Legislature(2011 - 2012)BARNES 124

02/21/2011 01:00 PM RESOURCES


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01:05:32 PM Start
01:05:45 PM HB110
05:22:08 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to 5:15 pm Today --
+= HB 110 PRODUCTION TAX ON OIL AND GAS TELECONFERENCED
Heard & Held
+ Presentation by Dept. of Revenue TELECONFERENCED
              HB 110-PRODUCTION TAX ON OIL AND GAS                                                                          
                                                                                                                                
1:05:45 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE announced  that  the only  order  of business  is                                                               
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."                                                                                                                
                                                                                                                                
1:06:46 PM                                                                                                                    
                                                                                                                                
BRYAN BUTCHER, Acting Commissioner,  Department of Revenue (DOR),                                                               
provided a PowerPoint discussion on  the ramifications of the oil                                                               
tax changes  proposed by HB 110.   He began by  noting that three                                                               
of the  bill's goals are:   to make Alaska more  competitive both                                                               
nationally and globally,  to produce more jobs  for Alaskans, and                                                               
to increase oil production for  Alaska (slides 1-3).  He reminded                                                               
members that  North Dakota is  expected to surpass Alaska  in oil                                                               
production within the next five years.   Two more goals of HB 110                                                               
are:   to  develop currently  unexplored fields  and to  get more                                                               
production out of the legacy  fields, which currently provide 80-                                                               
90 percent  of Alaska's  oil production.   The challenge  is that                                                               
the bulk  of the easiest  to produce  fuel has been  produced and                                                               
Alaska is now looking at viscous  and heavy oil.  This is coupled                                                               
with   looking   at  areas   that   have   very  little   to   no                                                               
infrastructure, which  makes the high  cost of doing  business in                                                               
Alaska even higher than it has been in the past.                                                                                
                                                                                                                                
ACTING  COMMISSIONER BUTCHER  noted that  HB 110  is the  largest                                                               
part of a bigger effort  by Governor Parnell to increase Alaska's                                                               
oil production.  For example,  the Department of Transportation &                                                               
Public  Facilities (DOT&PF)  is building  infrastructure to  open                                                               
areas for exploration, such as the  road to the Gubik field.  The                                                               
Department  of  Natural Resources  (DNR)  is  looking at  how  to                                                               
expedite permitting.   The  Department of  Law (DOL)  is actively                                                               
engaged in  the federal issues  that have been roadblocks  to the                                                               
development  of oil  and other  natural resources  in the  state.                                                               
The  Department  of  Labor  &  Workforce  Development  (DLWD)  is                                                               
actively  engaged in  training Alaskans  for the  jobs the  state                                                               
sees  coming in  the  future.   The  Department of  Environmental                                                               
Conservation  (DEC)  is  continuing   work  to  ensure  that  all                                                               
development is done in an environmentally responsible manner.                                                                   
                                                                                                                                
1:10:09 PM                                                                                                                    
                                                                                                                                
ACTING COMMISSIONER BUTCHER reviewed  the decline in Alaska's oil                                                               
production,  explaining that  a  naturally maturing  field has  a                                                               
decline similar  to that depicted  on slide  4.  The  question is                                                               
what can  be done about it.   Texas has produced  oil longer than                                                               
has Alaska, yet has successfully  ramped up its oil production to                                                               
a zero or minimal  decline.  This can also be  done in Alaska, he                                                               
said, and  HB 110 will play  a large role in  accomplishing that.                                                               
He addressed the issue that investment  is needed in both old and                                                               
new fields (slide  5).  He said the Department  of Revenue's fall                                                               
[2010] forecast projects  that by the year 2020  about 50 percent                                                               
of the  oil is expected  to come from currently  producing fields                                                               
and  approximately  50  percent  is expected  to  come  from  new                                                               
fields.                                                                                                                         
                                                                                                                                
ACTING  COMMISSIONER BUTCHER  allowed there  has been  a question                                                               
that the Department of Revenue  does not have all the information                                                               
that it could.  However,  he continued, when the information that                                                               
is  on hand  indicates something  is  not working,  then that  is                                                               
weighed to  decide what needs  to be done  to move forward.   For                                                               
example, at the  time the petroleum production  profits tax (PPT)                                                               
was being considered  the department had next  to no information,                                                               
but  given the  amount  of  production and  the  amount of  taxes                                                               
coming in  it was clear something  needed to be done  and the PPT                                                               
was passed.   Eighteen months later Alaska's  Clear and Equitable                                                               
Share (ACES)  was taken  up.   The department  now has  much more                                                               
information than it  has ever had, and while  this information is                                                               
not  enough  to  answer  every   single  question  it  is  enough                                                               
information  to   know  that  the   state  is  not   getting  the                                                               
exploration and  development that should be  happening given what                                                               
is out  there.  This is  highlighted by the projection  that only                                                               
one exploration  well will  be drilled in  Alaska in  2011 (slide                                                               
6).                                                                                                                             
                                                                                                                                
1:13:06 PM                                                                                                                    
                                                                                                                                
ACTING COMMISSIONER BUTCHER maintained that  a lot of oil is left                                                               
in  Alaska (slide  7).   Cumulative  production  through 2010  is                                                               
estimated at about  16 billion barrels, he said.   The department                                                               
believes there  is 5-7 billion  barrels remaining in  North Slope                                                               
reserves.   Most of  the remaining  reserves are  more challenged                                                               
than the previous  barrels.  An example of this  is the estimated                                                               
20 billion  barrels of heavy oil  in the giant Ugnu  field.  This                                                               
oil is  not included  in the  department's forecast  of remaining                                                               
reserves  because recovery  is not  economically  viable at  this                                                               
time.   However, he pointed out,  six years ago all  of the shale                                                               
gas  deposits in  the Lower  48 were  considered uneconomic,  and                                                               
that has now  completely turned around to  being highly economic.                                                               
He noted  that the  department's projected  reserves also  do not                                                               
include  offshore  volumes from  the  Chukchi  or Beaufort  seas.                                                               
While those offshore  volumes would be federal  barrels, that oil                                                               
would  go through  the Trans-Alaska  Pipeline  System (TAPS)  and                                                               
would create jobs for Alaskans  an allow the pipeline to continue                                                               
operating for many years to come.                                                                                               
                                                                                                                                
1:14:58 PM                                                                                                                    
                                                                                                                                
ACTING COMMISSIONER BUTCHER reviewed the  six primary goals of HB                                                               
110 (slide 9).  Goal 1  is to encourage development of new leases                                                               
or properties, he  said.  This would be  accomplished by lowering                                                               
the base tax  rate [from 25 percent to 15  percent] on leases and                                                               
properties that have not been produced  prior to 2011.  Goal 2 is                                                               
to   encourage  investment   in  exploration,   development,  and                                                               
production.   This  would be  accomplished by  using a  different                                                               
calculation  for  [progressivity]  that  does not  take  such  an                                                               
extreme percent  of the high  end.  Goal  3 is to  strengthen the                                                               
minimum  tax.    This  would  be  accomplished  by  lowering  the                                                               
threshold value.  Thus, while the  state gives up a little bit at                                                               
the high end,  it picks up a little  bit at the low end.   Goal 4                                                               
is  to extend  to  the North  Slope (north  of  68 degrees  north                                                               
latitude) the 40  percent tax credit for  well lease expenditures                                                               
and allow producers to apply tax  credits in one year rather than                                                               
over two  years.  Changing application  of the tax credit  to one                                                               
year  is  minor  to  the  state, but  gives  more  value  to  the                                                               
companies.   Goal  5  is  to limit  the  time  for assessment  of                                                               
additional production  taxes.   Four years  will now  be adequate                                                               
for  completing audits,  as opposed  to the  six years  currently                                                               
allowed under  ACES.  Goal  6 is to  reduce the interest  rate on                                                               
delinquent taxes and  refunds. Currently the interest  rate is 11                                                               
percent  or  the  federal  rate  plus  5  percent,  whichever  is                                                               
[higher].   With the  low interest rate  environment of  the past                                                               
few years,  11 percent seems  higher than needed  for adjustments                                                               
on overpayment or underpayment of  taxes.  The interest rate cuts                                                               
both  ways   because  the   state  must   pay  interest   on  any                                                               
overpayments.                                                                                                                   
                                                                                                                                
