Legislature(2005 - 2006)HOUSE FINANCE 519
04/27/2006 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 305 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 27, 2006
1:45 P.M.
CALL TO ORDER
Co-Chair Chenault called the House Finance Committee meeting
to order at 1:45:29 PM.
MEMBERS PRESENT
Representative Mike Chenault, Co-Chair
Representative Kevin Meyer, Co-Chair
Representative Bill Stoltze, Vice-Chair
Representative Richard Foster
Representative Mike Hawker
Representative Jim Holm
Representative Reggie Joule
Representative Mike Kelly
Representative Beth Kerttula
Representative Carl Moses
Representative Bruce Weyhrauch
MEMBERS ABSENT
None
ALSO PRESENT
Representative Ethan Berkowitz; Representative Kurt Olson;
Representative Harry Crawford; Angus Walker, Commercial Vice
President, British Petroleum (BP) Alaska; Tom Williams,
Senior Tax Counsel, British Petroleum (BP) Alaska; Richard
Owen, Alaska Production Manager, Exxon Mobil; Brian Wenzel,
Vice President, Finance and Administration, ConocoPhillips,
Alaska
SUMMARY
CS SB 305(FIN) am
An Act repealing the oil production tax and the
gas production tax and providing for a production
tax on oil and gas; relating to the calculation of
the gross value at the point of production of oil
and gas and to the determination of the value of
oil and gas for purposes of the production tax on
oil and gas; providing for tax credits against the
production tax on oil and gas; relating to the
relationship of the production tax on oil and gas
to other taxes, to the dates those tax payments
and surcharges are due, to interest on
overpayments of the tax, and to the treatment of
the tax in a producer's settlement with the
royalty owners; relating to flared gas, and to oil
and gas used in the operation of a lease or
property under the production tax; relating to the
prevailing value of oil and gas under the
production tax; relating to surcharges on oil;
relating to statements or other information
required to be filed with or furnished to the
Department of Revenue, to the penalty for failure
to file certain reports for the tax, to the powers
of the Department of Revenue, and to the
disclosure of certain information required to be
furnished to the Department of Revenue as
applicable to the administration of the tax;
relating to criminal penalties for violating
conditions governing access to and use of
confidential information relating to the tax, and
to the deposit of tax money collected by the
Department of Revenue; amending the definitions of
'gas,' 'oil,' and certain other terms for purposes
of the production tax, and as the definition of
the term 'gas' applies in the Alaska Stranded Gas
Development Act, and adding further definitions;
making conforming amendments; and providing for an
effective date.
CS SB 305(FIN) am was HEARD & HELD in Committee
for further consideration.
CS FOR SENATE BILL NO. 305(FIN) am
An Act repealing the oil production tax and the gas
production tax and providing for a production tax on
oil and gas; relating to the calculation of the gross
value at the point of production of oil and gas and to
the determination of the value of oil and gas for
purposes of the production tax on oil and gas;
providing for tax credits against the production tax on
oil and gas; relating to the relationship of the
production tax on oil and gas to other taxes, to the
dates those tax payments and surcharges are due, to
interest on overpayments of the tax, and to the
treatment of the tax in a producer's settlement with
the royalty owners; relating to flared gas, and to oil
and gas used in the operation of a lease or property
under the production tax; relating to the prevailing
value of oil and gas under the production tax; relating
to surcharges on oil; relating to statements or other
information required to be filed with or furnished to
the Department of Revenue, to the penalty for failure
to file certain reports for the tax, to the powers of
the Department of Revenue, and to the disclosure of
certain information required to be furnished to the
Department of Revenue as applicable to the
administration of the tax; relating to criminal
penalties for violating conditions governing access to
and use of confidential information relating to the
tax, and to the deposit of tax money collected by the
Department of Revenue; amending the definitions of
'gas,' 'oil,' and certain other terms for purposes of
the production tax, and as the definition of the term
'gas' applies in the Alaska Stranded Gas Development
Act, and adding further definitions; making conforming
amendments; and providing for an effective date.
