Legislature(2011 - 2012)HOUSE FINANCE 519

03/28/2011 01:30 PM FINANCE

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01:37:36 PM Start
01:38:13 PM HB110
02:58:25 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 110                                                                                                            
     "An  Act relating  to the  interest rate  applicable to                                                                    
     certain amounts due for fees,  taxes, and payments made                                                                    
     and property  delivered to  the Department  of Revenue;                                                                    
     relating  to  the  oil and  gas  production  tax  rate;                                                                    
     relating to  monthly installment payments  of estimated                                                                    
     oil and  gas production  tax; relating  to oil  and gas                                                                    
     production  tax   credits  for   certain  expenditures,                                                                    
     including  qualified capital  credits for  exploration,                                                                    
     development,   and   production;    relating   to   the                                                                    
     limitation  on assessment  of  oil  and gas  production                                                                    
     taxes;  relating to  the determination  of oil  and gas                                                                    
     production  tax values;  making conforming  amendments;                                                                    
     and providing for an effective date."                                                                                      
1:38:13 PM                                                                                                                    
Co-Chair  Stoltze  discussed  that  Rena  Delbridge,  Staff,                                                                    
Representative Mike Hawker would  provide an overview of the                                                                    
proposed CS HB 110 (FIN) 27-GH1007\I (Bullock 3/27/2011).                                                                       
Vice-chair  Fairclough MOVED  to ADOPT  workdraft CS  HB 110                                                                    
(FIN) 27-GH1007\I (Bullock 3/27/2011).                                                                                          
Co-Chair Stoltze OBJECTED for purpose of discussion.                                                                            
Representative   Gara   had   several  questions   for   the                                                                    
Department of  Revenue (DOR) related  to the  Fraser Report.                                                                    
Additionally,  he  had  read an  article  that  called  into                                                                    
question some of the prior  testimony by petroleum economist                                                                    
Roger  Marks  related  to  the  tax  system  in  the  United                                                                    
Co-Chair  Stoltze relayed  that  the bill  sponsor would  be                                                                    
available  for  additional questions  at  a  later time.  He                                                                    
clarified that his office would relay the question to DOR.                                                                      
Representative  Gara  communicated  that he  would  like  to                                                                    
speak  to  Commissioner Bryan  Butcher  in  person during  a                                                                    
committee meeting.                                                                                                              
1:41:56 PM                                                                                                                    
RENA   DELBRIDGE,   STAFF,   REPRESENTATIVE   MIKE   HAWKER,                                                                    
discussed the proposed CS HB  110 (FIN) 27-GH1007\I (Bullock                                                                    
3/27/2011). She informed the committee  that two changes had                                                                    
been made  to the title to  conform to Section 8  in the CS.                                                                    
Sections 1 through 5 that  related to interest rates had not                                                                    
Representative  Doogan wondered  what  specific changes  had                                                                    
been made  to the  title. Ms.  Delbridge explained  that the                                                                    
terms  "estimated,"   in  Line   4  and  "relating   to  the                                                                    
determination of,"  in Lines 6  and 7 had been  deleted from                                                                    
the title.                                                                                                                      
Co-Chair  Stoltze discussed  that a  redline version  of the                                                                    
bill would be provided.                                                                                                         
Ms. Delbridge continued to address  changes that appeared in                                                                    
the CS. Section  6 limited the lowered  tax rate eligibility                                                                    
to the first seven years  of sustained production. Section 7                                                                    
included new language that clarified  the "brackets" and had                                                                    
been  recommended  by   Donald  Bullock,  Legislative  Legal                                                                    
Counsel. She  explained that  the change  did not  alter the                                                                    
net effect of  the original brackets that  had been proposed                                                                    
by the governor. Section 7  of the House Resources Committee                                                                    
(Resources) version  had been deleted  and Section 8  of the                                                                    
CS  restored   a  monthly  progressivity   tax  calculation.                                                                    
Sections 9,  10, and  11 were  unchanged from  the Resources                                                                    
Sections  10, 11,  and  12. Sections  12 and  13  in the  CS                                                                    
modified the  issuance of tax  certificates to  occur within                                                                    
one year instead  of over two years. Sections  14 through 17                                                                    
related to the well  expenditure lease credit that increased                                                                    
from 20 percent  to 40 percent and a ten-year  sunset on the                                                                    
increase  related  to  the  North   Slope.  Section  18  was                                                                    
unchanged  from the  Resources Section  18.  Section 19  was                                                                    
unchanged  from the  Resources Section  20. Section  19 from                                                                    
the Resources version was not included in the CS.                                                                               
1:45:26 PM                                                                                                                    
Representative Gara  asked about  the details of  Section 19                                                                    
that was  included in the  Resources version.  Ms. Delbridge                                                                    
responded that Section 19 had  related to an increase in the                                                                    
small  producer  credit  from  $12  million  to  up  to  $15                                                                    
Ms. Delbridge discussed  that Section 20 in the  CS had been                                                                    
unchanged from Section 22 in  the Resources version. Section                                                                    
21 was unchanged  from Section 23 in  the Resources version.                                                                    
Sections 22 and 23 in  the CS were new conforming amendments                                                                    
that  accommodated the  ten-year  sunset on  the well  lease                                                                    
expenditure  credit  that  had  been added  in  Section  14.                                                                    
Section  24 was  unchanged  from the  Resources Section  28.                                                                    
Section  25 was  unchanged  from the  Resources Section  29.                                                                    
Section  26 was  unchanged  from the  Resources Section  30.                                                                    
Section  27 was  unchanged  from the  Resources Section  31.                                                                    
Section 28 was unchanged  from Resources Section 32. Section                                                                    
29  dealt   with  applicability.  Sections  30   through  36                                                                    
addressed retroactivity and effective dates.                                                                                    
DONALD BULLOCK,  LEGISLATIVE COUNSEL, DIVISION OF  LEGAL AND                                                                    
RESEARCH  SERVICES,  LEGISLATIVE AFFAIRS  AGENCY,  discussed                                                                    
that one of  the most significant effective dates  in the CS                                                                    
related to  the 25  percent and 15  percent tax  changes and                                                                    
the two levels of progressivity  that took effect January 1,                                                                    
Representative  Gara  asked  whether   there  had  been  any                                                                    
additional  changes   related  to  the  credits   that  were                                                                    
included  in   the  Resources  version  of   the  bill.  Ms.                                                                    
Delbridge responded  in the  affirmative and  explained that                                                                    
the Resources Section  21 that established a  new credit for                                                                    
30 percent  of exploration  outside of  an existing  unit or                                                                    
within  a unit  formed after  a  certain date  had not  been                                                                    
included in the Finance CS.                                                                                                     
Representative Gara wondered  whether, aside from conforming                                                                    