1:18:48 PM                                                                                                                    
                                                                                                                                
ACTING COMMISSIONER BUTCHER said that  ultimately HB 110 is about                                                               
balance  between  current  revenue   and  the  future  health  of                                                               
Alaska's  economy (slide  10).    Under HB  110  the state  would                                                               
continue receiving its  fair share of revenue.   Additionally, HB                                                               
110  would establish  a secure  investment climate  for industry.                                                               
While there  would be a revenue  reduction over the near  term if                                                               
HB 110  is enacted, it  is projected  that the state  would still                                                               
have plenty  of surplus revenues 10  years from now.   After that                                                               
the  surplus is  expected to  increase as  the state  experiences                                                               
more exploration and development.                                                                                               
                                                                                                                                
1:19:53 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON requested  an explanation  of what  is meant  by                                                               
strengthening the minimum tax under Goal 3.                                                                                     
                                                                                                                                
ACTING  COMMISSIONER  BUTCHER  reminded  members  that  producers                                                               
testified they  were not thrilled with  this particular provision                                                               
of the bill.  However,  [the administration] believes that if the                                                               
state gives  up something at the  high end, it is  reasonable for                                                               
the state to pick up something at the low end.                                                                                  
                                                                                                                                
CO-CHAIR SEATON  asserted that this  provision would  weaken, not                                                               
strengthen, the state's  position because it appears  to him that                                                               
the state would get less revenue.                                                                                               
                                                                                                                                
ACTING  COMMISSIONER BUTCHER  responded  that the  4 percent  [of                                                               
gross] would  apply at a  lower cost of oil.   So, under  HB 110,                                                               
the 4  percent [of  gross] would  kick in at  $20 instead  of the                                                               
current $25.   The 3 percent of gross that  currently kicks in at                                                               
$20-$25 would  kick in  at $17.50-$20.   The  2 percent  of gross                                                               
that  currently kicks  in at  $17.50-$20  would kick  in at  $15-                                                               
$17.50.  The  1 percent of gross that currently  kicks in at $15-                                                               
$17.50 would kick in at $12.50-$15.                                                                                             
                                                                                                                                
CO-CHAIR  SEATON described  a scenario  of  declining oil  prices                                                               
under current  law in which a  price of $25 is  reached, at which                                                               
the floor  would kick  in and  the state  would be  guaranteed at                                                               
least 4 percent;  but under HB 110 the 4  percent floor would not                                                               
kick in until the price goes down to $20.                                                                                       
                                                                                                                                
ACTING COMMISSIONER BUTCHER  said the 4 percent would  kick in at                                                               
$20 and  would also  be there  for $25.   The difference  is that                                                               
right now at a price of $21 the  floor would not be 4 percent; it                                                               
would have  to get  to $25.   Under HB 110,  the 4  percent floor                                                               
would hit at $21.                                                                                                               
                                                                                                                                
1:23:33 PM                                                                                                                    
                                                                                                                                
ACTING  COMMISSIONER BUTCHER  returned  to  his presentation  and                                                               
compared the current nominal tax  rate on production tax value to                                                               
the  two rates  proposed by  HB 110  (slide 12).   For  presently                                                               
operating fields the  proposed nominal tax rate  [would remain at                                                               
the current  starting rate  of 25 percent]  and would  follow the                                                               
same curve as under ACES, but  it would be bracketed and would be                                                               
capped at  a peak  of 50  percent.  For  new fields  the proposed                                                               
nominal tax rate  would start at 15 percent,  would be bracketed,                                                               
and would be capped at 40 percent.                                                                                              
                                                                                                                                
ACTING COMMISSIONER  BUTCHER next  compared the  current marginal                                                               
tax  rate on  production  tax  value to  the  two marginal  rates                                                               
proposed by  HB 110 (slide 13).   He explained that  the marginal                                                               
tax rate is  what the tax is on each  additional dollar above the                                                               
production tax  value and what  percent goes  to the state.   The                                                               
proposed  incremental  progressivity  eliminates the  current  87                                                               
percent marginal  tax rate effect.   He  pointed out that  the 87                                                               
percent is strictly  for the state production tax  percent; it is                                                               
actually  93  percent  when  all  state  and  federal  taxes  are                                                               
included.  Under HB 110, the  marginal tax rate would increase at                                                               
a more  gradual rate and  would not have as  large a take  at the                                                               
high end of production tax value than under current law.                                                                        
                                                                                                                                
1:25:43 PM                                                                                                                    
                                                                                                                                
ACTING COMMISSIONER BUTCHER moved to  a comparison of the current                                                               
effective tax  rate based on  gross value at point  of production                                                               
with  the two  effective rates  proposed  by HB  110 (slide  14).                                                               
Under current  and proposed rates,  the percentage of  state take                                                               
increases as the [Alaska North  Slope West Coast price per barrel                                                               
increases].  However, under HB 110  the slope of the tax increase                                                               
is less than that of current law.                                                                                               
                                                                                                                                
ACTING  COMMISSIONER BUTCHER,  in  response  to Co-Chair  Seaton,                                                               
confirmed that the  effective tax rate is the real  money that is                                                               
paid and is  the percent of total dollars earned  per barrel that                                                               
would  go to  the  state.   He  said the  effective  tax rate  is                                                               
applied after  tax credits and after  deduction of transportation                                                               
and other costs.                                                                                                                
                                                                                                                                
1:27:18 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON  said  industry  has  reported  that  the  other                                                               
countries  it is  investing in  have effective  tax rates  in the                                                               
range of 60  percent or so.  For example,  the government take in                                                               
Norway  is 78  percent on  the gross  and in  Indonesia it  is 85                                                               
percent.   He  asked why,  when compared  to other  jurisdictions                                                               
around the  world, Alaska's effective  tax rate of 35  percent is                                                               
perceived as onerous.                                                                                                           
                                                                                                                                
ACTING  COMMISSIONER BUTCHER  responded  that  the effective  tax                                                               
rate shown  [on slide 14]  is lower  because of the  credits that                                                               
Alaska  has,  which are  something  that  many other  states  and                                                               
countries do  not have.   The credits apply  to some but  not all                                                               
dollars produced.   He said he believes California  and one other                                                               
state are  the only states  with a  higher tax rate  than Alaska.                                                               
Therefore, on  a North  American basis Alaska  does not  stack up                                                               
when companies are deciding where to  invest their dollars.  On a                                                               
world basis  there are other  countries that have  vast resources                                                               
like  what  Alaska  used to  have  and,  infrastructure-wise  and                                                               
exploration-wise, those  countries are not nearly  as challenging                                                               
as is Alaska.                                                                                                                   
                                                                                                                                
1:30:14 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  requested the Department  of Revenue  to provide                                                               
the  committee   with  a  comparison   of  where   companies  are                                                               
investing,  rather  than  a  comparison of  where  they  are  not                                                               
investing.  In  regard to the argument that  investment in Alaska                                                               
does  not compare  to  others,  he maintained  that  some of  the                                                               
countries in which industry is  investing, such as Russia, do not                                                               
have any more infrastructure than does Alaska.                                                                                  
                                                                                                                                
CO-CHAIR FEIGE observed that at  an Alaska North Slope West Coast                                                               
price of  $100 per barrel, the  effective tax rate is  28 percent                                                               
(slide  14).   He  asked  whether this  includes  the percent  of                                                               
federal taxes and property taxes.                                                                                               
                                                                                                                                
ACTING  COMMISSIONER  BUTCHER  replied  that  this  is  just  the                                                               
production  tax.   In  further response,  he  confirmed that  the                                                               
percentages  depicted  on slide  14  do  not include  the  entire                                                               
government take.                                                                                                                
                                                                                                                                
1:32:08 PM                                                                                                                    
                                                                                                                                
ACTING   COMMISSIONER  BUTCHER   resumed  his   presentation  and                                                               
discussed the cash flow split  at different oil prices under ACES                                                               
for  the years  2013-2040 as  projected under  the Department  of                                                               
Revenue's  fall   2010  production  forecast  (slide   15).    He                                                               
recounted that when oil first  started flowing through the Trans-                                                               
Alaska  Pipeline System  (TAPS),  then-Governor  Hammond and  the                                                               
legislature emphasized  that an approximately even  split between                                                               
the  producers'   take  and  the  state's   take  was  considered                                                               
reasonable.  He  said he is not saying  that [the administration]                                                               
is  shooting for  this; rather,  it is  a historical  observation                                                               
that  he is  relating.   At  Alaska North  Slope  West Coast  oil                                                               
prices of $50-$90  per barrel, Alaska's take under  ACES would be                                                               
50 percent or less of the cash  flow for the years 2013-2040.  At                                                               
$100 per  barrel, Alaska's take would  be 53 percent of  the cash                                                               
flow, the  producers' take would  be 29 percent, and  the federal                                                               
government  take would  be  18  percent.   At  a  price of  $150,                                                               
Alaska's take would be 62 percent.                                                                                              
                                                                                                                                