BRITISH PETROLEUM (BP)-ALASKA
1:47:17 PM
ANGUS WALKER, COMMERCIAL VICE PRESIDENT, BRITISH PETROLEUM
(BP)-ALASKA, referenced handouts. (Copy on File). He noted
that the Alaska North Slope (ANS) production is declining
rapidly, despite current level of investment.
· At the current rate of decline, production could reach
about 450,000 barrels per day in 10 years.
· To achieve the Department of Revenue's latest
production forecast, investment will need to be
significantly higher than the current level.
· The revenue projections provided to the Legislature by
the Department & consultants rely upon production
forecasts that require more capital than currently is
being invested and make no attempt to quantify adverse
impacts that increased taxes have on investment.
Mr. Walker pointed out that decline poses a serious risk to
Alaska's future making it essential to carefully consider
all factors. He encouraged a lower tax rate, which would
reduce risk by attracting investment and generating
production, revenue, jobs, economic activity and
contributions to the Alaska Permanent Fund and sustainable
benefits for all Alaskans. Lower tax rates also mean a
healthier oil business and stronger foundation to build a
gas pipeline.
1:50:00 PM
Mr. Walker continued, since 1999 both the industry and the
Department of Revenue have consistently overestimated
production and revised down the production forecasts
significantly each year. That is of great concern.
The Alaska North Slope (ANS) production is declining at 6%
per year. The development of Alpine, Northstar and Prudhoe
Bay Satellites between 2000 and 2002, successfully stemmed
North Slope decline for a number of years. However, with
Northstar & Alpine on plateau or declining, 2005 saw a
return to the 6% decline, which has characterized that area
in the past. Unfortunately, there are no more fields of
Alpine or Northstar's magnitude waiting to be developed.
1:51:21 PM
Mr. Walker addressed investment leading to actual
production. The decline abatement experienced in about
2000, required investment levels above historical averages.
The graph demonstrates cause and effect relationship between
investment and production. The graph extrapolates the 6%
historical decline to demonstrate what can occur to
production if investment remains at current levels. Within
ten years, Alaska North Slope (ANS) production will be
approximately 450 mbd. The projection assumes investment
stays at historic levels and is not adversely affected by
increased taxation.
Co-Chair Chenault asked if investment dollars were industry
wide. Mr. Walker explained they are the industry total
expenditures.
1:53:24 PM
Mr. Walker pointed out that the latest Department of Revenue
2006 spring forecast is represented by the line above the
blue wedge. The wedge represents the difference between the
spring forecast and the expected decline at current
investment. The cause & effect (investment and production)
demonstrated in the 1998 to 2004 timeframe, provides an
illustration of why significant investment is required to
meet the Department's spring forecast. That future can only
be realized if Alaska has a significant investment increase.
It would be unrealistic to assume that the tax increases
recommended by the current version SB 305, would lead to a
significant investment. Unless investments are made,
decline will continue at the current rate and the Department
will be revising production forecasts down again.
The blue wedge indicates 1.3 billion barrel production over
twenty years. At today's prices that represent tens of
billions in State revenue lost because oil was left in the
ground. It comes before consideration of an economic
multiplier effect of the investment, which will create
economy for jobs and business.
tax rate reduces risk by attracting more investment and
generating more production, revenue, jobs, economic
activity, contributions to the Permanent Fund and more
sustainable benefits for Alaskans. A lower tax rate would
also mean a healthier oil business and stronger foundation
on which to build the gas pipeline.
1:58:07 PM
Mr. Walker referenced Page 6 of handout #2, the key
petroleum production tax (PPT) issues & solutions. (Copy on
File). Page 6 identifies the eleven key issues of the bill.
