Legislature(2005 - 2006)HOUSE FINANCE 519
04/09/2006 01:00 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB488 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 488 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 9, 2006
1:11 P.M.
CALL TO ORDER
Co-Chair Kevin Meyer called the House Finance Committee
meeting to order at 1:11:32 PM.
MEMBERS PRESENT:
REPRESENTATIVES
Representative Mike Chenault, Co-Chair
Representative Kevin Meyer, Co-Chair
Representative Bill Stoltze, Vice-Chair
Representative Richard Foster
Representative Mike Hawker
Representative Reggie Joule
Representative Mike Kelly
Representative Beth Kerttula
Representative Carl Moses
MEMBERS ABSENT
Representative Jim Holm (Teleconferenced)
Representative Bruce Weyhrauch
SENATORS:
Senator Lyda Green
Senator Gary Wilken
Senator Fred Dyson
Senator Donny Olson
Senator Bert Steadman
Senator Ben Stevens
Senator Gary Stevens
Senator Thomas Wagoner
REPRESENTATIVES
Representative Harry Crawford
Representative Carl Gatto
Representative Ralph Samuels
Representative Paul Seaton
ALSO PRESENT
Daniel Johnston, Legislative Consultant, Daniel Johnston &
Company Incorporate, Hancock, New Hampshire
SUMMARY
HB 488 An Act repealing the oil production tax and gas
production tax and providing for a production tax
on the net value of oil and gas; relating to the
relationship of the production tax to other taxes;
relating to the dates tax payments and surcharges
are due under AS 43.55; relating to interest on
overpayments under AS 43.55; relating to the
treatment of oil and gas production tax in a
producer's settlement with the royalty owner;
relating to flared gas, and to oil and gas used in
the operation of a lease or property, under AS
43.55; relating to the prevailing value of oil or
gas under AS 43.55; providing for tax credits
against the tax due under AS 43.55 for certain
expenditures, losses, and surcharges; relating to
statements or other information required to be
filed with or furnished to the Department of
Revenue, and relating to the penalty for failure
to file certain reports, under AS 43.55; relating
to the powers of the Department of Revenue, and to
the disclosure of certain information required to
be furnished to the Department of Revenue, under
AS 43.55; relating to criminal penalties for
violating conditions governing access to and use
of confidential information relating to the oil
and gas production tax; relating to the deposit of
money collected by the Department of Revenue under
AS 43.55; relating to the calculation of the gross
value at the point of production of oil or gas;
relating to the determination of the net value of
taxable oil and gas for purposes of a production
tax on the net value of oil and gas; relating to
the definitions of 'gas,' 'oil,' and certain other
terms for purposes of AS 43.55; making conforming
amendments; and providing for an effective date.
HB 488 was HEARD & HELD in Committee for further
consideration.
HOUSE BILL NO. 488
An Act repealing the oil production tax and gas
production tax and providing for a production tax on
the net value of oil and gas; relating to the
relationship of the production tax to other taxes;
relating to the dates tax payments and surcharges are
due under AS 43.55; relating to interest on
overpayments under AS 43.55; relating to the treatment
of oil and gas production tax in a producer's
settlement with the royalty owner; relating to flared
gas, and to oil and gas used in the operation of a
lease or property, under AS 43.55; relating to the
prevailing value of oil or gas under AS 43.55;
providing for tax credits against the tax due under AS
43.55 for certain expenditures, losses, and surcharges;
relating to statements or other information required to
be filed with or furnished to the Department of
Revenue, and relating to the penalty for failure to
file certain reports, under AS 43.55; relating to the
powers of the Department of Revenue, and to the
disclosure of certain information required to be
furnished to the Department of Revenue, under AS 43.55;
relating to criminal penalties for violating conditions
governing access to and use of confidential information
relating to the oil and gas production tax; relating to
the deposit of money collected by the Department of
Revenue under AS 43.55; relating to the calculation of
the gross value at the point of production of oil or
gas; relating to the determination of the net value of
taxable oil and gas for purposes of a production tax on
the net value of oil and gas; relating to the
definitions of 'gas,' 'oil,' and certain other terms
for purposes of AS 43.55; making conforming amendments;
and providing for an effective date.