1:34:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER  described a  scenario in which  the price                                                               
of  oil rises,  thereby increasing  the marginal  tax rate.   She                                                               
surmised  that since  Alaska has  a  net profit  tax, a  producer                                                               
could  reduce its  tax  rate in  the  aforementioned scenario  by                                                               
reinvesting the extra dollar which would reduce the profit.                                                                     
                                                                                                                                
ACTING COMMISSIONER BUTCHER agreed.                                                                                             
                                                                                                                                
REPRESENTATIVE  GARDNER  further  surmised that  a  producer  can                                                               
control its  tax rate by  drilling a  new well and  deducting it,                                                               
which is exactly what the state  is trying to do.  She understood                                                               
that about one-third of every dollar  less in state take would go                                                               
to  the federal  government.   Thus, she  presumed, the  graph on                                                               
slide 15 is  based on certain assumptions that can  be changed by                                                               
any producer.                                                                                                                   
                                                                                                                                
ACTING COMMISSIONER BUTCHER answered  yes.  He directed attention                                                               
to  slide 16  which illustrates  what the  total cash  flow spilt                                                               
would be  under the  proposed provisions of  HB 110  at different                                                               
oil  prices  for  the  years 2013-2040  as  projected  under  the                                                               
department's [fall 2010] production forecast.   He said the graph                                                               
shows that the  state's take would be reduced,  while the federal                                                               
government's and producers' takes would increase.                                                                               
                                                                                                                                
1:36:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER surmised it  is being assumed that passage                                                               
of HB 110 would result in  a certain amount of investment, but it                                                               
is unknown how much that investment  might be because there is no                                                               
way to calculate it.                                                                                                            
                                                                                                                                
ACTING  COMMISSIONER  BUTCHER  agreed.     He  related  that  the                                                               
governor has made  it clear there is no  way [the administration]                                                               
can promise  what will happen  in the  future.  The  governor has                                                               
pointed out that  industry needs to step up and  discuss where it                                                               
sees things going, which it did  last week.  He acknowledged that                                                               
the  Department  of Revenue's  numbers  in  the fiscal  note  are                                                               
estimates based on the best information available at the time.                                                                  
                                                                                                                                
1:37:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER  understood  that predicting  the  future                                                               
price of oil is an informed  guess.  However, she said predicting                                                               
how investment  may or may  not change as a  result of HB  110 is                                                               
crucial.  She asked whether there  is any data and noted that the                                                               
producers  testified that  the  passage of  HB  110 "may"  change                                                               
investment or  that it  is "a  start."   There was  no commitment                                                               
that  reducing taxes  would necessarily  increase the  producers'                                                               
investments.                                                                                                                    
                                                                                                                                
ACTING  COMMISSIONER BUTCHER  referenced the  [2/11/11] testimony                                                               
of  the department's  consultant  [Rich  Ruggiero] from  Gaffney,                                                               
Cline &  Associates.  In  this testimony the  consultant provided                                                               
general projections  about what the  state would be giving  up in                                                               
the short term  and what the state would potentially  have in the                                                               
long term.   However, he continued, the department  does not have                                                               
a dollar  to dollar breakdown  of those projections.   He offered                                                               
to provide members with more detail in this regard.                                                                             
                                                                                                                                
REPRESENTATIVE  GARDNER said  she is  very interested  in knowing                                                               
what goes into calculating what the investments will be.                                                                        
                                                                                                                                
1:39:22 PM                                                                                                                    
                                                                                                                                
ACTING  COMMISSIONER BUTCHER  returned  to  his presentation  and                                                               
outlined the estimated total cash  flow spilt that would occur at                                                               
different oil prices  under HB 110 for the  years 2013-2040 based                                                               
on the  department's [fall 2010] production  forecast (slide 16).                                                               
At  an Alaska  North  Slope  West Coast  oil  price  of $100  per                                                               
barrel, the cash flow split would  be 44 percent to the state, 35                                                               
percent  to  the  producers,  and   21  percent  to  the  federal                                                               
government,  as  compared  to  53 percent,  29  percent,  and  18                                                               
percent,  respectively, under  current  ACES law.   At  increased                                                               
prices, the producers' percentage of  take would still be reduced                                                               
and the state's take would still  increase, but not as steeply as                                                               
under current  law.   He said  [the administration]  believes the                                                               
state would still be getting its  fair share at 50 percent of the                                                               
cash flow when oil prices are high [$150].                                                                                      
                                                                                                                                
1:40:49 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  inquired where  the incentive  comes in  for the                                                               
investment.  He  calculated that at a price of  $120, less $30 in                                                               
cost, the  production tax value  would be $90, at  which industry                                                               
would  receive 29  percent  of  the cash  flow  under  HB 110  as                                                               
compared to  25 percent under  ACES, as well as  industry getting                                                               
the  investment  in  the  field.   Under  HB  110,  all  of  that                                                               
investment would  only yield industry  a 1 percent change  in the                                                               
retention of  tax.   He inquired whether  HB 110  would therefore                                                               
eliminate the  tax incentive that was  trying to be built  in for                                                               
stimulating infield production.                                                                                                 
                                                                                                                                
ACTING  COMMISSIONER  BUTCHER  said   he  believes  industry  has                                                               
testified quite  strongly behind  HB 110.   He presumed  that, if                                                               
asked,  industry  would  suggest  lower  numbers  than  what  are                                                               
proposed in the  bill.  The purpose  of slide 16 is  to show that                                                               
from  the  department's  perspective  the state  would  still  be                                                               
protected  under HB  110 and  would get  its fair  share; not  to                                                               
point out  why the industry should  be happy that this  change is                                                               
being made.                                                                                                                     
                                                                                                                                
1:43:03 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON directed  attention  to the  marginal tax  rates                                                               
depicted  on slide  13.   He  calculated that  if  the amount  of                                                               
investment reduced the production tax  value from $90 to $70, the                                                               
marginal basis  would drop by  15 percent under current  law, but                                                               
under HB  110 the marginal  basis would  drop by only  5 percent.                                                               
He said this is two-thirds less  reward for the investment and he                                                               
therefore   questions  how   HB   110   provides  incentive   for                                                               
investment.                                                                                                                     
                                                                                                                                
ACTING COMMISSIONER BUTCHER responded that  any time the tax rate                                                               
is reduced and  there is deduction, theoretically  there would be                                                               
a  reduction in  what industry  would be  able to  take from  the                                                               
taxes.  The  producers and explorers have testified  that this is                                                               
not  viewed  as  detrimental  to their  business,  just  as  [the                                                               
administration] does not view it as detrimental to the state.                                                                   
                                                                                                                                
1:45:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON said  that in his aforementioned  example the tax                                                               
liability is reduced by 15  percent [under current law], but that                                                               
same investment under HB 110  would only reduce the tax liability                                                               
by  5  percent.     He  asked  how  that  is   an  incentive  for                                                               
reinvesting,  other  than  just  saying that  industry  might  do                                                               
something if it has more money.                                                                                                 
                                                                                                                                
ACTING COMMISSIONER BUTCHER replied  that producers have told the                                                               
department  and  have  testified   that  when  making  investment                                                               
decisions about where  to explore and where to  invest funds, the                                                               
long  term  is  looked at  and  it  is  more  than just  what  is                                                               
reinvestment and tax  credits.  It is what the  high end is, what                                                               
effective is, and what marginal  is, and taking a higher marginal                                                               
tax  rate down  a higher  percentage to  what is  still a  higher                                                               
number  is going  to be  less of  an incentive  than would  occur                                                               
under HB 110,  which would take it down a  smaller percentage but                                                               
would be at a lower percentage of taxes looking long term.                                                                      
                                                                                                                                
1:47:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE asked whether the  commissioner and the department                                                               
believe   that  the   current  ACES   structure  has   encouraged                                                               
exploration.                                                                                                                    
                                                                                                                                
