02/22/2007 03:00 PM House OIL & GAS

HB  89-OIL & GAS PRODUCTION TAX                                                                                               
                                                                                                                                
4:19:15 PM                                                                                                                    
                                                                                                                                
CHAIR KOHRING announced that the  next order of business would be                                                               
HOUSE BILL  NO. 89, "An  Act providing  for the use  of petroleum                                                               
production and other facilities  by additional entities; amending                                                               
the powers  of the  Alaska Oil  and Gas  Conservation Commission;                                                               
relating to oil and gas  properties production taxes and credits;                                                               
providing for  production tax adjustments to  increase the amount                                                               
of tax at  high oil prices, reduce  the amount of tax  at low oil                                                               
prices, and reduce  the amount of tax on the  production of heavy                                                               
oil; relating to the determination of  the gross value of oil and                                                               
gas at  the point of  production; and providing for  an effective                                                               
date."                                                                                                                          
                                                                                                                                
REPRESENTATIVE LES GARA, Alaska  State Legislature, sponsor of HB
, informed the  committee that there are two major  ways to tax                                                               
oil.   The first is  by taxing the  taxpayers on the  profit from                                                               
production and the second is to  tax on a percentage of the sales                                                               
value of the oil.   The latter system is known  as "taxing on the                                                               
gross."  With budget deficits  approaching, he explained, "taxing                                                               
on the  gross" is  the best  way to  obtain the  maximum possible                                                               
benefit  for Alaskans  from  resource development.    He said  he                                                               
believes  there are  several reasons  to support  HB 89.   First,                                                               
when compared to the world average  tax rate on oil, the PPT will                                                               
result in tax  revenue to the state of about  $1 billion less per                                                               
year.   Secondly, Alaska's  political stability  is a  benefit to                                                               
the producers;  there is no  threat of a coup  or nationalization                                                               
of  assets.    Additionally,  the  PPT  allows  the  North  Slope                                                               
producers  to  deduct  the  cost  of  developing  gas  production                                                               
facilities before  the production of  gas begins.   The estimated                                                               
cost  of  the  development  of  the  gas  field  is  $9  billion;                                                               
therefore,  a  40  percent  gas  line  development  deduction  is                                                               
estimated  to equal  between $200  million and  $300 million  per                                                               
year.   This  amount  will  be subtracted  from  oil tax  revenue                                                               
during the development years.   Representative Gara observed that                                                               
once  a gas  pipeline  is built  there  is no  reason  to give  a                                                               
company a subsidy for developing its  gas field, as there will be                                                               
no  risk to  do so.    Finally, the  development and  exploration                                                               
deductions allowed under the PPT  are unknown, unpredictable, and                                                               
will impact revenue  income for the state.  The  PPT is a profit-                                                               
based tax  that allows  the opportunity  for companies  to deduct                                                               
costs,   thereby  reducing   tax  revenue   due  to   the  state.                                                               
Representative  Gara  described  HB  89  as  a  law  designed  to                                                               
determine  a tax  rate closer  to the  world average,  to provide                                                               
fair incentives for  new exploration, and to  address the problem                                                               
of  facilities  access.   Regarding  the  problem  of  facilities                                                               
access,  he reported  that initial  data from  DNR suggests  that                                                               
more  oil can  be developed  on  the North  Slope if  independent                                                               
companies had access to the  existing processing facilities.  The                                                               
North  Slope processing  facilities are  filled to  capacity with                                                               
high  water  content  oil  from  older  fields.    ConocoPhillips                                                               
Alaska,  Inc., ExxonMobil  Corporation, and  BP own  most of  the                                                               
facilities  and   are  unwilling  to  provide   access  to  their                                                               
competitors who are  producing higher oil content  oil from newer                                                               
fields.  This bill, Representative  Gara acknowledged, may not be                                                               
the best  way to address  the facilities access issue.   However,                                                               
HB  89 includes  production incentives,  one  of which  is a  tax                                                               
exemption of the first 7,500  barrels per day produced by smaller                                                               
fields.  Representative Gara said that  the tax rate set by HB 89                                                               
is designed to  raise tax revenue at higher oil  prices.  The tax                                                               
rate begins at 15  percent gross tax when the price  of oil is at                                                               
$35 per  barrel of oil.   For every $1  increase in the  price of                                                               
oil per barrel  there is an approximate increase  of one-third in                                                               
the tax rate percentage.  If the  price of oil falls to below $20                                                               
per   barrel,    the   tax   rate   percentage    will   decrease                                                               
proportionately.   In conclusion,  Representative Gara  urged the                                                               
committee to consider the following:   HB 89 seeks to tax the oil                                                               
producers at the  world average in a verifiable way;  it will not                                                               
encourage surprise deductions  for questionable expenditures; and                                                               
it  will   not  require   hiring  a   team  of   accountants  for                                                               
implementation  and enforcement.   The  PPT, Representative  Gara                                                               
emphasized,  will  increase  tax   revenue  in  the  short  term;                                                               
however, it  provides for a $4  million subsidy to build  the gas                                                               
pipeline.   This subsidy, he  cautioned, will  come at a  time of                                                               
reduced  state  revenue; furthermore,  it  is  only available  to                                                               
major North Slope lease owners.                                                                                                 
                                                                                                                                
CHAIR  KOHRING  stated his  support  of  the  concept of  HB  89;                                                               
however, he  said he  is strongly  opposed to  greatly increasing                                                               
taxes to  the oil producing  industry.   He announced that  HB 89                                                               
would be held over for public testimony.