language, all of  the credit provisions were the  same as in                                                                    
the governor's  original legislation. Ms.  Delbridge replied                                                                    
that she would follow up on the question.                                                                                       
Co-Chair   Stoltze   noted    that   the   provisions   were                                                                    
substantially the same.                                                                                                         
Representative Hawker clarified that  the change was related                                                                    
to the implementation of a  10-year sunset on the well lease                                                                    
expenditure  credit that  increased  from 20  percent to  40                                                                    
Vice-chair Fairclough added that the  15 percent tax base in                                                                    
the second tax bracket was  limited to the first seven years                                                                    
of production. The  producer would then go up  to the second                                                                    
tier or  first tier  at the 25  percent rate.  She explained                                                                    
that  the limit  would apply  to each  individual well,  the                                                                    
producer of the well, and the  time period that the well had                                                                    
to recover its cost at the lower rate.                                                                                          
1:50:22 PM                                                                                                                    
Co-Chair Stoltze  discussed his desire  to adopt the  CS but                                                                    
did  not  want  to  move   faster  than  the  committee  was                                                                    
comfortable  with. He  believed  there would  be a  vigorous                                                                    
amendment process.                                                                                                              
Representative Doogan  asked for  detail on the  portions of                                                                    
the  Resources version  that had  not been  included in  the                                                                    
current CS. Ms. Delbridge discussed  that the current CS did                                                                    
not  include the  Resources language  that  had lowered  the                                                                    
floor  for the  minimum  tax. Section  17  of the  Resources                                                                    
version that provided a new  credit related to wages paid to                                                                    
Alaska workers in the Resources  version was not included in                                                                    
the Finance  CS. Section  19 of  the Resources  version that                                                                    
increased the small producer credit  from $12 million to $15                                                                    
million  was  not  included.  Language  from  the  Resources                                                                    
version  that  created  a  new  credit  for  30  percent  of                                                                    
exploration  outside  of  existing  units  or  within  units                                                                    
formed after a certain  date was not included. Additionally,                                                                    
Resources  Section  24  that eliminated  the  distance  from                                                                    
existing unit  boundaries in well  requirements in  order to                                                                    
be eligible for the 30 percent credit was not included.                                                                         
Co-Chair Stoltze appreciated the clarification.                                                                                 
1:53:04 PM                                                                                                                    
Ms.  Delbridge relayed  that the  Finance CS  maintained the                                                                    
extension  of  the  eligibility for  exploration  and  small                                                                    
producer credits  from the current  statute date of  2016 to                                                                    
2021 that had been included in the Resources version.                                                                           
Representative Doogan wondered  about the additional changes                                                                    
in  the  legislation  that did  not  involve  the  Resources                                                                    
version. Ms. Delbridge communicated  that the CS limited the                                                                    
benefits  of the  15 percent  base  rate tier  to the  first                                                                    
seven  years after  sustained production  began and  at that                                                                    
point the production  would be taxed at the  25 percent base                                                                    
rate tier.                                                                                                                      
Representative Doogan  asked for  confirmation that  at year                                                                    
eight the  15 percent base  rate tier would increase  to the                                                                    
25  percent base  rate tier.  Ms. Delbridge  replied in  the                                                                    
affirmative  and   explained  that  after  seven   years  of                                                                    
sustained  production  a  producer  would be  moved  to  the                                                                    
higher bracket.                                                                                                                 
Ms. Delbridge  continued to  discuss the  additional changes                                                                    
in the  Finance CS. She  explained that the CS  restored the                                                                    
progressivity  tax  back from  an  annual  calculation to  a                                                                    
monthly  calculation. Additionally,  the CS  included a  10-                                                                    
year sunset on the 40  percent well lease expenditure credit                                                                    
that  had been  extended  to  the North  Slope  in both  the                                                                    
original and Resources versions of the bill.                                                                                    
Mr. Bullock discussed  that the CS excluded  an amendment to                                                                    
AS 43.55.160  that provided instruction on  how to determine                                                                    
the production  tax value. He explained  that the governor's                                                                    
bill had  amended the  section to address  the new  tax plan                                                                    
that took  out the monthly progressivity  determination. The                                                                    
proposed CS returned to the  current status, including fixed                                                                    
rates of 15 percent and  25 percent in 43.55.011(e), and the                                                                    
progressivity  rates   in  AS  43.55.011(g).   The  existing                                                                    
43.55.160(a) that  addressed the annual calculation  and the                                                                    
monthly  calculation would  work  with  the current  version                                                                    
without an amendment.                                                                                                           
Co-Chair  Stoltze   asked  whether  the  objection   to  the                                                                    
adoption of  workdraft CS HB 110  (FIN) 27-GH1007\I (Bullock                                                                    
3/27/2011) was maintained.                                                                                                      
Hearing no further objection the CS was ADOPTED.                                                                                
1:57:32 PM                                                                                                                    
AT EASE                                                                                                                         
1:59:03 PM                                                                                                                    
BRYAN   BUTCHER,   COMMISSIONER,  DEPARTMENT   OF   REVENUE,                                                                    
discussed  that DOR  had not  had ample  time to  thoroughly                                                                    
read  the  CS, but  would  be  happy  to discuss  any  other                                                                    
questions the committee had.                                                                                                    
Co-Chair Stoltze  communicated that  there would be  time to                                                                    
digest the changes to the bill.                                                                                                 
Representative   Gara   asked   whether   the   commissioner                                                                    
remembered telling  the Resources Committee that  the Fraser                                                                    
Report  (a survey  of oil  company  executives) showed  that                                                                    
only  56 percent  of  the executives  saw  Alaska's oil  tax                                                                    
system as a  non-deterrent to investment and  44 percent saw                                                                    
it  as a  deterrent. Commissioner  Butcher responded  in the                                                                    
Representative Gara relayed that  his office had spoken with                                                                    
the  author  of  the  report  who  had  explained  that  the                                                                    
pertinent information  on oil tax and  royalties was located                                                                    
in the  fiscal terms section.  He discussed that  the fiscal                                                                    
terms  section showed  that 74  percent  of companies  found                                                                    
Alaska's oil  tax system as  a non-deterrent  to investment.                                                                    
