Legislature(2005 - 2006)HOUSE FINANCE 519
07/27/2006 10:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB3003 | |
| HB3004 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB3003 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB3001 | TELECONFERENCED | |
| += | HB3004 | TELECONFERENCED | |
Presentation by AOGA and AOGCC on HB 3001, HB 3003, HB 3004
JUDY BRADY, EXECUTIVE DIRECTOR, ALASKA OIL AND GAS
ASSOCIATION (AOGA), stated that all three bills raise taxes
on the oil and gas industry, but are very different.
Ms. Brady highlighted the changes and policy issues of each
piece of legislation. She read as follows (copy on file):
NB 3003 and HB 3004 are tax bills introduced for the first
time in this special session. Both proposed bills go back
to the present production tax - and add some new twists, in
order to increase taxes; HB 3004 adds complications to the
present tax system, and raises policy issues that are
arguably outside the call of this special session; both are
strictly tax increases on the gross production at a level
that fails to address the critical need for Alaska to
attract new investment at the same time as the state's
share in oil revenues increases.
You have heard us say many times that declining production
is the eight hundred pound gorilla in Alaska's future. Tax
legislation must be configured to attract the new
investment necessary to increase production. Incentives for
new investment and reasonable tax rates that keep Alaska
competitive with like oil and gas regions must be part of
the package. Any legislation that overreaches on tax rates
or neglects real world incentives will simply be a black
hole that leaves Alaska as a backwater in worldwide oil and
gas regions.
There are now l4 days left in this special session - and
four tax bills on the table. HB 3003 and HB 3004 you've
just been hearing. HB 3005 was introduced two days ago. We
understand two other bills are being drafted. Of the four
tax bills presently on the table, only one has been the
subject of long and intense review and scrutiny - and that
is HB 3001, the Petroleum Production Tax legislation. The
PPT legislation was the subject of hundreds of hours of
hearings in the last legislative session and in the last
special session. It has been reviewed and critiqued by
consultants hired by the legislature, the administration
and the oil and gas companies affected. The parameters of
this legislation are well understood.
We ask you to consider focusing the remaining days in this
special session on reviewing, finalizing and adopting HB
3001. The fact of the matter is that developing clear, fair
tax legislation that both incentivizes investment and
brings a larger share of revenue to the state is rocket
science. Those of you who have spent hundreds of hours
trying to develop fair, equitable legislation, are well
aware of this fact. Rocket science takes time and so does
tax legislation. The legislature has spent that time on a
new approach for oil production tax in Alaska - a tax that
reflects real production economics. A tax that substitutes
real cost figures for the proxy Economic Limit Factor. The
promise is that this tax will increase revenues to Alaska
by over one billion dollars a year. The promise is that in
addition to increased revenues, this tax will provide
incentives for new investments for the new production so
desperately needed.
AOGA Supports HB 3001 - Governor's PPT
• Even though many of our members remain concerned that
the increased level of state take reflected in this
bill will result in reduced investment in Alaska. This
bill would raise taxes on the industry over $1 billion
a year at $60/bbl.
• There continues to be a sense of astonishment in oil
and gas financial circles about this agreement to a tax
increase of this size.
• And would raise total government take to around 60%.
• "Government take" - royalty; production tax, corporate
income tax; property tax, federal taxes
• What do "costs" have to do with it - costs have to be
counted either directly or as a proxy to conserve oil
in the ground in maturing fields
• PPT more accurately reflects true production economics
• The balance in the PPT is the higher tax rate
counterbalanced by the reinvestment incentive.
• The balance is essential - throughout the hearings on
PPT there have been references to countries with a
"higher" government take than Alaska - as Pedro Van
Muers and other consultants have pointed out, many of
those countries either have government-owned oil
companies or are using production sharing contracts. In
both cases the governments take a bigger share of risk
for a bigger share of profits.
• Some policy makers seem to be frozen between the
concepts of "risk" and "profits". They want a lot more
of the share of the profits; they don't want any share
of the risk.
• This one-sided "two for me - one for you" won't work in
the worldwide competitive market. Under those terms,
Alaska's won't even place for new investment in any
serious way.
Gross Versus Net tax - Criticisms of a net system seem to
be based on a misunderstanding of how the present system
works and how the PPT would work.
• The ELF in the current system is a proxy for costs. So
in that sense the current system is a form of "net"
tax. The PPT simply substitutes real costs for the
proxy.
• Some legislators have expressed the concern that the
state does not have the capability to determine real
costs. However, the state currently audits the costs in
the netback in a lot of detail.
• Operating and capital costs are in our state income tax
return and property tax renderings.