· PPT Rate = 20%
· Progressivity = none
· Credit = 25%
· Special Conditions on Credit = none
· Transition (TIE) Credits = last five years, 2
to 1 new investments to old
st
· Effective Date = July 1, 2006
· Use of Royalty Netback = Allowed
· "Abandonment" Costs = Already Addressed
· Safe Harbor = 95% due cumulatively
during year, delinquent after 3/31 of next year
· Deductable "lease expenditures"= Clarify definitions
(AOGA proposal)
· Non-Arm's Length Costs = Addressed
Mr. Walker clarified the most important feature to the
industry is the tax rate. Any progressivity would act as a
deterrent to Alaskan investment. If progressivity is
inevitable, he urged it be based on net revenue rather than
gross, which is in the Senate draft.
2:01:30 PM
Representative Kerttula inquired about a new Senate section,
which reduces the taxable amount on gas. With a decline in
production, she worried about a reduction in tax money. Mr.
Walker replied it is important to look at the entirety of
revenue received by the State. Gas typically has a lower
tax rate than oil because of the difficultly getting it to
market; that is consistent with other markets around the
world.
2:03:12 PM
Representative Kerttula thought with the resulted decline,
the State would receive less royalty. Under that scenario,
Alaska could end up with "nothing back". Mr. Walker
reiterated that a healthy oil and gas business would serve
Alaska well.
2:03:54 PM
TOM WILLIAMS, SENIOR TAX COUNSEL, BRITISH PETROLEUM (BP)-
ALASKA, pointed out in the Senate version, there are special
credit conditions, which pass the benefit on to the
companies using the facilities. Tax is not part of the fee
charged for exploration. The PPT falls on the fact that
producing the oil is costly.
2:05:50 PM
Representative Kerttula asked about costs of building a
facility credit and how it would be included in the tariff.
Mr. Williams explained that if nothing were being charged
for that tax, then a reduction in tax would not make sense.
It would hamstring credits for the utility. The credit
amount is not known for many years. The Department of
Revenue is responsible for auditing and pass-through of
credits. It can be loosed.
2:08:32 PM
Representative Kerttula pointed out that the credits were
for costs and that she understood they were charged for in
the tariff. Mr. Williams stressed that the facility costs
what it costs. The credit reduces the price paid on the oil
moving through the facility. The cost of the royalty is not
passed on. There might be a credit for investments but that
has nothing to do with the cost to build that facility.
2:09:46 PM
Representative Kerttula stated that the tax was reduced by
the credit of the cost of the facility and that benefit
should flow through to the customers.
2:10:22 PM
Mr. Williams claimed that each facility would have some part
of their costs disallowed, based on production. The
"decision-maker" must have confidence that the credit will
exist before the investment is made to be effective.
2:11:08 PM
Representative Hawker referenced Page 2, suggesting a remedy
to deleting certain material. Mr. Williams apologized for
that error.
2:12:19 PM
Mr. Walker identified the importance of transition credits
and the 2 for 1 provision, aligned with more investment is a
solution that might work.
2:13:15 PM
Mr. Walker thought an effective retroactive date would be
unfair; he urged the earliest tax enforcement implementation
st
date be July 1, 2006.
2:14:05 PM
Mr. Williams discussed the use of the royalty netback
proposed in each version. He hoped for some guidance &
instruction for the Department's calculations.
2:16:09 PM
Mr. Williams stated that abandonment costs are not an
accounting term but rather cash costs incurred. The
expenditures must be ordinary and necessary to produce gas &
oil. Since those are cash-costs, there would be no issue
until abandoned. To make the PPT cost-side work, it must be
determined what partners are willing to pay for operating
those fields & costs of running the field, different from
abandoning the field. The current language is adequate to
protect the State against situations where a field has not
produced for a long time.
2:19:01 PM
Representative Kerttula asked about no credit/no reduction -
the true abandonment. Mr. Williams responded that the costs
of true abandonment remain true costs. Overly broad
language creates more problems than it is worth. Abandoning
& closing a facility is part of the cost of running
business; it would be a legislative policy call. PPT is a
cash tax and therefore, should be an allowed deduction to
costs incurred for running a business.
