Reforming Alaska’s Production Tax:                     ELF, PPT, ACES, CIRA                          and beyond.          ...
Overview   • Reforming Alaska’s Oil and Gas Production Tax   • Orienting Example   • Mathematical relationships: graphs, e...
Orienting Example   • Marginal Effect of $1/bbl increase in price.                         Who receives?                Wa...
Orienting Example   • Marginal Effect of $1/bbl capital investment.                           Who pays?                Way...
Production Tax Math   • Production Tax Math   •    Gross Tax   •    Net Tax   •    Net Tax with Capital Credits   •    Net...
Production Tax Math   • Gross   • Tax = (Destination Value – Transportation Cost) * 7.5%   • Tax = (ANS WC - $7.00) * 7.5%...
Production Tax Math   •    Gross: Tax = (ANS WC - $7.00) * 7.5%   •    Net: Subtract all the costs, lower base so higher r...
Production Tax Math   • Gross: Tax = (ANS WC - $7.00) * 7.5%   • Net: Tax = (ANS WC - $25.00) * 25%   Less Capital Credits...
Production Tax Math   • Gross: Tax = (ANS WC - $7.00) * 7.5%   • Net: Tax = (ANS WC - $25.00) * 25%   Less Capital Credits...
Production Tax Math   • Focus in the Legislature on Total State Take:   • Royalties – average around 13% - of the value at...
Production Tax Math   •    Gross: Tax = (ANS WC - $7.00) * 7.5%   •    Net: Tax = (ANS SC - $25.00) * 25%   •    Net w/Cr ...
Production Tax Math     • Comparison of Progressivity of Gross, Net, and       Progressivity add on:   Tax On Net Value (D...
Production Tax Math   • What happens when taxpayer earns the incremental     dollar that starts progressivity?            ...
History   •    History   •    ELF (Gross Tax)   •    PPT (Net Tax with Cap Credits and Progressivity   •    ACES (Net Tax ...
History – prologue to the future?   •    In 1977 as Prudhoe Bay was coming on line and eclipsing the Cook        Inlet    ...
History                               Alaska Oil Production, 1965 - 2019                             2.2                  ...
History – prologue to the future   •    In 2003 Stranded Gas Development Act (SGDA) amended to        include project to/t...
History – prologue to the future?   •    2005 – Dickinson signs aggregation order combining small Prudhoe        satellite...
History – prologue to the future?   •    2006 Production Tax Reform (“PPT”)         – Switch from “gross to net”,         ...
History – prologue to the future?   • Aug 2006 Governor Murkowski loses in Republican primary   • Sept 2006 FBI raids 6 le...
History – prologue to the future?   • 2007 Production Tax Reform (ACES)         – Switch from gross to net maintained     ...
History – prologue to the future?   •    In Mar 2008 ANS WC monthly price breaks $100 for first time   •    In Apr 2008 AN...
$ per barrel                                        Dan E.                                                                ...
History - 2008                State of Alaska General Fund Revenues                            (& WC ANS price)           ...
History -2008                       State of Alaska General Fund Revenues                                   (& WC ANS pric...
History - 2008    • Order of magnitude increase in production tax ’04 -.08    • Half of the increase – a quintupling of pr...
How Significant was FY 2008?                                                          12,000.0                            ...
History - 2008                                                General Fund In/Out              12,000                     ...
History - 2008                                                                                                            ...
History - 2008   • What if Prudhoe Bay had been producing in the other     seven big producing states in 2008 (with no or ...
History 2008   ConocoPhillips Revenues (and uses) for Alaska Segment   •             Caution – Calendar Year, GAAP based, ...
Some 26th Legislature Legislative Proposals - Rate   • Rep Johnson’s Proposal HB 308/(Sen McGuire: SB 267)   • Progressivi...
Some 26th Legislature Legislative Proposals   Rep Crawford’s Proposal HB 48   • Gas Reserves Tax – 1 billion a year on maj...
Some 26th Legislature Legislative Proposals   • Interest Issues      – Rate      – No interest arising from retroactive re...
Some 26th Legislature Legislative Proposals   • Governor Parnell’s Proposed Production Tax     Changes SB 271/HB 337   • (...
Proposals for Further Reform   • Proposals for reform   • Governor’s proposal   • Roger Mark’s proposal   • One approach: ...
Proposals for Further Reform   • Governor Parnell’s Campaign Suggestions   • (October 15 2010 presentation at Resource    ...
Proposals for Further Reform   • Caps under PPT and ACES:   • (Assume 26 dollar a barrel total costs in this example)     ...
Proposals for Further Reform   • 2009 Credits – (a) “room to work” and (b) Goldplating     effects    Estimated           ...
