Presentation to the Senate Finance Committee Department of Revenue Comments on CSSB 192

Presentation Organization DOR position on bill and individual components of bill Comparison to ACES and CS HB 110 (FIN) Suggested improvements to bill 2 Alaska Department of Revenue

Components of CSSB 192 Progressive surcharge Allowance for production increases Gross minimum tax Petroleum information system Decoupling some oil and gas 3 Alaska Department of Revenue

CS SB 192 Changes to progressive surcharge 1.Changes the progressivity rate over $30 / barrel production tax value from 0.4% to 0.35% 2.Changes the trigger point that slows the rate of progressivity to 0.1%, from $92.50 to $ / barrel production tax value 3.Changes the maximum production tax rate from 75% to 60% (would apply over $ / barrel production tax value) 4.Based on our Fall 2011 forecast, reduces revenue by $125 million in FY 13, $230 million in FY 14, and $200 million / year in FY Alaska Department of Revenue

Effective Production Tax Rates: ACES and CSSB 192 (progressivity only) 5 Alaska Department of Revenue Assumes FY 2012 Transport costs of $8.72/ bbl, Opex of $14.03 per taxable barrel, and Capex of $10.25 per taxable bbl.

Progressive Surcharge Changes do not do enough to provide a meaningful change that would influence investment decisions. The biggest benefit from this provision comes at very high prices, from the change in maximum tax rate. Suggestions: – Keep the lower maximum tax rate; consider a 50% cap on maximum rate. – Consider a bracketed approach, so that higher rates apply only to additional profit and not to the first dollar of profit. – Or, consider further reductions in slope of progressivity to provide a meaningful change. 6 Alaska Department of Revenue

Allowance for production increases Describe allowance Revenue impact Examples Does not create an incentive that would alter an investment decision Does increase complexity for DOR and taxpayers Suggestion: New field incentives, or provide allowance by means of a credit 7 Alaska Department of Revenue

CS SB 192 Allowance for production increases Allowance for each additional barrel sent down TAPS, over prior year’s level. Effectively reduces PTV by $10 per additional barrel, only for the base rate of 25% = $2.50 per additional barrel. Not part of production tax calculation; benefit is calculated and refunded by DOR. Based on our Fall 2011 forecast, reduces revenue by less than $25 million total for all companies, for all years. 8 Alaska Department of Revenue

Allowance for production increases: Example Major producer with 200,000 barrels per day Invests $1 billion per year to achieve modest decline rate in legacy fields Invests an additional $5 billion to develop several marginal fields and in-field projects in legacy fields Increases production 5% to 210,000 barrels per day, and maintains that level for several years. First year benefit is $9.1 million Benefit in following years is ZERO 9 Alaska Department of Revenue

Allowance for production increases Allowance does not provide a meaningful change that would influence investment decisions. A very small benefit, for only one year, with no benefit for maintaining production. Mechanism requires DOR to track and calculate the benefit. Suggestions: – Consider replacing this incentive with reduced tax rates for new fields or incentives for in-field development. – If this concept is furthered, use a credit as the mechanism as it would be easier to administer. – If this concept is furthered, acknowledge that maintaining production would be a significant accomplishment for some producers. 10 Alaska Department of Revenue

CS SB 192 Gross Minimum Tax 10% gross minimum tax for certain fields Applies only to units with over 1 billion barrels cumulative production and over 100,000 barrels per day in most recent year Effectively applies only to Prudhoe and Kuparuk “Hard floor” – credits cannot be used to reduce tax for these fields below 10% of gross value. Also changes community revenue sharing provisions Based on our Fall 2011 forecast, increases revenue by less than $25 million per year. At $40 / barrel, increases revenue by over $400 million per year. 11 Alaska Department of Revenue

Gross Minimum Tax vs. Status Quo 12 Alaska Department of Revenue

Community Revenue Sharing This bill impacts appropriations to the community revenue sharing fund Currently 20% of revenue from progressivity Would change to lesser of: – 20% of progressivity revenue, or – Difference between 25% of PTV from fields subject to 10% minimum tax, and minimum tax for those fields. Maintains existing limit on revenue sharing: $60 million or the amount that brings fund balance to $180 million. Increases complexity of the calculation, but not likely to materially impact the amount of revenue appropriated. If this change ever would make a difference it would be to the detriment of municipalities. 13 Alaska Department of Revenue

Gross Minimum Tax Provision will impact some companies at current prices. Provision creates a substantial tax increase at lower prices (<$60 / barrel). Creates a disincentive to investment in Prudhoe and Kuparuk, Alaska’s most important fields. – Including development drilling, expansions such as new pads and facilities, and heavy oil development Mechanism requires DOR to track and calculate the benefit. Suggestions: – Remove this provision as it represents a tax increase. – If this concept is furthered, allow credits to be applied against minimum tax so there is still some incentive to invest at lower prices. – If this concept is furthered, consider removing the change to community revenue sharing language. 14 Alaska Department of Revenue

CS SB 192 Petroleum Information System New information system to be implemented by AOGCC. Operational before January 1, Suggestions: – Consider need in context of DOR efforts to make more information available. – Defer to AOGCC on challenges with this provision. 15 Alaska Department of Revenue

CS SB 192 Decoupling Some Oil and Gas Identical to SB305 Creates 2 separate progressivity calculations: 1.Oil, Cook Inlet gas, and gas used in state 2.Gas other than Cook Inlet and used in state Allocates lease expenditures based on Gross Value Revenue impacts: – Less than $10 million / year prior to major gas sale – Could increase revenue by over $1 billion / year with major gas sale 16 Alaska Department of Revenue

Comparison to ACES and CS HB 110 (FIN) 17 Alaska Department of Revenue

Effective Production Tax Rates: ACES, CS SB 192, CS HB 110 (FIN) 18 Alaska Department of Revenue Assumes FY 2012 Transport costs of $8.72/ bbl, Opex of $14.03 per taxable barrel, and Capex of $10.25 per taxable bbl.

