Legislature(2009 - 2010)SENATE FINANCE 532

03/09/2010 09:00 AM FINANCE

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09:03:00 AM Start
09:03:05 AM SB305
09:52:52 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
<Bill Hearing on SB 306 Postponed>
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  SENATE FINANCE COMMITTEE                                                                                      
                       March 9, 2010                                                                                            
                         9:03 a.m.                                                                                              
9:03:00 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Stedman called the Senate Finance Committee meeting                                                                    
to order at 9:03 a.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Charlie Huggins, Vice-Chair                                                                                             
Senator Johnny Ellis                                                                                                            
Senator Dennis Egan                                                                                                             
Senator Donny Olson                                                                                                             
Senator Joe Thomas                                                                                                              
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Senator Joe  Paskvan, Senator John Coghill,  Charles Logsdon,                                                                   
Logsdon  and Associates,  Consultant  Legislative Budget  and                                                                   
Audit; Roger  Marks, Petroleum  Economist, Economic  Research                                                                   
Section, Tax Division, Department of Revenue.                                                                                   
PRESENT VIA TELECONFERENCE                                                                                                    
SB 305-SEPARATE OIL & GAS PRODUCTION TAX                                                                                        
SENATE BILL NO. 305                                                                                                           
     "An Act relating to the tax on oil and gas production;                                                                     
     and providing for an effective date."                                                                                      
     SB 305 was HEARD and HELD in Committee for further                                                                         
9:03:05 AM                                                                                                                    
Co-Chair  Stedman   explained  that   SB  305  concerns   the                                                                   
separation  of  oil  and  gas   production  tax.  Preliminary                                                                   
questions will be answered today  by legislative consultants.                                                                   
Public  testimony is  scheduled  for Thursday,  March 11.  He                                                                   
stated that SB 306 will not be addressed today.                                                                                 
CHARLES   LOGSDON,   LOGSDON   AND   ASSOCIATES,   CONSULTANT                                                                   
LEGISLATIVE BUDGET  AND AUDIT, stated  that he was  the Chief                                                                   
petroleum economist for the state  from 1979 through 2004 and                                                                   
he became  familiar with the oil  and gas production  tax. He                                                                   
negotiated a fiscal  regime which involved changing  from the                                                                   
Economic  Limit   Factor  (ELF)  system  to   the  net  value                                                                   
production  system, which  eventually  became Alaska's  Clear                                                                   
and Equitable  Share (ACES). He  also works with  Legislative                                                                   
Budget  and  Audit  (LB&A)  which is  a  non  partisan  joint                                                                   
committee. Co-Chair  Stedman informed  that LB&A is  the body                                                                   
who hires  consultant for technical  help in the oil  and gas                                                                   
ROGER MARKS, PETROLEUM ECONOMIST,  ECONOMIC RESEARCH SECTION,                                                                   
TAX  DIVISION, DEPARTMENT  OF REVENUE,  explained that  works                                                                   
with Logsdon and  associates under the arrangement  with LB&A                                                                   
to assist in analyzing gas taxation.  He worked previously as                                                                   
a  petroleum   economist  with   the  tax  division   of  the                                                                   
Department  of Revenue  for 25  years. He  explained that  he                                                                   
continually  analyzed  North   Slope  gas  commerciality.  He                                                                   
retired  approximately  one  year  ago and  started  his  own                                                                   
private practice.                                                                                                               
Co-Chair  Stedman  requested  a  brief  high  level  overview                                                                   
regarding the oil and gas tax regime.                                                                                           
Mr. Marks reviewed  the PowerPoint presentation  "SB 305: The                                                                   
Separation of  Oil from  Gas for the  Oil and Gas  Production                                                                   
9:09:36 AM                                                                                                                    
Mr. Marks addressed Slide 2: "Premise of the Bill"                                                                              
     even though oil operations are unaffected                                                                                  
Mr. Marks addressed Slide 3: "Oil is Different than Gas"                                                                        
Mr. Marks detailed Slide 4: "BTU 10:1"                                                                                          
West Coast ANS                                                                                                                
        o Shipping  $2.07                                                                                                     
        o TAPS      $4.18                                                                                                     