1:13:19 PM
DANIEL JOHNSTON, LEGISLATIVE CONSULTANT, DANIEL JOHNSTON &
COMPANY INCORPORATE, HANCOCK, NEW HAMPSHIRE, provided a
handout to Committee members, titled - Further Discussions
of SB 305 & HB 488. (Copy on File)
Mr. Johnston remarked that the oil industry is working
diligently to maintain their position and enumerated threats
received from the industry:
· Investments will dry up with 25/20% proposal, including
the progressive features
· Alaska reputation will be seriously harmed
· There may be no gas pipeline
· Philanthropic donations would be at risk
Mr. Johnston pointed out that large oil companies are
fighting similar battles around the planet. It is important
that Alaska understand why oil companies are fighting hard.
He provided an "independent view", expecting to continue
work for the oil companies. He stated that he would never
identify the actual profits made by the companies. Oil
companies in general lost hundreds of millions of dollars
before the 1970's. They continued to pump oil in
expectation that those prices would rise.
1:22:23 PM
Mr. Johnston suggested that times like the present should be
rather glorious for the State of Alaska, however, the
current system is regressive. Oil prices could easily
continue to rise.
Page 2 of the handout provides a comparison of Alaska with
peer groups from around the world. He recommended that
Alaska not be compared to Kansas or Colorado. Alaska does
have problems but the major players would rather be here
than any other state. There are a couple countries that
compare to Alaska, one of which is Russia. Russia has
fields governed through a royalty tax system. The terms
under that contract are so "tough" that it would make Alaska
look like one of the "finest places on the planet". The
Russian terms are difficult given the royalty tax
arrangement, where they expect tariffs at $30 dollars a
barrel off the top. He pointed out that the same producers
in Alaska operate in Russia.
1:26:36 PM
Mr. Johnston took threats being made by the oil companies
with a "grain of salt", pointing out their continued
involvement in those places.
Mr. Johnston referenced the graph on Page 2, indicating
government take from oil prices from around the world. The
graph demonstrates that fiscal terms could be priced @ the
$60 dollars per barrel price. Moving from $20 to $60
dollars per barrel indicates a 90% profit. Governments do
not change terms in that fashion and instead, the graph
indicates the upside of barrel prices at each rate. Alaska
is proposing only a 5-percentage point increased intake not
30.
1:29:56 PM
Page 3 highlights the countries that are progressive. Mr.
Johnston pointed out that Azerbaijan has a progressive rate
throughout the range, with a system rate of return featuring
no royalty or cost recovery limit. The world today captures
rate of return features. The government takes are under the
government contracts and fluctuate; the kind of option most
governments wish they had. Most systems are regressive
systems, but that 20% have progressive features.
1:32:53 PM
Mr. Johnston stated that the version from the Senate Finance
Committee does not destroy the State's reputation.
Page 4, China's finance ministry added a 20% tax with a
sliding scale for prices above $40 dollars a barrel a scale
is similar to what is being proposed in Alaska and is
referred to as a windfall profit type-tax or price cap
formula. He stressed the actions taken in China are
"horrifying" to the oil companies.
1:35:05 PM
Pages 5 & 6: Mr. Johnston commented on a response he
received from Dr. Juan Carlos Boue, Oxford University,
regarding the question of rigging the rules, understanding
the profitability and prospects of upstream oil activities
in the offshore U.S. Gulf of Mexico. It is not unique that
in Alaska, oil companies have significant power. It is
frustrating for governments, when those companies operating
in there, rival the power of the government. One of the
"worst situations" exists in Mexico with PEMEX having "way
too much control".
Mr. Johnston referenced the United Kingdom (UK) North Sea
output maturing fields, often put forward as a prime example
of the power of a more flexible taxation scheme. He
discussed industry and taxation, central to Alaskans.
Increasing the government take is another name for an
"effective tax rate".
1:40:04 PM
British Petroleum (BP) claims that after 1993, they
increased their investment in the North Sea. They were
selective in their choice of statistics and focused only on
what they did; however, the information points out that in
general, investment in the North Sea after 1993 that
industry did not increase investment activity and
development activity remained the same.