He  expounded   that  DOR   had  mistakenly   referenced  an                                                                    
incorrect  section  of   the  report.  Commissioner  Butcher                                                                    
agreed that DOR had been trying  to present its focus on the                                                                    
tax regime.  However, he discussed that  DOR's testimony had                                                                    
not been related  to production tax and  the department felt                                                                    
it  had  provided  a  snapshot that  depicted  how  the  oil                                                                    
industry viewed  Alaska. He relayed  that the tax  regime in                                                                    
Alaska was  extremely low  and there was  no state  sales or                                                                    
income tax. He  reported that out of all of  the states that                                                                    
had  been studied  the  only states  the  industry rated  as                                                                    
having a works  tax regime than Alaska  were California, New                                                                    
York, and Florida. He reiterated  that the survey provided a                                                                    
snapshot which  showed that the  general view of  Alaska was                                                                    
much more pessimistic  than it deserved to  be. He discussed                                                                    
that  the  department  had  discontinued  using  the  Fraser                                                                    
Report and  the Wood Mackenzie Report,  which rated Alaska's                                                                    
fiscal situation as 129 out of  141, and had begun to narrow                                                                    
its  focus to  specific items  that were  known such  as the                                                                    
decline, the lack of exploration, etc.                                                                                          
Representative  Gara discussed  that  "tax  regime" was  the                                                                    
Fraser  Report's  definition  of personal  taxes,  corporate                                                                    
payroll  and capital  taxes; however,  the report  indicated                                                                    
that there was a much  higher number than DOR had previously                                                                    
testified that  saw Alaska's oil royalty  and production tax                                                                    
system as  favorable. Commissioner  Butcher answered  in the                                                                    
affirmative,  but  noted that  DOR  had  been attempting  to                                                                    
present something a bit different.                                                                                              
Representative  Gara discussed  that  DOR had  characterized                                                                    
the Alaska  tax system  as out of  whack; however,  when the                                                                    
Fraser Report  ranked Alaska's production taxes  it put more                                                                    
than half  of the  jurisdictions that  had been  surveyed as                                                                    
less competitive  than Alaska in  terms of  production taxes                                                                    
and royalties.  Commissioner Butcher  replied that  the more                                                                    
DOR had dug into the issue  it had discovered that there was                                                                    
never an  apples to  apples comparison.  In addition  to the                                                                    
Fraser Report,  the department had pulled  the Wood McKenzie                                                                    
report that  had been much more  negatively weighted towards                                                                    
Alaska compared  to other reports.  He explained  that there                                                                    
were a significant  number of variables to  consider and DOR                                                                    
did  not want  to lose  the focus  on what  the decline  and                                                                    
exploration activity had been in the state.                                                                                     
Representative  Gara  responded   that  the  department  had                                                                    
presented  the wrong  chart to  the Resources  Committee and                                                                    
the  chart that  applied to  Alaska's oil  taxes ranked  the                                                                    
state  much more  favorably. He  emphasized that  DOR should                                                                    
have  corrected its  mistake and  presented the  appropriate                                                                    
chart to the House Finance Committee.                                                                                           
Vice-chair Fairclough believed there did  not appear to be a                                                                    
way to  compare one  Fraser Report  to another  to determine                                                                    
whether respondents  had changed their views.  There was not                                                                    
a defined  set of criteria  to provide a consistent  look at                                                                    
something. She believed that Wood  Mackenzie polled from the                                                                    
same type  of people  on a  continuous basis.  She discussed                                                                    
that the Fraser Report had  been pulled because its accuracy                                                                    
had been  brought into question. She  added that respondents                                                                    
were paid $1000 for their response  and it did not provide a                                                                    
consistent message given  that there was no way  to know who                                                                    
the  respondents  were.  She had  heard  the  administration                                                                    
voice  that  there  was  a  different  look  each  time  the                                                                    
information  was  presented  and that  sometimes  it  looked                                                                    
favorable and  other times  it did not.  She hoped  that the                                                                    
committee  would listen  to Alaskans  who were  telling them                                                                    
that there was  job loss and that there  was production loss                                                                    
in the  service industry  that supplied labor  and materials                                                                    
to North Slope production.                                                                                                      
2:08:01 PM                                                                                                                    
Representative Hawker  had a  copy of  the Fraser  Report in                                                                    
question  and  believed that  the  entire  report should  be                                                                    
taken  with  a  grain  of  salt. He  read  from  the  survey                                                                    
methodology that "names of  potential respondents were taken                                                                    
from   publicly   available   membership  lists   of   trade                                                                    
associations.  Some  Canadian   trade  commissioners  abroad                                                                    
provided names of individuals in  their host countries. Some                                                                    
trade  industry associations  assisted by  providing contact                                                                    
information  with  individuals   of  member  companies."  He                                                                    
relayed that there  were a total of 645  responses, but they                                                                    
only  represented  364  different companies.  He  emphasized                                                                    
that  only three  out of  every  five respondents  indicated                                                                    
that they  held a  managerial position  or were  officers of                                                                    
companies. He read  from a copy of the  solicitation for the                                                                    
2011  Global  Petroleum Survey:  "please  note  that if  you                                                                    
complete  the  survey  and  provide  us  with  your  contact                                                                    
information, at  the end  of the  questionnaire you  will be                                                                    
entered into a drawing for $1000."                                                                                              
Co-Chair Stoltze appreciated the clarification.                                                                                 
Representative   Doogan  hoped   that   the  Fraser   Report                                                                    
discussion was at  an end and noted  that the administration                                                                    
should  not  have presented  the  report  if  it was  not  a                                                                    
reliable form of information. He  asked for clarification on                                                                    
the department's  response to  Question 7  in its  March 28,                                                                    
2011  letter that  was provided  to the  committee (copy  on                                                                    
file). He  wondered whether the  legislature would  not have                                                                    
the full  cost of  HB 110  until 2014.  Commissioner Butcher                                                                    
replied in the affirmative.                                                                                                     
Representative Doogan  thought costs to the  state that were                                                                    
indicated  by DOR  for 2014  were between  $1.3 billion  and                                                                    
$1.5  billion  plus  additional  costs  that  had  not  been                                                                    
determined.    Commissioner   Butcher    replied   in    the                                                                    
