Contents
Alaska Production Tax Reform−Will it Achieve its Goals?
Biographies ................................................................................................. A

Louisiana W. Cutler−Partner, K&L Gates, Anchorage,
Moderator

Barry Pulliam−Managing Director, Econ One, Speaker
Supplemental Information ........................................................................... B

Comparison of Alaska’s Tax System Over Time, Econ One
Research

Materials Related to SB21
K&L Gates LLP
Alaska Production
Tax Reform
Presented by:
Barry Pulliam
Managing Director
Econ One Research, Inc.
2nd Annual K&L Gates
Alaska Oil and Gas Conference
Anchorage, Alaska
July 10, 2013
Econ One
•
Economic Research and Consulting Firm
•
Three Decades of Experience Working
in Alaska
•
Advised Legislature and Administration
on Gas Development and Tax Issues
Since 2005
•
Consulted with Numerous State and
Federal Agencies as Well as Industry
•
Barry Pulliam is the Managing Director
of the Firm’s Energy Practice
Who We Are
1
Topics
•
Fiscal Concepts 101
•
Alaska’s Tax System Over Time
•
It’s The (Lack of) Production, Stupid
•
The Case for ACES
•
The Case for Reform: SB21
•
SB21: Giveaway or Alaska’s Hope?
Fiscal Concepts 101
Disposable Income and Government Take
$100 / Barrel
Disposable
Income
$70 / Barrel
Production
Costs
$30 / Barrel
•
“Disposable Income” is Divided
Among Interest Owners:
Producers, Royalty Owners
and Taxing Authorities
•
Portion of Income that
Flows to Royalty Owners
and Taxing Authorities is
“Government Take”
2
Fiscal Concepts 101
Elements of Government Take
Production
Tax
35%
Royalties
15%
Federal
Income Tax
State Income Tax
•
Production Tax is Largest
Component of Government
Take in Alaska
•
Government Take: 70%
•
Producer Take: 30%
15%
3%
Property Tax
2%
Profit
30%
Assumption: Legacy fields (Prudhoe Bay / Kuparuk) using 2012 volumes and costs, a 12.5% royalty rate and $100 wellhead value.
Alaska’s Tax System Over Time
Key Elements of Alaska’s Production Tax Systems
Gross Tax System
PPT / ACES *
SB 21
Effective Date
1977
2006 / 2007
2014
Base Tax Rate
15% on Gross
Modified by ELF
25% on Net
35% on Net
Progressive Tax
None
0.4% Per $1 Above $30 Net;
0.1% Per $1 Above $92.50 Net
None
Maximum Statutory Tax Rate
15%
75%
35%
Credits
None
20% of Qualified
Capital Expenditure
Up to $8 Per Barrel
Produced
Gross Revenue Exclusion (GRE)
Rate on “New Oil”
N/A
N/A
20%: 12.5% Royalty
30%: >12.5% Royalty
State Purchase of Losses Prior to Production
No
Yes
Yes
$0.80 Per Barrel
4% of Gross
@ WC ANS > $25
4% of Gross
@ WC ANS > $25
Credits Reduce Minimum Tax
N/A
Yes
GRE Barrels Only
Small Producer Credit
N/A
$12 Million
Regressive
Highly
Progressive
Minimum Tax
Government Take
$12 Million
Moderately
Progressive
* Alaska changed to a net tax system in 2006 (PPT). The rates were modified in 2007 (ACES).
Rates shown in this column are those that went into effect in 2007 under ACES.
3
Alaska’s Tax System Over Time
Total Production Taxes as Percent of Oil Value
35%
$120
Tax as % of Gross Value
30%
100
Wellhead Value
25%
20%
60
15%
(Dollars Per Barrel)
(Percent)
80
40
10%
20
5%
0%
0
FY2002
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
FY2011
FY2012
Source: DOR Revenue Sourcebook for each year.
Alaska’s Tax System Over Time
Average Alaska Production Tax Rates v. Highest Tax Rates from Other Major Producing States
35%
(Percent of Gross Wellhead Value)
30%
25%
20%
15%
Louisiana
North Dakota
10%
Oklahoma
Wyoming
Texas
5%
0%
FY2002
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
FY2011
FY2012
Note: There are no production taxes in California and on Federal properties offshore Gulf of Mexico.
4
It’s the (Lack of) Production, Stupid
Alaska North Slope Production Over Time: 1977 - 2012
2,000
North Slope Decline Rate:
(Thousand Barrels Per Day)
1,600
From Peak:
5.4%
Last 10 Years:
6.5%
1,200
800
Percent of
2012
Production
400
Other North Slope
Colville River Unit
Kuparuk River Unit
Prudhoe Bay Unit
12%
14%
22%
54%
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0
Source: AOGCC.
