Legislature(2011 - 2012)SENATE FINANCE 532

04/03/2012 09:00 AM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 192 OIL AND GAS PRODUCTION TAX RATES TELECONFERENCED
Heard & Held
+= SCR 24 COMMISSION ON 100TH ANNIV. OF LEGISLATURE TELECONFERENCED
Heard & Held
+ HB 129 DECEASED VETERAN DEATH CERTIFICATE TELECONFERENCED
Heard & Held
+ HB 245 GAMING:SNOW CLASSIC/BROADCASTING/INTERNET TELECONFERENCED
Moved CSHB 245(FIN) Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= SB 159 SUSITNA STATE FOREST TELECONFERENCED
Moved CSSB 159(RES) Out of Committee
+= SB 151 FETAL ALCOHOL SPEC. DISORDER AS MITIGATOR TELECONFERENCED
Moved CSSB 151(JUD) Out of Committee
+= SB 226 PURCHASE & LEASE OF NOME OFFICE BUILDING TELECONFERENCED
Moved CSSB 226(FIN) Out of Committee
+= SB 179 MISSING VULNERABLE ADULT RESPONSE PLAN TELECONFERENCED
Moved SB 179 Out of Committee
+= SB 210 CRIMES AGAINST CHILDREN TELECONFERENCED
Moved CSSB 210(FIN) Out of Committee
SENATE BILL NO. 192                                                                                                           
                                                                                                                                
     "An Act relating to the oil and gas production tax;                                                                        
     and providing for an effective date."                                                                                      
                                                                                                                                
                                                                                                                                
Co-Chair  Stedman  stated  that   there  would  be  a  short                                                                    
presentation  by PFC  Energy and  that  the committee  would                                                                    
adopt a committee  substitute (CS) for SB  192. He furthered                                                                    
that  PFC   Energy  would  be   brought  back   for  further                                                                    
discussion regarding a component  that had not been included                                                                    
in  the  CS. He  noted  that  the  committee would  also  be                                                                    
discussing  how it  would balance  the schedule  between the                                                                    
Finance  Committee, PFC  Energy,  and the  industry so  that                                                                    
there  was  ample  time  to   analyze  the  information.  He                                                                    
observed  that  there  were  differences   in  some  of  the                                                                    
modeling, cost assumptions, as well as other aspects.                                                                           
                                                                                                                                
Co-Chair  Stedman  asked  for a  brief  description  of  PFC                                                                    
Energy.  He pointed  out that  PFC Energy  was hired  by the                                                                    
Legislative Budget  and Audit Committee,  a joint  House and                                                                    
Senate committee that handled consultants.                                                                                      
                                                                                                                                
9:54:56 AM                                                                                                                    
                                                                                                                                
TONY REINSCH,  SENIOR DIRECTOR, UPSTREAM &  GAS, PFC ENERGY,                                                                    
explained  that PFC  Energy  was an  above  ground risk  and                                                                    
analytical  consultant  to  the   oil  and  gas  sector.  He                                                                    
detailed   that  PFC   Energy   advised  international   oil                                                                    
companies,   governments,  regulators,   and  national   oil                                                                    
companies on issues of policy finance economics.                                                                                
                                                                                                                                
9:55:23 AM                                                                                                                    
                                                                                                                                
JANAK MAYER,  MANAGER, UPSTREAM &  GAS, PFC ENERGY,  began a                                                                    
PowerPoint  presentation titled  "Discussion Slides:  Alaska                                                                    
Senate  Finance  Committee"  (copy on  file)  and  explained                                                                    
slide 2 titled "Difficulties in Existing Fiscal Structure":                                                                     
                                                                                                                                
   · The incorporation of progressivity into the Profit-                                                                        
     Based Production Tax (Net) in ACES creates three                                                                           
     significant problems                                                                                                       
                                                                                                                                
        · Large-scale gas production at low gas prices                                                                          
         could in the future significantly reduce                                                                               
         production tax revenue from existing oil                                                                               
          production                                                                                                            
                                                                                                                                
             · Resolving this problem within the framework                                                                      
               of ACES requires significant complexity                                                                          
                                                                                                                                
                                                                                                                                
             · Approach to decoupling in CSSB 192 requires                                                                      
               ability to split costs between oil and gas                                                                       
               production, creating high degree of                                                                              
               administrative burden, and limiting capacity                                                                     
               of state to effectively audit                                                                                    
                                                                                                                                