North Slope Gas                                                                                                               
        o Tariff AK to AB $3.54                                                                                                 
        o AB Hub      $.24                                                                                                      
        o Tariff AB to L48 $0.85                                                                                                
     as much as gas                                                                                                             
9:13:26 AM                                                                                                                    
Mr. Marks detailed Slide 5: "Some Things that have BTUs"                                                                        
Mr.  Marks  explained  that  if a  suggestion  were  made  to                                                                   
combine oil and shoe leather for  taxation, you might wish to                                                                   
decline the opportunity. He pointed  out that gas and oil are                                                                   
so different in value and net worth.                                                                                            
Mr. Marks described Slide 6: "Mechanics of Current Tax"                                                                         
     costs=Combined oil and gas net value                                                                                       
     BOEs=p/BOE net value (see Slide #7)                                                                                        
     25% base rate=tax rate                                                                                                     
Co-Chair  Stedman referred  to the  Senate Finance  Committee                                                                   
presentations  during  the last  couple  of  weeks. He  noted                                                                   
those presentations from the Department  of Revenue (DOR) and                                                                   
various consultants.                                                                                                            
Mr. Marks continued with Slide  7: "Barrel of Oil Equivalents                                                                   
(BOEs): Putting Oil and Gas on an Apples/Apples Basis                                                                           
     mmbtu's (4.5 X 1,100)                                                                                                      
     equivalence of 900,000 barrels of oil (BOEs)                                                                               
     total 500,000+900,000=1,400,000                                                                                            
Co-Chair Stedman asked if the  4.5 billion cubic feet per day                                                                   
indicates   in  estimated   capacity   that  TransCanada   is                                                                   
proceeding  with their  binding open season.  He pointed  out                                                                   
that the  capacity was important  with the large  diameter of                                                                   
gasline moving down into Alberta.                                                                                               
Mr. Marks  stated that  the plan for  TransCanada is  to ship                                                                   
4.5 billion  cubic feet a day  of natural gas from  the North                                                                   
Slope to  Alberta. North Slope  gas is enriched  with natural                                                                   
gas  liquids  such  as ethane,  butane,  propane,  and  other                                                                   
heavier hydrocarbons  that enhance  the British Thermal  Unit                                                                   
(BTU) content.  Dry gas content  without natural  gas liquids                                                                   
has approximately  1000 BTUs to  the cubic foot.  North Slope                                                                   
gas is expected to have approximately  1100 BTUs to the cubic                                                                   
Mr. Marks  explained that  the per  Barrel of Oil  Equivalent                                                                   
(BOE)  net  value is  the  combined  oil  and gas  net  value                                                                   
divided by  the total amount  of oil  and gas BOEs.  Based on                                                                   
the per  BOE net  value, a progressivity  factor is  derived.                                                                   
The progressivity  factor kicks in when the net  value is $30                                                                   
a BOE or greater. Below 30 dollars  there is no progressivity                                                                   
factor. The progressivity  factor is added to  the 25 percent                                                                   
base  rate. The  single  tax  rate for  the  oil  and gas  is                                                                   
applied to  the combined oil and  gas net value to  arrive at                                                                   
the tax.                                                                                                                        
9:21:43 AM                                                                                                                    
Mr. Marks addressed Slide 8: "Progressivity Mechanics"                                                                          
        o Base tax rate=25%                                                                                                     
        o Progressivity=($50-$30)X.004=8%                                                                                       
        o Total tax of 33% on net value                                                                                         
        *Slope changes to 0.1% after $92.50 net per BOE                                                                         
Co-Chair Stedman explained that the operating cost is                                                                           
subtracted along with capital expenditures and shipping                                                                         
charges from Valdez to the market.                                                                                              
Mr. Marks  stated that the starting  point is the  per barrel                                                                   
of oil equivalent net value, which  includes the shipping and                                                                   
pipeline  tariffs   and  the  operating  and   capital  lease                                                                   
development costs.                                                                                                              