It’s the (Lack of) Production, Stupid
Alaska Contains an Estimated 40 Billion Barrels of Economic Resources Yet to be Produced
Conventional
Resources - Discovered
(5.6 BBO est.)
State
(3.0 BBO est.)
Conventional Resources - Undiscovered
NPRA
Offshore
(0.5 BBO est.)
(15.7 BBO est.)
ANWR
(9.9 BBO est.)
Historical: Produced to Date
(16.2 BBO)
Unconventional
Resources
(5.5 BBO est.)
5
It’s the (Lack of) Production, Stupid
There are Approximately 16 Billion Barrels Yet to be Produced from State Lands and NPRA
Total Conventional
~ 9.2 BBO
~ 5.6 BBO
~ 5.5 BBO
• Similar to Volume of
Oil that has Already
Been Produced
• However, Remaining Oil
is More Challenged
~ 3.5 BBO
• Most of Undiscovered
Resource is in Small
(Less Economic) Fields
(e.g., 50 MMBO Range)
Conventional
Discovered
State / NPRA
Conventional
Undiscovered
Unconventional
Resources
It’s the (Lack of) Production, Stupid
The Challenge: How to Stem the Production Decline
600
(Thousand Barrels Per Day)
500
0.8 BBO
0% Decline
(6.0 BBO)
1.2 BBO
1% Decline
(5.2 BBO)
400
300
3% Decline
(4.0 BBO)
Current Production: ~ 550 MBD
or 200 MMB / Year
200
1.2 BBO
Historic: 6% Decline
(2.8 BBO)
100
Economic to Ship Through TAPS (?)
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
6
It’s the (Lack of) Production, Stupid
Increased Production Requires Additional Investment
600
0% Decline
(Thousand Barrels Per Day)
500
$20 Billion
400
1% Decline
$30 Billion
300
3% Decline
$30 Billion
200
6% Decline
100
Economic to Ship Through TAPS (?)
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Assumes $25/Barrel finding and development costs in $2012.
Investment
It’s the (Lack of) Production, Stupid
Alaska North Slope Investment v. Rest of World
Alaska North Slope
U.S. Spending
Worldwide Spending
WC ANS Price
500
450
$120
•
350
•
300
100
North Slope Grew by
~30% While Rest of World
Grew by Over 100%
80
250
60
200
40
150
100
(Dollars Per Barrel)
(Index 2003 = 100)
400
North Slope Investment
Growth Has Lagged Rest
of World Since 2007
20
50
0
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
* North Slope based on tax return information; U.S. based on top 50 public companies;
worldwide based on top 75 public companies
7
The Case for ACES
Key Arguments
•
North Slope and Alaska Very Attractive
Investment Opportunity
(e.g., Rule of Law; Geology)
•
Tax Rate Falling Under ELF, Even as Oil
Prices Rise
•
Alaskans Should Receive “Fair Share” of
Oil Value, Particularly When Prices are High
•
Move to Net System is More Efficient;
Better Aligns Producer and State
•
System was Designed to Encourage
Investment with Combination of Credits and
Ability to “Buy-Down” the Progressive Tax
Rate Through Additional Capital Spending
•
“Rewards” Producers who Reinvest in Alaska
•
State Provides 20% Credit for Capital
Spending
•
Higher and Progressive Tax Rate
Substantially Increases Tax on Producers,
Particularly at High Prices
•
But…Producers That (Re)Invest can
Reduce “Buy-Down” Tax Rate on
Their Current Production
•
Very Attractive Returns (IRR) When Viewed
on “Integrated” Basis
The Case for ACES
Examining the Incentive
to Invest
8
The Case for ACES
The “Buy-Down” Effect: How It Works
Costs
$100/Barrel
Taxable Value
$100/Barrel
35%
41% Tax
$70/Barrel
37% Tax
$60/Barrel
Cost of New Project
Per Barrel of Current
Production
$10/Barrel
$30/Barrel
Costs for
Current Production
$30/Barrel
The Case for ACES
Higher Taxes Provide Better Returns and Encourage Investment?
60%
IRR for New Investment Grows as Tax Rate Increases
(Percent)
50%
40%
30%
20%
10%
0%
NPV-12 ($ Million)
25% Net Tax
$9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
25% Net Tax
2% Progressivity
25% Net Tax
4% Progressivity
25% Net Tax
6% Progressivity
But, Taxes Increase and NPV of Producer’s Oil Falls
Producer NPV
Severance Tax NPV
Assumption: Incumbent Producer with ongoing production equal to 25% of Prudhoe Bay / Kuparuk investing in new 50 MB project
with development cost of $20 / barrel, royalty of 12.5% and expected wellhead ANS value of $100.