        · Combination of high credits with high tax rates                                                                       
          can produce excessive levels of support for                                                                           
          certain spending, and weak incentives for cost                                                                        
          control                                                                                                               
                                                                                                                                
             · Effective After-Tax rate of Government                                                                           
               support for exploration can be over 100% at                                                                      
               high price levels                                                                                                
                                                                                                                                
        · Options for incentivizing new production are                                                                          
          limited, and relatively complex                                                                                       
                                                                                                                                
             · Proposed incentives within existing                                                                              
               framework focus on either allowances to                                                                          
               reduce Production Tax Value, or revenue                                                                          
               exclusions (tax holiday)                                                                                         
                                                                                                                                
9:58:25 AM                                                                                                                    
                                                                                                                                
Mr. Mayer discussed slide 3 titled "Summary of Progressive                                                                      
Severance Tax (Gross) Structure":                                                                                               
                                                                                                                                
                                                                                                                                
        · A Progressive Severance Tax (Gross) option would                                                                      
          instead remove progressivity from the Profit-                                                                         
          Based Production Tax (Net), instead levying this                                                                      
          tax at the flat, base rate of 25%                                                                                     
                                                                                                                                
        · To retain an element of progressivity, a new                                                                          
          Progressive Severance Tax (Gross) would then be                                                                       
          added to the system. The tax would:                                                                                   
                                                                                                                                
             · Be non-deductible for Profit-Based                                                                               
               Production Tax purposes                                                                                          
             · Be levied on gross production (net of                                                                            
               royalties)                                                                                                       
                                                                                                                                
             · Be levied solely on oil                                                                                          
                                                                                                                                
             · The tax would use a progressivity structure                                                                      
               not dissimilar to that under the current                                                                         
               system, with progressivity coefficients that                                                                     
              apply at different thresholds.                                                                                    
                                                                                                                                
        · The proposed Progressive Severance Tax would use                                                                      
          the following parameters:                                                                                             
                                                                                                                                
             · No severance tax below $65 Gross Value at                                                                        
               Point of Production (GVPP)                                                                                       
                                                                                                                                
             · Progressivity of .25% commencing at a                                                                            
               threshold of $65 GVPP                                                                                            
                                                                                                                                
             · At $125 GVPP, a tax rate of 15% is reached.                                                                      
               At this point, progressivity is reduced to                                                                       
               0.05%                                                                                                            
                                                                                                                                
             · Progressivity is capped at 20%                                                                                   
                                                                                                                                
10:00:00 AM                                                                                                                   
                                                                                                                                
Mr. Mayer spoke to slide 4 titled "Benefits of Progressive                                                                      
Severance Tax (Gross) Structure":                                                                                               
                                                                                                                                
        · By removing progressivity from the Profit-Based                                                                       
          Production Tax (Net), and having the progressive                                                                      
         element of the structure be a Progressive                                                                              
          Severance Tax (Gross), two things become much                                                                         
          easier to achieve                                                                                                     
                                                                                                                                
             · The issue of gas production reducing                                                                             
               production tax revenue ceases to be a                                                                            
               problem without progressivity in the Profit-                                                                     
               Based Production Tax                                                                                             
                                                                                                                                
                  · Complex provisions to split costs                                                                           
                    between oil and gas production under                                                                        
                    CSSB 192 are thus no longer required                                                                        
                                                                                                                                
             · Much of the issue of excessive spending                                                                          
              support ceases to be a problem                                                                                    
                                                                                                                                
                  · Even with 40% exploration credit,                                                                           
                    effective after-tax Government support                                                                      
                    for exploration flat at 65%                                                                                 
                                                                                                                                
             · Significant incentives can be provided to                                                                        
               new production, by eliminating or reducing                                                                       
               the Progressive Severance Tax (Gross) for                                                                        
               new production                                                                                                   
                                                                                                                                
        · A wide range of levels of government take can be                                                                      
          achieved using this structure, depending on the                                                                       
          parameters applied                                                                                                    
                                                                                                                                
