Legislature(2013 - 2014)

03/29/2013 02:52 PM RES


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02:52:10 PM Start
02:52:28 PM SB21
03:10:23 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
               SB  21-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
2:52:28 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  announced that the  only order of business  is CS                                                               
FOR SENATE BILL NO. 21(FIN) am(efd  fld), "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; providing  a tax credit  against the  corporation income                                                               
tax  for qualified  oil and  gas  service industry  expenditures;                                                               
relating to the oil and gas  production tax rate; relating to gas                                                               
used in  the state; relating  to monthly installment  payments of                                                               
the  oil  and  gas  production  tax;  relating  to  oil  and  gas                                                               
production  tax  credits  for certain  losses  and  expenditures;                                                               
relating  to  oil and  gas  production  tax credit  certificates;                                                               
relating  to nontransferable  tax  credits  based on  production;                                                               
relating to the  oil and gas tax credit fund;  relating to annual                                                               
statements by  producers and explorers; establishing  the Oil and                                                               
Gas   Competitiveness  Review   Board;   and  making   conforming                                                               
amendments."                                                                                                                    
                                                                                                                                
2:52:45 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER  moved  to  adopt  HCS  CSSB  21,  Version  28-                                                               
GS1647\B,  Nauman/Bullock,  3/29/13,  as  the  working  document.                                                               
There being no objection, Version B was before the committee.                                                                   
                                                                                                                                
2:53:07 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE pointed  out two issues with Version  B, the first                                                               
being the language [added] in the  title on page 1, line 9, which                                                               
begins with "relating to the  determination of annual oil and gas                                                               
production tax value  ...".  He explained there  were sections in                                                               
the bill  that came over from  the other body dealing  with this,                                                               
but it  was not included  in the title,  so this is  a "technical                                                               
adjustment"  and by  itself it  does not  require a  title change                                                               
resolution.  The second issue is  that Version B does not address                                                               
the effective  dates.   In the  Senate version,  the vote  on the                                                               
effective  date failed,  which led  to the  stripping out  of the                                                               
effective date clauses, but the bill  is still written as if some                                                               
of  those  effective  date  clauses  were there.    He  said  the                                                               
committee will deal with these issues in future amendments.                                                                     
                                                                                                                                
2:54:41 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  reviewed the changes  included in Version B.   In                                                               
Section 2,  page 2, line 5,  the revenue sharing source  has been                                                               
changed back to  the corporate income tax.  Section  22, page 16,                                                               
line 7,  is the  most major  change to the  bill and  pertains to                                                               
changes  in the  per  barrel  exclusions in  AS  43.55.024  -   a                                                               
sliding  scale   has  been  established  for   those  per  barrel                                                               
exclusions within areas that do  not fall under the categories of                                                               
the  gross value  reduction (GVR),  previously  called the  gross                                                               
revenue  exclusion  (GRE),  which  is  detailed  in  Section  31.                                                               
Sections 23  and 24,  pages 17 and  18, eliminate  the three-mile                                                               
rule  between previously  drilled bottom  hole locations  and new                                                               
exploration wells, but only as it  applied to "Middle Earth".  He                                                               
advised that  the committee is  not neglecting the  several other                                                               
issues raised  during the course  of testimony, saying  work will                                                               
be continued to address some of those issue.                                                                                    
                                                                                                                                
2:56:49 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  stated she has not  had a chance to  look at                                                               
Sections 23  and 24, and noted  that some issues were  brought to                                                               
her attention  about the Middle  Earth provisions in  last year's                                                               
"omnibus  bill"  [Senate  Bill 23,  Twenty-Seventh  Legislature].                                                               
One  issue was  extension of  the credit  period, which  it looks                                                               
like this  does.   She asked  whether the  co-chair was  aware of                                                               
those concerns and whether the changes address them.                                                                            
                                                                                                                                