Proposals for Further Reform    • Roger Marks writing in the Oil and Gas Financial Journal    • “Alaskas production tax is...
Progressivity in AS 43.55.011(g) vs. Personal Income Tax   • Under AS 43.55.011(g) the progressivity rate generated     at...
Production Tax: Progressivity + 25%     90.0%                 ACES Nominal     80.0%       ACES Marginal     70.0%       A...
Proposals for Further Reform   • 2006:   • (1) Incentivize investment by shifting the tax burden     towards those who exp...
Proposals for Further Reform   • What Does “Fix Aces” mean?   • Lower Take, Lower Marginal Rate at high profitability     ...
Dr. Wood’s Illustration Divided into Zones                A3 B2                                     C2     D              ...
Proposals for Further Reform   • Tax by Design – the Mirrlees Review   • 20.1 A Good Tax System   • “First consider the sy...
Thank You                 Dan E. Dickinson CPA                     Anchorage, AK                ddickinsoncpa@gci.net     ...
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Dan dickinson reforming alaska production tax nov 23

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Presentation to Commwealth North's Board of Directors regarding ACES.

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Dan dickinson reforming alaska production tax nov 23

  1. 1. Reforming Alaska’s Production Tax: ELF, PPT, ACES, CIRA and beyond. Dan E. Dickinson CPA Commonwealth North Board of Directors November 23, 2010Dan E.Dickinson CPA
  2. 2. Overview • Reforming Alaska’s Oil and Gas Production Tax • Orienting Example • Mathematical relationships: graphs, equations, tables – Marginal rates vs. average rate • History 2005 to 2010 – 2008!!! • Proposals for change – 2010 & Current • Production tax – or severance tax -- is a tax imposed on the production of oil, or the severance of a non- 11.23.2010 renewable resource.Dan E.Dickinson CPA Commonwealth North Board of Directors 2
  3. 3. Orienting Example • Marginal Effect of $1/bbl increase in price. Who receives? Way Simple Analysis $/bbl $/bbl Diff Destination Price West Coast 120.36 121.36 1.000 Less Transportation Cost 6.00 6.00 - Gross Value at Point of Production 114.36 115.36 1.000 Royalty (12.5% of Gross Value) 14.30 14.42 0.125 Less Upstream Costs* 20.00 20.00 - "PTV" or net value 80.07 80.94 0.875 Taxable Barrels 87.5% 87.5% PTV / taxable bbl 91.50 92.50 Production Tax - Progressivity Rate 24.6% 25.0% Production Tax - Base Rate 25.0% 25.0% Total Production Tax Rate 49.6% 50.0% 0.40% Royalty (12.5% of Gross Value) 14.30 14.42 0.125 11.23.2010 Pre Credits Production Tax (rate * PTV) 39.71 40.47 0.758 Production Tax Credits (assumed) (10.00) (10.00) - Property Tax (Assumed) 0.50 0.50 - State Income Tax (9.4% * PTV less taxes) 4.69 4.70 0.011 Federal Income Tax (35% * PTV less taxes) 15.81 15.85 0.037Dan E. Government Take 65.00 65.93 0.931Dickinson CPA Commonwealth North Board of Directors 3
  4. 4. Orienting Example • Marginal Effect of $1/bbl capital investment. Who pays? Way Simple Analysis $/bbl $/bbl Diff Destination Price West Coast 121.36 121.36 - Less Transportation Cost 6.00 6.00 - Gross Value at Point of Production 115.36 115.36 - Royalty (12.5% of Gross Value) 14.42 14.42 - Less Upstream Costs* 20.00 21.00 1.000 "PTV" or net value 80.94 79.94 (1.000) Taxable Barrels 87.5% 87.5% PTV / taxable bbl 92.50 91.36 Production Tax - Progressivity Rate 25.0% 24.5% Production Tax - Base Rate 25.0% 25.0% Total Production Tax Rate 50.0% 49.5% -0.46% Royalty (12.5% of Gross Value) 14.42 14.42 - 11.23.2010 Pre Credits Production Tax (rate * PTV) 40.47 39.61 (0.865) Production Tax Credits (assumed) (10.00) (10.10) (0.100) Property Tax (Assumed) 0.50 0.50 - State Income Tax (9.4% * PTV less taxes) 4.70 4.69 (0.003) Federal Income Tax (35% * PTV less taxes) 15.85 15.83 (0.011)Dan E. Government Take 65.93 64.95 (0.980)Dickinson CPA Commonwealth North Board of Directors 4
  5. 5. Production Tax Math • Production Tax Math • Gross Tax • Net Tax • Net Tax with Capital Credits • Net tax with Progressivity and Capital Credits • Average Tax • Nominal Tax • Marginal Tax 11.23.2010Dan E.Dickinson CPA Commonwealth North Board of Directors 5