1:40:48 PM
Page 10 indicates Norwegian production increased
significantly at a time when they did not drop the tax
rates. When taxes did drop in 1993, production appeared
that the industry was responding to an anticipated drop
rate, that was not the case. In 1968, the UK allowed the
equivalent of credits for exploration drilling, which is why
it increased dramatically. Taxes were reduced but it was
moderate. It is understood that allowing credits, reduces
taxes.
1:43:05 PM
Page 10: Mr. Johnston continued the number of fields
brought on line after 1993:
· Andrew
· Harding
· Fionaven
· Schiehallion
· Eastern Trough Area Project (ETAP)
1:44:44 PM
Page 11: Mr. Johnston spoke to the Norwegian development
activity before and after 1993. Taxes were not changed
during that period. Oil companies are threatening Alaska
with false hope and loss of the gas pipeline, which does not
fit with information existing in other parts of the world.
He reiterated that the Norwegian exploration activity before
and after the 1993 huge tax cuts. He recommended that
Alaska demand information stating that there will be a
severe drop in economic activity through the proposed
changes. Enough information has not been provided to
justify that conclusion.
1:46:12 PM
Page 12: Mr. Johnston read an article from the "Economist"
th
dated March 16, 2006, which highlight that new taxes would
bump a 10% increase in government take. At today's oil
price, the impact on development would be minimal. The
danger comes when prices start to slip. Mr. Johnston
mentioned the Wyoming experience, which is second only to
Alaska in regard to the importance that the oil industry
plays to the economy and is important research to what is
happening in Alaska.
1:49:35 PM
Mr. Johnston recommended that information provided by the
oil industry should be presented more fairly, emphasizing
that those companies are "bullying" Alaskans. He offered to
answer questions of the Committee.
1:50:30 PM
Co-Chair Meyer had not recalled the comparison of Alaska to
Kansas but had heard a comparison to Texas and the Gulf
shores. He noted that in Texas, drilling is allowed most of
the year with lower drilling costs. Mr. Johnston
acknowledged comparisons in states throughout the U.S. He
was aware of the weather windows as compared to Texas, given
the permitting and low cost environment there and thought it
would be more appropriate to compare such places to Cook
Inlet.
The North Slope consists 90% - Prudhoe Bay and Kaparuck.
Most oil tax action does not involve exploration. Mr.
Johnston suggested Alaska has not made enough room made for
smaller oil companies. In order to compete with places like
Texas with easier permitting, more must than what is being
offered in the proposed legislation must be done. He
reiterated Russia is the best comparison.
1:55:28 PM
Co-Chair Meyer asked which parts of Russia were being
compared. He was hopeful to discover more exploration sites
and in a country like Russia, it would be difficult to
compete with those costs. Mr. Johnston advised that the big
companies are already in Alaska. Russia does not have the
permitting problems, however, many more bureaucracy
concerns. He emphasized the huge advantages that Alaska
offers; the conditions would have to be glorious in Russia
to invest there rather than here.
1:57:58 PM
Co-Chair Meyer thought that the potential for larger fields
would be better in Russia than in Alaska. He referenced the
known oil accumulations on the North Slope. He asked if the
Governor's proposal was enough incentive to get at that oil.
1:58:58 PM
Mr. Johnston pointed out that ConocoPhillips first went to
Russia in the 1990's, which has been "a bit of a nightmare".
To imply that Russia has virtues that do not exit in Alaska
is untrue. Heavy oil hasn't changed much over the years.
None of the proposals before the Legislature adequately
address heavy oil unless oil prices stay at $60 dollars a
barrel. The proposed system attempts to be all things to
those involved.
2:01:11 PM
In response to comments by Co-Chair Meyer, Mr. Johnston
clarified that he does not expect prices to stay at $60
dollars per barrel.
2:02:07 PM
SENATOR GARY WILKEN recalled times when oil was projected to
stay below $20 dollars a barrel for decades. He asked what
part prospectivity plays for Alaska.
2:03:46 PM
Mr. Johnston advised that the issue is complex and that
treats the National Petroleum Reserve-Alaska (NPRA) areas
separately from the Alaska National Wildlife Refuge (ANWR)
area. He mentioned that the field size expectation,
distribution and prospectivity are significantly different
in those areas. Prospectivity identifies exploration
activity; 80% of the current drama discussions are not about
exploration.