11:19:22 AM
MIKE HURLEY, CONOCOPHILLIPS ALASKA, CHAIR OF AOGA TAX
COMMITTEE, spoke to auditing. Every return filed by the oil
companies is audited. The audit assessments over the past
several years have been within 2% for what is anticipated
payment. He reiterated that it is a 100% audit.
11:21:04 AM
Ms. Brady said she knew that the Department of Revenue has
the capability to audit. She addressed previous court cases
surrounding the production tax and prevailing value.
Currently, the state has been through all necessary steps
for a net production tax.
Ms. Brady continued with her presentation:
AOGA Does Not Support either HB 3003 or HB 3004
• These bills are simply tax increases with no
counterbalance
• No re-investment incentives, do nothing to stem decline
or encourage investment, there's no structural change
in the risk sharing.
• With HB 3003 ELF disappears so there's no recognition
of costs at all.
• HB 3004 is a band-aid approach - a higher rate, with
much more complexity. It seemed puzzling that the
sponsor spent so much of his time providing figures
about the industries profits, yet was proposing a tax
that has nothing to do with the profits.
Oil and Gas Tax Legislation Is Not a Game of Texas Hold 'Em
• Whether it is political one-ups-man-ship during an
election year - or real belief that Alaska does not
have to be competitive to attract new investment - the
bidding up of how much the state of Alaska can "make"
or "take" from oil production is going to lose the game
for all of us.
The end game for oil and gas tax legislation can be about a
higher return for the state of Alaska but must recognize
the need for incentives that foster additional investment -
bottom line - It is about increasing production and keeping
Alaska competitive.
The pipeline is only half full. This must be turned
around.
11:25:22 AM
Mr. Hurley addressed access. He maintained that access has
not been denied.
11:26:18 AM
REPRESENTATIVE LES GARA commented on the access issue. He
asked if ConocoPhillips' facilities had been made available
to small producers. Mr. Hurley replied that a company
called Windstar made use of ConocoPhillips' facilities but
came up with a dry hole. He stated that there has been no
production loss.
Representative Gara clarified that no other independent
company has been able to produce oil through ConocoPhillips'
facilities.
11:27:58 AM
Representative Gara wondered why, in spite of an increase in
profits, exploration and investment have not increased. Ms.
Brady replied that in the years when the oil company profits
increased, so did the state's. As far as further
investment, ConocoPhillips is investing "big time" this
year. There are more wells being drilled. She did not know
the investment figures, but thought all investments had
increased. Exploration doubled during that time period.
There is money going to investors in dividends and the
Alaska Permanent Fund benefits from that; there is money
going to investment; and there will be more buy outs.
Analysts look at the reserves, which need to be explored or
bought.
11:31:32 AM
Co-Chair Meyer commented on the only common ground found in
the net versus gross debate, which is to increase investment
and production. He asked if the net would help meet that
objective better. Ms. Brady replied it would; net is based
on profit. Net only, without incentives, would not work and
would be dangerous. Under the net tax, the state takes a
bigger risk through the incentives, and the companies can
afford to take less profit at the top. She concluded that
she prefers the net.
Co-Chair Meyer asked how to attract more oil companies to
Alaska. Ms. Brady replied that the fiscal system is the
only thing that the government can control. Shell Oil is
coming back into Alaska and other companies are showing an
interest. The state needs a big find.
11:34:57 AM
Co-Chair Meyer asked if AOGA represented all oil companies
in Alaska. Ms. Brady replied that it represents all 18
companies.
11:35:21 AM
Co-Chair Chenault addressed a question about Prudhoe Bay to
Mr. Hurley. He wondered what paper work would be required
to allow for "gaming" of the system. He did not envision a
scenario that the auditors could not work through. The
state can audit for any detail and the level of auditing
would be a choice made by the state and the legislature.
Co-Chair Chenault speculated that it would take all three
companies to successfully "game" the state. If that was
done there could be jail time and fines. Mr. Hurley agreed.
Co-Chair Chenault thought that there were protective
mechanisms in place.
11:39:09 AM
Representative Kerttula stated it wouldn't be collusion;
there could be disagreements with the state over the
rightful costs, which could result in court cases. Mr.
Hurley recalled that there was a past case settled regarding
tax costs. Representative Kerttula added that she has been
involved in tariff cases regarding disagreements. She spoke
to her history in the Department of Law. She disagreed with
the usage of "fraud".
Mr. Hurley noted that AOGA submitted comments on the
Governor's PPT bill requesting clarity on excluded costs.
There are concerns by the companies.
11:41:23 AM
Representative Kerttula foresaw problems with costs when
giving substantial weight to the agreements. She encouraged
that a standard be established. She emphasized it is not a
collusion situation.