10:02:19 AM                                                                                                                   
                                                                                                                                
Mr.  Mayer  turned  to  slide  5  titled  "FY  2013  Revenue                                                                    
Comparison."  He  stated that  the  slide  showed a  revenue                                                                    
comparison of how the severance  tax option compared to some                                                                    
of  the other  alternatives.  He related  that  the red  and                                                                    
yellow  lines  depicted ACES  and  CSSB  192 as  being  very                                                                    
similar in  terms of  revenue, but there  was a  very slight                                                                    
reduction  from  ACES  in  CSSB  192.  He  stated  that  the                                                                    
severance tax option was represented  by the light blue line                                                                    
and  that it  diverged from  ACES and  CSSB 192  from around                                                                    
$100 to $110  per barrel; furthermore, from  $130 per barrel                                                                    
and  upwards,  the scenario  flattened  and  evened out  the                                                                    
split between the government and  producers at around the 72                                                                    
percent or 73 percent government  take level. He pointed out                                                                    
that  the  slide  compared  the   severance  option  to  the                                                                    
placement of a  40 or 50 percent cap  on progressivity under                                                                    
the  current   system.  The  50   percent  cap   option  was                                                                    
represented by the  darker blue line and the  40 percent cap                                                                    
option was  reflected by  the green  line. He  observed that                                                                    
the chart  was based  on FY 13  Department of  Revenue (DOR)                                                                    
numbers  for  production  and  costs;  on  that  basis,  the                                                                    
severance tax option's split of  revenue from production tax                                                                    
and the  split between cash  to companies versus  revenue to                                                                    
the  state  were  in  between  the 40  and  50  percent  cap                                                                    
options.                                                                                                                        
                                                                                                                                
10:04:14 AM                                                                                                                   
                                                                                                                                
Mr.  Mayer  looked  at  slide  6  titled  "FY  2013  Revenue                                                                    
Comparison." He  pointed out  that in  terms of  total state                                                                    
and government  take, the severance  tax option  was between                                                                    
the 40 and 50 percent cap options.                                                                                              
                                                                                                                                
Mr.  Mayer  highlighted  slide 7  titled  "FY  2013  Revenue                                                                    
Comparison." He  stated that  the comparative  revenue table                                                                    
showed that at  around the $100 per barrel  price level, the                                                                    
total revenue  under the severance tax  option was projected                                                                    
be  slightly above  that of  the Senate  Resources Committee                                                                    
version of CSSB  192; at prices above $100  per barrel (i.e.                                                                    
a $150  to $200  per barrel)  there was  a balancing  of the                                                                    
government  take  "between  the   two."  He  referenced  the                                                                    
government take figures on the  lower right table and stated                                                                    
that the  severance tax  option's government  take flattened                                                                    
out at about  73 percent from the $150 per  barrel range and                                                                    
above.                                                                                                                          
                                                                                                                                
Co-Chair  Stedman  pointed out  that  there  were a  lot  of                                                                    
numerics in  the tables and  that although it may  take some                                                                    
time,  it  would  be  helpful  if  the  committee  had  some                                                                    
comparison  material. Mr.  Mayer replied  that the  table in                                                                    
question was  done consistent with DOR  methodology and that                                                                    
it did  not include  tax credits  that were  claimed against                                                                    
current production. He noted that  the state was expected to                                                                    
expend $400 million in FY 13.                                                                                                   
                                                                                                                                
10:05:59 AM                                                                                                                   
                                                                                                                                
Mr.  Mayer  looked  at  slide  8  titled  "FY  2013  Revenue                                                                    
Comparison  -  Adjusted  for  Credits  Not  Claimed  Against                                                                    
Current Production."  He stated  the slide's  table examined                                                                    
the production tax in terms of  total state take in order to                                                                    
include the $400 million tax credit expenditure.                                                                                
                                                                                                                                
Senator  McGuire noted  that when  the decoupling  issue was                                                                    
discussed, the  state projected about $80  million in losses                                                                    
per  year.  She  inquired  if   the  projected  losses  were                                                                    
reflected  in the  cost chart  as  a savings  that would  be                                                                    
returned to the state. Mr.  Mayer replied that the projected                                                                    
losses were not  included in the figures and  that the chart                                                                    
was based  solely on FY  13 revenue numbers. He  stated that                                                                    
the projected losses  would come to the state  as savings in                                                                    
the event of significant gas production.                                                                                        
                                                                                                                                
Senator McGuire  commented that the  point was  important to                                                                    
note.                                                                                                                           
                                                                                                                                