Representative  Doogan  asked why  it  was  not possible  to                                                                    
figure out what the  additional costs would be. Commissioner                                                                    
Butcher  discussed  that  it  was  impossible  to  determine                                                                    
whether there  would be  a net positive  or net  negative in                                                                    
2014 related to a change in  interest rate. There would be a                                                                    
15 percent tax rate for  areas that were not currently being                                                                    
developed.  The  state  was   currently  not  receiving  any                                                                    
revenue from  the areas; however, when  development occurred                                                                    
the number would become positive.                                                                                               
Representative  Doogan  surmised that  it  would  be a  good                                                                    
thing if  it happened at all.  Commissioner Butcher answered                                                                    
in the affirmative.                                                                                                             
Representative  Doogan  asked about  item  9  in Question  7                                                                    
related  to the  expansion of  exploration credits  that was                                                                    
listed as  indeterminate in  the March  28 letter  from DOR.                                                                    
Commissioner Butcher  responded that the  exploration credit                                                                    
item had  been added  in the  House Resources  Committee and                                                                    
that DOR considered it as  an indeterminate cost because the                                                                    
department did  not know to  what degree the credits  may or                                                                    
may not be used. The number  would be zero in the event that                                                                    
the exploration credits were not  used; however, it would be                                                                    
an undetermined  number in the  event that the  credits were                                                                    
Co-Chair  Stoltze  noted that  there  would  be a  committee                                                                    
discussion  related  to the  fiscal  impact  of the  CS.  He                                                                    
encouraged   Representative   Doogan    to   continue   with                                                                    
additional questions.                                                                                                           
Representative Doogan asked about items  10 and 12 that were                                                                    
listed as indeterminate in  Question 7. Commissioner Butcher                                                                    
responded  that item  10  related to  the  extension of  the                                                                    
small producer credit from 2016  to 2021. The department had                                                                    
no idea what activity would be  used for the credit. Item 12                                                                    
that added  a credit in  the amount of producers'  wages and                                                                    
compensation paid  to Alaska resident workers  that exceeded                                                                    
80  percent,  was  not  in  the current  CS.  The  cost  was                                                                    
indeterminate  because  it  had been  nearly  impossible  to                                                                    
determine how  the credit would  be used. He  explained that                                                                    
many companies had  a small number of employees  and a large                                                                    
number of contractors that  could potentially manipulate the                                                                    
system  so  that  over  80 percent  of  the  company's  five                                                                    
employees  would  be Alaska  workers,  and  it was  next  to                                                                    
impossible to  determine what  impact it  would have  on the                                                                    
2:14:48 PM                                                                                                                    
Representative   Doogan   asked   whether  it   was   really                                                                    
impossible to  estimate what the  additional costs  would be                                                                    
in the event  that all of the provisions  listed in Question                                                                    
7 were  included in the  bill. He understood that  the items                                                                    
were  not all  included  in  the CS  and  that  it would  be                                                                    
necessary to make that distinction as well.                                                                                     
Commissioner Butcher  supposed that  DOR may have  been able                                                                    
to come  up with a  no-clue guess for  five to ten  years in                                                                    
the future. He used the 2016  to 2021 language from the bill                                                                    
as an  example and explained that  DOR would have to  try to                                                                    
estimate  the amount  of  credits that  would  be used  five                                                                    
years  from the  present date  and  going out  to ten  years                                                                    
without any knowledge about what  bill the legislature would                                                                    
decide to pass.  He added that it had been  too difficult to                                                                    
come up  with a number in  the time that the  department had                                                                    
been given.                                                                                                                     
Representative   Doogan  expressed   his   desire  for   the                                                                    
department's best guess regarding  the potential cost of the                                                                    
bill prior to its departure  from committee. He believed the                                                                    
claim that  it was impossible  to be certain what  the costs                                                                    
would be  was not  a persuasive  argument given  that fiscal                                                                    
notes  were frequently  a best  guess. Commissioner  Butcher                                                                    
responded  by  providing an  example  related  to the  small                                                                    
producer credit  from 2016 to 2021  that was likely to  be a                                                                    
very small number. A 15  percent bracket for areas that were                                                                    
not  currently  under development  could  have  been in  the                                                                    
hundreds  of millions  to billions  of dollars  depending on                                                                    
the areas such as Great Bear  or the Brooks Range. He opined                                                                    
that the indeterminate negatives  would be much smaller than                                                                    
the  indeterminate  positives.   The  department  could  not                                                                    
provide a prediction  on what the exact  production would be                                                                    
in  different  areas  in  the  future as  a  result  of  the                                                                    
Representative Doogan  understood that  it was  difficult to                                                                    
determine  an estimate  but he  expected  the department  to                                                                    
provide  a   verifiable  price   tag  on   the  legislation.                                                                    
Commissioner  Butcher responded  that he  would look  at the                                                                    
data  but he  did  not have  a crystal  ball  and could  not                                                                    
estimate  what the  production would  be with  an acceptable                                                                    
2:18:45 PM                                                                                                                    
Representative Costello  wondered whether DOR had  looked at                                                                    
the levels of  production that were needed in  order for the                                                                    
present legislation to result  in revenue that would surpass                                                                    
funds generated  from ACES. She  recounted testimony  from a                                                                    
DOR presentation that  for HB 110 to surpass  the revenue of                                                                    
ACES  that the  state would  need  a 5  percent increase  in                                                                    
production at $80 a barrel, a  10 percent increase at $100 a                                                                    
barrel, and a 15 percent increase  at $120 a barrel. She had                                                                    
found the  presentation helpful because it  was not possible                                                                    
to predict what  would happen. She noted  that companies had                                                                    
testified  that  they  would  take  another  look  at  their                                                                    
inventory  and consider  investing in  Alaska when  the bill                                                                    
passed.  Commissioner Butcher  replied  that the  department                                                                    
had  worked to  look  at  as many  angles  as possible,  but                                                                    
unfortunately  it was  extremely  difficult  because of  the                                                                    
multiple  variables involved  that  included  tax, price  of                                                                    
oil,  and  how production  might  increase  or decrease.  He                                                                    