9:24:06 AM                                                                                                                    
Mr. Marks remarked on Slide 9: "How Gas impacts oil taxes"                                                                      
                                   Alone            Gas                                                                       
                                   (p/bbl)         (p/mmbtu)                                                                  
Market Price                        $80.00         $6.00                                                                        
Transportation                       $5.00         $4.50                                                                        
Gross Value                                                                                                                     
Costs                               $20.00         $0.50                                                                        
Net (p/barrel or p/mmbtu)           $55.00         $1.00                                                                        
Base rate                           25.00%                                                                                      
Progressivity                       10.00%                                                                                      
Total tax rate                      35.00%                                                                                      
Daily bbls (oil) or mmbtu (gas)     500,000        4,950,000                                                                    
Daily BOEs                          500,000        900,000                                                                      
Annual BOEs(millions)               183            329                                                                          
Combined Oil and Gas                                                                                                          
Oil                                 $55.00                                                                                      
p/bbl net value                     183                                                                                         
mmbtu's (millions)                  $10,038                                                                                     
p/mmbtu net value                   $1.00                                                                                       
mmbtu's (millions)                  1,807                                                                                       
Total gas net value ($mm)           $1,807                                                                                      
Total oil and gas net value         $11,844                                                                                     
Total BOEs                          511                                                                                         
Net value/BOE                       $23.18                                                                                      
No Progressivity!                                                                                                               
9:26:41 AM     AT EASE                                                                                                        
9:26:56 AM     RECONVENED                                                                                                     
Mr. Marks detailed Slide 10: "Department  of Revenue Examples                                                                   
from February  24, 2010 Presentation  to Senate  Finance." He                                                                   
discussed the  magnitude of the  combination of oil  and gas.                                                                   
The  more oil  and gas  values  differ, the  greater the  net                                                                   
value is diminished. The progressivity and tax also drop.                                                                       
9:32:40 AM                                                                                                                    
Mr. Marks detailed Slide 11: "How the Bill Works"                                                                               
        o Plus progressivity based on the combined oil and                                                                      
          gas net value/BOE                                                                                                     
     oil net value/barrel                                                                                                       
     not reduce oil taxes.                                                                                                      
Co-Chair Stedman  stated that the committee does  not have an                                                                   
intention of bringing SB 306 to the committee.                                                                                  
9:34:58 AM     AT EASE                                                                                                        
9:35:33 AM     RECONVENED                                                                                                     
Dr. Logsdon  noted that the  bill's intention is  to separate                                                                   
oil  and  gas   for  the  purpose  of  production   tax.  The                                                                   
legislation  is  designed  to  correct the  method  that  the                                                                   
progressive  element  in the  current  tax is  calculated  in                                                                   
respect  to oil and  gas. He  referred to  Section 1  and the                                                                   
specific language  that identifies the production  of oil for                                                                   
progressivity  rate purposes, which  includes Section  (g) of                                                                   
AS 43.55.011.  He noted  that (g) shows  a number  of changes                                                                   
designed to  take out  the language  per BTU equivalent.  The                                                                   
two  words  define  the  combination   of  gas  with  oil  to                                                                   
calculate  the progressivity  tax  schedule outlined  through                                                                   
(g) one  and two.  He noted  that when  the price  of oil  is                                                                   
greater than  $30 per barrel  then progressivity kicks  in at                                                                   
the rate of 4/10  of a percent for every dollar  that the net                                                                   
value per barrel  is above $30 to a maximum  trigger point of                                                                   
$92.50.  Gas has  been removed  from the  calculation of  the                                                                   
progressivity element of the tax rate.                                                                                          