10:07:12 AM                                                                                                                   
                                                                                                                                
Mr.  Mayer  discussed  slide  9  titled  "Impact  of  Rising                                                                    
Operating  Costs."  He  shared  that  the  slide  showed  an                                                                    
important impact that came  from shifting progressivity from                                                                    
the net to the gross; the  impact was a question of what the                                                                    
shift looked  like in  different cost  environments compared                                                                    
to the existing system. He  noted that DOR projected that in                                                                    
FY 13, the cost per barrel  of oil produced would be $11.70.                                                                    
He  observed  that  the chart  compared  the  difference  in                                                                    
revenue under  ACES and the  severance tax  option; anything                                                                    
above  the  zero line  represented  an  increase in  revenue                                                                    
compared  to  ACES, while  anything  below  the line  was  a                                                                    
decrease in  revenue. The slide  showed that at the  $70 per                                                                    
barrel price  level and at  $12 per barrel  operating costs,                                                                    
the revenue between  ACES and the severance  tax option were                                                                    
identical; the  two options also generated  the same revenue                                                                    
at the  $60 per barrel  level and  the same cost  per barrel                                                                    
level. He  stated that revenue  increased below the  $60 per                                                                    
barrel level in  all of the instances because  of the impact                                                                    
of the  higher floor that was  in CSSB 192. He  related that                                                                    
in  the $12  per  barrel cost  scenario,  the severance  tax                                                                    
option had reduced revenue at  the $100 per barrel tax level                                                                    
when  compared to  ACES; in  comparison,  it had  relatively                                                                    
similar revenue  compared to  CSSB 192 at  the $100  to $130                                                                    
per barrel level, but had  significant reductions in revenue                                                                    
past $130 per barrel as  the split between producers and the                                                                    
state was capped.                                                                                                               
                                                                                                                                
10:09:05 AM                                                                                                                   
                                                                                                                                
Mr.  Mayer stated  that when  looking at  what would  happen                                                                    
under  significantly higher  operating cost  assumptions, it                                                                    
was important  to understand that the  progressive severance                                                                    
option saw an  increased take at price levels in  the $70 to                                                                    
$140 per barrel  range. He explained that at  $12 per barrel                                                                    
operating costs and  at a $100 per  barrel price, production                                                                    
tax rates  under ACES  were probably  around 35  percent. He                                                                    
furthered that if the operating  costs were at a higher rate                                                                    
of $24 per barrel, the tax  rate under ACES could drop to 28                                                                    
percent; the  drop in the rate  was a result of  a reduction                                                                    
in the production  tax value (PTV) after the  costs had been                                                                    
deducted. He  related that  in some of  the higher  cost per                                                                    
barrel cases,  the progressivity  that was  put in  place on                                                                    
the gross (through the progressive  severance option) may be                                                                    
higher than  the progressivity  experienced under  ACES when                                                                    
production costs  were particularly high; this  was a result                                                                    
of the  progressive option being  calibrated to the  $12 per                                                                    
barrel level.                                                                                                                   
                                                                                                                                
Mr. Mayer  reiterated that a  $12 per barrel  operating cost                                                                    
was the  current average on  the North Slope. He  noted that                                                                    
from  a producer  perspective, the  progressivity at  higher                                                                    
cost levels may be viewed  as problem; however, on the other                                                                    
hand it was important to  consider the current system's lack                                                                    
of cost  control incentive.  He furthered  that particularly                                                                    
at high  marginal tax rates  and when there was  the ability                                                                    
to deduct  costs from  progressivity, the  effective support                                                                    
from the  state for  new capital and  operating expenditures                                                                    
could  be very  high; in  that sense,  it was  a significant                                                                    
incentive for controlling costs  in the future. He concluded                                                                    
that part  of the  discussion going  forward would  be about                                                                    
the two  sides of the progressive  option's progressivity at                                                                    
higher operating costs.                                                                                                         
                                                                                                                                
10:11:55 AM                                                                                                                   
                                                                                                                                
Mr.  Mayer  discussed slide  10  titled  "Data on  Operating                                                                    
Costs."  He stated  that the  top right  chart depicted  the                                                                    
historical average  costs for Prudhoe Bay,  Kuparuk, and the                                                                    
North Slope; in  recent years, operating costs  in the areas                                                                    
were between $10 and $12 per  barrel. He noted that in 2010,                                                                    
Prudhoe Bay had a slightly  higher operating cost of $12 per                                                                    
barrel compared to  Kuparuk's cost of around  $10 per barrel                                                                    
and that  the North  Slope average  was a  bit over  $10 per                                                                    
barrel.  He pointed  out that  based on  FY 13  numbers, the                                                                    
North  Slope average  was projected  to rise  to $11.70  per                                                                    
barrel. He  directed the committee's attention  to the chart                                                                    
on the upper left portion of  the slide that showed a longer                                                                    
time  period.  He  related that  ConocoPhillips  was  unique                                                                    
because it  reported Alaska  separately as  a region  in its                                                                    
financial reporting. ConocoPhillip's  10-K reports [required                                                                    
annual   report  to   the  U.S.   Securities  and   Exchange                                                                    
Commission]  showed an  operating cost  of about  $12.50 per                                                                    
barrel in 2011  and costs below the $10 per  barrel mark for                                                                    
prior  years. He  spoke to  the  chart in  the lower  middle                                                                    
portion of the  slide. He related that the  DOR forecast for                                                                    
average operating costs on the  North Slope predicted a cost                                                                    
around the $12  per barrel mark until around  2017, at which                                                                    
point  the costs  were expected  to continue  to rise  every                                                                    
year.                                                                                                                           
                                                                                                                                