  6. 6. Production Tax Math • Gross • Tax = (Destination Value – Transportation Cost) * 7.5% • Tax = (ANS WC - $7.00) * 7.5% $6.00 $4.00 $/bbl of Tax $2.00 $- $10.00 $20.00 $30.00 $40.00 $50.00 $(2.00) $(4.00) $(6.00) 11.23.2010 Destination Value (DV $/bbl) 7.5% tax on Gross.Dan E.Dickinson CPA Commonwealth North Board of Directors 6
  7. 7. Production Tax Math • Gross: Tax = (ANS WC - $7.00) * 7.5% • Net: Subtract all the costs, lower base so higher rate • Tax = (DV – Transportation & Upstream Costs) * 25% • Tax = (ANS WC - $25.00) * 25% $6.00 $4.00 $/bbl of Tax $2.00 $- $10.00 $20.00 $30.00 $40.00 $50.00 $(2.00) $(4.00) $(6.00) 11.23.2010 Destination Value (DV $/bbl) 7.5% tax on Gross. 25% tax on netDan E.Dickinson CPA Commonwealth North Board of Directors 7
  8. 8. Production Tax Math • Gross: Tax = (ANS WC - $7.00) * 7.5% • Net: Tax = (ANS WC - $25.00) * 25% Less Capital Credits (assumed $10/bbl Capex) • Tax = (ANS WC - $25.00) * .25 – (10 * 20%) $6.00 $4.00 $/bbl of Tax $2.00 $- $10.00 $20.00 $30.00 $40.00 $50.00 $(2.00) $(4.00) $(6.00) 11.23.2010 Destination Value (DV $/bbl) 7.5% tax on Gross. 25% tax on net 25% tax on net w/ CreditsDan E.Dickinson CPA Commonwealth North Board of Directors 8
  9. 9. Production Tax Math • Gross: Tax = (ANS WC - $7.00) * 7.5% • Net: Tax = (ANS WC - $25.00) * 25% Less Capital Credits (assumed $10/bbl Capex) • Tax = (ANS WC - $25.00) * .25 – (10 * 20%) $60.00 $50.00 $40.00 $/bbl of Tax $30.00 $20.00 $10.00 $- $(10.00) 0 0 0 0 0 0 0 0 0 0 0 0 0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 .0 0 .0 0 .0 0 .0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 $11 $12 $13 11.23.2010 Destination Value (DV $/bbl) 7.5% tax on Gross. 25% tax on net 25% tax on net w/ CreditsDan E.Dickinson CPA Commonwealth North Board of Directors 9
  10. 10. Production Tax Math • Focus in the Legislature on Total State Take: • Royalties – average around 13% - of the value at the point of production • Special Oil and Gas Income Tax – 9.4% times AK apportionment factor times World Wide Income • Special Oil and Gas property tax (2% of Oil and Gas Assets Value) (offset by local levy on same base) • When combined with ELF on gross, AK had one of the most regressive system (as values went up percentage 11.23.2010 of take to state went down.) • Solution: Use the Production tax to compensateDan E.Dickinson CPA Commonwealth North Board of Directors 10
  11. 11. Production Tax Math • Gross: Tax = (ANS WC - $7.00) * 7.5% • Net: Tax = (ANS SC - $25.00) * 25% • Net w/Cr Tax = (DV - $25.00) * .25 – (Cap Inv * 20%) • Tax = (ANS WC - $25.00) * (.25 + Prog) – (10*20%) $60.00 $50.00 $/bbl of Tax $40.00 $30.00 $20.00 $10.00 $- $(10.00) 00 00 00 00 00 00 00 00 00 00 00 00 00 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. $1 $2 $3 $4 $5 $6 $7 $8 $9 $1 0 $1 1 $1 2 $1 3 Destination Value (DV $/bbl) 11.23.2010 7.5% tax on Gross. 25% tax on net 25% tax on net w / Credits 25% Plus Progressity tax on net 25% Plus Progressity tax on net w / creditsDan E. (Prog is defined as an additional .004 of rate/$ of PTV over 30)Dickinson CPA Commonwealth North Board of Directors 11
  12. 12. Production Tax Math • Comparison of Progressivity of Gross, Net, and Progressivity add on: Tax On Net Value (DV - $25) 100% 80% 60% 40% 20% 0% 00 00 00 00 00 00 00 00 00 00 00 00 00 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. $1 $2 $3 $4 $5 $6 $7 $8 $9 $1 0 $1 1 $1 2 $1 3 Destination Value ($/bbl) 11.23.2010 7.5% tax on Gross. 25% tax on net 25% Plus Progressity tax on netDan E.Dickinson CPA Commonwealth North Board of Directors 12
  13. 13. Production Tax Math • What happens when taxpayer earns the incremental dollar that starts progressivity? 100% 80% Tax Rate 60% 40% 20% 0% 37 43 49 55 61 67 73 79 85 91 97 103 109 115 121 127 133 ANS WC (assuming $23/bbl to derive PTV) 11.23.2010 Nominal Rate Marginal RateDan E.Dickinson CPA Commonwealth North Board of Directors 13