ACTING  COMMISSIONER  BUTCHER  answered that,  based  upon  there                                                               
being virtually  no new exploration  over the past few  years and                                                               
based upon  anecdotal information that explorers  that have found                                                               
oil have been unable to  find partners to develop, the department                                                               
believes  the  current tax  structure  has  been a  deterrent  to                                                               
investment.   The state has  not received the kind  of investment                                                               
that seems to be going on in the  rest of the U.S. and the world,                                                               
which is spurred in particular by the high price of oil.                                                                        
                                                                                                                                
CO-CHAIR FEIGE  inquired whether  the commissioner  believes that                                                               
altering  the tax  rate  as  proposed by  HB  110 would  increase                                                               
exploration  and  subsequent  production if  the  exploration  is                                                               
successful.                                                                                                                     
                                                                                                                                
ACTING  COMMISSIONER  BUTCHER  said  he would.    The  department                                                               
believes  the  changes  in  HB  110  will  spur  exploration  and                                                               
increase production  while still allowing  the state to  keep its                                                               
fair share and not do more than it needs to do.                                                                                 
                                                                                                                                
1:49:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   P.  WILSON   observed  that   the  decrease   in                                                               
exploration  started a  few years  before PPT  or ACES  went into                                                               
effect.    Therefore,  she  asked,  how  is  it  known  that  the                                                               
decreased exploration would not have happened anyway.                                                                           
                                                                                                                                
ACTING  COMMISSIONER BUTCHER  responded that  during the  pre-PPT                                                               
years  the price  of oil  was fairly  low.   When Governor  Frank                                                               
Murkowski took office in 2003, the  state was looking at a budget                                                               
deficit of about  $500-$600 million.  While much of  that was due                                                               
to the  ELF needing to  be reformed, it was  also due to  the low                                                               
oil price.  Many factors  affect whether there is exploration, he                                                               
continued, but he  believes that tax rates are  the biggest piece                                                               
that the State of  Alaska can do something about.   He said it is                                                               
his opinion that  the lack of exploration in Alaska  is even more                                                               
alarming given  what is  going in other  states and  countries at                                                               
this high price.                                                                                                                
                                                                                                                                
1:51:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER  observed  that industry  must  currently                                                               
spend  money in  Alaska to  reduce its  taxes, but  if HB  110 is                                                               
passed industry  will not  have to spend  anything to  reduce its                                                               
tax rate.   She inquired  whether HB 110  is not the  opposite of                                                               
what the state would want to do.                                                                                                
                                                                                                                                
ACTING COMMISSIONER  BUTCHER replied  that under HB  110 spending                                                               
and increased  investment would reduce  industry's tax load.   He                                                               
allowed that on a percentage basis  a lower tax rate would result                                                               
in a  lower amount of taxes  being reduced by spending,  but said                                                               
that producers  take many things  into consideration  when making                                                               
their decisions,  and for the out  years they look at  the tax to                                                               
see where  the high take  can be to  offset when prices  are low;                                                               
for example,  "Shell" has spent  nearly $4 billion  in developing                                                               
the  outer  continental  shelf (OCS).    When  making  decisions,                                                               
industry looks at  the upside as well as  everything.  Department                                                               
discussions indicate that looking at  the tax rate, in particular                                                               
the high  marginal tax  rate, plays  a greater  role than  do the                                                               
other pieces,  although that is not  to say the other  pieces are                                                               
unimportant.   The department is trying  to do what it  has heard                                                               
will spur investment  and spending and would create  more jobs in                                                               
the state.                                                                                                                      
                                                                                                                                
1:53:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER said  she still  does not  understand how                                                               
reducing taxes will increase industry investment.                                                                               
                                                                                                                                
ACTING COMMISSIONER  BUTCHER responded that  if he was  running a                                                               
company he  would not  increase spending  on exploration  just to                                                               
reduce his  taxes if it was  cost prohibitive in the  long run to                                                               
develop and  produce the area  that he  was exploring.   It would                                                               
ultimately  cost hundreds  of millions  of dollars  to do  so, he                                                               
said.  He suggested that industry be asked this question.                                                                       
                                                                                                                                
REPRESENTATIVE  GARDNER remarked  that this  would be  true under                                                               
either system.                                                                                                                  
                                                                                                                                
1:56:40 PM                                                                                                                    
                                                                                                                                
BRUCE TANGEMAN, Deputy Commissioner,  Office of the Commissioner,                                                               
Department of Revenue (DOR), provided  a sectional analysis of HB                                                               
110.  He  explained that Sections 1-5 of the  bill would amend AS                                                               
43.05.225  to  address  the interest  rate  clauses  (slide  18).                                                               
Sections 1 and  2 are conforming amendments.   Section 3 proposes                                                               
a new  interest rate  of 11  percent or the  federal rate  plus 3                                                               
percent, whichever is lower.   Currently, the interest rate is 11                                                               
percent or the federal rate  plus 5 percent, whichever is higher.                                                               
Sections 4 and 5 are conforming amendments.                                                                                     
                                                                                                                                
MR. TANGEMAN related that Section  6 addresses the 25 percent tax                                                               
rate  for   existing  oil  producing   fields  and   proposes  to                                                               
incorporate a  15 percent  tax rate  for state  land that  is not                                                               
currently producing or  not unitized (slide 19).   Section 6 also                                                               
proposes that progressivity  be levied on an  annual, rather than                                                               
a monthly, basis.   This would annualize the revenue  side of the                                                               
equation to  what is currently  annualized under the  credits and                                                               
expenditures  side.   The  state would  still  receive a  monthly                                                               
payment, but how that payment is calculated would be changed.                                                                   
                                                                                                                                
1:58:46 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN said  Section 7 proposes lower  threshold prices for                                                               
application  of  the minimum  tax  (slide  20).   Currently,  the                                                               
minimum tax  is 4 percent  of gross  when the Alaska  North Slope                                                               
West Coast  price is over $25  per barrel; Section 7  would lower                                                               
the  price  to  $20.    Currently,  three  percent  of  gross  is                                                               
calculated between $20  and $25; under the new  language it would                                                               
be between  $17.50 and $20.   Two  percent of gross  currently is                                                               
calculated  between $17.50  and $20;  under the  new language  it                                                               
would be between  $15 and $17.50.  Minimum tax  of one percent of                                                               
gross  currently  is  between  $15  and  $17.50;  under  the  new                                                               
language it would be between $12.50 and $15.                                                                                    
                                                                                                                                
MR.  TANGEMAN explained  that Section  8 proposes  an income-tax-                                                               
type  bracketing  of  progressivity  (slide  20).    He  directed                                                               
attention to  page 4  of the  bill where Section  8 lays  out the                                                               
brackets  for both  the  25  percent oil  production  and the  15                                                               
percent oil production.                                                                                                         
                                                                                                                                
2:00:33 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN  said Section 9  accounts for the  technical changes                                                               
of  going from  a monthly  to an  annual calculation  (slide 21).                                                               
Section 10  is a conforming  amendment for the  proposed interest                                                               
rate change.  Section 11  proposes to remove the requirement that                                                               
tax credits for qualified capital  expenditures be taken over two                                                               
years; thus, the  credit could be taken in one  year.  Section 12                                                               
is a cleanup  section to allow the proposed change  in Section 11                                                               
to take place.                                                                                                                  
                                                                                                                                
MR. TANGEMAN  related that Sections  13 and 14 are  amendments to                                                               
reflect  the proposed  interest  rate change  and  relate to  the                                                               
proposed change  in issuance of  well lease  expenditure credits.                                                               
Sections 15  and 16 propose to  expand the 40 percent  well lease                                                               
expenditure  credit  to  include qualified  expenditures  on  the                                                               
North  Slope; currently  the 40  percent credit  applies only  to                                                               
wells below  68 degrees north latitude.   Sections 17 and  18 are                                                               
the  conforming  amendments  to implement  Sections  15  and  16.                                                               
Section  19   proposes  that  the  statute   of  limitations  for                                                               
production tax be reduced from  six years to four years beginning                                                               
with the 2014 tax liability.   It is believed that this would not                                                               
be onerous on the department, he said.                                                                                          
                                                                                                                                
2:03:20 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN explained  that Section 20 would  amend AS 43.55.160                                                               
to account for production subject  to the proposed 15 percent tax                                                               
rate  and   the  proposed   progressivity  changes   (slide  23).                                                               
Sections  21,  22,  and  23 are  conforming  amendments  for  the                                                               
proposed  interest  rate change.    Section  24 would  repeal  AS                                                               
43.55.023(m)  since  all  capital credit  certificates  would  be                                                               
issued  as one  certificate and  relates to  the proposed  change                                                               
that the credits do not have to be taken over two years.                                                                        
                                                                                                                                