11:42:28 AM
Ms. Brady pointed out that there is competition on the North
Slope. Each company thinks their way is the best. Over the
past 40 years, the state has had access to the disputed
information. Many issues have already been worked out. Mr.
Hurley pointed out grouping of costs, with 3 to 4 different
conceptual models:
* Inter-company billing
* IRS reference to ordinary and necessary
* DNR regulations for net profit sharing exclusions
11:45:42 AM
CATHY FOERSTER, COMMISSIONER, ALASKA OIL AND GAS
CONSERVATION COMMISSION (AOGCC), read from her prepared
testimony (copy on file.)
Before proceeding, I want to disclose to you that,
immediately prior to serving on the AOGCC, I worked as
an engineering consultant and, as such, I participated
in preparing the "North Slope of Alaska Facility
Sharing Study" performed by Petrotechnical Resources of
Alaska for the Division of Oil and Gas of the
Department of Natural Resources. I discussed this
participation with the other AOGCC commissioners and
they agreed that this did not represent a conflict of
interest. However, I did want to disclose the
information to you.
The AOGCC recognizes the need to enable new operators
to acquire reasonable access to existing facility
infrastructure.
If the Legislature adopts HB 3004, the AOGCC will do
our best to implement it. That said, there are a few
challenges to implementing this bill as it is currently
written and, if you'll bear with some technical
description from me, I'll explain what those are with
some suggested ways around them.
The bill requires working interest owners to provide
access to production or other facilities "only if the
commission finds that the facility has excess capacity
and that directing the working interest owner to
provide access by or for the benefit of others would
not materially interfere with the owner's paramount use
of the facility." The AOGCC has two concerns with this
wording.
First, there will never be excess capacity in the oil
production facilities that this bill is targeting.
11:49:52 AM
Representative Gara related that he does not dispute the
excess capacity issue. The question is if new facilities
should be expanded and the costs charged to the company.
Ms. Foerster explained the capacity design by providing the
history of oil, gas, and water in various fields. She used
the example of expanded facilities and no excess capacity.
The gas and water continue to increase, but not all oil
produced can fit into the facility, which becomes a problem.
She showed a hypothetical situation where Tarn comes in with
10,000 barrels and where that same amount must be taken out
to provide room. Each well takes a priority ranking and the
bottom wells get "backed out". There is no cost at this
point to get into the facility.
11:57:16 AM
Ms. Foerster discussed how a new player with 10,000 barrels
of oil would enter the market, backing out 9,000 barrels of
water and 1,000 barrels of water. The cost to get in would
be the sum of lost revenue and profit. The costs are very
clearly spelled out in the DNR study. The lost area costs
are debatable. The third issue concerns what a fair profit
would be. Negotiation would have to take place.
12:00:59 PM
Co-Chair Meyer asked if the process would scare off new
producers. Ms. Foerster said her opinion is that people
assume that there is a monopoly going on. She suggested
talking to Windstar who negotiated with ConocoPhillips.
Co-Chair Meyer commented that that was a dry hole. Ms.
Foerster maintained that the negotiation process was held
and was valuable.
12:03:19 PM
Ms. Foerster continued to read from her handout:
Even if we get past the "excess capacity" wording,
there is a second complication. Since the owner's
paramount use of the facility is to separate the
associated gas and water from their oil, any back out
for another operator would interfere with their
"paramount use of the facility."
Supposing that we work our way past these two concerns,
let's next take a look at the fiscal impact.
First, a primary role here is a rate-setting role, and
the AOGCC has no staffing or experience in rate
setting. Therefore, to take on this rate-setting role
we would have to hire accountants and/or other
financial expertise. Second, we would need someone on
staff who understands and can oversee facility
optimization; we currently have no one on staff to
perform that function.
12:05:02 PM
We have one final concern with placing this authority
within the AOGCC. And that is the potential for
conflict with the AOGCC's role implementing the Oil &
Gas Conservation Act. The commission is charged with
preventing waste, ensuring greater ultimate recovery,
protecting correlative rights, and protecting ground
waters. Decisions under this bill may be in conflict
with the commission's responsibility to prevent waste
of hydrocarbon resources and ensure greater ultimate
recovery. For example, granting access to a production
facility for one WIO's high-oil-rate well may result in
the permanent loss of oil from the WIO whose marginal
well is backed out of the facility.
Our recommendation would be to give this rate-setting
responsibility to either a new or an existing agency
that is intended as a rate-setting agency.
I want to conclude by reiterating what I said first:
The AOGCC recognizes the need to enable new operators
to acquire reasonable access to existing facility
infrastructure, and if the Legislature adopts HB 3004,
the AOGCC will do our best to implement it.
12:07:05 PM
Co-Chair Chenault suggested Representative Gara and AOGCC
meet to discuss the issues and work out their differences.
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