  14. 14. History • History • ELF (Gross Tax) • PPT (Net Tax with Cap Credits and Progressivity • ACES (Net Tax with Cap Credits and Progressivity) • CIRA (Cook Inlet Incentives) 11.23.2010Dan E.Dickinson CPA Commonwealth North Board of Directors 14
  15. 15. History – prologue to the future? • In 1977 as Prudhoe Bay was coming on line and eclipsing the Cook Inlet – New property tax (on pipelines under construction) in 1973 special session (AS 43.56) – Raised production taxes from max rate of 8% to 12.25% and replaced “stair step” with “economic limit factor” (ELF) driven by well productivity in 1977, then in 1981 added ”rounding rule” so Prudhoe Bay ELF = 1 – Tried four years of ‘separate accounting’ income tax from 1977 to 1980 – replaced with modified apportionment income tax in 1981 • 1989 added field size factor to ELF and dropped rounding rule. Small field taxes go down, large field taxes go up • 2003 Exploration Credits (AS 43.55.025) added to production tax 11.23.2010Dan E.Dickinson CPA Commonwealth North Board of Directors 15
  16. 16. History Alaska Oil Production, 1965 - 2019 2.2 Area 17 2.0 Pt Thomson Actual Projected 1.8 Offshore 1.6 Liberty Million Barrels/ Day 1.4 (1) Other 1.2 Northstar 1.0 Alpine 0.8 Kup-Sat 0.6 Kuparuk 0.4 PBU-Sat 0.2 Prudhoe Bay 11.23.2010 0.0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Fiscal Year Source: Alaska Department of Revenue, Fall 2009 Revenue Sources Book.& Fall 1999 RSB, DNR 2007 Oil and Gas ReportDan E. (1) Cook Inlet, Duck Island, Milne Point, Liberty, Pt Thomson, Fiord, Nanuq, Oooguruk, Nikaitchuq and NPRA.Dickinson CPA Commonwealth North Board of Directors 16
  17. 17. History – prologue to the future • In 2003 Stranded Gas Development Act (SGDA) amended to include project to/thru Canada • In 2004 ANS WC monthly price breaks $40 for first time • In 2005 • Production tax for oil was nominal 15% (reduced to 12.5% for first five years of production from a field) of “gross value at point of production” times Economic Limit Factor (ELF), which in 2005 generated an effective tax rate of about 7.5% for North Slope Crude. Cook Inlet oil ELFs were all zero so effective tax rate was zero. • Production tax for gas was nominal 10% of “gross value at point of production” times a different Economic Limit Factor formula (ELF), which in 2005 coincidentally generated an effective tax rate of about 11.23.2010 7.5%. Cook Inlet gas taxed.Dan E.Dickinson CPA Commonwealth North Board of Directors 17
  18. 18. History – prologue to the future? • 2005 – Dickinson signs aggregation order combining small Prudhoe satellite fields with large mother-field for ELF purposes • In 2005 ANS WC monthly price breaks $60 for first time • In 2006 after 2 ½ years of negotiation, Governor Murkowski announced 3 largest taxpayers had agreed to production tax reform to be part of SGDA contract package to be introduced presently. – Key elements of “20/20” Oil Tax reform – • switch from “gross to net” at 20% rate • investment and loss carryforward credits of 20% • Conforming law for SGDA contract and oil tax reform die in 2006 regular session • SGDA contract introduced • In July 2006 ANS WC monthly price breaks $70 for first time 11.23.2010 • No oil or gas bills emerge from first special session • Production Tax reform passes in second special sessionDan E.Dickinson CPA Commonwealth North Board of Directors 18
  19. 19. History – prologue to the future? • 2006 Production Tax Reform (“PPT”) – Switch from “gross to net”, – Tax on 22.5% of PTV or “net value” – Progressivity (above $40 of PTV, at rate of .25% per dollar) – 20% investment credit – 20% loss carryforward credit – 20%/20%/40% Exploration credits incorporated – Transitional Investment Expenditure Credits – Small producer credits of up to $12 million a year – US costs focus on unit operating agreement and working interest owner audits (with 18 exclusions) – Retroactive to April 1, 2006 • No change to – royalties – generally 12.5% of gross, 11.23.2010 – 2% oil and gas ad val property tax and – special oil and gas 9.4% income tax on apportioned world wide incomeDan E.Dickinson CPA Commonwealth North Board of Directors 19