MR.  TANGEMAN   said  the  rest   of  the  sections   are  mostly                                                               
clarification and  conforming amendments (slide 25).   Section 26                                                               
would provide the Department of  Revenue (DOR) with the authority                                                               
to adopt regulations  to implement HB 110, which  is standard for                                                               
any proposed  tax change.   Sections 27-30 provide  the effective                                                               
dates:   July 1,  2011, is  the proposed  effective date  for the                                                               
proposed  reduction   in  interest   rate  for   overpayment  and                                                               
underpayment  of   taxes;  January  1,  2012,   is  the  proposed                                                               
effective   date  for   the  proposal   to   allow  credits   for                                                               
expenditures made after this date to  be used in one year instead                                                               
of having to  be spread over two years; January  1, 2012, is also                                                               
the proposed  effective date  for the  proposed extension  to the                                                               
North  Slope of  the 40  percent well  lease expenditure  credit;                                                               
January 1, 2013, is the  proposed effective date for the proposed                                                               
change  to  annual  and  bracketed  progressivity  along  with  a                                                               
proposed 50 percent  maximum rate;  January 1, 2013,  is also the                                                               
proposed effective  date for  the proposed lower  tax rate  of 15                                                               
percent for new leases or properties  as well as for the proposed                                                               
change to  the minimum  tax thresholds; and  January 1,  2014, is                                                               
the  proposed effective  date for  the proposed  change from  six                                                               
years to four years in  the statute of limitations for production                                                               
tax.                                                                                                                            
                                                                                                                                
2:05:57 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  pointed out that  all of the  producers testified                                                               
the  effective  dates  should  be  sooner.    He  asked  why  the                                                               
department chose these effective dates.                                                                                         
                                                                                                                                
ACTING COMMISSIONER BUTCHER responded that  the Tax Division is a                                                               
bit  behind in  auditing because  of  the PPT  and ACES  changes.                                                               
Additionally,  new regulations  would  need to  be  written.   An                                                               
effective date for the tax  changes of January 1, 2013, therefore                                                               
seemed much  more realistic than  2012.  The effective  dates for                                                               
the interest  rate and credit  changes are earlier  because those                                                               
would not take  a tremendous amount of work by  the department to                                                               
implement.   The additional year  for the statute  of limitations                                                               
change is to make absolutely sure  the department is as caught up                                                               
on  its audits.    In  further response,  he  confirmed that  the                                                               
spacing  of  the   proposed  effective  dates  is   to  give  the                                                               
department the time to write the new rules.                                                                                     
                                                                                                                                
2:08:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER  referenced Section 8 and  inquired who is                                                               
doing exploration work right now.                                                                                               
                                                                                                                                
ACTING  COMMISSIONER  BUTCHER  replied   that  according  to  the                                                               
Department of Natural Resources (DNR)  and the Alaska Oil and Gas                                                               
Conservation  Commission  (AOGCC),   Brooks  Range  Petroleum  is                                                               
drilling the  one oil  exploration well  expected in  Alaska this                                                               
year, and it is on the North Slope.                                                                                             
                                                                                                                                
2:08:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER  asked what is  the total amount  paid out                                                               
in capital  tax credits under ACES  and how much of  that was for                                                               
exploration wells.                                                                                                              
                                                                                                                                
MR. TANGEMAN deferred to Mr. Lennie Dees.                                                                                       
                                                                                                                                
LENNIE DEES, Audit Master, Production  Audit Group, Tax Division,                                                               
Department of  Revenue (DOR), answered  that he does not  have in                                                               
front  of  him  a  number  for just  ACES.    However,  from  the                                                               
beginning of PPT  to date, the total is $3  billion in the amount                                                               
withheld from tax liability plus  what the state has paid through                                                               
the appropriations  fund.  Of  that, about $450 million  was paid                                                               
out for exploration credits.                                                                                                    
                                                                                                                                
2:11:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER calculated  that about  one-sixth of  the                                                               
tax credits  paid out were for  exploration.  She asked  what, in                                                               
broad terms, the rest of the tax credits were for.                                                                              
                                                                                                                                
MR.  DEES  responded that  capital  expenditure  credits are  for                                                               
drilling development  wells and  building facilities in  both old                                                               
and new fields and these credits  were about $2.4 billion of that                                                               
amount.   Net  operating  loss carried  forward  credits are  for                                                               
companies that  are not  currently tax  payers but  are incurring                                                               
net  operating loss  and these  credits were  $475 million.   The                                                               
remainder was the small producer credits applied against taxes.                                                                 
                                                                                                                                
REPRESENTATIVE GARDNER cited  the Kuparuk field as  an example of                                                               
basically  $0 in  production tax  under  the old  ELF system  and                                                               
inquired  whether  there  was  any  evidence  of  exploration  or                                                               
drilling of new wells.                                                                                                          
                                                                                                                                
MR. DEES said he believes  the exploration credit came into being                                                               
in 2003  and that  about $48 million  in exploration  credits was                                                               
applied for prior to PPT.                                                                                                       
                                                                                                                                
2:13:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER asked  whether the  state has  historical                                                               
data indicating that the lowering  of taxes fosters job growth or                                                               
new wells.                                                                                                                      
                                                                                                                                
MR. DEES said he does not  have any data that he could positively                                                               
associate with that.                                                                                                            
                                                                                                                                
ACTING  COMMISSIONER BUTCHER  interjected  that a  few years  ago                                                               
Alberta  raised its  royalty to  a level  seen as  prohibitive by                                                               
industry  and the  amount  of  exploration subsequently  dropped.                                                               
About  a  year ago  the  province  lowered  its royalty  and  the                                                               
anecdotal information is that there  is now more development; the                                                               
department   is  still   looking  into   finding  black-and-white                                                               
information  to show  that.   In  further response,  he said  the                                                               
department has  no data  for Alaska  since the  last two  oil tax                                                               
increases, other than it appears that there is less exploration.                                                                
                                                                                                                                
2:15:15 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  inquired whether  there has  been an  increase or                                                               
decrease  in  capital  credits for  exploration  since  the  2007                                                               
enactment of ACES.                                                                                                              
                                                                                                                                
MR. DEES  answered that when  PPT was  in effect prior  to Fiscal                                                               
Year (FY)  2007, the exploration  credits claimed were  about $48                                                               
million  in   addition  to  what   was  withheld  from   the  tax                                                               
liabilities  and  what was  claimed  via  the applications.    In                                                               
fiscal years  2007, 2008, 2009,  and 2010, that amount  was about                                                               
$92  million,  $93  million,  $84   million,  and  $133  million,                                                               
respectively.   The projection for  FY 2011  is $22 million.   He                                                               
cautioned  against looking  at  that trend  as  being when  those                                                               
activities actually occurred because there  is a time lag between                                                               
when the activities  occur and when the  companies actually apply                                                               
for those particular credits.                                                                                                   
                                                                                                                                
2:18:33 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  understood that these credits  do not necessarily                                                               
reflect activity that took place in those particular years.                                                                     
                                                                                                                                
MR. DEES replied correct.   He explained that the drilling season                                                               
on the North  Slope is typically between October of  one year and                                                               
March and April  of the next year.  Under  the statute, companies                                                               
must file for the credit within  6 months after completion of the                                                               
project.   Some projects may take  two drilling periods.   So, by                                                               
the  time the  department receives  and processes  an application                                                               
there could be  a lag time of  one to one and a  half years since                                                               
the actual  expenditure was  incurred.   In further  response, he                                                               
confirmed that the  figure of $133 million in FY  2010 could have                                                               
happened as far back as 2008.   He further clarified that many of                                                               
the  applications for  FY 2010  would  have begun  July 1,  2009,                                                               
through June 30, 2010, so  the department probably received a lot                                                               
of those applications in September of 2009.                                                                                     
                                                                                                                                
2:20:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  MUNOZ  asked how  much  of  the $2.4  billion  in                                                               
capital  expenditure credits  since  PPT was  for maintenance  of                                                               
facilities.                                                                                                                     
                                                                                                                                
MR. DEES responded he does not have that breakdown.                                                                             
                                                                                                                                
REPRESENTATIVE GARDNER  inquired whether  that data  is available                                                               
to the state or whether Mr. Dees does not have it right now.                                                                    
                                                                                                                                