explained   that  when   numbers   were  indeterminate   the                                                                    
department  worked to  avoid  providing  the committee  with                                                                    
guesses  that could  have been  misleading.  He provided  an                                                                    
example that  DOR could put  an estimate in the  fiscal note                                                                    
that  15 percent  over the  next five  years would  bring in                                                                    
$600 million to  $1.2 billion in revenue.  He explained that                                                                    
DOR  was working  to  provide the  committee  with the  most                                                                    
precise  information possible  and did  not want  to mislead                                                                    
them with a guess.                                                                                                              
Representative  Gara wondered  whether the  department would                                                                    
incorporate its  new price estimates in  the existing fiscal                                                                    
note dated January  18. He elaborated that  DOR had recently                                                                    
raised its  forecast for the  price of  oil and that  with a                                                                    
higher price  in oil  the loss in  tax revenue  between ACES                                                                    
and the  proposed legislation would  be greater.  The fiscal                                                                    
note  showed that  the price  of oil  was estimated  at $1.3                                                                    
billion  in  FY16; however,  with  the  revised figures  the                                                                    
number  would be  greater  that  year. Commissioner  Butcher                                                                    
answered in  the affirmative. He  added that just as  it saw                                                                    
increased  revenue coming  into  the  state and  potentially                                                                    
more  revenue in  the Constitutional  Budget Reserve  (CBR),                                                                    
the increased price  of oil would result in  a larger short-                                                                    
term potential loss in revenue.                                                                                                 
Representative  Gara wondered  whether the  department could                                                                    
provide  an estimate  of the  fiscal cost  to the  state for                                                                    
reducing  the tax  from 25  percent down  to 15  percent for                                                                    
fields that  were going  to move  forward regardless  of the                                                                    
tax   decrease.  He   explained   that  ConocoPhillips   had                                                                    
announced  its  desire to  move  forward  on NPRA  [National                                                                    
Petroleum Reserve-Alaska]  development with the  approval of                                                                    
the Army Corps of Engineers.  He believed there was evidence                                                                    
that  Great Bear  and fracking  technology  would result  in                                                                    
increased production.  He relayed  that there had  also been                                                                    
discussion about  delayed but eventual production  at Umiat.                                                                    
Commissioner  Butcher responded  that from  the department's                                                                    
perspective that it was premature  to make assumptions about                                                                    
the future. He  used shale and Great Bear as  an example and                                                                    
explained that it was promising,  but the cost of drilling a                                                                    
well in  Alaska was three  times more than in  North Dakota.                                                                    
He  discussed  that it  would  be  much  harder to  have  an                                                                    
economic small  volume well  in Alaska than  it would  be in                                                                    
North Dakota. He relayed that it  did not make sense for the                                                                    
department  to try  to make  an  assumption about  potential                                                                    
development that could  occur under the current  tax when it                                                                    
was not sure what would occur under a 15 percent tax.                                                                           
2:23:46 PM                                                                                                                    
Co-Chair  Stoltze remarked  on the  impact of  environmental                                                                    
policy regarding fracking.                                                                                                      
Representative Gara disagreed  with the department's stance.                                                                    
He  believed  that  DOR  would start  taxing  fields  at  15                                                                    
percent  that would  have  been developed  and  taxed at  25                                                                    
percent  and that  it  would cost  the  state a  significant                                                                    
amount of money.                                                                                                                
Vice-chair  Fairclough  relayed that  Representative  Gara's                                                                    
statement may  have been  accurate for  a future  field that                                                                    
currently  did  not  have  a  permit;  however,  there  were                                                                    
existing producers  that were  caught in  the middle  of the                                                                    
present  debate  and  had   been  negatively  impacted.  She                                                                    
discussed  that  there had  been  testimony  the prior  week                                                                    
related to companies that had  entered Alaska's regime under                                                                    
the Petroleum Production  Tax (PPT) and had  been caught off                                                                    
guard  when  ACES had  been  implemented.  She relayed  that                                                                    
there  were  currently  uneconomical fields  that  had  been                                                                    
forced to  produce due  to debt in  excess of  $140 million.                                                                    
The  fields  would  begin  operating  in  order  to  recover                                                                    
shareholders investments  based on  a regime that  no longer                                                                    
Representative  Gara remarked  that  they  disagreed on  the                                                                    
Representative  Guttenberg  wondered   when  the  department                                                                    
would provide  the committee with  updated fiscal  notes. He                                                                    
thought  that DOR  could provide  projections that  used the                                                                    
current tax system  compared to the proposed  tax for fields                                                                    
that  were known  to be  coming  online. He  had received  a                                                                    
letter  from Professor  Reynolds,  an oil  economist at  the                                                                    
University  of  Alaska  Fairbanks who  projected  oil  would                                                                    
increase to  $200 or $300  based upon  world-wide production                                                                    
levels and decline. He was  concerned about the department's                                                                    
overall  inability broadcast  and to  forecast way  out into                                                                    
the  future  when  it  talked  about  the  bill's  focus  on                                                                    
changing behavior and making things  more economical and the                                                                    
relationship with  world competitive  costs. Over  the years                                                                    
the  legislature had  received reports  from Wood  Mackenzie                                                                    
and  Gaffney,   Cline  &   Associates  that   discussed  the                                                                    
expensive  but lucrative  nature  of doing  business on  the                                                                    
North Slope.  The whole premise  of the bill was  that there                                                                    
would  be a  change of  behavior; however,  it appeared  the                                                                    
department was  asking legislators to  take a leap  of faith                                                                    
and that  it had  no ability to  make projections  about new                                                                    
wells, exploration, and the location of new fields.                                                                             
2:28:52 PM                                                                                                                    
Co-Chair Stoltze replied that  the department would have the                                                                    
fiscal notes ready the following day.                                                                                           
Commissioner  Butcher responded  that  the department  would                                                                    
provide  a  fiscal  note  to  the  committee  after  it  had                                                                    
reviewed the  CS. He added that  DOR had made it  known that                                                                    
the U.S.  Department of Energy  had reported that  the state                                                                    
was not close  to a mature field. There had  been next to no                                                                    
exploration  on 75  percent  of state  land,  which was  the                                                                    
focus  of the  15  percent tax.  He  relayed that  questions                                                                    
related to geological information  should be directed to the                                                                    