Mr. Mayer explained that the  levels of averages on slide 10                                                                    
could disguise  some of the  granularity that  existed (e.g.                                                                    
BP's  costs may  reflect something  different than  what was                                                                    
shown for  ConocoPhillips). He opined that  although Prudhoe                                                                    
Bay  and  Kuparuk's costs  were  probably  similar for  both                                                                    
companies,  BP's other  assets might  have higher  operating                                                                    
costs. He  added that new  producers could have  higher cost                                                                    
assets that  would involve higher operating  costs (i.e. $16                                                                    
to  $18 per  barrel). He  pointed out  that new  production,                                                                    
which would have  a higher cost structure,  could have lower                                                                    
rates of  progressivity applied to  it. He offered  that the                                                                    
committee  may  also   want  to  have  the   lower  rate  of                                                                    
progressivity apply  to higher  cost projects that  had been                                                                    
brought on line in the recent past.                                                                                             
                                                                                                                                
10:14:46 AM                                                                                                                   
                                                                                                                                
Mr. Mayer spoke to slide 11 titled "Impact of Inflation":                                                                       
                                                                                                                                
        · Under ACES, thresholds and coefficients for                                                                           
          progressivity are specified in nominal terms,                                                                         
          without indexation                                                                                                    
                                                                                                                                
             · As a result, when economics over the long-                                                                       
               term rather than just 2013 are examined, we                                                                      
               see the effects of 'bracket creep' or                                                                            
               'stealth tax'                                                                                                    
                                                                                                                                
             · In   real   terms,    as   prices   increase,                                                                    
               thresholds  for  progressivity decrease,  and                                                                    
               the    higher    take   that    comes    with                                                                    
               progressivity  occurs  at   lower  and  lower                                                                    
               price levels                                                                                                     
                                                                                                                                
        · Similarly,     unless    progressive     severance                                                                    
          thresholds are indexed to inflation, progressive                                                                      
          severance will apply at steadily lower thresholds                                                                     
          over time                                                                                                             
                                                                                                                                
             · Indexing thresholds will also go some way to                                                                     
               addressing the cost sensitivity issue                                                                            
                                                                                                                                
Mr. Mayer  noted that it  was particularly important  to put                                                                    
in place  indexation for inflation  in reference to  the two                                                                    
prior  slide's information  regarding  the  impact of  costs                                                                    
when progressivity was  levied on the gross  rather than the                                                                    
net.  As long  as  the real  costs did  not  also rise,  the                                                                    
indexing would result in progressivity  rising along with it                                                                    
if costs  rose in nominal  terms. He added that  cost rising                                                                    
in real terms  was another question related to  the issue of                                                                    
incentives for cost control.                                                                                                    
                                                                                                                                
10:16:19 AM                                                                                                                   
                                                                                                                                
Mr.  Mayer discussed  slide 12  titled  "Incentives for  New                                                                    
Production":                                                                                                                    
                                                                                                                                
        · Significant incentives can be provided to new                                                                         
          production, by eliminating or reducing the                                                                            
          Progressive   Severance   Tax   (Gross)   on   any                                                                    
          combination of:                                                                                                       
                                                                                                                                
             · Production from new areas                                                                                        
                                                                                                                                
             · Production from new plans of development                                                                         
               (determined through the regulatory process                                                                       
               to be for "new production")                                                                                      
                                                                                                                                
             · Production above a fixed decline rate                                                                            
                                                                                                                                
        · One possibility for a reduced rate of Progressive                                                                     
          Severance Tax is:                                                                                                     
                                                                                                                                
             · No severance tax below $65 Gross Value at                                                                        
               Point of Production (GVPP)                                                                                       
                                                                                                                                