MR. DEES said he  does not have the data in front  of him, but of                                                               
the  $2.4  billion  nearly  $1 billion  was  credits  claimed  by                                                               
companies not currently producing.   In the application process a                                                               
company must provide  a listing of the expenditures  for which it                                                               
is  claiming credits.   The  companies applying  for transferable                                                               
tax credit  certificates are primarily  in either  an exploration                                                               
or development stage,  so at least $1 billion of  that would have                                                               
been for  construction of facilities  or drilling  of development                                                               
wells, not  maintenance.   The remaining  $1.5 billion  came from                                                               
the   more  mature   fields,   which  means   currently-producing                                                               
companies, and the department does  not have a breakdown of those                                                               
particular  costs until  it actually  audits  those tax  filings.                                                               
The department has completed its  audits for the year 2006, which                                                               
is  the first  year on  the PPT,  and is  now in  the process  of                                                               
auditing 2007.   Under the current requirements  for tax filings,                                                               
the  amount of  capital  expenditures must  be  provided for  the                                                               
amount  of credits  being claimed,  but a  detailed breakdown  of                                                               
what those capital expenditures are for is not required.                                                                        
                                                                                                                                
2:24:29 PM                                                                                                                    
                                                                                                                                
ACTING  COMMISSIONER BUTCHER  added  that the  Department of  Law                                                               
(DOL)  has  concluded  that  a   regulatory  change  requiring  a                                                               
breakdown of capital  expenditures can be done  by the Department                                                               
of Revenue.   When the  regulations were written,  the department                                                               
did not include  that as a requirement; thus, it  is not a matter                                                               
of industry not giving this information to the department.                                                                      
                                                                                                                                
CO-CHAIR   FEIGE  said   the  committee   probably  expects   the                                                               
department to add something to those regulations.                                                                               
                                                                                                                                
ACTING COMMISSIONER BUTCHER replied, "Duly noted."                                                                              
                                                                                                                                
2:25:29 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON recalled that the  monthly basis of progressivity                                                               
was put in  place for the purpose of windfall  profits, such that                                                               
the  state  rather  than the  federal  government  would  receive                                                               
something if there was  a big spike in oil prices.   He asked why                                                               
Section  6 proposes  to  change the  progressivity  to an  annual                                                               
basis that would miss capturing any windfall profit tax.                                                                        
                                                                                                                                
ACTING  COMMISSIONER  BUTCHER  conveyed  that it  has  been  more                                                               
difficult  than  expected to  line  up  monthly oil  prices  with                                                               
expenditures, which are  done on a yearly basis.   This provision                                                               
is not a  key aspect of the  bill, it is just one  of many tweaks                                                               
the  department  looked  at  to  simplify  things  for  both  the                                                               
department and the industry.                                                                                                    
                                                                                                                                
2:27:56 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON commented  that he  does not  see how  the state                                                               
would benefit  from giving  up the windfall  profit tax  angle by                                                               
going from a monthly to an annual basis for progressivity.                                                                      
                                                                                                                                
ACTING COMMISSIONER BUTCHER responded that  it would be a rolling                                                               
average through the  course of the year.  He  said the department                                                               
believes the true-up in March would  be easier if it was based on                                                               
a  rolling average  that adjusted  as the  year went  on than  it                                                               
would  be with  the spike  and drop  of monthly  oil prices.   He                                                               
allowed  that  Co-Chair  Seaton   is  correct  because  when  the                                                               
department  reviewed   the  last  six  years   to  determine  the                                                               
difference  between  monthly  and  annually,  it  varied  from  a                                                               
difference of about $150 million to about $450 million.                                                                         
                                                                                                                                
ACTING  COMMISSIONER  BUTCHER,  in response  to  Co-Chair  Feige,                                                               
confirmed that  this difference  was in  relation to  billions of                                                               
dollars per year over this time  period.  In further response, he                                                               
confirmed that a  rolling average would not only  smooth over the                                                               
spikes, it would fill in the  sharp troughs in the price as well.                                                               
However, he allowed, a rolling average would have an effect.                                                                    
                                                                                                                                
CO-CHAIR  SEATON noted  that  the intended  effect  was to  catch                                                               
those  windfall profit  spikes  that occur  when  an accident  or                                                               
worldwide event happens and that are  not at all tied directly to                                                               
investment.   He inquired  whether the  fiscal note  reflects the                                                               
loss of $100-$400 million from this issue.                                                                                      
                                                                                                                                
ACTING COMMISSIONER BUTCHER replied yes.                                                                                        
                                                                                                                                
2:30:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI said he does  not see this loss reflected                                                               
in the  fiscal note.  He  asked what price per  barrel the fiscal                                                               
note is modeled on.                                                                                                             
                                                                                                                                
ACTING COMMISSIONER  BUTCHER answered that  it is modeled  on the                                                               
Department of  Revenue's fall 2010  forecast for  both production                                                               
and price.                                                                                                                      
                                                                                                                                
REPRESENTATIVE KAWASAKI  inquired how the calculations  for price                                                               
spikes are done, such as for  the current spike that is happening                                                               
as a result of the turmoil in Egypt and Libya.                                                                                  
                                                                                                                                
ACTING COMMISSIONER  BUTCHER responded  that it  would be  just a                                                               
very rough  estimate, given that no  one can predict the  ups and                                                               
downs throughout a year.                                                                                                        
                                                                                                                                
REPRESENTATIVE   KAWASAKI  asked   whether  the   department  has                                                               
considered calculating  the deductions monthly as  opposed to the                                                               
way they are done annually.                                                                                                     
                                                                                                                                
ACTING COMMISSIONER BUTCHER replied that  he believes it would be                                                               
much more difficult for the industry.  He deferred to Mr. Dees.                                                                 
                                                                                                                                
MR. DEES said  he does not believe the Department  of Revenue has                                                               
looked at  deducting actuals  on a monthly  basis.   He predicted                                                               
that  industry  would  tell  the committee  that  this  would  be                                                               
difficult to do.   There would be a greater  need for industry to                                                               
do  adjustments if  this was  required, he  continued.   It would                                                               
depend on  each company's  monthly accounting  cycles and  when a                                                               
company finalizes  its books as to  how difficult it would  be to                                                               
match up  the actual expenditures for  the month; so it  would be                                                               
possible for  some companies and  more difficult for others.   He                                                               
said he  believes that  most companies  currently have  an annual                                                               
estimate  for projected  lease  expenses for  the  year; as  that                                                               
changes throughout the year the  company makes adjustments to its                                                               
monthly installments and  must also adjust prior  months if those                                                               
are affected.                                                                                                                   
                                                                                                                                
2:34:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON  requested  the department  to  prepare  a                                                               
slide showing a  scenario where the overall tax  rate remains the                                                               
same as current law, but with the progressivity bracketed.                                                                      
                                                                                                                                
ACTING COMMISSIONER BUTCHER agreed to do so.                                                                                    
                                                                                                                                
2:35:07 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  inquired where the  $100-$400 million  loss from                                                               
the proposed annualizing of progressivity is shown.                                                                             
                                                                                                                                
ACTING COMMISSIONER BUTCHER deferred to Ms. Nienhuis.                                                                           
                                                                                                                                
CHERYL  NIENHUIS, Petroleum  Economics Policy  Analyst, Anchorage                                                               
Office, Tax Division,  Department of Revenue (DOR),  said the tax                                                               
rate change is  addressed in Section 3 of [Fiscal  Note #1, dated                                                               
1/13/11, page 2].  Because the  tax rate change would take effect                                                               
on January  1, 2013, it  is unknown  what the monthly  oil prices                                                               
will  be  in FY  2013  and  therefore  unknown what  the  monthly                                                               
variation in tax  rate will be.   So, as far as  being built into                                                               
the fiscal  note, the department did  not hazard a guess;  for FY                                                               
2013 just one price for the  year is projected.  Under ACES there                                                               
was a  pretty significant monthly  to annual tax rate  change, so                                                               
calculating monthly versus annually  would have a fairly sizeable                                                               
difference,  especially  if there  is  volatility  in that  year.                                                               
Under  the  proposed bracketed  progressivity  of  HB 110,  there                                                               
would be  much less of a  change between monthly and  annual; the                                                               
percentages are significantly  less.  That is  because under ACES                                                               
the progressivity is formulaic, which  means that every dollar of                                                               
profit  actually increases  the tax  rate; whereas  under HB  110                                                               
there would  be $12.50 worth of  profit under the same  tax rate,                                                               
so the  monthly to annual calculation  would result in less  of a                                                               
tax rate change.                                                                                                                
                                                                                                                                