Effective Production Tax Rates: ACES, CS SB 192, CS HB 110 (FIN) Impact of 10% gross tax 19 Alaska Department of Revenue Assumes FY 2012 Transport costs of $8.72/ bbl, Opex of $14.03 per taxable barrel, and Capex of $10.25 per taxable bbl. Assumes that 80% of production is impacted by 10% gross minimum tax with no credits allowed against gross tax.

Marginal Government Take: ACES, CS SB 192, CS HB 110 (FIN) 20 Alaska Department of Revenue Assumes FY 2012 Transport costs of $8.72/ bbl, Opex of $14.03 per taxable barrel, and Capex of $10.25 per taxable bbl.

Share of Profit under ACES 21 Alaska Department of Revenue Profit defined as total gross value of all oil produced, less transportation costs and lease expenditures. Assumes FY 2012 Transport costs of $8.72/ bbl, Opex of $14.03 per taxable barrel, and Capex of $10.25 per taxable bbl.

Share of Profit under CSSB Alaska Department of Revenue Profit defined as total gross value of all oil produced, less transportation costs and lease expenditures. Assumes FY 2012 Transport costs of $8.72/ bbl, Opex of $14.03 per taxable barrel, and Capex of $10.25 per taxable bbl. Assumes that 80% of production is impacted by 10% gross minimum tax with no credits allowed against gross tax.

Share of Profit under CS HB 110 (FIN) 23 Alaska Department of Revenue Profit defined as total gross value of all oil produced, less transportation costs and lease expenditures. Assumes FY 2012 Transport costs of $8.72/ bbl, Opex of $14.03 per taxable barrel, and Capex of $10.25 per taxable bbl.

Suggested improvements Bracketed progressivity Lower cap on progressivity Reduced tax for new fields Increased credits for in-field drilling 24 Alaska Department of Revenue

Bracketed progressivity ACES and CSSB 192 apply progressive tax rate to the entire production tax value Tax on the first $1 of value can vary from 25% to 75% (ACES) or 60% (CSSB 192) Bracketed approach applies progressive tax only to the incremental value – Similar to how income tax brackets work… Other jurisdictions with price progressive systems use a bracketed approach Companies have committed $5 billion under this tax change 25 Alaska Department of Revenue

Bracketed progressivity 26 Alaska Department of Revenue Assumes FY 2012 Transport costs of $8.72/ bbl, Opex of $14.03 per taxable barrel, and Capex of $10.25 per taxable bbl.

Bracketed progressivity 27 Alaska Department of Revenue Assumes FY 2012 Transport costs of $8.72/ bbl, Opex of $14.03 per taxable barrel, and Capex of $10.25 per taxable bbl.

Lower cap on progressivity Part of a bracketed or non-bracketed approach Provides the “upside potential” companies need to make investments attractive at higher prices. 60% cap in CSSB 192 would only apply at prices over ~$240 / barrel 50% cap in CSSB 192 would apply at prices over ~$140 / barrel 28 Alaska Department of Revenue

Lower cap on progressivity 29 Alaska Department of Revenue Assumes FY 2012 Transport costs of $8.72/ bbl, Opex of $14.03 per taxable barrel, and Capex of $10.25 per taxable bbl.

Reduced tax for new fields Provide a lower tax rate to incentivize new fields over the life of the project. No fiscal impact for many years Would apply primarily to production that is not even in our current forecast – the state has “nothing to lose” 30 Alaska Department of Revenue

Reduced tax for new fields 31 Alaska Department of Revenue Example reduces all tax rates by 10% for “new fields” Assumes FY 2012 Transport costs of $8.72/ bbl, Opex of $14.03 per taxable barrel, and Capex of $10.25 per taxable bbl.

Increased credits for in-field drilling Existing 40% credit for well-related lease expenditures outside North Slope. Recommend extending credit to include North Slope. Makes in-field development work more attractive to companies. Improves economics of developing new North Slope fields, and increasing production from existing fields. 32 Alaska Department of Revenue

Increased credits for in-field drilling 33 Alaska Department of Revenue Example assumes that 50% of qualified capital expenditures qualify for higher 40% credit Assumes FY 2012 Transport costs of $8.72/ bbl, Opex of $14.03 per taxable barrel, and Capex of $10.25 per taxable bbl.

Summary: Effective Production Tax Rates: ACES, CS SB 192, CS SB 192 with recommended changes 34 Alaska Department of Revenue Assumes FY 2012 Transport costs of $8.72/ bbl, Opex of $14.03 per taxable barrel, and Capex of $10.25 per taxable bbl.

Questions ? 35 Alaska Department of Revenue