Mr. Johnston said the State will be short changed with the
proposed plan. He did not know how many more alpine fields
exist. He recommended designing terms accommodate to all
situations for the two big fields.
2:06:43 PM
Senator Wilken asked to what degree does prospectivity drive
a project. Mr. Johnston replied it is the major driver.
Senator Wilken pointed out comments regarding cataclysmic
events assuming a change. At the highlighted numbers, it
could mean a $300 - $400 million dollar per year to people
of Alaska, a 4% increase to government take. He questioned
if 4% in government take, could fuel the industry to remove
operations from Alaska.
2:09:43 PM
Mr. Johnston said he has been doing this kind of work for 25
years and has never ever seen statistics lowering indicating
the level of activity from changes in a tax rate. He
questioned how ConocoPhillips could make the statement that
a 2% increase in government-take would reduce investment by
20%.
Mr. Johnston noted the change in the UK tax rate, pointing
out that investment remained the same. In Venezuela on
April 1, 2006, new harsh terms were declared and most
companies agreed to the terms and remained. Increasing the
government take by 3 - 4 percentage points is not
significant. He noted that industry agreed to the terms
offered by the Governor and he concluded that the difference
between those numbers and the ones being proposed is not
significant.
2:14:06 PM
Senator Wilken stated that the well-being for Alaskans had
not been addressed. He pointed out assertions that Mr.
Johnston does not live in Alaska & really does not have an
investment in Alaska. He inquired why Alaskans should
listen to Mr. Johnston. Mr. Johnston observed that his
reputation could be judged by his statements during the
Committee process and maintained that he cares deeply about
what happens here.
2:17:10 PM
Representative Kerttula expressed concern with statements
that "we cannot separate out" legacy fields from exploration
in Cook Inlet for the heavy oil. Mr. Johnston agreed it
would be better to separate them, but did not think it was
feasible, especially within the legislative session. He
emphasized the vast differences.
Representative Kerttula questioned the rough boundary
differences for treating legacy fields from exploration and
heavy oil. Mr. Johnston stated that the differences are
dramatic. In the legacy fields alone, there are production
rates of decline. The spectrum of exploration could create
an additional category of reserve, subject to different
terms. The incentive for exploration could be different
with higher risks. Cook Inlet has its own problems and
boundary conditions such as the high water cut over 90%. A
couple of platforms have been abandoned in Cook Inlet, which
is discouraging, given the number of jobs that exist; he
voiced concern with further withdrawals.
2:21:10 PM
SENATOR FRED DYSON acknowledged the issue of the high water
cuts in Cook Inlet. He observed that the Alaska Regulatory
Commission (ARC) allows for gas discoveries but that there
is not much of a market for new gas. There is not an easy
place to sell new gas. He stated that Alaskans are on the
edge of encountering demand concerns while looking at supply
problems over 5 years. The concern is how to give incentive
for more exploration and production in Cook Inlet.
2:23:32 PM
Mr. Johnston observed that he is not well versed in Cook
Inlet gas and hoped to explore those issues in the future.
Senator Dyson noted that some of the non-legacy owners in
Prudhoe Bay would have access to processing facilities
because they are bumping up against their capacity to handle
water. He asked how could short-term incentives for those
facilities to be expanded.
Mr. Johnston noted that one of the founding principles of
the Administration's work is to provide access to facilities
and the infrastructure for small producers. In order to
provide facilities for the bigger producers, there will be
costs and it might have to be a tariff or fee of some sort.
He did not have further information on the issue.
2:26:16 PM
SENATOR LYDA GREEN addressed the underlying concern
regarding the surety of the 30-year window. She questioned
how other entities balance these situations. Mr. Johnston
advised that his position had not changed regarding the
producers need for certainty, especially in light of
increases in the steel prices. He observed that there is a
range of possibilities for certainty and maintained that one
of Alaska's sovereign rights is to make changes. He
stressed that once a change is made, it remains for many
years and said certainty must have a "value". A robust
progressive system is needed to address what is requested &
required. He observed how the capital costs for the gas
pipeline have increased. In similar situations, producers
have moved forward without certainty.
2:31:24 PM
Senator Green inquired where a cap on progressivity could
fit. Mr. Johnston noted that the Chinese capped their
progressivity at $60 a barrel with a tax rate of 40%. He
acknowledged that progressivity could go "to far", but
questioned why capping the price, which could allow everyone
to share in the high prices of oil.
