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 1

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 2

U.S. Tax Rate for Single Taxpayer • First $8,350 10% • Next $25,600 15% • Next $48,300 25% • Next $89,300 Next $89,300 28% 28% • Next $201,400 33% • Anything over $372,950 35% 3

What Happens to the First Dollar of Value under ACES First Dollar of Value 60% 55% 50% 45% 40% Tax Rate on the Firs 35% 30% 25% 20% Net Value per Barrel ($/bbl) 4

Marginal Tax Rate under ACES (All State & Federal Taxes & Royalties) How Much Gov't Gets When Price Goes Up $1 100% 90% 80% ginal Tax Rate 70% 60% 50% Margina 40% 40% 30% 20% 10% 0% $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 ANS Market Price ($/bbl) 5

Relative Taxes Under ACES $60 $50 r Barrel Taxes $40 $30 Per Bar $20 $10 $0 $50 $70 $90 $110 $130 $150 ANS Market Price ($/bbl) royalty severance tax (ACES) property tax state & fed corp inc tax 6

Conceptual Net Present Value to Producers ACES vs. Bracketed Tax Structure Producers ($) NPV to Pro Price ($/bbl) ACES Tax Structure Bracketed Tax Structure 7

Hypothetical Expected Price Distribution 25% 20% of Certain Price 15% Probability of C 10% 5% 0% $30 $50 $70 $90 $110 $130 $150 $170 $190 $210 $230 $250 Oil Price ($/bbl) 8

Getting a Fair Share 9

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 10

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 opportunities 11

International Competitiveness 12

Where did $100/bbl in Alaska Go in 2008? Costs Producers $24 $20 State & Federal Government $56 13

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

International Marginal Tax Rates @ $100/bbl Market Price Tax & Royalty Regimes 90% 80% Rate @ $100/bbl 70% 60% 50% 50% Marginal Tax Rate 40% 30% 20% 10% 0% U.S. GOM U.K. Alberta Thailand Australia Brazil Norway Alaska - ACES 15

International Effective Tax Rates (Total Tax / Net Value) 80% 75% 70% ective Tax Rate 65% 60% Effectiv 55% 55% 50% 45% 40% $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 ANS Market Price ($/bbl) U.S. GOM U.K. Alberta Thailand Australia Brazil Norway Alaska - ACES 16

Evaluating ACES 17

Gold-Plating How Much of a Dollar of Spending is Picked Up by Gov't 100% 90% 80% ginal Tax Rate 70% 60% 50% Margina 40% 40% 30% 20% 10% 0% $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 ANS Market Price ($/bbl) 18

Dept of Revenue ANS Production Forecast Before & After ACES (bbls/day) 850,000 Forecast (bbls/day) 800,000 750,000 ANS Production For 700,000 650,000 600,000 2010 2011 2012 2013 2014 2015 2016 Spring 2007 Forecast (last forecast before ACES) Current Forecast (Fall 2010) 19

Fixing ACES 20

How NOT to Fix It: Mechanisms that Retain Current Structure • More credits • Go back to PPT • Cap progressivity rate • Reduce base rate 21

Cash Flow Impact: Credits vs. ACES Severance Tax dit / Severance Tax $60 $50 $40 $30 $30 Per Barrel Credit $20 $10 $0 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 ANS Market Price ($/bbl) per/bbl credits per/bbl severance tax 22

Marginal Tax Rate under PPT 100% 90% 80% 70% arginal Tax Rate 60% 50% 40% Marg 30% 20% 10% 0% $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 ANS Market Price ($/bbl) 23

Marginal Tax Rate With Tax Rates Capped at 40% and 50% 100% 90% 80% inal Tax Rate 70% 60% 50% Marginal 40% 30% 20% 10% 0% $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 ANS Market Price ($/bbl) Capped at 40% Capped at 50% 24

Marginal Tax Rate under ACES with a 15% Base Tax Rate 100% 90% 80% 70% nal Tax Rate 60% 50% 50% Marginal 40% 30% 20% 10% 0% $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 ANS Market Price ($/bbl) 25

Proposal for Fix: Bracketed Tax Rates 26

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 27

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) • Next $22/bbl ($73 - $95/bbl) 33% 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). 28

Example: $130/bbl ANS Market Price Market Price $130 Costs $30 Net Value $100 Bracketed Tax 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 29

Marginal Tax Rate ACES & Proposed Bracketed 100% 90% nal Tax Rate 80% Marginal T 70% 60% 50% $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 ANS Market Price ($/bbl) ACES Bracketed 30

International Marginal Tax Rates @ $100/bbl Market Price Tax & Royalty Regimes 90% 80% Rate @ $100/bbl 70% 60% 50% Marginal Tax Rat 40% 30% 20% 10% 0% U.S. GOM U.K. Alberta Thailand Australia Brazil Alaska - Norway Alaska - Bracket ACES 31

International Effective Tax (& Royalty) Rates 80% 75% 70% Effective Tax Rate 65% 60% 55% Ef 50% 50% 45% 40% $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 ANS Market Price ($/bbl) U.S. GOM U.K. Alberta Thailand Australia Brazil Norway Alaska - ACES Alaska - Bracketed 32

Severance Tax Per Barrel $70 $60 $50 ev Tax Per Bbl $40 Sev Ta $30 $30 $20 $10 $0 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 ANS Market Price ($/bbl) ACES BRACKETED 33