             · Progressivity of .05% commencing at a                                                                            
               threshold of $65 GVPP                                                                                            
                                                                                                                                
             · Progressivity capped at 5%                                                                                       
                                                                                                                                
Mr.  Mayer stated  that based  on some  of the  numbers, the                                                                    
slide's example  of a possible  way to  reduce progressivity                                                                    
would result  in a significant improvement  in the economics                                                                    
for some projects  and would have levels  of government take                                                                    
around  the mid-60  percentage range  instead of  the mid-70                                                                    
percentage range.                                                                                                               
                                                                                                                                
10:17:23 AM                                                                                                                   
                                                                                                                                
Mr.  Mayer  highlighted  another  consideration  related  to                                                                    
incentivizing new  production. He explained  that production                                                                    
from new areas was straight  forward; however, the impact of                                                                    
new areas would be minimal because  in the near term most of                                                                    
the  new  production  would come  from  existing  areas.  He                                                                    
stated  it was  important to  think about  how incentivizing                                                                    
production above a fixed decline rate would work.                                                                               
                                                                                                                                
Mr.  Mayer spoke  to  slide 13  titled  "Production Above  a                                                                    
Decline-Fixed  v Annual  Calculation." He  pointed out  that                                                                    
the slide's two charts  used DOR revenue production forecast                                                                    
data and that  data was looked at in two  different ways. He                                                                    
noted  that  the slide  was  an  exercise  and that  it  was                                                                    
important to  pretend that the production  was reflective of                                                                    
one  producer rather  than  multiple  producers. The  charts                                                                    
depicted what  the production from  a single  producer would                                                                    
look like if production above  a decline rate was determined                                                                    
in two  different ways. The  left chart assumed there  was a                                                                    
determined  rolling average  decline; the  option would  use                                                                    
the  recent  average  decline  to  determine  how  much  new                                                                    
production there  was in the  current year when  compared to                                                                    
the  prior  year.  He  stated  that  based  on  the  slide's                                                                    
production  curve, the  rolling average  method resulted  in                                                                    
very little  production being classified as  new production.                                                                    
He  stated  that there  two  reasons  for  the lack  of  new                                                                    
development   classification  under   the  rolling   average                                                                    
option:  (1)   only  the  previous  year   was  examined  to                                                                    
determine a production level above  the decline rate and (2)                                                                    
in any  years in  which incremental new  production existed,                                                                    
the rolling  average went from  a decline to an  incline and                                                                    
as  a  result, it  became  difficult  to produce  additional                                                                    
production above the high threshold.                                                                                            
                                                                                                                                
10:19:46 AM                                                                                                                   
                                                                                                                                
Mr. Mayer  continued to speak  to slide 13 and  offered that                                                                    
the chart on the right  depicted the scenario with a simpler                                                                    
and more  "effective" method by  selecting a  specific point                                                                    
in  time  and projecting  what  production  would look  like                                                                    
going forward  based on the  decline rate; there would  be a                                                                    
significant "wedge" of new production  if anything above the                                                                    
decline  rate would  be incentivized  with a  lower taxation                                                                    
rate. If the goal was  to incentivize production above the 6                                                                    
percent decline, the strategy  provided was useful and would                                                                    
allow companies  to work towards a  lower tax rate in  a way                                                                    
that a year-by-year process would not allow.                                                                                    
                                                                                                                                
10:21:15 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:24:33 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
10:25:01 AM                                                                                                                   
                                                                                                                                
Co-Chair  Hoffman  MOVED  to ADOPT  the  proposed  committee                                                                    
substitute  for SB  192,  Work  Draft 27-LS1305\T  (Bullock,                                                                    
4/2/12).                                                                                                                        
                                                                                                                                
Co-Chair Stedman OBJECTED for the purpose of discussion.                                                                        
                                                                                                                                
10:25:29 AM                                                                                                                   
                                                                                                                                
DARWIN PETERSON,  STAFF, SENATOR BERT STEDMAN,  reviewed the                                                                    
changes  in the  new  CS for  SB 192.  He  relayed that  all                                                                    
sections (Sections  1, 5, 7,  8, 10, 11, and  12) pertaining                                                                    
to  oil and  gas tax  decoupling had  been removed  from the                                                                    
bill because  the process of  removing progressivity  from a                                                                    
profits based  production tax and  applying it to  the gross                                                                    
value was  a de  facto decoupling. The  increased production                                                                    
allowance  (Section 13)  was removed,  which had  proposed a                                                                    
$10  per barrel  reduction in  PTV  for each  barrel of  oil                                                                    
delivered  to  the  Trans-Alaska Pipeline  System  that  was                                                                    
above the base volume as  determined from the prior calendar                                                                    
year.                                                                                                                           
                                                                                                                                