2:32:53 PM
Mr. Johnston understood the desire for an incentive based
arrangement. He observed that an oil reserve tax is fairly
punitive and expressed concern with the approach. He
observed that there are a number of situations in which the
government would like to see the oil companies move faster.
Oil companies hold the acreage and have a lot of power. He
did know what incentives could be put into a gas pipeline
contract to assure that it goes forward. Companies can
delay if they feel abused and must be unanimous to move
forward, which places Alaska at a disadvantage.
2:38:02 PM
Senator Dyson asked if credits could be structured so that
they can offset to help achieve the pipeline. Mr. Johnston
had not considered that, but thought it sounded
"interesting".
2:39:03 PM
Vice Chair Stoltze noted that he was puzzled with the
Governor's 20/20 proposal and asked if it was "usual
dynamics" for oil companies. Mr. Johnston thought so and
was surprised by the protection mechanisms offered by the
industry.
2:41:58 PM
SENATOR DONNY OLSON referenced an article submitted to the
Senate Finance Committee (SFC) by the Eastern Nova Scotia
Province, asking for Mr. Johnston's comments regarding the
stringent tax structure proposed. Mr. Johnston responded
that he had seen the article, which fascinated him. The
last time he was in New Foundland, he discussed those
concerns with the Prime Minister and the circumstances there
are similar to Alaska. The federal government taxes at the
federal level, leaving little maneuvering ability. That
providence rivals North Slope conditions with offshore
icebergs and worse conditions than the North Sea. In order
to work, the area would have had to bend further than they
are willing. He could add no any further information on the
situation.
2:44:27 PM
Mr. Johnston acknowledged the article was valid and the main
purpose article highlighted that "negotiations broke down
and oil companies walked away". He did not know the terms
or conditions offered under the contract and recommended
finding out more information regarding the circumstances.
2:45:36 PM
Representative Kelly inquired if Mr. Johnston stuck by his
original proposal. Mr. Johnston stated that he was not
comfortable with the Governor's 20/20 or the neutrality of
that proposal. He noted the amount of lobbying pressure
occurring during the process; lobbying power of the oil
companies is substantial. They are not going to try to
resurrect the process. There are many dimensions to the
certainty. He voiced strong support for starting at 25/20,
attaching a progressivity scale.
Representative Kelly asked if Mr. Johnston supported the
progressivity ratio of 50/40. Mr. Johnston advised that he
recommended the start point be about $25 dollars a barrel.
Most producers have made it clear that they are not
interested in major investments at that price. He said that
$40 dollars a barrel would be a significant change and that
he was comfortable with that number. Mr. Johnston felt
there was room for negotiations beginning at $40 dollars a
barrel.
2:51:33 PM
Representative Kelly inquired the maximum terms of the
contract that the State of Alaska should consider. Mr.
Johnston claimed that it would be unfair to insist on both
certainty in gas and oil. A typical contract is 25-years,
which he said was "unthinkable" & recommended that 10-years
was more reasonable. If the State leaves money on the
table, the oil companies would not fix it. If the State
asks too much, they have the power to change. There should
be certainty with regard to the gas line as it will take 12-
years before the State starts producing. To reach half-life
of the gas will take 25-years. He recommended that offering
all equity interest could help and pointed out that he has
strongly lobbied for progressive terms on oil and now gas.
2:55:22 PM
Representative Kelly addressed bottom tax concerns. Mr.
Johnston responded that it should not matter if it went to
zero, if oil prices fall below $25 dollars a barrel. At
zero, a severance tax could be okay if a royalty amount was
included. To a large extent, it is an estimate on what the
expected prices of oil will be. He did not think oil prices
would weaken significantly as the pressure seems to be
moving upward.
2:59:14 PM
Representative Kelly mentioned the no-start date for a gas
contract. Mr. Johnston voiced concern regarding a hard and
firm start date; industry has proven that mega projects
usually come in over-budget and never are on time. It is
difficult to account for that. Crafting language for
something new is worrisome. It usually takes ten years
before contract language can appropriately address possible
outcomes. He could not offer any alternatives to a firm
start deadline.