Department of Natural Resources (DNR).                                                                                          
Representative Wilson wondered whether  the state was trying                                                                    
to  make it  more economical  to  extract the  oil that  was                                                                    
becoming  harder to  get. She  believed the  bill was  about                                                                    
increasing  activity and  not about  changing behavior.  She                                                                    
discussed that  activity could increase  as a result  of new                                                                    
technology.    Commissioner   Butcher    replied   in    the                                                                    
affirmative.  In discussions  with  DNR  the department  had                                                                    
learned that  the giant  Prudhoe field  and the  majority of                                                                    
the most easily obtained oil  had already been produced. The                                                                    
state was  looking at heavy oil,  infrastructure, challenges                                                                    
away  from the  Prudhoe  Bay field  and  TAPS [Trans  Alaska                                                                    
Pipeline System],  and issues that  were continuing  to spur                                                                    
production that  were much more  cost intensive  and complex                                                                    
than they were 30 years earlier.                                                                                                
Representative  Wilson opined  that there  appeared to  be a                                                                    
gap in  the correlation  between explorers and  producers in                                                                    
the  state.  She  knew  that the  number  of  explorers  had                                                                    
increased  in   Alaska.  Commissioner  Butcher   agreed.  He                                                                    
elaborated  that it  was necessary  to explore  in order  to                                                                    
develop and produce, but without  production the state would                                                                    
not receive what it hoped to from its natural resources.                                                                        
Representative  Wilson   ascertained  the  system   was  not                                                                    
working  and that  the purpose  of the  bill was  to sustain                                                                    
Alaska's oil fields  for a longer period of  time than would                                                                    
occur without any action.  Commissioner Butcher responded in                                                                    
the affirmative. He elaborated that  there would be a short-                                                                    
term reduction followed by a long-term gain.                                                                                    
2:32:27 PM                                                                                                                    
Representative Doogan  wondered whether DOR  had information                                                                    
to indicate that in five  years there would be an equivalent                                                                    
amount of oil in the pipeline  to match an expenditure of $5                                                                    
billion to $10 billion. He  discussed that there was a rough                                                                    
idea  of what  the costs  would  be that  depended on  items                                                                    
which  could  not be  nailed  down  presently; however,  the                                                                    
committee  had been  given no  idea about  what the  benefit                                                                    
might  be. He  was  not  aware of  any  guarantees from  oil                                                                    
companies that giving them $1.5  billion a year for the next                                                                    
five years, for  example, would result in  anything like the                                                                    
kind  of   oil  production   that  would  balance   out  the                                                                    
expenditure.  He thought  the  committee  would be  provided                                                                    
with  estimates, but  there had  been none  provided in  any                                                                    
presentation,   committee   meeting,  or   public   hearing.                                                                    
Commissioner  Butcher responded  that there  were almost  an                                                                    
infinite number  of possibilities that the  department would                                                                    
be happy  to run at  a member's request. He  reiterated that                                                                    
he  did not  have  a crystal  ball and  could  not read  the                                                                    
future. He stated  that the bill was  the governor's attempt                                                                    
to  change that  Alaska  did  not have  the  same amount  of                                                                    
exploration  that  other  areas had  been  experiencing.  He                                                                    
stressed that it would be  great if the bill was successful;                                                                    
however, a  change in the  law would likely be  discussed in                                                                    
the   future  if   it  was   unsuccessful.  The   department                                                                    
considered the  bill to  be a positive  step forward  and it                                                                    
hoped it was the correct solution.                                                                                              
Representative Doogan  could not believe that  the committee                                                                    
was discussing  a bill that  could potentially give  the oil                                                                    
industry somewhere in the range  of $1.5 billion or more per                                                                    
year  without any  concrete evidence  that it  would have  a                                                                    
desirable outcome. He  had not heard anything  that had made                                                                    
him  want to  vote in  favor of  the bill  and believed  the                                                                    
department was  asking the legislature  to "throw  the money                                                                    
up in the air  and hope that some of it  lands where we want                                                                    
it to."  Commissioner Butcher responded that  the department                                                                    
believed the industry would perceive  the bill as a material                                                                    
change and as something that  would make them reevaluate how                                                                    
they  viewed  Alaska.  The department  had  not  received  a                                                                    
guarantee   from   companies   that  they   would   increase                                                                    
development; however,  he added that  because of all  of the                                                                    
variables in the  future, he would be a  little concerned if                                                                    
he were on  the board of directors and the  company had made                                                                    
guarantees about  investment. He  did not believe  that ACES                                                                    
would  have passed  in  2007  if the  state  had looked  for                                                                    
guarantees four years  in the future regarding  the price of                                                                    
oil  and the  positive or  negative impact  the price  would                                                                    
have  on exploration  in  the state.  He  expounded that  it                                                                    
would not  have been possible  to see what  Texas, Oklahoma,                                                                    
North Dakota,  and other  areas would do  in the  future. He                                                                    
opined that  in order  to move forward  it was  necessary to                                                                    
make an assumption  and take a look at it  a few years later                                                                    
to  determine what  worked  and  what did  not  and to  take                                                                    
appropriate action.                                                                                                             
2:37:31 PM                                                                                                                    
Representative Hawker  expressed concern that  the committee                                                                    
was debating the bill.                                                                                                          
Co-Chair Stoltze  communicated that the topic  was important                                                                    
and did not want to stifle the conversation.                                                                                    
Representative  Hawker  disagreed  with the  statement  that                                                                    
there had been no testimony  about a potential upside to the                                                                    
bill. He opined  that there had been  assumptions made about                                                                    
prior testimony that  was not black and  white. He discussed                                                                    
that the $1.5  billion cost listed in the fiscal  note was a                                                                    
worst case  scenario that did  not factor in  any additional                                                                    
production into the  pipeline. He believed it  was a problem                                                                    
with the  fiscal note that  did not  accurately characterize                                                                    
the  debate  that members  had  heard.  He had  listened  to                                                                    
testimony  from  Brooks  Range,   Great  Bear,  Repsol,  BP,                                                                    
ConocoPhillips,  and from  Pioneer about  projects that  the                                                                    
