03/01/2007 03:00 PM House OIL & GAS

HB  89-OIL & GAS PRODUCTION TAX                                                                                               
                                                                                                                                
4:22:05 PM                                                                                                                    
                                                                                                                                
VICE CHAIR OLSON 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."                                                                                                                          
                                                                                                                                
4:22:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE LES GARA, Alaska  State Legislature, sponsor of HB
, informed the  committee that there are two  issues facing the                                                               
state regarding the production profits  tax (PPT).  The issues of                                                               
subsidies for the  gas pipeline are the first  concern.  Although                                                               
the intention was  for the subsidies to  benefit a producer-owned                                                               
gas line, in fact, the subsidies  will only benefit the holder of                                                               
the  Pt. Thompson,  Alaska,  oil  lease and  those  who hold  the                                                               
current oil  leases on  the North  Slope.   The second  issue, he                                                               
said, is comparing  Alaska's oil tax rate with  the world average                                                               
oil tax rate.  Representative  Gara asked whether, when the state                                                               
is anticipating  budget deficits within two  years, should Alaska                                                               
tax at  $1 billion  to $2  billion per year  less than  the world                                                               
average.    Oil is  a  world  commodity,  he  said, and  the  oil                                                               
production  companies  in  Alaska  also produce  oil  around  the                                                               
world.                                                                                                                          
                                                                                                                                
REPRESENTATIVE GARA  continued to explain  that the oil  tax rate                                                               
is measured  by "total government  take."  According  to analyses                                                               
by consultants  Econ One  Research Inc.,  Daniel Johnston  & Co.,                                                               
Inc.,  and Wood  Mackenzie  Ltd., total  government  take is  the                                                               
portion of  the oil's  value that  [Alaska] receives  compared to                                                               
the oil  company's profit.   Daniel  Johnston estimates  that the                                                               
average world government take is  approximately 67 to 70 percent.                                                               
Wood Mackenzie  projected that the world  average government take                                                               
is approximately 71 percent, including  factors for the high cost                                                               
of  production   in  Alaska.     After  subtracting   taxes,  the                                                               
producer's net income is  approximately 30 percent Representative                                                               
Gara noted.  Under the PPT  legislation, when the price of oil is                                                               
$60  per barrel,  the  total  government take  for  Alaska is  61                                                               
percent.  Again,  when the price of  oil is at $60  per barrel, a                                                               
one percent  change in  the total government  take equals  a $200                                                               
million  loss or  gain  in  revenue.   Analysis  provided to  the                                                               
legislature last  year by Econ  One Research Inc., shows  that an                                                               
increase in  revenue of  $100 million  is produced  by increasing                                                               
total government take by .5 percent.                                                                                            
                                                                                                                                
REPRESENTATIVE  GARA  pointed  out  that Alaska's  taxes  on  oil                                                               
production are  between six and  ten percent less than  the world                                                               
average tax  rate.  This difference  equals a loss of  about $1.2                                                               
billion and  $2 billion per  year to  Alaska.  He  then suggested                                                               
that  the  committee  also  consider  oil  production  companies'                                                               
profit  margins.    "ConocoPhillips Annual  Reports,  2003-2006",                                                               
indicate that  Alaska-based profits for 2005  were $2.55 billion,                                                               
which is a profit margin of 43.1  percent.  In 2006, with the PPT                                                               
legislation  in  effect  for  three-quarters  of  the  tax  year,                                                               
profits  were $2.33  billion,  which  is a  profit  margin of  37                                                               
percent.                                                                                                                        
                                                                                                                                
4:31:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA returned  to  the subject  of the  subsidies                                                               
provided by the  PPT legislation.  He said that  it provides a $3                                                               
billion,  or 42.5  percent, subsidy  for the  development of  Pt.                                                               
Thompson.  In addition, the oil  companies will be able to deduct                                                               
from their  oil tax the costs  of the development of  gas fields.                                                               
The  cost of  developing  the  gas line  on  the  North Slope  is                                                               
estimated to be $9.2 billion,  including the cost of construction                                                               
of the gas treatment plant.   Representative Gara noted that most                                                               
of the cost of   and risk taken is during  development of the gas                                                               
pipeline,  and    so  a  subsidy by  the  state  may  be  needed.                                                               
However, he  concluded, once the  pipeline is in place,  there is                                                               
no need for  Alaska to further subsidize the  construction of the                                                               
gas fields.                                                                                                                     
                                                                                                                                
REPRESENTATIVE  GARA surmised  that Alaska  will be  obligated to                                                               
pay $1.2  billion of  Pt. Thomson's development  costs.   The gas                                                               
and oil  field development at  Pt. Thompson  is expected to  be a                                                               
profitable venture and legislation   is pending that provides for                                                               
additional  grant  money  for gas  line  development.    Perhaps,                                                               
Representative Gara suggested, the  subsidy under the PPT statute                                                               
is not  needed.  He  pointed out  that during the  development of                                                               
Pt.  Thompson, there  will be  no income  from the  production of                                                               
gas.  At  this same time, gas field development  costs will begin                                                               
to be deducted  from oil tax revenues.   Representative Gara said                                                               
he  feels  the  state  needs to  separate  gas  line  development                                                               
provisions from the PPT statute.                                                                                                
                                                                                                                                
REPRESENTATIVE GARA then concluded with these remarks:                                                                          
                                                                                                                                
     As  budget gaps  are on  their  way, ...  does it  make                                                                    
     sense to tax  [$1 billion to $2 billion]  less than the                                                                    
     world average  for our  oil commodity?   And  should we                                                                    
     allow  somewhere   in  the  neighborhood   of  ...[$1.5                                                                    
     billion  to $3  billion] worth  of deductions  from our                                                                    
     oil  taxes for  companies  developing  gas fields  once                                                                    
     they know there's going to be  a gas line in place? ...                                                                    
     I think  the answer  to both questions  is, we  need to                                                                    
     take another  look at  our oil tax  law. ...  These are                                                                    
     both billion-dollar  issues ...  and I think  we should                                                                    
     resolve  them  in  favor  of  changing  both  of  those                                                                    
     provisions in the PPT law. ...                                                                                             
                                                                                                                                
[HB 89 was held over.]