3:02:28 PM
Representative Kelly worried about any contract that would
affect Alaska for 15-years. Mr. Johnston added that there
are circumstances governed by the commerciality of a
contract, determining if a field is viable or not. He
emphasized that the option before the Committee presents a
unique situation that might not be best for the State.
3:04:31 PM
Representative Kelly addressed the challenges of pipeline
in-fill and the gamble associated with that for Alaska.
3:06:15 PM
Co-Chair Meyer appreciated the 2 for 1 idea coming from the
Senate Resource Committee (SRC). Mr. Johnston stated that
his first impulse was negative to that idea. The House
Resource Committee (HRC) attempted to determine if that
result would achieve increased investment. The 2 for 1
proposal could help satisfy both conditions of fairness and
economic logic on investments made during that time made and
it encourages the original investment because it enables
recouped costs.
3:08:21 PM
Co-Chair Meyer commented that the goal of the State, similar
to that of the oil companies, is to maximize the return to
the State's shareholders. He asked if the goal should
rather be getting more out of declining existing fields.
Mr. Johnston pointed out a general consensus that "80% of
the action" is in existing fields. The idea of the demise
of exploration is premature; there is virtue in further
exploration. He thought, there would be some pleasant
surprises. Dollar for dollar, the two big legacy fields and
significant accumulation of heavy oil, is where the State
should be spending most of their time; however, not to the
exclusion of exploration.
3:11:40 PM
Co-Chair Meyer recommended that the issues be addressed
separately. Mr. Johnston stated that during his testimony
th
on March 6, the tax and the credits were directly
discussed, an attempt to balance the existing tax
production.
3:12:54 PM
Co-Chair Meyer questioned if larger oil companies would opt
to spend their dollars in Alaska or the Gulf of Mexico if
Alaska chooses the 25/20 plan. Mr. Johnston stated that he
could run those numbers to determine the choice including
progressivity, reserves, cost rates and costs involved.
3:14:16 PM
Co-Chair Meyer recommended comparing Alaska to Texas & the
Gulf of Mexico rather than Russia. He thought that
opportunities for working year round and tax rates were more
favorable in Texas.
3:14:54 PM
Representative Kerttula mentioned negotiation considerations
and the unlikelihood of a low side and worried about
incorporating a "floor" at the low side. When she had
written contracts, a date certain was always included to
address delays.
Mr. Johnston responded that oil prices falling below $25
dollars a barrel could happen at the end of exploration. A
mechanism must be in place to accommodate such situations.
The $9 a barrel scenario happened in 1998, but did not last
long. If that happens again, the State and the industry
will need to revisit the situation. He continued, a start
date is a difficult consideration and he could not conceive
of a hard date with all the uncertainties.
3:19:13 PM
Mr. Johnston responded to Representative Kerttula that he
was not able to provide a single tax rate to cover all
fields and situations.
3:20:14 PM
SENATOR BEN STEVENS referred to the graph on Page 9 of the
handout. He observed that of the 10 largest fields brought
on line during that time (1980 - 2000), 8 were in Norway.
He thought that the increase in those fields resulted from
the access to resources. They were the largest fields
outside of the Middle East during that period. He suggested
that if Alaska's productions were overlaid, those challenges
could become obvious. Mr. Johnston responded that the
characterization of the tax rate impact the United Kingdom
(UK) was over simplified and not correct. He noted that the
investment activity in Norway and the production profile was
dramatic and he believed that exploration must have occurred
earlier when fiscal terms were tough. He pointed out that
the climate and the regulatory terms in Norway are severe.
3:24:25 PM
Senator Stevens suggested that government-owned oil
companies were doing the exploration. Mr. Johnston doubted
that they were doing all or even most of the exploration.
3:25:20 PM
Senator Stevens referred to Page 3, graph 2. He counted 9
progressive systems and 23 countries that have production-
share agreements and 4 with service agreements. He
concluded that there appears to be a small percentage with
progressivity, including the "R" factor. He was curious
about the terms of a production sharing agreement, recalling
that the average time of such an agreement was 23 years.
Mr. Johnston responded that 10 years would be reasonable in
the absence of a certainty clause. If a change were made by
the Legislature, it would be unthinkable that it could be
reconsidered sooner than 10 years. He clarified that the
average term of a production contract is about 25 years.