companies were  ready to undertake  provided that  they were                                                                    
given  relief in  the out-year  taxation  on operations.  He                                                                    
elaborated that  Repsol was sitting  on billions  of dollars                                                                    
and that they had told the  Petroleum News that it was great                                                                    
to  have  exploration  credits  but in  order  for  them  to                                                                    
undertake  production they  needed the  state to  reconsider                                                                    
the out-year  taxation or the progressivity  and bracketing.                                                                    
Brooks Range  and Great  Bear had  both testified  that they                                                                    
needed  capital   in  order   to  pursue   their  investment                                                                    
opportunities and  were also  dependent on  a change  to the                                                                    
out-year  taxation. He  relayed that  Pioneer had  discussed                                                                    
that the expansion of its  Oooguruk project was dependent on                                                                    
a  change  to  the  high  out-year  taxation  that  was  not                                                                    
competitive  worldwide. A  ConocoPhillips press  release had                                                                    
stated that the company's  commitment for additional capital                                                                    
expenditure  was   contingent  upon   the  outcome   of  the                                                                    
legislation. Claire  Fitzpatrick with BP had  testified that                                                                    
she was  competing for  capital with  her peers  from around                                                                    
the world.                                                                                                                      
Representative Gara wondered how  much production would need                                                                    
to  increase in  order for  there to  be no  loss under  the                                                                    
proposed  legislation when  the price  of oil  was $100  per                                                                    
barrel. He  asked whether the  commissioner had said  that a                                                                    
10  percent   increase  in   production  would   be  needed.                                                                    
Commissioner Butcher  did not have  the number with  him. He                                                                    
added  that the  price  of  oil was  not  the only  variable                                                                    
Representative  Gara asked  for  an  estimate regarding  the                                                                    
necessary  increase  in   production.  Commissioner  Butcher                                                                    
could not provide an estimate at the time.                                                                                      
Representative  Gara thought  the commissioner  had provided                                                                    
the number  earlier in  the meeting.  He wondered  where the                                                                    
department  had  received  its information  that  production                                                                    
would   increase  enough   to   offset  the   cost  of   the                                                                    
legislation.  He had  heard prior  testimony different  than                                                                    
Representative Hawker.  He elaborated that Exxon  and BP had                                                                    
testified   that  they   would  not   drill  a   single  new                                                                    
exploration   well   with   the   passage   of   the   bill.                                                                    
ConocoPhillips  had  not been  able  to  confirm whether  it                                                                    
would or  would not  build a new  exploration well  with the                                                                    
passage  of the  bill. He  emphasized that  none of  the big                                                                    
three oil companies had guaranteed  that they would increase                                                                    
production with  the passage of  the bill. He  stressed that                                                                    
the department  was asking  the legislature  to pass  a bill                                                                    
that  required an  increase in  production that  no one  had                                                                    
guaranteed. He  stated that the  commissioner had  said that                                                                    
smaller explorers  in places  such as  Umiat and  Great Bear                                                                    
were  too  speculative  to  consider.  Commissioner  Butcher                                                                    
responded  that  he   had  not  said  that   they  were  too                                                                    
speculative.  He had  said  that they  were  far enough  out                                                                    
there and  there were enough  questions that  the department                                                                    
did  not know  definitively whether  they would  occur under                                                                    
the current  tax regime. He  believed that  proposed changes                                                                    
would  make a  definite change  in how  companies looked  at                                                                    
Alaska and the administration  would not have introduced the                                                                    
legislation  if  it did  not  believe  that the  bill  would                                                                    
result in  a material  change. He  thought the  industry had                                                                    
room to be more forthcoming  about how the bill would impact                                                                    
oil  investment   in  the   state;  however,   just  because                                                                    
companies  had  not   provided  guarantees  about  increased                                                                    
development did not  mean that the bill had  no relevance as                                                                    
a game changer moving forward.                                                                                                  
BRUCE TANGEMAN, DEPUTY  COMMISSIONER, DEPARTMENT OF REVENUE,                                                                    
added that there had been a  lot of talk about trying to get                                                                    
back   to  a   certain   number.  He   contended  that   the                                                                    
administration would not have  introduced the legislation if                                                                    
it  had believed  that the  state  was at  that number.  The                                                                    
department believed that the pendulum  had swung too far and                                                                    
that  the current  number had  caused the  present situation                                                                    
that included no exploration and  oil at over $100 a barrel.                                                                    
He explained  that trying  to get back  to a  certain number                                                                    
meant that  it would be  necessary to assume that  the state                                                                    
was  at the  "sweet  spot" number.  The department  presumed                                                                    
that the  state was not at  the number. If the  state was at                                                                    
the sweet  spot number, Alaska would  have been experiencing                                                                    
booming  exploration  like  other   areas  in  the  U.S.  He                                                                    
explained that  DOR was not trying  to get back to  a number                                                                    
that it saw as  too big, but it was trying  to lower the tax                                                                    
structure in order to increase production in the pipeline.                                                                      
Representative  Gara responded  that  his  problem with  the                                                                    
approach was  that it was  based on "a  hope, a wing,  and a                                                                    
prayer."  He stressed  that the  department  was asking  the                                                                    
legislature to give  money away in hopes that  it would come                                                                    
back,  with no  assurance  from any  company  that it  would                                                                    
happen. He  could understand  providing better  and stronger                                                                    
exploration   credits   if   the  goal   was   to   increase                                                                    
exploration.  Likewise, if  the  goal was  to make  moderate                                                                    
size  fields  economic,  it would  make  sense  to  increase                                                                    
production  facilities.   He  did   not  believe   that  the                                                                    
department had introduced any  evidence that companies would                                                                    
stem the  production decline or  increase production  to the                                                                    
necessary levels  that would be required  under the proposed                                                                    
2:45:37 PM                                                                                                                    
Mr.  Tangeman  replied  that  the  bill  was  not  heavy  on                                                                    
changing tax credits  but heavy on changing  the current tax                                                                    
system.  Companies  had been  taking  advantage  of the  tax                                                                    
credits for exploration; however,  the producers were seeing                                                                    
an  incredibly  high tax  rate  on  oil production  and  had                                                                    
experienced   difficulty   locating   partners.   The   only                                                                    