CO-CHAIR FEIGE  said he is aware  of the concerns but  that these                                                               
changes  do not  address them.   If  those changes  are made,  he                                                               
continued,  they will  be made  in the  House Finance  Committee.                                                               
The specific changes are  on page 18, lines 2 and  21, and all it                                                               
says is that  the credits in subsection (m) of  AS 43.55.025 must                                                               
include (c)(1), (c)(2)(A), and  (c)(2)(C); exempted is (c)(2)(B),                                                               
which pertains to the three-mile rule.                                                                                          
                                                                                                                                
2:58:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  inquired whether in Section  22 the credit                                                               
is calculated on a monthly basis with no annual true-up.                                                                        
                                                                                                                                
MICHAEL PAWLOWSKI, Oil & Gas  Development Project Manager, Office                                                               
of  the  Commissioner,  Department   of  Revenue  (DOR),  replied                                                               
Section  22 applies  to the  per  barrel credit,  the per  barrel                                                               
credit for  the specific production  identified on page  16, line                                                               
17,  which is  the  production  that does  not  meet  any of  the                                                               
criteria in  AS 43.55.160(f).   He  explained AS  43.55.160(f) is                                                               
the adjustment  to the gross value  reduction section, previously                                                               
referred to as  the gross revenue exclusion section,  on page 24,                                                               
beginning on line 19.   Last night the committee had considerable                                                               
debate regarding  identified pockets  in legacy fields  that were                                                               
not contributing.   This  has been removed  from that  section so                                                               
the Section  22 per barrel  credit only  applies to the  oil that                                                               
does  not meet  one  of the  GVR  sections.   The  tax credit  is                                                               
determined  monthly based  on the  gross  value at  the point  of                                                               
production  and  it  does  not affect  the  annual  true-up  that                                                               
happens  in  the  natural  course   of  calculating  a  company's                                                               
production tax liability.                                                                                                       
                                                                                                                                
SUSAN  POLLARD, Assistant  Attorney  General, Oil,  Gas &  Mining                                                               
Section, Civil Division (Juneau),  Department of Law (DOL), added                                                               
that "the look  back for figuring out the credit  is ... monthly,                                                               
gross value  at point of production  of the North Slope  oil, the                                                               
prior month."                                                                                                                   
                                                                                                                                
3:00:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON surmised  it  is the  same calculation  as                                                               
progressivity  with a  monthly  tax, but  in this  case  it is  a                                                               
credit that is monthly rather than on an annual basis.                                                                          
                                                                                                                                
MR. PAWLOWSKI responded  the credit is what is  changing in value                                                               
on a monthly basis.   That credit is based on  the gross value at                                                               
the  point of  production and  the taxable  production.   The tax                                                               
rate  itself is  not  changing, it  remains at  the  level of  35                                                               
percent which avoids some of  the marginal impacts that happen as                                                               
a tax  rate itself  changes.  It  is a credit  that adjusts  on a                                                               
monthly basis, rather  than a tax rate that adjusts  on a monthly                                                               
basis.                                                                                                                          
                                                                                                                                
3:01:46 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE drew attention to  the gross value reduction (GVR)                                                               
provisions in  Section 31, page 24,  explaining that subparagraph                                                               
(1)  applies  to   new  units  formed  after   January  1,  2003.                                                               
Subparagraph  (2)  applies  to   new  participating  areas  (PAs)                                                               
established in an  old unit after December 31,  2011.  Addressing                                                               
subparagraph  (3),   he  explained  the  previous   language  was                                                               
discarded because it  was fuzzy in regard to whether  an area had                                                               
contributed to production.   The new language provides  that if a                                                               
producer adds  to an existing  PA, then  that area is  defined as                                                               
new  oil and  qualifies  for the  GVR.   Anything  that does  not                                                               
qualify  under the  GVR  would qualify  for  the credit  provided                                                               
under Section 22.                                                                                                               
                                                                                                                                
3:03:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  surmised this is added  acreage, not added                                                               
production.                                                                                                                     
                                                                                                                                
CO-CHAIR  FEIGE  answered no,  it  is  going  to  be on  the  oil                                                               
produced from those new areas.                                                                                                  
                                                                                                                                