9
The Case for
Reform: SB21
•
Alaska is Attractive, but Opportunities
Outside the State Have Changed with
Higher Prices and Newer Technologies
•
Alaska Investment Climate Perceived
Very Poorly by Industry in General
•
Economically Unattractive for New
Participants, Despite Credits
•
Rates and Government Takes Too High
Under ACES, Particularly at Higher Prices
•
North Slope Investment Not as Robust
as it Should be Given Higher Prices
Key Arguments
The Case for Reform: SB21
Government Takes: $100 Wellhead Value
ACES (New Development)
ACES (Existing Producer)
SB21 (Existing Producer)
Average All
Average OECD
SB21 (New Development)
Non-OECD
OECD
ACES (Alaska)
SB21 (Alaska)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Source: Non-Alaska: PFC Energy; Averages from Econ One Presentation, Analysis of Alaska’s Tax System, North Slope
Investment and The Administration’s Proposal SB21 / SRES CS SB21, March 1, 2013.
Alaska: Econ One Presentation, Analysis of HCS CS SB21 (FIN) for House Finance Committee, April 11, 2013.
10
The Case for Reform: SB21
Alaska Production Tax Rates v. Other Large Oil-Producing States
35%
30%
(Percent)
25%
20%
15%
10%
5%
0%
ACES
SB21
LA
ND
Alaska
OK
NM
WY
CO
Highest Tax Rate, Other Large Oil-Producing States
TX
Note: California and Federal Offshore properties are not subject to a production tax.
Source: Econ One Presentation, Analysis of HCS CS SB21 (FIN) for House Finance Committee, April 11, 2013.
SB21: Giveaway or Alaska’s Hope?
The Cost of the Tax Cut if No Additional Production: $0.6 - $0.8 Billion Per Year
$6.0
$5.2
5.0
(Billion $2012 Dollars)
$4.4
4.0
$4.0
$3.4
3.0
2.0
1.0
0.0
ACES
SB 21
If 6% Base Decline
(Historical Average)
ACES
SB 21
If 3% Base Decline
Source: Econ One Presentation, Analysis of HCS CS SB21 (FIN) for House Finance Committee, April 11, 2013.
11
SB21: Giveaway or Alaska’s Hope?
But What if Tax Change Stimulates Investment?
$7.0
$6.1
6.0
$5.4
$6.1
$5.2
$5.4
5.0
(Billion $2012 Dollars)
$4.4
4.0
$4.0
3.0
2.0
1.0
0.0
ACES at 6%
SB 21 at 3%
SB 21 at 1%
If 6% Base Decline
(Historical Average)
SB 21 at 0%
ACES at 3%
SB 21 at 1%
If 3% Base Decline
SB 21 at 0%
Source: Econ One Presentation, Analysis of HCS CS SB21 (FIN) for House Finance Committee, April 11, 2013.
SB21: Giveaway or Alaska’s Hope?
New Production and Investment Needed to “Breakeven” with ACES
30
$700
Annual Production
Annual Investment
•
Requires Approximately
a Mustang-Sized Field
Every 2 Years
•
Approximately 570-750
Million Barrels of
Additional Production
Over 30 Years
•
Less Than 30% of
Undiscovered
Conventional Oil on
State Lands
600
25
(Million Dollars Per Year)
(Million Barrels Per Year)
500
20
15
10
5
400
300
200
100
0
0
6% Base
Decline
3% Base
Decline
6% Base
Decline
3% Base
Decline
Note: Production Over 30 Years.
Source: Econ One Presentation, Analysis of HCS CS SB21 (FIN) for House Finance Committee, April 11, 2013.
12
•
Studies Indicate that Production from
Wells Already Drilled Not Sensitive to
Tax Changes
SB21: Giveaway or
Alaska’s Hope?
•
But Investment in New Drilling Activity
is Very Sensitive to Taxes
What About Studies that
Claim Production Not
Sensitive to Tax Rates
(Gerking, et al.)?
•
Wyoming Analysis: 5 Percentage Points
(10% to 5%) in Tax Rate Resulted in a
Greater Than 20% Change in Drilling
•
Sustaining Alaska Production Depends
on Additional Drilling
•
Alaska’s Tax Rate Changing by
Approximately 10 Percentage Points
•
SB21: Giveaway or
Alaska’s Hope?