adjustments to  the tax  credits were  the increase  from 20                                                                    
percent up  to 40  percent for  infield credit  and movement                                                                    
from  two  years   down  to  one  year.  The   goal  of  the                                                                    
legislation  was  to  change  the  tax  system  to  increase                                                                    
producers' interest in investing in oil development.                                                                            
Representative Gara found that  the most implausible part of                                                                    
the  bill  was the  assumption  that  companies were  taking                                                                    
advantage  of the  tax credits  and  spending a  significant                                                                    
amount on exploration,  but that they had  not thought about                                                                    
the  cost  of the  production  tax  rate. He  believed  that                                                                    
exploration  companies  talked  to  producers  to  determine                                                                    
their   interest  in   development   prior  to   undertaking                                                                    
exploration. He believed that it  was an "insanely illogical                                                                    
world" that the department had presented.                                                                                       
Commissioner Butcher responded that  the department had used                                                                    
examples of  companies such as  FEX that went  out, obtained                                                                    
leases, explored, made a discovery,  and then could not find                                                                    
a deeper pocketed  company to help them  develop and produce                                                                    
the  oil. He  did  not believe  that  companies were  acting                                                                    
naïvely,  but  that it  was  a  much graver  situation  than                                                                    
companies realized when they began.  Some companies, such as                                                                    
FEX had  begun work prior to  ACES and once they  had made a                                                                    
discovery ACES had  passed and they were not  able to locate                                                                    
a developer.                                                                                                                    
Co-Chair Thomas compared  the inability to see  how the bill                                                                    
would impact the  state in the future  to commercial fishing                                                                    
and the unforeseen changes in  expenditures and pricing that                                                                    
impacted fishermen on an annual basis.                                                                                          
Vice-chair  Fairclough believed  that the  film credit  bill                                                                    
was a  true example of  operating on a  hope, a wing,  and a                                                                    
prayer because no  one had demanded specifics  on its future                                                                    
performance. She  discussed that many committee  members had                                                                    
voted  for film  credits  and believed  that  it would  draw                                                                    
industry.  She  relayed  that  the  film  industry  had  not                                                                    
contributed directly  to state  coffers. She  discussed that                                                                    
the bill would be before  the legislature again to determine                                                                    
whether  the credits  generated revenue  for the  state. She                                                                    
stressed that oil and gas  credits had provided the backbone                                                                    
and  lifeblood   for  Alaskans  and  state   government  for                                                                    
decades. Every person  in the State of  Alaska had benefited                                                                    
when companies  took advantage of  the oil and  gas credits.                                                                    
She  emphasized that  she would  rather bet  on oil  and gas                                                                    
than on  film credits that  may shut  the state down  in the                                                                    
future. She believed that it  was important for the state to                                                                    
help "pony up" a portion of  the risk on development that it                                                                    
benefited from 100 percent.                                                                                                     
2:51:46 PM                                                                                                                    
Representative   Gara  referred   to   a   March  15,   2011                                                                    
presentation  by Roger  Marks that  related to  marginal tax                                                                    
rate in  the United Kingdom.  He relayed that Mr.  Marks had                                                                    
listed the United Kingdom at  a 50 percent marginal tax rate                                                                    
at when  oil was $100  a barrel. A recent  newspaper article                                                                    
had reported  that the U.K.  charged an 80 percent  tax rate                                                                    
for legacy  field and that  it charged a different  rate for                                                                    
new fields.  He asked whether  the 80 percent tax  on legacy                                                                    
fields had been reflected in the chart.                                                                                         
ROGER  MARKS, PETROLEUM  ECONOMIST, LOGSDON  AND ASSOCIATES,                                                                    
responded that the U.K. did  have some "vintaging" and older                                                                    
fields did pay  a higher rate. He discussed  that PFC Energy                                                                    
had  done an  analysis on  international tax  rates for  the                                                                    
administration in  2007 and based on  its extensive database                                                                    
had reported that there was  very little production going on                                                                    
in fields  that were  subject to the  old vintage  tax rates                                                                    
and it  had been the  company's decision to not  include the                                                                    
data in  its report.  He expressed that  Representative Gara                                                                    
was correct,  but very little  current activity  was subject                                                                    
to  the higher  rate.  He  would be  interested  to know  if                                                                    
Representative Gara had found different information.                                                                            
Representative Gara  did not know  what barrels  were paying                                                                    
the  80 percent  rate and  hoped that  Mr. Marks  would have                                                                    
included a  breakdown on  the barrels  that paid  the higher                                                                    
rate. He  added that according  to the newspaper the  UK was                                                                    
raising its  oil tax  rate significantly  as of  the current                                                                    
Co-Chair Stoltze  asked which newspaper  Representative Gara                                                                    
was referring to.                                                                                                               
Representative Gara cited the New York Times as his source.                                                                     
Representative Doogan  wondered whether  Mr. Marks  had used                                                                    
the   word  "vintaging."   Mr.   Marks   responded  in   the                                                                    
Representative  Hawker discussed  an earlier  statement that                                                                    
the big three  oil companies would not invest  more money in                                                                    
new exploration.  He opined that  the comment may  have been                                                                    
true but  that it was only  half of the story.  He expressed                                                                    
that 90 percent of the  state's future production would come                                                                    
from  legacy   fields  and  that  BP,   ConocoPhillips,  and                                                                    
ExxonMobil corporations  were all heavily invested  in these                                                                    
areas.  He thought  it  was  a putdown  to  refer  to BP  as                                                                    
British Petroleum  and clarified that the  company's correct                                                                    
name was BP Alaska. He  discussed that with the exception of                                                                    
Badami  that BP  had  never discovered  oil  in Alaska.  The                                                                    
company's business  profile was to buy  oil producing assets                                                                    
from exploration  companies. He  emphasized that  both Exxon                                                                    
and ConocoPhillips  had provided testimony  regarding legacy                                                                    
field  development projects  that  they would  like to  move                                                                    
forward  on.  He  believed  that  it  was  a  disservice  to                                                                    
mischaracterize the  debate by using  only a portion  of the                                                                    
testimony that had been provided by the companies.                                                                              
HB  110  was  HEARD  and   HELD  in  committee  for  further                                                                    

Document Name Date/Time Subjects
HB 110 WORK DRAFT HFIN-I VERSION.pdf HFIN 3/28/2011 1:30:00 PM
HB 110
HB 110 DOR Response 03282011.pdf HFIN 3/28/2011 1:30:00 PM
HB 110