That does not mean that the fiscal terms cannot be changed
and noted that contract terms have changed worldwide. Some
of the production-sharing contracts are more stable, but he
knew of no country that gave up their sovereignty.
3:30:07 PM
Senator Stevens questioned why statements regarding onerous
tax increases & their impacts should be discarded. Mr.
Johnston disagreed that the tax rates being discussed were
onerous. He observed that those working in the industry are
not as objective as they should be. He pointed out he had
been given a mandate to be "objective". He stressed his
intent to be objective and to provide prospective for both
sides & advised that he was not being onerous but attempting
to protect those non-oil interests.
Senator Stevens continued, the decisions being made will
impact the people of Alaska, who should be listened to. Mr.
Johnston stressed that the process has included all types of
people and that he had listened to testimony from all sides
to learn the process. Industry is not the only entity that
needs to have representation. He maintained that Alaskans
want to take care of the oil industry "almost to a fault",
because no one wants to hurt Cook Inlet.
3:36:12 PM
SENATOR BERT STEADMAN stated that the only way the State can
really know what the resource is worth is to have them
withdrawn and re-bid. He questioned the range if the
resource were relinquished. Mr. Johnston referred to
Indonesia where contracts were relinquished and then re-bid.
He observed that after 30 years, terms had been
renegotiated. It was acknowledged that if the government
had taken ownership at the end of the contract, the industry
would have stopped production 5 years before the terms
ended; the result was a $60 million dollar bonus.
3:41:25 PM
Senator Steadman assumed that the government's take could be
higher than what currently is on the table. He understood
that the intent was to stimulate production and exploration
until the gas line comes on. The hope is to leave some on
the table, not driving off the industry. Mr. Johnston
maintained that there is stillroom to error on the
conservative side, although it is difficult to know what
that number is. He referred to other markets, observing
that there have never been prices demonstrated in the
1990's. He said that many of his friends living in the
United Kingdom (UK) believe that the terms being offered in
Alaska are "luke warm".
3:44:05 PM
Representative Kelly referred to the prospective price and
asked what sort of adjustment was needed. Mr. Johnston
explained that there were two dimensions and relatively
speaking, prospectivity has not changed a lot as oil prices
have. Increase in oil prices does not happen immediately;
it takes a couple of years of drilling activity, costs of
services are increasing.
3:46:24 PM
Representative Kelly commented that the relative
progressivity could change little and asked if the numbers
could be changed at a later date. Mr. Johnston did not know
the mechanisms that exist to address royalty reductions but
believed that someone must have the authority to do it.
Presently, there are no beneficiaries.
Representative Kelly spoke to the fairness of the 2 for 1,
derived from a base average initial investment and asked
about the effective date. Mr. Johnston had not thought
about inserting a threshold. Regarding the effective date,
he recommended that it be sooner rather than later. He
identified sense of urgency to fix a "broken system". He
spoke to the amount of money that the State would be loosing
by not putting the systems in place. He thought that
January 2006 might be an appropriate start date and was open
to discussion.
3:52:22 PM
Representative Kerttula asked about critical audit
functions. Mr. Johnston agreed it was a big issue, stating
that auditors are worth their weight in gold. There are
many concerns about having profit-based mechanisms in place.
About 70% of what governments receive in this world comes
from profit-based mechanisms. Most of the means by which
governments insure that the accounting is done properly, is
"field-proven" off the shelf methods, often done with great
success. He pointed out royalty determination disputes. He
recommended that it is important to get the tax rate right
at the beginning when determining a correct structure.
3:54:45 PM
Senator Dyson noted his support for the Governor's proposal
and the blanket credit for development work. He asked if a
standard definition had been used. Mr. Johnston explained
that with the boundary conditions placed on the Department
of Revenue, they did what they had to do to accommodate the
situation within a single system and determined:
· Tax Rates
· Credit Systems
· Allowances
Mr. Johnston recommended a system to cover all the
structures. For enhanced oil, there are no well-established
guidelines for what could be appropriate; which is important
to establish guidelines, as there is a substantial amount of
heavy oil in Alaska.
HB 488 was HELD in Committee for further consideration.
3:59:04 PM
ADJOURNMENT
The meeting was adjourned at 3:58 P.M.
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