Legislature(2005 - 2006)CAPITOL 124

03/14/2006 12:30 PM RESOURCES

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12:36:10 PM Start
12:37:19 PM HB488
12:52:57 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
HB 488-OIL AND GAS PRODUCTION TAX                                                                                             
CO-CHAIR SAMUELS announced that the  only order of business would                                                               
be HOUSE BILL  NO. 488, "An Act repealing the  oil production tax                                                               
and gas production tax and providing  for a production tax on the                                                               
net value  of oil and  gas; relating  to the relationship  of the                                                               
production  tax  to  other  taxes;  relating  to  the  dates  tax                                                               
payments  and surcharges  are  due under  AS  43.55; relating  to                                                               
interest  on  overpayments  under   AS  43.55;  relating  to  the                                                               
treatment  of  oil  and  gas   production  tax  in  a  producer's                                                               
settlement with  the royalty owner;  relating to flared  gas, and                                                               
to oil  and gas  used in  the operation of  a lease  or property,                                                               
under AS  43.55; relating to the  prevailing value of oil  or gas                                                               
under AS  43.55; providing  for tax credits  against the  tax due                                                               
under AS 43.55 for certain  expenditures, losses, and surcharges;                                                               
relating to statements or other  information required to be filed                                                               
with or furnished  to the Department of Revenue,  and relating to                                                               
the penalty for failure to  file certain reports, under AS 43.55;                                                               
relating to the  powers of the Department of Revenue,  and to the                                                               
disclosure  of certain  information required  to be  furnished to                                                               
the Department of  Revenue, under AS 43.55;  relating to criminal                                                               
penalties for  violating conditions  governing access to  and use                                                               
of  confidential   information  relating  to  the   oil  and  gas                                                               
production tax;  relating to  the deposit  of money  collected by                                                               
the  Department  of  Revenue  under AS  43.55;  relating  to  the                                                               
calculation of the gross value at  the point of production of oil                                                               
or  gas;  relating to  the  determination  of  the net  value  of                                                               
taxable oil and  gas for purposes of a production  tax on the net                                                               
value  of oil  and gas;  relating  to the  definitions of  'gas,'                                                               
'oil,' and certain  other terms for purposes of  AS 43.55; making                                                               
conforming amendments; and providing for an effective date."                                                                    
CO-CHAIR  SAMUELS  said  the committee  substitute  (CS)  is  not                                                               
ready, but  he has provided a  list of changes that  are included                                                               
in a forthcoming CS.                                                                                                            
12:37:19 PM                                                                                                                   
CO-CHAIR SAMUELS  said he will  allow the administration  and the                                                               
industry to comment on the CS.                                                                                                  
12:39:06 PM                                                                                                                   
CO-CHAIR  SAMUELS stated  that this  is the  beginning of  a long                                                               
process,  and he  has no  illusions that  what comes  out of  the                                                               
House  Resources Standing  Committee will  be the  final product.                                                               
He said he tried to build a committee consensus for the CS.                                                                     
12:40:43 PM                                                                                                                   
CO-CHAIR SAMUELS  said the first change  to HB 488 is  making the                                                               
tax  rate progressive.   He  said  the rate  would go  up by  0.3                                                               
percent per dollar  increase after $50 per barrel.   It is a good                                                               
balance to  make sure there  is no  impact on the  economy, while                                                               
taking advantage  of high oil  prices, he stated.   Secondly, the                                                               
CS  has  reduced the  transitional  money.    It will  allow  the                                                               
deduction of 75 percent of  2005 expenditures; 50 percent of 2004                                                               
expenditures; and 25  percent of 2003 expenditures.   He said the                                                               
original legislation  spread that  cost recovery over  six years,                                                               
and the  CS extends the payback  period to seven years.   He said                                                               
that at  the request  of the  chair of  the House  Rules Standing                                                               
Committee,  the  inflation indexing  mechanism  [on  the $40  per                                                               
barrel price  of Alaska North  Slope oil] is  not going to  be in                                                               
regulation but  will be  in the CS.   He added  that he  does not                                                               
have  the one  that  will be  used,  but the  $40  price will  be                                                               
adjusted with inflation.                                                                                                        
CO-CHAIR SAMUELS  said the CS will  also extend SB 185,  from the                                                               
23rd Legislature,  which expires  in 2007.   It will  be extended                                                               
for the  explorers on  the North  Slope, he noted.   He  said the                                                               
explorer  will have  to  choose between  a 40  percent  and a  20                                                               
percent tax credit dependent on  other parameters.  He said there                                                               
was concern about  abandonment costs being used  for tax credits,                                                               
and the CS  will contain specific language that  those costs will                                                               
not  be eligible  for  tax  credits.   The  CS  will set  private                                                               
royalty  oil severance  tax at  5 percent,  and there  is a  very                                                               
small amount  of land  where it  is at  1 percent,  he said.   He                                                               
worked with those  holders and the industry in trying  to come up                                                               
with a fair number.                                                                                                             
