Limitations on Upside Profit Potential under Alaskas Oil and Gas - - PowerPoint PPT Presentation

Limitations on Upside Profit Potential under Alaska’s Oil and Gas Production Tax

(“The Problem with ACES”)

Roger Marks Presentation to Board of Directors Commonwealth North December 14, 2010

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Tax Rate under ACES

• Base rate of 25% of net value (after deducting all

costs)

• Progressivity element when net value per barrel

exceeds $30/bbl:

(Net value per barrel value - $30) X .004 – (Net value per barrel value - $30) X .004

• So if oil price is $85/bbl:

– Net value per barrel is about $56/bbl – Progressivity = ($56 - $30) X .004 = 10.4% – Total tax rate = 25% + 10.4% = 35.4% – APPLIES TO ENTIRE NET VALUE

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U.S. Tax Rate for Single Taxpayer

• First $8,350

10%

• Next $25,600

15%

• Next $48,300

25% Next $89,300 28%

• Next $89,300

28%

• Next $201,400

33%

• Anything over $372,950

35%

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40% 45% 50% 55% 60% First Dollar of Value

What Happens to the First Dollar of Value under ACES

20% 25% 30% 35% Tax Rate on the Firs Net Value per Barrel ($/bbl)

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40% 50% 60% 70% 80% 90% 100% ginal Tax Rate

Marginal Tax Rate under ACES (All State & Federal Taxes & Royalties) How Much Gov't Gets When Price Goes Up $1

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0% 10% 20% 30% 40% $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 Margina ANS Market Price ($/bbl)

$30 $40 $50 $60 r Barrel Taxes

Relative Taxes Under ACES

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$0 $10 $20 $50 $70 $90 $110 $130 $150 Per Bar ANS Market Price ($/bbl) royalty severance tax (ACES) property tax state & fed corp inc tax

Producers ($)

Conceptual Net Present Value to Producers ACES vs. Bracketed Tax Structure

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NPV to Pro Price ($/bbl) ACES Tax Structure Bracketed Tax Structure

15% 20% 25%

• f Certain Price

Hypothetical Expected Price Distribution

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0% 5% 10% $30 $50 $70 $90 $110 $130 $150 $170 $190 $210 $230 $250 Probability of C Oil Price ($/bbl)

Getting a Fair Share

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Fair Share: Maximum Benefit to the People

• Assume this is the long-run benefit
• Maximizing long-run benefit linked to

maximizing long-run production maximizing long-run production

• Long run production of oil & gas can only

be maximized by continual investment

• Alaska competes with other jurisdictions

for investment

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What is the Fair Share

• “The World is Flat”

– Capital is fluid – Capital is finite – Capital goes to where it gets the best deal Capital goes to where it gets the best deal

• What is “fair” is what you can get in a

competitive environment

• Have to consider how investing in Alaska

stacks up against other investment

• pportunities

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International Competitiveness

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$24 $20 Where did $100/bbl in Alaska Go in 2008? Producers Costs

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$56 State & Federal Government

ConocoPhillips Financial Performance: Alaska vs. Rest of World 2008 & 2009 ($millions)* (Oil Prices averaged $62/bbl in 2009 and $100/bbl in 2008)

Alaska : Non-Alaska Rest of World Additional : Additional 2009 2008 (Difference) : 2009 2008 (Difference)

: Pre-tax income 3,391 7,064 3,673 : 6,799 21,506 14,707

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Pre-tax income 3,391 7,064 3,673 : 6,799 21,506 14,707 : Total taxes 1,851 4,749 2,898 : 4,837 12,000 7,163 : After-tax income 1,540 2,315 775 : 1,962 9,506 7,544 : Percentage of additional pre-tax income : retained after-tax 21% : 51%

* includes natural gas

50% 60% 70% 80% 90% Rate @ $100/bbl

International Marginal Tax Rates @ $100/bbl Market Price Tax & Royalty Regimes

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0% 10% 20% 30% 40% 50% U.S. GOM U.K. Alberta Thailand Australia Brazil Norway Alaska - ACES Marginal Tax Rate

55% 60% 65% 70% 75% 80% ective Tax Rate

International Effective Tax Rates (Total Tax / Net Value)

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40% 45% 50% 55% $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 Effectiv ANS Market Price ($/bbl) U.S. GOM U.K. Alberta Thailand Australia Brazil Norway Alaska - ACES