10:26:20 AM                                                                                                                   
                                                                                                                                
Mr.  Peterson walked  through the  bill sections.  Section 1                                                                    
amended the production tax so  that progressivity on oil was                                                                    
calculated on  the gross value  at the point  of production.                                                                    
The section  maintained the 25  percent base tax on  the PTV                                                                    
of  oil and  gas that  was  currently included  in the  ACES                                                                    
statute. He relayed that Section  2 was identical to Section                                                                    
6 from  the previous bill  version. The section  repealed AS                                                                    
43.55.011(f) and set a new minimum  tax of 10 percent of the                                                                    
gross  value  at the  point  of  production for  areas  with                                                                    
historical production of  1 billion barrels of  oil to date;                                                                    
the provision  would apply only  to the Kuparuk  and Prudhoe                                                                    
legacy fields.                                                                                                                  
                                                                                                                                
Mr. Peterson explained that Section  3 repealed the existing                                                                    
progressivity  based  on  the   PTV  (AS  43.55.011(g))  and                                                                    
replaced  it with  a new  progressive severance  tax on  the                                                                    
gross  value.   He  elaborated  that  on   a  monthly  basis                                                                    
progressivity on  oil produced  in a  legacy field  would be                                                                    
calculated  as follows:  no severance  tax  below $65  gross                                                                    
value  at the  point  of production,  progressivity of  0.25                                                                    
percent  commencing  at $65  gross  value  at the  point  of                                                                    
production at $125 gross value a  tax rate of 15 percent was                                                                    
reached progressivity would be  reduced to 0.05 percent, and                                                                    
progressivity would  be capped  at 20 percent.  He furthered                                                                    
that the concept had been  introduced by PFC Energy on March                                                                    
30, 2012 and  had been referred to as  "Severance Tax Option                                                                    
Number 1."                                                                                                                      
                                                                                                                                
10:27:51 AM                                                                                                                   
                                                                                                                                
Mr.  Peterson  turned  to  Section  3,  page  3  that  would                                                                    
establish a  reduced rate for the  progressive severance tax                                                                    
on  oil produced  outside  of the  legacy  fields. The  rate                                                                    
would be calculated  as follows: no severance  tax below $65                                                                    
gross  value at  the point  of production,  progressivity of                                                                    
0.05  percent   would  commence   at  a  $65   gross  value,                                                                    
progressivity would  be capped at  5 percent, and  the lower                                                                    
tax  on   fields  outside  Prudhoe  and   Kuparuk  was  only                                                                    
applicable for the first seven  years of production (page 3,                                                                    
line 2).                                                                                                                        
                                                                                                                                
Mr.  Peterson  relayed  that  Section  4  was  a  conforming                                                                    
amendment to  statute that dealt  with the payment  of taxes                                                                    
by  a producer;  the  section included  the new  progressive                                                                    
severance  tax and  the 10  percent minimum  tax. Section  5                                                                    
(page 6) was  a conforming amendment that  instructed DOR to                                                                    
adopt   regulations  to   calculate   the  new   progressive                                                                    
severance  tax based  on the  gross  value at  the point  of                                                                    
production.                                                                                                                     
                                                                                                                                
10:29:06 AM                                                                                                                   
                                                                                                                                
Mr. Peterson shared that Section  6 was identical to Section                                                                    
12 from  the previous bill  version. The section  amended AS                                                                    
43.55.160  by  adding  three  subsections  to  describe  the                                                                    
allocation of  lease expenditures  to oil or  gas production                                                                    
or exploration  in different areas  of the state.  Section 7                                                                    
was  same as  Section 14  of the  previous bill  version and                                                                    
would  amend   AS  43.55.165(h),  which  dealt   with  lease                                                                    
expenditures.  The Section  required DOR  to allocate  lease                                                                    
expenditures  between oil  and gas  production based  on the                                                                    
gross value at the point of production.                                                                                         
                                                                                                                                