9:38:21 AM                                                                                                                    
Dr.  Logsdon referred  to Section  3, where  elements of  the                                                                   
production  tax  addresses  taxation  outside  of  the  North                                                                   
Slope. He mentioned that taxes  on the Cook Inlet are limited                                                                   
to the  lesser of  the net tax.  Section 3 addresses  taxable                                                                   
oil if  sold at  the average  price as  calculated under  the                                                                   
Economic Limit Factor  (ELF) law. The current  law includes a                                                                   
cross  reference   to  the  base   rate.  Any   reference  to                                                                   
progressivity in the statute does not affect gas.                                                                               
Dr. Logsdon referred to Section  4, which is an exception for                                                                   
the application  of the  net tax to  property outside  of the                                                                   
Cook Inlet.  He noted that  the base  rate is another  way to                                                                   
clarify  that gas  will  not be  subject  to the  progressive                                                                   
rate. Section 5 repeats the sentiment.                                                                                          
9:43:15 AM                                                                                                                    
Dr.  Logsdon  continued  that  a key  concept  is  that  each                                                                   
reference  to  the use  of  a  progressivity factor  is  only                                                                   
indicated  for  oil,  never  for gas.  Section  6  covers  AS                                                                   
43.55.160(a)(2)  to  the tax base and the calculation  of the                                                                   
net  production   value.  There   are  no  references   to  a                                                                   
progressive tax rate affected  by the calculation. The annual                                                                   
production  tax  value  in  Section  1  references  (e),  but                                                                   
Section 6  references AS 43.55.011(g),  which is  the section                                                                   
that  describes the  progressivity rates.  All references  to                                                                   
gas are  parsed out. The  next change  is in Section  7 where                                                                   
the  language  controlling  the  taxable net  value  and  any                                                                   
reference  to gas is  eliminated. Section  8 states  that the                                                                   
bill takes effect  after the governor's signature  or the day                                                                   
after  the expiration  period on  gubernatorial action.  This                                                                   
bill separates oil from gas in  calculating the progressivity                                                                   
factor, which is  a function of calculating the  net value at                                                                   
the  point of  production and  focuses  on the  progressivity                                                                   
calculated  on the  basis  of the  value  of oil  and how  it                                                                   
compares to $30 per barrel.                                                                                                     
9:48:38 AM                                                                                                                    
Senator  Olson asked  about  the advantages  for  eliminating                                                                   
progressivity for the natural gas production tax.                                                                               
Dr. Logsdon responded  that the task was to  separate oil and                                                                   
gas because of  the dilution affect on the tax  rate. One tax                                                                   
theory states that matching up  the tax on substances matches                                                                   
the ability  to pay, which would  suggest that a  lower value                                                                   
commodity  should  be taxed  at  a  lower rate.  Setting  tax                                                                   
policy is  more complicated than  speculating. He  noted that                                                                   
taxes  can  have  positive  effects   on  state  revenue  and                                                                   
negative effects on  the revenue source. He did  not offer an                                                                   
opinion on Senator  Olson's question. Senator  Olson imagined                                                                   
that there were  no advantages to encouraging  exploration or                                                                   
investment.  Dr.  Logsdon  responded  that SB  305  does  not                                                                   
change  the basic  incentive  structure  that  is already  in                                                                   
9:51:17 AM                                                                                                                    
Senator  Thomas asked  if  there was  gas  currently sold  at                                                                   
Prudhoe Bay. He  asked about the effect of SB  305 on the gas                                                                   
sales.  Mr. Marks  answered  that the  gas  sold in-state  is                                                                   
subject  to  the  ELF  provisions  and  is  not  affected  by                                                                   
Co-Chair Stedman stated that public  hearing is scheduled for                                                                   
March 11, 2010 with input from the administration.                                                                              
9:52:52 AM                                                                                                                    
SB  305  was   HEARD  and  HELD  in  Committee   for  further                                                                   
The meeting was adjourned at 9:53 AM.                                                                                           

Document Name Date/Time Subjects
SB 305 Marks Intro 030910.pdf SFIN 3/9/2010 9:00:00 AM
SB 305
SB 305 2010 03 09 Logsdon Sectional Analysis.pdf SFIN 3/9/2010 9:00:00 AM
SB 305