  20. 20. History – prologue to the future? • Aug 2006 Governor Murkowski loses in Republican primary • Sept 2006 FBI raids 6 legislators’ offices (two of those have subsequently been convicted of felonies including bribery and are serving prison sentences of 5 years +) • November 2006 Governor Palin Elected – Among her campaign issues is that switch in production tax from net to gross was mistake • 2007 legislative session focuses on creation of AGIA license • Sept 2007 Governor Palin announces special session that will reexamine production taxes – proposes “ACES” package of reforms • In Oct 2007 ANS WC monthly price breaks $80 for first time • In Nov 2007 ANS WC monthly price breaks $90 for first time • November 2007 special session passes production tax reforms 11.23.2010Dan E.Dickinson CPA Commonwealth North Board of Directors 20
  21. 21. History – prologue to the future? • 2007 Production Tax Reform (ACES) – Switch from gross to net maintained – Tax from 22.5% to 25% of PTV – Progressivity (above $30 of PTV, at rate of .4% per dollar) • Changed from $40 and .25% – 20% investment credit now spread over 2 years – 25% loss carryforward credit (from 20%) – 5%/30%/30%/40% Exploration credits incorporated (from 20%/20%) – Transitional Investment Expenditure Credits ended/restricted – Small producer credits of up to $12 million a year – US costs focus from unit operating agreement and working interest owner audits to “allowed by dept. by regulation” (with 21 11.23.2010 exclusions) – Retroactive to July 1, 2007Dan E.Dickinson CPA Commonwealth North Board of Directors 21
  22. 22. History – prologue to the future? • In Mar 2008 ANS WC monthly price breaks $100 for first time • In Apr 2008 ANS WC monthly price breaks $110 for first time • In May 2008 ANS WC monthly price breaks $120 for first time • In Jun 2008 ANS WC monthly price breaks $130 for first time • Then the price collapsed • By Dec 2008 back below $30 a barrel a year later • Finally “stabilizing” in the 60 to 90 range since June 2009 • In May of 2010 Cook Inlet Revitalization Act and SB 309 passed • In July of 2010 final regulations implementing 2007 (ACES) reforms 11.23.2010 implementedDan E.Dickinson CPA Commonwealth North Board of Directors 22
  23. 23. $ per barrel Dan E. 0 20 40 60 80 100 120 140 Jul-77 Dickinson CPA Jul-78 Jul-79 Jul-80 Jul-81 Jul-82 Jul-83 Jul-84 Jul-85 Jul-86 Jul-87 Jul-88 Jul-89 Jul-90 Jul-91 Source: Alaska Department of Revenue, Tax Division Jul-92 Jul-93 Jul-94 History Jul-95 Jul-96 Jul-97 Jul-98 Jul-99Commonwealth North Board of Directors Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 ANS West Coast Price, July 1977 – Oct 2010 Jul-07 Jul-08 Jul-09 10-Jul23 11.23.2010
  24. 24. History - 2008 State of Alaska General Fund Revenues (& WC ANS price) FY 2007 FY 2008 FY 2009 Average ANS WC Price/bbl $ 61.63 $ 96.51 $ 68.34 figures in $000: O&G Production Tax 2,292.3 6,879.0 3,112.0 O&G Income Tax 594.4 605.8 492.2 O&G Property Tax 65.6 81.5 111.2 O&G Royalties 1,613.0 2,446.1 1,465.6 O&G Subtotal 4,565.3 10,012.4 5,181.0 All Other GF Sources 675.2 780.0 650.2 11.23.2010 Total GF 5,240.5 10,792.4 5,831.2 SOURCE: SOA DOR Fall 2007, Fall 2008 & Fall 2009 Revenue Sources BookDan E.Dickinson CPA Commonwealth North Board of Directors 24
  25. 25. History -2008 State of Alaska General Fund Revenues (& WC ANS price) $12,000 $10,000 $8,000 $millions $6,000 $4,000 $2,000 $0 FY 2007 FY 2008 FY 2009 11.23.2010 All Other GF Sources O&G Royalties O&G Property Tax O&G Income Tax O&G Production Tax SOURCE: SOA DOR Fall 2007, Fall 2008 & Fall 2009 Revenue Sources BookDan E.Dickinson CPA Commonwealth North Board of Directors 25