Mr. Peterson explained that Section  8 (page 8) was the same                                                                    
as Section 15  of the previous bill version; it  added a new                                                                    
subsection  to  AS  43.55.170,  which  was  the  section  of                                                                    
statute that  dealt with adjustments to  lease expenditures.                                                                    
The  section would  require DOR  to  adopt regulations  that                                                                    
provided  for reasonable  methods of  allocating adjustments                                                                    
to  lease   expenditures,  payments,  and   credits  between                                                                    
different categories of oil and gas production.                                                                                 
                                                                                                                                
10:30:06 AM                                                                                                                   
                                                                                                                                
Mr.  Peterson  communicated  that  Section  9  included  the                                                                    
Petroleum  Information Management  System.  The only  change                                                                    
was the  placement of  the system under  the purview  of DOR                                                                    
instead  of AOGCC.  Section 10  repealed AS  43.55.160(a)(2)                                                                    
that dealt with the  monthly progressivity calculation based                                                                    
on the  production tax  value. He  expounded that  under the                                                                    
new CS  the section was irrelevant  given that progressivity                                                                    
would  be  taxed  on  the   gross  value  at  the  point  of                                                                    
production.                                                                                                                     
                                                                                                                                
Mr. Peterson  discussed that Section  11 was  uncodified law                                                                    
that required DOR  to develop a work plan  for the Petroleum                                                                    
Information  Management System;  the  section required  that                                                                    
the  system  be  operational  before  January  1,  2014.  He                                                                    
concluded  with Section  12  that  established an  effective                                                                    
date of January 1, 2013.                                                                                                        
                                                                                                                                
Co-Chair  Stedman  REMOVED  his OBJECTION.  There  being  NO                                                                    
FURTHER OBJECTION, Work Draft 27-LS1305\T was ADOPTED.                                                                          
                                                                                                                                
10:31:36 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman noted that  the incremental production from                                                                    
Prudhoe  Bay and  Kuparuk was  not included  in the  CS; his                                                                    
office was working with PFC  Energy and would meet with them                                                                    
to  work out  details related  to the  item. He  had concern                                                                    
about using  the 2013  decline curve  versus the  curve from                                                                    
2011 or  2012; he  believed the committee  needed to  take a                                                                    
look at  the item. He shared  that his intent was  to "get a                                                                    
CS on  the table"  in order  for the  industry offer  a more                                                                    
fine-tuned opinion on the bill.                                                                                                 
                                                                                                                                
SB  192  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
Co-Chair Stedman discussed the following meeting's agenda.                                                                      
                                                                                                                                

Document Name Date/Time Subjects
Explanation of Changes for HB 129 Version A to Version D.pdf SFIN 4/3/2012 9:00:00 AM
HB 129
Letter of support from AARP.pdf SFIN 4/3/2012 9:00:00 AM
HB 129
HB 129 Sponsor Statement v.2.pdf SFIN 4/3/2012 9:00:00 AM
HB 129
HB 129 - Death Certificate Example v.2.pdf SFIN 4/3/2012 9:00:00 AM
HB 129
HB 245 Background Info.pdf SFIN 4/3/2012 9:00:00 AM
HB 245
HB 245 Sectional Analysis.pdf SFIN 4/3/2012 9:00:00 AM
HB 245
HB 245 Sponsor Statement.pdf SFIN 4/3/2012 9:00:00 AM
HB 245
HB 245 Support Letters.pdf SFIN 4/3/2012 9:00:00 AM
HB 245
SCR24_2ndOrganicAct_1912.PDF SFIN 4/3/2012 9:00:00 AM
SCR 24
SCR24_Alaskas_1stHouseRepresentatives_1913.jpg SFIN 4/3/2012 9:00:00 AM
SCR 24
SCR24_Alaskas_1stSenate_1913.jpg SFIN 4/3/2012 9:00:00 AM
SCR 24
SCR24_HomeRule_forAK.pdf SFIN 4/3/2012 9:00:00 AM
SCR 24
SCR24_SessionLaws_Summary_1913.pdf SFIN 4/3/2012 9:00:00 AM
SCR 24
SCR24_Sponsor_Statement_29March12.pdf SFIN 4/3/2012 9:00:00 AM
SCR 24
SB 192 April 3 Alaska Senate Finance .pdf SFIN 4/3/2012 9:00:00 AM
SB 192
SB 210 work draft Version T.pdf SFIN 4/3/2012 9:00:00 AM
SB 210
CSSB 192 (FIN) ver T.pdf SFIN 4/3/2012 9:00:00 AM
SB 192
Sb 226 - CSSB 226 - v.B.PDF SFIN 4/3/2012 9:00:00 AM
SB 226