spoke to the following:
Cook Inlet Incentives: Recent History
2003 Exploration tax credit, 20-40% of
expenditures
2006 PPT enacted, Cook Inlet tax ceilings
enacted, limited state purchase of tax credits
enacted
2007 ACES enacted, NOL credit rate increased
2008 exploration credit rate increased,
expanded purchase of tax credits
2010 Cook Inlet Recovery Act. Jack-up rig
credit, gas storage facility credit, well lease
expenditure credit, removed reinvestment
requirement for tax credit purchases
2013 SB21 enacted, NOL credit rate temporarily
increased
2016 HB 247, Cook Inlet oil tax ceiling
increased, multiple credits sunset, limits to
cash purchase of credits
2017 HB 111, eliminated credits available for
cash purchase
4:28:05 PM
CO-CHAIR BISHOP pointed out that House Bill 247 that passed in
2016 and House Bill 111 that passed in 2017 both changed the tax
policy that was implemented with Senate Bill 21 that was
introduced in 2013.
CO-CHAIR GIESSEL observed that the legislation passed in 2016
and 2017 were specifically for Cook Inlet.
MR. STICKEL agreed that House Bill 247 and House Bill 111 both
were modifications to Senate Bill 21.
4:28:59 PM
MR. STICKEL turned to slide 23 and reviewed the current Cook
Inlet incentives.
Cook Inlet Incentives: Current
All lease expenditures can apply against oil tax
calculation for fields with both oil and gas
Tax ceilings in place for oil and gas
Low effective tax rates and Government Take
relative to North Slope
No tax credits currently available (small
producer credit phasing out)
Corporate tax does not apply to all companies
Royalty relief may be available DNR
4:30:06 PM
MR. STICKEL advanced to slide 24 and reviewed the list of
potential options for future Cook Inlet energy supply
incentives. He clarified that this was not an exhaustive list
and it was not a recommendation or endorsement from the
administration. He also noted that it would be important to
understand what would influence the decision-making of the one
major producer in Cook Inlet.
Cook Inlet Energy Supply Incentives: Potential Options
Tax changes
Tax or royalty holiday for new gas production
or all gas production
Changes to ring fencing of lease expenditure
deductions
Lower tax ceilings for gas
Per-mcf tax credit
Reinstitute some prior tax credits
Funding or loan guarantees for developing current
gas discoveries
Incentives or funding for gas pipeline from North
Slope to Interior and South Central Alaska (AKLNG
or ASAP)
Incentives, funding, or loan guarantees for
renewable energy projects
Could reduce demand for gas
Utility-scale or residential/commercial
Incentives, funding or loan guarantees for gas
imports (i.e. Marathon LNG)
SENATOR DUNBAR remarked that one challenge in Cook Inlet is that
the market is too small to justify the investment. He asked if
DOR had considered that increasing gas consumption might
stimulate investment, and that this could be done by reopening
exports and/or the Donlin Mine.
MR. STICKEL offered his perspective that it was a chicken and
egg issue; it may be challenging to commit to an additional
major source of supply, whatever the source, without knowing
that the demand would be there. Similarly, it's difficult to
commit to the demand side without knowing that the supply would
be available. He said there could potentially be a state role in
helping bring the market together.
4:33:53 PM
CO-CHAIR GIESSEL observed that the notion of loan guarantees
makes her think about companies like Blue Crest. They know
there's an offshore gas supply but they don't have the ability
financially to bring it into production.
4:34:12 PM
CO-CHAIR BISHOP commented that it's all a policy call, but the
legislature has to look at the goal for Cook Inlet and weigh the
cost and benefit of any proposal.
SENATOR KAUFMAN observed that the goal is to find the sweet spot
between the revenue and production curves, and the devil is in
the details.
CO-CHAIR GIESSEL commented that it was a difficult process to
repeal the cash credits because some people were counting on
them and went bankrupt.
She thanked Mr. Stickel for the presentation and the additional
documents he provided.
4:36:34 PM
There being no further business to come before the committee,
Co-Chair Giessel adjourned the Senate Resources Standing
Committee meeting at 4:36 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Cook Inlet Update SRES 03.31.23.pdf |
SRES 3/31/2023 3:30:00 PM |
|
| DOR Response to SRES 03.30.23.pdf |
SRES 3/31/2023 3:30:00 PM |
|
| Willow Project Fiscal Analysis 2023.03.23 revision.pdf |
SRES 3/31/2023 3:30:00 PM |
|
| DOR Response to SRES Cook Inlet Update 03.31.23.pdf |
SRES 3/31/2023 3:30:00 PM |
|
| Attachment 1 - CI Oil Monthly Weighted Average Royalty.pdf |
SRES 3/31/2023 3:30:00 PM |
|
| Attachment 2 - CI Gas Monthly Weighted Average Royalty.pdf |
SRES 3/31/2023 3:30:00 PM |