  26. 26. History - 2008 • Order of magnitude increase in production tax ’04 -.08 • Half of the increase – a quintupling of production tax – from the changes to law Production Taxes X Check Royalty Less CI Apples to Million Million Prod Tax gas Apples bbls bbls Price Royalty Rev ($ ($000 Rev ($000 2008$ / WC daily annual times 2008$ / Rev ($ 2008$ / Fiscal Year 000 000) 000) 000) 2004 $ Price Prod Prod volume 2004 $ 000 000) 2004 $ (E) = (D) (F) = (C) * (A1) (A2) (A) (B) (C) (D) * 365 (E) (G) (I) (J) 2004 651.9 (24.7) 627.2 31.74 0.999 364.6 11,573.5 1,056.1 2005 863.2 (24.4) 838.8 43.44 0.931 339.8 14,761.6 1,419.9 2006 1,199.5 (33.2) 1,166.3 60.80 0.858 313.2 19,040.7 1,784.1 2007 2,208.4 (6.0) 2,202.4 61.83 0.750 273.8 16,926.0 1,613.0 2008 4,940.5 (6.0) 6,879.0 11.0 96.51 0.730 266.5 25,715.1 2.2 2,446.1 2.3 Tax Increase attributable to changes in rules= 11.0 /2.2 = 5 11.23.2010*Note: Tax revenues from some North Slope gas sales will be included in revenues with no corresponding volume effect.That adjustment (adding .004 to the daily volume) will not materially affect the outcome. NS NGL are in both vols and $.Data from Fall 2008 Revenue Sources Book, from Appendix A-4a (royalty sum of royalty & Bonuses etc.), C-2a and B-1a.Cook Inlet Gas adjustment from Fall 2007 RSB, Appendix A-5a (CI data not broken out in Fall 2008 RSB)Note: Historical volume and price data in Fall 2008 RSB differ from same historical data series in Fall 2007 RSB and earlier.Dan E.Dickinson CPA Commonwealth North Board of Directors 26
  27. 27. How Significant was FY 2008? 12,000.0 Over 11% of the Unrestricted Revenue 11,000.0 collected in the first 50 years of Total General Purpose Unrestricted Revenue 10,000.0 statehood was collected in FY 2008 9,000.0 8,000.0 7,000.0 6,000.0 5,000.0 4,000.0 Prudhoe Bay Lease Sale 3,000.0 FY 1970 2,000.0 1,000.0 11.23.2010 Annual revenue- First broke $100 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 Million in 1968 Fiscal Year Source: Alaska DOR Fall 2008 Revenue Sources Book (2009 data point from 2009 RSB)Dan E.Dickinson CPA Commonwealth North Board of Directors 27
  28. 28. History - 2008 General Fund In/Out 12,000 Actual Projected 10,000 8,000 $millions 6,000 4,000 2,000 - 11.23.2010 0 2 4 6 8 0 2 4 6 8 0 200 200 200 200 200 201 201 201 201 201 202 Unrestricted GF IN Unrestricted GF Out Source: SOA DOR Fall 2009 Revenue Sources Book; OMB, 2010 Long Range Fiscal PlanDan E.Dickinson CPA Commonwealth North Board of Directors 28
  29. 29. History - 2008 11.23.2010Dan E. Source: SOA FY 2009 Comprehensive Annual Financial Report and DOR Fall 2009 Revenue Sources BookDickinson CPA Commonwealth North Board of Directors 29
  30. 30. History - 2008 • What if Prudhoe Bay had been producing in the other seven big producing states in 2008 (with no or gross based production taxes)? 70 (Prod/inc/prop) Tax 60 $ Per Barrel state 50 40 30 20 10 0 30 40 50 60 70 80 90 100 110 120 130 $/BBl Value at market 11.23.2010 AK California Colorado Lousiana New Mexico Oklahoma Texas WyomingDan E.Dickinson CPA Commonwealth North Board of Directors 30
  31. 31. History 2008 ConocoPhillips Revenues (and uses) for Alaska Segment • Caution – Calendar Year, GAAP based, include CI gas (product price are US total) DV: $57.40/bbl $89.38/bbl $63.87/bb 10,000 9,000 8,000 Taxes other than Taxes other than Incom e Taxes, 7,000 Incom e Taxes, 3,432 Taxes other than $ millions 6,000 1,663 Income Taxes, Income Taxes, Income Taxes, 5,000 1,135 1,248 1,317 4,000 All other Costs, All other Costs, Income Taxes, 716 3,000 2,010 2,126 All other Costs, 2,140 2,000 Conoco Phillips Conoco Phillips 1,000 Net Income, Net Income, Conoco Phillips Net Income, 1,540 11.23.2010 - 2,255 2,315 2007 2008 2009 Total Revenues: $7,716 $9,190 $ 5,521 Source: CP 10K filings, pages 40, 41, 148, 149, 150Dan E.Dickinson CPA Commonwealth North Board of Directors 31
  32. 32. Some 26th Legislature Legislative Proposals - Rate • Rep Johnson’s Proposal HB 308/(Sen McGuire: SB 267) • Progressivity rate dropped from .4% to .2% • Resident Hire rebates can drive 25% base rate down to 20% • Discussed introducing brackets into Progressivity • Rep Millet’s Proposal HB 321 • 25% base rate down to 20% • No change to progressivity • Rep Kelly’s Proposal HB 351 • Production tax holiday for “new production” 11.23.2010 • Credit = (production from leases or properties with out commercial production before 2012/all production) * total taxDan E.Dickinson CPA Commonwealth North Board of Directors 32