2:37:27 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON reiterated that  eliminating the windfall portion                                                               
of the  monthly progressivity would  result in an  average annual                                                               
decrease of  $100-$400 million.   He  asked whether  this revenue                                                               
loss is shown somewhere in the fiscal note or is off the books.                                                                 
                                                                                                                                
MS. NIENHUIS  responded that the $100-$400  million referenced by                                                               
Acting  Commissioner  Butcher was  calculated  under  ACES.   The                                                               
department is  calculating much  lower changes  under HB  110 and                                                               
without knowing the volatility it  is unknown how much that would                                                               
be.   With  the  current  year prices  it  could  be very  little                                                               
because   there  has   been  little   month-to-month  volatility;                                                               
therefore,  that  was not  automatically  built  into the  fiscal                                                               
note.   Department  fiscal notes  are normally  done on  the most                                                               
recent forecasted  prices and  production, so  there was  not any                                                               
volatility  to model  this under.    She offered  to provide  the                                                               
ranges of differences  in production tax with  monthly and annual                                                               
calculations.                                                                                                                   
                                                                                                                                
2:39:11 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE accepted  Ms. Nienhuis's  offer.   Regarding  the                                                               
difference between these  two methods of calculating  the tax, he                                                               
surmised that  if the  price is less  volatile the  difference is                                                               
less, and if the price is more volatile the difference is more.                                                                 
                                                                                                                                
MS. NIENHUIS  replied correct.  She  noted that FY 2009  had very                                                               
volatile oil  prices and  that was  where the  biggest difference                                                               
was seen.  This would be  calculated on a calendar year basis, so                                                               
it would  not necessarily correspond  to fiscal years.   However,                                                               
whatever  measure of  volatility there  is for  month-to-month is                                                               
going to make  the difference in the production  tax rate between                                                               
monthly and annual.                                                                                                             
                                                                                                                                
2:40:16 PM                                                                                                                    
                                                                                                                                
CO-CHAIR   SEATON  expressed   his  concern   that  the   revenue                                                               
projections  for HB  110 do  not reflect  this loss  of $100-$400                                                               
million  per year.    He  inquired whether  there  are any  other                                                               
aspects of HB  110 that reduce revenue that are  not shown on the                                                               
fiscal note for the same type of reasoning.                                                                                     
                                                                                                                                
ACTING  COMMISSIONER BUTCHER  apologized for  this misinformation                                                               
on the fiscal note.   He said he and Ms.  Nienhuis had not spoken                                                               
in  detail about  this and  her view  that the  amount of  change                                                               
based  on the  switch  from  the higher  spikes  of  ACES to  the                                                               
brackets would  result in a much  smaller number.  He  added that                                                               
he thinks it will be much less than $100-$400 million.                                                                          
                                                                                                                                
2:41:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI referenced  [Chart  8, page  11] of  the                                                               
commissioner's  [January 18,  2011,  Oil and  Gas Production  Tax                                                               
Status Report] which  depicts employment in Alaska's  oil and gas                                                               
industry during the  years of a gross profits tax  and during the                                                               
years of a net profits tax.   He asked for an explanation of what                                                               
these  numbers would  mean in  terms of  Representative Gardner's                                                               
question about  whether the state has  historical data indicating                                                               
that the lowering of taxes fosters job growth.                                                                                  
                                                                                                                                
ACTING  COMMISSIONER BUTCHER  answered that  the department  does                                                               
not  have a  good breakdown  of  where that  employment has  been                                                               
going.  The producers have  told the department that a tremendous                                                               
amount of maintenance work is being  done on mature fields and in                                                               
trying  to keep  production  levels from  declining further,  but                                                               
very little  is going into exploration.   That is backed  up when                                                               
exploration wells are  looked at, but DOR does not  have the hard                                                               
data that says specifically what those positions are going for.                                                                 
                                                                                                                                
2:43:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI  inquired whether  DOR has any  data that                                                               
connects   jobs   with  what   has   happened   with  tax   rates                                                               
historically.                                                                                                                   
                                                                                                                                
ACTING COMMISSIONER  BUTCHER responded  that the  department does                                                               
not have  any breakdown  that would say  definitively one  way or                                                               
another, but there is anecdotal  information.  The department has                                                               
discovered that  through regulation  it can get  more information                                                               
than  it currently  has,  but  he is  unaware  why  that was  not                                                               
pursued by the department previously.                                                                                           
                                                                                                                                
MR. TANGEMAN  added that  specifically tying  the effects  of the                                                               
tax  one-to-one on  job growth  would be  very difficult  without                                                               
taking into account the other variables, such as oil price.                                                                     
                                                                                                                                
2:44:47 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE pointed  out that the number  of exploration wells                                                               
depicted  on slide  6 shows  a definite  downward trend  and this                                                               
could be tied to price or  jobs.  He asked whether Representative                                                               
Kawasaki wants more information.                                                                                                
                                                                                                                                
REPRESENTATIVE  KAWASAKI replied  he does  want more  information                                                               
because HB 110 has multi-billion-dollar  implications and it does                                                               
not seem like  the Department of Revenue has the  data to back up                                                               
any  of the  proposed  changes.   He  requested information  that                                                               
shows the number of exploration wells drilled prior to 2005.                                                                    
                                                                                                                                
ACTING COMMISSIONER BUTCHER said DOR will get what it can.                                                                      
                                                                                                                                
2:46:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER recalled  that House  Bill 280,  the Cook                                                               
Inlet gas storage bill by  Representative Hawker, was passed last                                                               
year.   That  bill replaced  the  20 percent  credit for  general                                                               
capital activity with  a new 40 percent credit  for well drilling                                                               
activity.   Under  Section 15  of HB  110, she  noted, the  state                                                               
would  pick up  the 40  percent credit  statewide.   She surmised                                                               
that because it is a net profits  tax the cost for the well would                                                               
bring down the  taxes; so, at a  price of $85 per  barrel the tax                                                               
rate would  be about 35 percent.   Therefore, the state  would be                                                               
participating in  the well at about  75 percent of the  cost, she                                                               
calculated.  She asked whether that is the intent of HB 110.                                                                    
                                                                                                                                
MR. TANGEMAN  answered that  it is not  that simple  because some                                                               
tax credits are  stackable and some are not.   He said 75 percent                                                               
is not a number he has heard.                                                                                                   
                                                                                                                                
2:47:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER  reiterated  that  there would  be  a  40                                                               
percent credit at the  top.  The tax would also  be reduced by 35                                                               
percent  of that  amount because  Alaska has  a net  profits tax.                                                               
For example,  if a company is  being taxed on $100  that would be                                                               
reduced to  $50 by the 40  percent tax credit; the  company would                                                               
then pay taxes  on only 60 percent.  Thus,  roughly 35 percent of                                                               
that $40 is also a tax savings to the taxpayer.                                                                                 
                                                                                                                                
MR. TANGEMAN asked  whether that $100 is the price  per barrel of                                                               
oil or $100 of investment in a well.                                                                                            
                                                                                                                                
CO-CHAIR FEIGE  interjected that the  tax credit is  not received                                                               
unless the company invests the money.                                                                                           
                                                                                                                                
REPRESENTATIVE GARDNER  said there is  the 40 percent  tax credit                                                               
as well as a deductible expense at about 35 percent tax rate.                                                                   
                                                                                                                                
MR. TANGEMAN deferred to Mr. Dees.                                                                                              
                                                                                                                                
MR. DEES  explained that  the 40  percent well  lease expenditure                                                               
credit did not replace the  20 percent credit; rather, it allowed                                                               
an additional credit on certain  well lease expenditures that met                                                               
certain criteria.   The  criteria for meeting  that are  what are                                                               
called  intangible  drilling  costs associated  with  drilling  a                                                               
well.  So, it  is not that the entire cost of  a well received 40                                                               
percent; the  intangible drilling  costs received  the additional                                                               
20 percent.  Intangible drilling  costs are those costs for items                                                               
associated with  a well  that are  deemed to  not have  a salvage                                                               
value.  As a rule  of thumb, intangible drilling costs constitute                                                               
about   75-85  percent   of  the   cost  of   drilling  a   well.                                                               
Theoretically,  what Representative  Gardner is  saying is  true:                                                               
if  the well  received the  regular  20 percent  credit plus  the                                                               
other additional  20 percent credit  on those certain  items, and                                                               
the cost was deductible for  production tax purposes, the company                                                               
would benefit to  the extent of whatever the  production tax rate                                                               
is for that particular month or year.                                                                                           
                                                                                                                                