Evaluating ACES

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40% 50% 60% 70% 80% 90% 100% ginal Tax Rate

Gold-Plating How Much of a Dollar of Spending is Picked Up by Gov't

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0% 10% 20% 30% 40% $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 Margina ANS Market Price ($/bbl)

750,000 800,000 850,000 Forecast (bbls/day)

Dept of Revenue ANS Production Forecast Before & After ACES (bbls/day)

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600,000 650,000 700,000 2010 2011 2012 2013 2014 2015 2016 ANS Production For Spring 2007 Forecast (last forecast before ACES) Current Forecast (Fall 2010)

Fixing ACES

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How NOT to Fix It:

Mechanisms that Retain Current Structure

• More credits
• Go back to PPT
• Cap progressivity rate
• Reduce base rate

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$30 $40 $50 $60 dit / Severance Tax

Cash Flow Impact: Credits vs. ACES Severance Tax

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$0 $10 $20 $30 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 Per Barrel Credit ANS Market Price ($/bbl) per/bbl credits per/bbl severance tax

40% 50% 60% 70% 80% 90% 100% arginal Tax Rate

Marginal Tax Rate under PPT

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0% 10% 20% 30% $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 Marg ANS Market Price ($/bbl)

50% 60% 70% 80% 90% 100% inal Tax Rate

Marginal Tax Rate With Tax Rates Capped at 40% and 50%

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0% 10% 20% 30% 40% $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 Marginal ANS Market Price ($/bbl) Capped at 40% Capped at 50%

50% 60% 70% 80% 90% 100% nal Tax Rate

Marginal Tax Rate under ACES with a 15% Base Tax Rate

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0% 10% 20% 30% 40% 50% $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 Marginal ANS Market Price ($/bbl)

Proposal for Fix: Bracketed Tax Rates

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Brackets: Design Considerations

• Base rate
• When progressivity starts
• Number of brackets

Size of brackets

• Size of brackets
• Net value for peak
• Peak rate
• All gauged to international competitiveness

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Proposed Bracket Structure Based on Net Value p/bbl*

• $0/bbl - $30/bbl

20%

• Next $22/bbl ($30 - $52/bbl)

24%

• Next $21/bbl ($52 - $73/bbl)

29%

• Next $22/bbl ($73 - $95/bbl)

33%

• Next $22/bbl ($73 - $95/bbl)

33%

• Next $22/bbl ($95 - $117/bbl)

37%

• Next $21/bbl ($117 - $138/bbl)

41%

• Next $22/bbl ($138 - $160/bbl)

46%

• Anything over $160/bbl

50%

* These net values are approximately $30 less than market values (the ANS West Coast price).

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Example: $130/bbl ANS Market Price

Market Price $130 Costs $30 Net Value $100 Bracketed Tax

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Dollars in Tax Bracket Rate Tax Bracket 1: $0/bbl - $30/bbl $30 20.0% $6.00 Bracket 2: Next $22/bbl ($30-$52/bbl) $22 24.0% $5.28 Bracket 3: Next $21/bbl ($52-$73/bbl) $21 29.0% $6.09 Bracket 3: Next $22/bbl ($73-$95/bbl) $22 33.0% $7.26 Bracket 3: Next $5/bbl ($95-$100/bbl) $5 37.0% $1.85

Bracketed tax per barrel $26.48

80% 90% 100% nal Tax Rate

Marginal Tax Rate ACES & Proposed Bracketed

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50% 60% 70% $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 Marginal T ANS Market Price ($/bbl) ACES Bracketed

50% 60% 70% 80% 90% Rate @ $100/bbl

International Marginal Tax Rates @ $100/bbl Market Price Tax & Royalty Regimes

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0% 10% 20% 30% 40% U.S. GOM U.K. Alberta Thailand Australia Brazil Alaska - Bracket Norway Alaska - ACES Marginal Tax Rat

50% 55% 60% 65% 70% 75% 80% Effective Tax Rate

International Effective Tax (& Royalty) Rates

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40% 45% 50% $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 Ef ANS Market Price ($/bbl) U.S. GOM U.K. Alberta Thailand Australia Brazil Norway Alaska - ACES Alaska - Bracketed

$30 $40 $50 $60 $70 ev Tax Per Bbl

Severance Tax Per Barrel

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$0 $10 $20 $30 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 Sev Ta ANS Market Price ($/bbl) ACES BRACKETED