3:03:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  cited the language  on page 24,  lines 30-                                                               
31,  "acreage  added to  an  existing  participating area."    He                                                               
concluded  this is  not on  increased production  necessarily; if                                                               
there is acreage added then that is what this is talking about.                                                                 
                                                                                                                                
CO-CHAIR  FEIGE  posed  a  scenario  to  explain:    There  is  a                                                               
participating area (PA) within a legacy  field.  In the course of                                                               
exploration the  company determines that outside  of the original                                                               
PA there  is production.  The  company expands the PA  to include                                                               
that  new pool  or reservoir  and will  now start  producing from                                                               
that.  The  state will consider this addition to  the existing PA                                                               
as  new  oil  because that  is  part  of  what  is trying  to  be                                                               
incentivized for development.                                                                                                   
                                                                                                                                
3:05:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  stated participating areas  have generally                                                               
been reservoirs.                                                                                                                
                                                                                                                                
CO-CHAIR FEIGE replied correct.                                                                                                 
                                                                                                                                
REPRESENTATIVE SEATON continued, saying  that here it is acreage,                                                               
which is surface, which is like a  unit.  He said he is trying to                                                               
get  clarity on  what is  meant here  - whether  it is  expanding                                                               
surface  acreage and  that changes,  or whether  it is  reservoir                                                               
delineation.                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  stated  Mr.  Pawlowski  will  get  back  to  the                                                               
committee with this clarification.                                                                                              
                                                                                                                                
3:05:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR inquired  whether Sharks  Tooth, an  example                                                               
previously discussed  in relation  to the GVR/GRE,  would qualify                                                               
under the parameters in Version B.                                                                                              
                                                                                                                                
JOE  BALASH, Deputy  Commissioner,  Office  of the  Commissioner,                                                               
Department  of Natural  Resources  (DNR), responded  that in  the                                                               
Sharks Tooth example  there is a circumstance where  a portion of                                                               
the  Kuparuk PA  could  be contracted  out of  the  PA and  later                                                               
expanded to  include the larger  acreage that would  comprise the                                                               
Sharks Tooth  production area.   In that  case, acreage  could be                                                               
added  and  to  qualify  for  the  GVR/GRE,  not  only  would  an                                                               
expansion  have to  take  place, but  it would  also  have to  be                                                               
metered separately.   So, not all expansions of PAs  are going to                                                               
qualify  for the  GVR  and if  they  do not,  they  will get  the                                                               
sliding scale per barrel credit.                                                                                                
                                                                                                                                
3:07:24 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  advised that the plan  is to let Version  B "soak                                                               
in the public arena" with  public testimony and invited testimony                                                               
next  week,  as well  as  presentations  from the  Department  of                                                               
Revenue and the legislature's consultant.                                                                                       
                                                                                                                                
3:08:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  inquired  whether  a fiscal  note  will  be                                                               
available by the next committee meeting.                                                                                        
                                                                                                                                
MR.  PAWLOWSKI replied  he is  unsure  whether there  will be  an                                                               
actual  fiscal  note,  explaining  that as  the  bill  has  moved                                                               
through committees  and amendments offered, DOR  has reserved the                                                               
final  fiscal  note  for  after  the version  is  adopted.    The                                                               
department is  putting out draft  tables of what the  fiscal note                                                               
would look  like, understanding that further  mechanisms might be                                                               
added or things  might be moved around.  He  assured members that                                                               
DOR will be prepared to  provide a reasonable presentation of the                                                               
fiscal impacts of the changes in Version B.                                                                                     
                                                                                                                                
3:09:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON requested  that  graphs  of the  different                                                               
impacts be provided by Monday.                                                                                                  
                                                                                                                                
3:09:35 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE, responding to  Representative Tarr, confirmed the                                                               
small  producer credits  and other  issues are  not addressed  in                                                               
Version B and stated amendments can be offered in this regard.                                                                  
                                                                                                                                
3:09:57 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE held over CSSB 21(FIN) am(efd fld).                                                                              

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