2:52:10 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE DICK  inquired how the federal  government take is                                                               
determined and  why the federal  government is  not participating                                                               
in the effort to stimulate development.                                                                                         
                                                                                                                                
ACTING  COMMISSIONER BUTCHER  explained  that  federal taxes  are                                                               
based on what  Congress passes.  Some parts of  the state tax are                                                               
deductible from  the federal  tax, so when  Alaska's tax  goes up                                                               
the federal  tax drops.   He offered to provide  more information                                                               
in this regard if it is requested.                                                                                              
                                                                                                                                
REPRESENTATIVE DICK said he will pursue that.                                                                                   
                                                                                                                                
2:53:08 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  said he  believes the original  intent of  the 40                                                               
percent credit for  Cook Inlet was to  encourage more exploratory                                                               
drilling in the Cook Inlet to  increase the supply of gas for the                                                               
Anchorage  Bowl.   He asked  whether there  has been  effect from                                                               
that credit.                                                                                                                    
                                                                                                                                
ACTING  COMMISSIONER  BUTCHER  deferred   to  the  Department  of                                                               
Natural  Resources for  details,  but said  it  appears that  the                                                               
credit is  working because  a couple  of companies  are currently                                                               
trying to bring jack-up rigs to the Cook Inlet.                                                                                 
                                                                                                                                
CO-CHAIR SEATON asked whether the  intangible drilling cost of 40                                                               
percent is  what is stimulating  that instead of the  100 percent                                                               
of the cost of the first well and 90 percent of the second.                                                                     
                                                                                                                                
ACTING COMMISSIONER BUTCHER replied he  is sure that is playing a                                                               
major role  as well.   A few  changes were made  and as  a result                                                               
there has been activity.                                                                                                        
                                                                                                                                
2:54:27 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON observed that Item 3  of Fiscal Note 1 [page 2 of                                                               
2] projects a decrease in revenue  to the state of $1,423 million                                                               
in FY 2017.   He further observed that Item  6 projects a revenue                                                               
decrease  of $200-$400  million,  which he  does  not believe  is                                                               
included in Item  3.  Additionally, $100-$400  million in revenue                                                               
would  be lost  from changing  the  windfall profits  tax from  a                                                               
monthly to an  annual basis.  He calculated that  the real impact                                                               
of  HB 110  would therefore  be a  revenue loss  of $1.723-$2.223                                                               
million in FY 2017.                                                                                                             
                                                                                                                                
ACTING COMMISSIONER  BUTCHER pointed out that  DOR's estimates of                                                               
reduced revenue  are only half of  the picture.  The  fiscal note                                                               
does not show the increased  revenue the department believes will                                                               
result from  passage of HB 110.   He deferred to  Ms. Nienhuis to                                                               
answer the question.                                                                                                            
                                                                                                                                
MS. NIENHUIS  agreed that  Co-Chair Seaton's  numbers are  in the                                                               
ballpark, although $100-$400  million might be a  little high for                                                               
the change  to annual progressivity.   The fiscal impact  of each                                                               
provision was  stated separately and  the impacts would  be added                                                               
together if  HB 110 passed as  currently written.  As  far as the                                                               
40  percent well  lease expenditure  credits, the  department had                                                               
very  limited data  on  which  to project  because  DOR does  not                                                               
receive its expenditure estimates by  type of expenditure.  It is                                                               
hoped there would  be additional production if passage  of HB 110                                                               
results in  the additional  development that  is foreseen  by the                                                               
department.   If  there is  additional drilling,  the well  lease                                                               
expenditure  credits could  go  up.   In  its  fiscal notes,  the                                                               
department tries as much as  possible to follow its last forecast                                                               
information, so anything  on this fiscal note  uses that forecast                                                               
alone.                                                                                                                          
                                                                                                                                
2:58:46 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON said  an average revenue reduction  of $2 billion                                                               
per year is  more significant than has been  the general feeling.                                                               
There  is  talk  about  increased  drilling,  yet  there  are  no                                                               
commitments from  anyone for new  projects.  The  major companies                                                               
testified that  they are  giving up  exploration leases  and will                                                               
not  be in  the position  to do  exploratory work.   There  is no                                                               
forecast  of potential  new units  beyond Liberty  and the  other                                                               
fields scheduled  to come on line  soon, and no forecast  that is                                                               
above the  current level  of well  workover and  production wells                                                               
within existing units.  He  therefore surmised that the projected                                                               
revenue  reduction will  not change  unless the  bill does  cause                                                               
stimulation.                                                                                                                    
                                                                                                                                
ACTING  COMMISSIONER  BUTCHER  agreed,  but  explained  that  Ms.                                                               
Nienhuis's task on  compiling the fiscal note was to  look at the                                                               
current forecast and  extrapolate the numbers from  that, she was                                                               
not  tasked with  estimating  the positive  effects  that HB  110                                                               
would  have on  exploration  and production.    Industry and  the                                                               
explorers have testified  about what they are looking  for; it is                                                               
unlikely there  will be any promise  of investments, particularly                                                               
from  the larger  corporations,  because they  must work  through                                                               
their boards of  directors.  However, industry should  be able to                                                               
give members the information that  is needed about whether HB 110                                                               
would be  a material  change to their  companies' views  on where                                                               
their investment dollar will go forward in regard to Alaska.                                                                    
                                                                                                                                
3:01:39 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE announced  that all  proposed amendments  must be                                                               
prepared  by  Legislative  Legal  and Research  Services  and  be                                                               
submitted to  the co-chairs 24  hours prior to the  next hearing.                                                               
He  further announced  that Admiral  Barrett of  Alyeska Pipeline                                                               
Service Company will give a  presentation on low-flow issues when                                                               
HB 110 is before the House Finance Committee.                                                                                   
                                                                                                                                
CO-CHAIR SEATON  inquired whether the Department  of Revenue will                                                               
have  the  requested analyses  of  projections  for oil  and  the                                                               
impact on state revenue by the next hearing on 2/23/11.                                                                         
                                                                                                                                
ACTING COMMISSIONER BUTCHER  said DOR should have  answers to the                                                               
questions that have been asked.                                                                                                 
                                                                                                                                
3:03:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON noted that  she was expecting to receive                                                               
an answer  from the department  regarding how the  statutes could                                                               
be  changed  so  the  state  could receive  more  of  the  needed                                                               
information.                                                                                                                    
                                                                                                                                
ACTING COMMISSIONER BUTCHER answered that  DOR believes it can do                                                               
this through regulation.   He said he will  provide the co-chairs                                                               
with the information that he has from the Department of Law.                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON pointed out  that when this question was                                                               
asked the other  day, the answer was that  more information could                                                               
not be  received by  the department than  now because  of current                                                               
state statute.                                                                                                                  
                                                                                                                                
ACTING COMMISSIONER BUTCHER said his  response at the time of the                                                               
question was  that he believed it  was statutory but it  could be                                                               
regulatory.   The  Department of  Law  (DOL) looked  into it  and                                                               
determined that  this can be  done by regulation.   He reiterated                                                               
that he would provide the DOL opinion.                                                                                          
                                                                                                                                
REPRESENTATIVE  GARDNER  observed  that  Section  20  of  HB  110                                                               
references  existing legislation  about  small producer  credits.                                                               
She asked whether expansion of  the small producer credits around                                                               
the state  could result in  a doubling up  on the credit  and, if                                                               
so, whether this is the intention or the effect.                                                                                
                                                                                                                                
ACTING COMMISSIONER BUTCHER replied he will get that information                                                                
to the committee.                                                                                                               
                                                                                                                                
3:05:30 PM                                                                                                                    
                                                                                                                                
The meeting was recessed at 3:05 p.m. until 5:15 p.m. that                                                                      
evening.                                                                                                                        
                                                                                                                                
5:21:53 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  ERIC   FEIGE  called   the  House   Resources  Standing                                                               
Committee meeting  back to  order at  5:21 p.m.   Present  at the                                                               
call back to order were  Representatives Feige, Seaton, Kawasaki,                                                               
P. Wilson, Herron, Munoz, Foster, and Gardner.                                                                                  
                                                                                                                                
[HB 110 was held over.]                                                                                                         

Document Name Date/Time Subjects