12:43:01 PM                                                                                                                   
CO-CHAIR SAMUELS  said that  the Alaska  Oil and  Gas Association                                                               
approached  the committee  suggesting several  technical changes.                                                               
He noted that the ones that  were policy calls were not included.                                                               
It would  be better to take  those changes to the  next committee                                                               
for adequate  consideration, he  said.  He  noted that  there had                                                               
been concern  about getting  credits for  contingency surcharges.                                                               
There is currently  a $0.05 per barrel charge, and  $0.02 of that                                                               
is  deposited  into the  response  mitigation  account, which  is                                                               
maxed  out  at  $50  million.   So  the  $0.02  charge  has  been                                                               
suspended.  The  CS will change the $0.02 charge  to $0.01, so if                                                               
the account  goes below $50  million, the $0.01 charge  will kick                                                               
in, he  explained.  The  remaining $0.03 in current  statute goes                                                               
into the  prevention mitigation account,  and the CS  raises that                                                               
to $0.04.   The  total surcharge  is still  $0.05 per  barrel, he                                                               
stated.  He said the CS will  change the effective date of HB 488                                                               
to April 1, 2006,  instead of July 1, 2006.   This will result in                                                               
an  almost immediate  effective  date and  conforms  to a  fiscal                                                               
12:45:37 PM                                                                                                                   
CO-CHAIR  SAMUELS  said  that  the   $73  million  allowance  was                                                               
actually  $14.6 million  directly off  the tax  bill, and  the CS                                                               
lowers it to $10 million and switches  it to a credit.  The first                                                               
$10 million  spent in  the state  is a  direct dollar  for dollar                                                               
credit.   It is a zero  sum game "for  the little guys."   It was                                                               
cut down  by a third and  made a credit instead  of an allowance,                                                               
he reiterated.  From the request  of the explorers, the CS allows                                                               
the  state to  buy up  to $10  million per  year per  company for                                                               
credits at 100 percent of face value.                                                                                           
CO-CHAIR SAMUELS  addressed the credits  that were sellable.   He                                                               
said,  "If   there  was  room   under  the  cap   for  ExxonMobil                                                               
Corporation, ConocoPhillips  Alaska, Inc.,  or BP  to be  able to                                                               
buy the credit,  they said that the going rate  was between $0.90                                                               
and $0.95.  And what we wanted to  make sure that we did is, that                                                               
the small company recouped 100 percent  of their value."  He said                                                               
the state "is on the hook" for the  entire value, so it is a moot                                                               
point for  the state.   The CS caps it  at $10 million,  he said.                                                               
The state  can have  a buy  back for  it as  long as  the company                                                               
proves it was moving forward  with reinvestment at the same level                                                               
in Alaska,  "and they'd  save a  little bit  of money  around the                                                               
margins."   He said he was  concerned that it was  open-ended, so                                                               
it was capped  at $10 million.   The CS puts a  5 percent penalty                                                               
for  underpayment  of taxes  on  the  monthly payments  below  90                                                               
percent  of  actual,  and  he  said that  is  currently  in  law.                                                               
Interest will be charged on any underpayment below 100 percent.                                                                 
12:48:09 PM                                                                                                                   
CO-CHAIR SAMUELS  said the  CS will  be distributed  to committee                                                               
members as soon  as possible.  There is one  large issue that was                                                               
not addressed and that was heavy  oil.  The committee is aware of                                                               
the problem, but  he personally felt that having  two tax schemes                                                               
for two  types of oil was  problematic but could be  addressed in                                                               
separate legislation.   He said he  realizes it is a  big problem                                                               
for the  big players  and some  of the  small ones.   He  said he                                                               
didn't find a way to incorporate it into this bill.                                                                             
CO-CHAIR SAMUELS said he believes  a bill will pass this session,                                                               
and  the committee  tried to  focus  the debate.   The  committee                                                               
focused on  progressivity [and  other key issues].   He  spoke of                                                               
all those involved  and the admirable job everyone did.   He said                                                               
he would  like to shift the  debate to the money  coming into the                                                               
state with  regard to the  future.  "What are  we going to  do if                                                               
prices go down?   Now is the  time to start debating  what are we                                                               
going to do at  low oil prices when we're $2  billion in the hole                                                               
at $20 [per  barrel], and what are  we going to do  at higher oil                                                               
prices when  you get more money  than you really know  what to do                                                               
12:51:22 PM                                                                                                                   
CO-CHAIR SAMUELS repeated the schedule of hearings.                                                                             
REPRESENTATIVE    SEATON   requested    clarification   regarding                                                               
exploration enhancements in that a company either gets the 40                                                                   
percent or the 20 percent credit, not both.                                                                                     
CO-CHAIR SAMUELS said the company can choose between the two                                                                    
12:52:11 PM                                                                                                                   
[HB 488 was held over]                                                                                                          

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