Prices were Much Lower During
ELF Period
•
Experience Under ELF:
No Additional Investment?
Expectation of Future Prices in
$20-$30 Per Barrel Range
•
Investment Growth Tracked Rest
of World Prior to 2007
13
•
SB21: Giveaway or
Alaska’s Hope?
Recent Announcements
ConocoPhillips and BP Announce Significant
New Investment
•
3 Additional Rigs (25% Increase)
•
New Areas Evaluated
•
Repsol Moving Forward with New Fields
•
But How Do We Know This Would Not Have
Happened Anyway?
•
Can’t Know with 100% Certainty…Can’t
Disprove a Negative
•
However, Investment Fundamentals
Have Changed Significantly and
Have Made Alaska a Much More
Attractive Play
•
Industry Perception of Alaska Climate
(Both Within and Outside State) Have
Changed Significantly
•
Increases Needed are Very Achievable
14
Louisiana W. Cutler
Partner
Anchorage
T 907.777.7630
F 907.865.2475
louisiana.cutler@klgates.com
OVERVIEW
Louisiana (“Louann”) Cutler advises clients in Alaska on a variety of legal matters, including oil
and gas issues; taxation; legislation and ordinance drafting; elections; administrative proceedings;
constitutional law questions; contracts and other legal document drafting. In her 23 years of
practice, she has obtained extensive complex litigation experience with an emphasis on
environmental issues and oil and gas taxation and royalties. She has litigated such matters in
Alaska trial and appellate courts, as well as administrative hearings and arbitrations. Most
recently, she led a cross office team of litigators that secured a $255 million arbitration award for
our client. Over the years, she has been successful in numerous hearings and appeals with
claims totaling billions of dollars in oil and gas income, production, and property taxes at stake.
She is recognized by Chambers USA as a 2013 “notable” Alaska litigator.
PROFESSIONAL BACKGROUND
Before joining the Firm in 1990, Louann worked as special legislative assistant to Al Adams from
1982 to 1987. At that time, Mr. Adams was Chair of the House Finance Committee. As special
assistant, Louann conducted policy, fiscal, and political analysis of all legislation in the House
Finance Committee and performed various research projects including oil and gas industry tax
reform, impact on local communities of proposed oil and gas development in the Arctic National
Wildlife Refuge, and funding problems of the health care system for Alaska Natives. Louann
served as legislative aide to Rep. Thelma Buchholdt from 1980 to 1982, researching and drafting
legislation.
PROFESSIONAL/CIVIC ACTIVITIES
Louann is a member of Commonwealth North, various sections of the Alaska Bar Association, the
Alaska Municipal League, and the Alaska Municipal Attorneys Association. In the past, she has
served on non-profit boards including the United Way of Anchorage and Abused Women’s Aid in
Crisis (AWAIC).
ADMISSIONS
• Alaska
• U.S. Court of Appeals for the Ninth Circuit
• U.S. District Court for the District of Alaska
Louisiana W. Cutler (continued)
EDUCATION
J.D., Northeastern University, 1990
B.A., Yale University, 1978 (with distinction)
2
Barry Pulliam
Managing Director, Econ One
T 213.624.9600
bpulliam@econone.com
Barry Pulliam has been engaged in economic research and consulting for 25 years. A major part of his
work has focused on economic issues related to the petroleum and natural gas industries. He has
extensive experience in the analysis of markets and competition, as well as regulatory issues and fiscal
policy.
Mr. Pulliam has consulted with a number of state governments, including Alaska, California, Hawaii,
Louisiana, New Mexico, Oklahoma and Texas. He has consulted with the U.S. Department of Justice, the
Federal Trade Commission, and the Department of the Interior on petroleum-related issues. He has
analyzed the potential competitive effects of mergers and acquisitions in the petroleum industry on behalf
of state and federal antitrust regulators. He also has advised the State of Alaska regarding fiscal and tax
policy. Mr. Pulliam has worked with numerous companies in the private sector as well, including
producers, refiners, pipelines, gas processors, and chemical manufacturers.