  33. 33. Some 26th Legislature Legislative Proposals Rep Crawford’s Proposal HB 48 • Gas Reserves Tax – 1 billion a year on major lease holders (3 cents per mcf times 35 tcf) until they commit to an AGIA licensed project; could reclaim as credit when gas is shipped Rep Crawford’s Proposal HB 189 • Continue formulaic calculation of non capital lease expenditures at Kuparuk and Prudhoe as 3% annual markup of 2006 costs Reps Gruenberg, Seaton, Cissna, Tuck, Peterson & Gatto Proposal HB 11 • “When interpreting a lease entered into under this section, ambiguous language shall be construed in favor of the state and 11.23.2010 against the interpretation offered by the person challenging the state’s interpretation.Dan E.Dickinson CPA Commonwealth North Board of Directors 33
  34. 34. Some 26th Legislature Legislative Proposals • Interest Issues – Rate – No interest arising from retroactive regulations (SB 309) • Credits for Well Work – General Production Well Tax Credit – Specific geographical credits for non NS (HB 280) – Income Tax Credits for CI work (SB 309) – Eliminate special constraints on CI ‘generated’ credits (HB 280) 11.23.2010 • Statute of Limitations drops from 6 years back to 3Dan E.Dickinson CPA Commonwealth North Board of Directors 34
  35. 35. Some 26th Legislature Legislative Proposals • Governor Parnell’s Proposed Production Tax Changes SB 271/HB 337 • (1) Interest not due on retroactive changes (SB 309) • (2) Credits Purchased without “forward spend” (SB 309) • (3) Credits not spread over two years (HB 280 – for some non-North Slope credits) • (4) 30% credit for well work (HB 280 – 40% credit for non North Slope well work) 11.23.2010Dan E.Dickinson CPA Commonwealth North Board of Directors 35
  36. 36. Proposals for Further Reform • Proposals for reform • Governor’s proposal • Roger Mark’s proposal • One approach: • First achieve a high level notion of what the reform should achieve • Second, define mechanics of achieving that end. • Another approach: 11.23.2010 • Are X, Y and Z better ideas than not-X, not-Y or not-Z?Dan E.Dickinson CPA Commonwealth North Board of Directors 36
  37. 37. Proposals for Further Reform • Governor Parnell’s Campaign Suggestions • (October 15 2010 presentation at Resource Development Council) • Put more oil into the Pipeline • Make Alaska more competitive • Cap Progressivity at higher prices • Tax credits for technically challenged fields 11.23.2010 Source: http://www.akrdc.org/membership/events/special/parnell.pdfDan E.Dickinson CPA Commonwealth North Board of Directors 37
  38. 38. Proposals for Further Reform • Caps under PPT and ACES: • (Assume 26 dollar a barrel total costs in this example) ACES Progressivity Nominal Tax Rate (applied 100% Bend over at 92.5 net – Capped at 50% 75% Progressivity rate drops to to (DV-26)) .001% per dollar 50% PPT progressivity capped at 25% 25% 0% 10 30 50 70 90 110 130 150 170 190 210 230 250 270 290 310 330 350 370 390 410 Destination Value ($/bbl) 11.23.2010 ACES PPTDan E.Dickinson CPA Commonwealth North Board of Directors 38
  39. 39. Proposals for Further Reform • 2009 Credits – (a) “room to work” and (b) Goldplating effects Estimated Less Investment (allocated Less Credits Per by Small RSB volume) Producer (allocated Resulting Percentage Producer: base tax Credit Result proportionally) Tax of Total Tax CP 1,490.6 1,490.6 (147.0) 1,343.6 46.1% } BP 1,114.8 1,114.8 (110.3) 1,004.5 34.5% } 102% EM & XTO 690.8 690.8 (66.0) 624.8 21.5% } Anadarko 118.1 (12.0) 106.1 (11.0) 95.1 3.3% } Chevron & Unocal 69.5 (12.0) 57.5 (14.4) 43.1 1.5% } 5% Pioneer NR 14.2 (12.0) 2.2 (1.3) 0.9 0.0% } Marathon 8.4 (8.4) - ML&P 2.1 (2.1) - Pacific Energy - - - ENI 6.1 (6.1) - Aurora 0.2 (0.2) - Murphy 1.9 (1.9) - Nana 0.3 (0.3) - Doyon 0.1 (0.1) - 11.23.2010 Petro-Hunt 0.0 (0.0) - 3,517.1 (55.1) 3,462.0 (350.0) 3,112.0 Paid To 15 Explorers (per Revenue Sources Book) (200.0) -7% -7% Total 2,912.0 100% 100%Dan E.Dickinson CPA Commonwealth North Board of Directors 39