Education
M.A. in Economics, Claremont Graduate School
B.A. in Economics, California State University, Long Beach
Work Experience
Econ One, July 1997 - present
Micronomics, Inc., 1988 - 1997
Testimonial Experience
Alaska Public Utilities Commission
Federal Energy Regulatory Commission
Alaska Department of Revenue
U.S. District Court
Various State Courts
Alaska and California State Legislature
Comparison of Alaska’s Tax Systems Over Time
Gross Tax System
PPT / ACES *
SB 21
Effective Date
1977
2006 / 2007
2014
Base Tax Rae
15% on Gross
Modified by ELF
25% on Net
35% on Net
Progressive Tax
None
0.4% Per $1 Above $30 Net;
0.1% Per $1 Above $92.50 Net
None
Maximum Statutory Tax Rate
15%
75%
35%
Credits
None
20% of Qualified
Capital Expenditure
Up to $8 Per Barrel
Produced
Gross Revenue
G
R
Exclusion
E l i (GRE)
Rate on “New Oil”
N/A
N/A
20% 12
20%:
12.5%
%R
Royalty
l
30%: >12.5% Royalty
State Purchase of Losses Prior to Production
No
Yes
Yes
$0.80 Per Barrel
4% of Gross
@ WC ANS > $25
4% of Gross
@ WC ANS > $25
Credits Reduce Minimum Tax
N/A
Yes
GRE Barrels Only
Small Producer Credit
N/A
$12 Million
$12 Million
Minimum Tax
* Alaska changed to a net tax system in 2006 (PPT). The rates were modified in 2007 (ACES).
Rates shown in this column are those that went into effect in 2007 under ACES.
Econ One Research
Materials Related to SB21
Legislation
1. SB 21 Final Bill as Enacted:
http://www.legis.state.ak.us/basis/get_bill_text.asp?hsid=SB0021Z&session=28
Presentations
1. April 11, 2013 House Finance Presentation: Analysis of HCS CS SB21 (FIN) for
House Finance Committee (19 pages)
http://www.legis.state.ak.us/basis/get_documents.asp?session=28&docid=8002
2. April 6, 2013 House Finance Initial Presentation: ACES, SB21/HB72 and HCS CS
SB21 (RES) for House Finance Committee (27 pages)
http://www.legis.state.ak.us/basis/get_documents.asp?session=28&docid=6378
3. April 2, 2013 House Resources Presentation: ACES, CS SB21 (FIN) and HCS SB21
(RES) Working Draft (10 pages); analysis of proposed HCS
http://www.legis.state.ak.us/basis/get_documents.asp?session=28&docid=5612
4. March 25, 2013 House Resources Initial Presentation: ACES, SB21/HB72 and CS
SB21 (FIN) Analysis for House Resources Committee (27 pages)
http://www.legis.state.ak.us/basis/get_documents.asp?session=28&docid=4712
5. March 14, 2013 Senate Finance Presentation: Comments on Senate Finance CS
SB21 (5 pages); analysis of takes and offset volumes needed on SFIN CS SB21
http://www.legis.state.ak.us/basis/get_documents.asp?session=28&docid=3488
6. March 13, 2013 Senate Finance Presentation: Comments on Senate Finance CS
SB21 (11 pages); analysis on SFIN CS SB21
http://www.legis.state.ak.us/basis/get_documents.asp?session=28&docid=3285
7. March 6, 2013 Senate Finance Presentation: Comments to Senate Finance, SB21 /
SRES CS SB21 (14 pages); analysis on alternatives to SRES CS SB21
http://www.legis.state.ak.us/basis/get_documents.asp?session=28&docid=2897
8. March 1, 2013 Senate Finance Initial Presentation (58 pages); analysis using SRES
CS SB21
http://www.legis.state.ak.us/basis/get_documents.asp?session=28&docid=2674
9. February 22, 2013 Senate Resources Presentation: Comments on SB21 (10
Pages); analysis on alternatives to SB21
http://www.legis.state.ak.us/basis/get_documents.asp?session=28&docid=2133
10. February 13, 2013 Senate Resources Initial Presentation (62 Pages); reorder and
revision to January 24, 2013 presentation to Senate TAPS Throughput Committee
http://www.legis.state.ak.us/basis/get_documents.asp?session=28&docid=1391
Articles
1. Chakravorty, Ujjayant, Shelby Gerking and Andrew Leach. State Tax Policy and Oil
Production: The Role of the Severance Tax and Credits for Drilling Expenses,
December 4, 2009
http://www.americantaxpolicyinstitute.org/pdf/energy_conference/chakravortygerking-leach.pdf
2. Kunce, Mitch, Shelby Gerking, William Morgan and Ryan Maddux. State Taxation,
Exploration, and Production in the U.S. Oil Industry, November 26, 2001
http://legisweb.state.wy.us/2001/interim/app/reports/oiltaxpaper%2011-26-01.pdf
3. Smith, James L. Modeling the Impact of Taxes on Petroleum Exploration and
Development, IMF Working Paper, WP/12/278
http://www.imf.org/external/pubs/ft/wp/2012/wp12278.pdf
-2-