  40. 40. Proposals for Further Reform • Roger Marks writing in the Oil and Gas Financial Journal • “Alaskas production tax is unique in that there is no bracketing. When progressivity occurs it applies to the very first dollar of value, as well as all subsequent dollars. Thus as value increases, additional tax is extracted from all previous value. • This can create high marginal tax rates. At higher prices a large share of incremental value goes to the government, which can significantly suppress upside potential. Given the importance of upside potential in portfolio analysis, Alaskas international attractiveness for investment may be uncompetitive.” 11.23.2010 Source: http://www.ogfj.com/index/article-display/3934072006/articles/oil-gas-financial-journal/volume-7/issue-9/features-/alaska_s-oil_and_gas.htmlDan E.Dickinson CPA Commonwealth North Board of Directors 40
  41. 41. Progressivity in AS 43.55.011(g) vs. Personal Income Tax • Under AS 43.55.011(g) the progressivity rate generated at high net values (PTVs)/bbl is applied to all the net value. • ((PTV/bbl-30)* .004)+ 25%* PTV= Tax • Under federal personal income tax rules: 11.23.2010Dan E.Dickinson CPA Commonwealth North Board of Directors 41
  42. 42. Production Tax: Progressivity + 25% 90.0% ACES Nominal 80.0% ACES Marginal 70.0% ACES bracketed like personal income tax nominal Aces Bracketed Marginal 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 11.23.2010 0.0% 40.0 50.0 60.0 70.0 80.0 90.0 100.0 110.0 120.0 130.0 ANS WC ($ per Barrel)Dan E.Dickinson CPA Commonwealth North Board of Directors 42
  43. 43. Proposals for Further Reform • 2006: • (1) Incentivize investment by shifting the tax burden towards those who expatriate rather than reinvest profits: “Tax expatriated profits” • (2) On a regressivity progressivity scale, shift the tax burden toward the progressivity end. “Higher prices, higher profits should mean higher taxes.” “More Progressive” • 2007: • “Remove the shadow” Palin proposal – moderate progressivity. Legislative enactment: increase progressive 11.23.2010 • 2010: • Cook Inlet Revitalization Act & Administrative issuesDan E.Dickinson CPA Commonwealth North Board of Directors 43
  44. 44. Proposals for Further Reform • What Does “Fix Aces” mean? • Lower Take, Lower Marginal Rate at high profitability – Progressivity Formula, brackets, bend over points, caps – Do we want to try to capture less in 2008-like years? Do we offset that with more in ‘normal’ years? • Lower take at lower profitability? – i.e transition to a “Christmas” model, state revenues come in mostly in “2008”-like years • Credits for favored activity – – Not much forward looking “room” in context of 4 fold tax increase looking back. – Is goldplating a problem? Or a “desired distortion.” • Complexity and Change 11.23.2010 – Does the DOR have the resources to implement complex schemes?Dan E.Dickinson CPA Commonwealth North Board of Directors 44
  45. 45. Dr. Wood’s Illustration Divided into Zones A3 B2 C2 D A1 B C1 11.23.2010Dan E.Dickinson CPA Commonwealth North Board of Directors 45
  46. 46. Proposals for Further Reform • Tax by Design – the Mirrlees Review • 20.1 A Good Tax System • “First consider the system as a whole. A good system should be structured to meet overall spending needs… Not all taxes need to address all objectives” • “Second, seek neutrality….Defining and policing boundaries between differently taxed activity is fraught with difficulty: it increases administrative and compliance costs.” • “Third, achieve progressivity as efficiently as possible… This means having a rate schedule that reflects the 11.23.2010 knowledge of … responsiveness of people to taxes and benefits at different income levels.”Dan E. Source http://www.ifs.org.uk/mirrleesreview/pampjlet.pdf pgs 1-3Dickinson CPA Commonwealth North Board of Directors 46
  47. 47. Thank You Dan E. Dickinson CPA Anchorage, AK ddickinsoncpa@gci.net 907 301 1565 http://www.dedcpa.com/ 11.23.2010Dan E.Dickinson CPA Commonwealth North Board of Directors 47
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