2:21:05 PM
Mr. Williams mentioned the "safe harbor".
2:21:16 PM
Representative Hawker brought up the issue of an effective
date. Mr. Williams asked how complicated would the
legislation be made. He thought that the objective was to
create a clear and understandable tax. The industry turns
in production reports everyday; it takes tremendous effort
to compile that information for each time there is an
abandonment. It would be difficult for the Department to
determine if the data was correct. Representative Hawker
disagreed that was "needlessly complex".
Co-Chair Chenault asked if abandonment costs are paid more
than once. Mr. Williams did not think so as it is a cash
based tax on cash expenditures. It is an expense.
Co-Chair Chenault asked if the industry returned to an
abandoned well in the future, could there then be a second
abandonment. Mr. Williams thought there could be similar
expenses incurred at different times could be good for the
State. Each expenditure is associated with different costs
& each time there are required expenditures, it must be
recognized.
Co-Chair Chenault submitted it could be claimed in the same-
single well. He worried about auditing costs for
abandonment. Mr. Williams pointed out that the PPT is less
than 100% and costs incurred would be "out of pocket".
2:27:39 PM
Mr. Williams pointed out the safe harbor comparison. In the
current system, the safe harbor is paid tax monthly. If it
is not paid, the company can be exposed to interest and
penalties for falling short. The problem remains with a
budget determination. Coming in under-budget is good
business for the State having less deducted costs.
Mr. Williams spoke to the cumulative correctness of the
retroactive impulses. It would be easiest to determine true
costs at the end of each year, the point at which penalties
could be implemented. It follows the federal meeting system
month-by-month test.
2:32:07 PM
th
Representative Hawker requested a copy of the April 13
letter from the Alaska Oil and Gas Association (AOGA). Mr.
Williams agreed.
2:32:39 PM
Mr. Williams referenced the deductible lease expenditures,
indicating concern with ordinary and direct costs. He
recommended it be explicit.
2:35:01 PM
Representative Hawker agreed with the analysis but warned
against intermingling "and / or". He asked if the
preference would be "direct, ordinary & necessary". Mr.
Williams agreed that would work but would be cumbersome. An
alternative would be "direct, ordinary, & necessary, which
means direct costs under Subsection D". He stressed that it
is important to safeguard the term of "art" for the ordinary
and necessary.
Mr. Williams said it could not be tied to any specific
location. Additional ambiguity results from language
regarding the point of production. There are upstream costs
incurred in support of the production and are ultimately
field operation costs as proposed by AOGA.
2:38:28 PM
Mr. Williams addressed No-Arm's Length Costs, encouraging it
to be "squeaky clean". An overcharged item is not an
ordinary cost and existing language allows that. The Senate
version incorporates the Internal Revenue Code (IRC) 482,
including overseas costs that are cumbersome. It can take
years for the IRS to complete that work. He stated the
addition of IRC 482 was "overkill", recommending alternative
language for protections of ordinary costs.
2:40:48 PM
Representative Kerttula questioned if the companies or the
Department would be able to establish the validity of such
work. Mr. Williams commented that the Department could look
at that when no partners are involved.
2:42:00 PM
Representative Hawker referred to (J) and (K), AS 43.55.160.
Mr. Williams advised that the credit sections were derived
from the definitions of lease expenditures and are a subset.
He thought the citations could be wrong.
2:43:37 PM
Mr. Walker concluded his testimony regarding the clarity of
the PPT structure mechanics. Mr. Williams noted a technical
flaw contained in the House Resource Committee version
progressivity clause as related to West Texas Intermediate
(WTI); he thought that instead the New York Mercantile
Exchange quotes should be referenced.
2:47:07 PM
Co-Chair Meyer pointed out that BP recommends the 20/25
proposal. He asked if that would be adequate to stimulate
exploration of heavy oil. Mr. Walker stated they are
requesting a lower tax rate and that heavy oil is getting
harder to pursue. He noted discovered technology that could
make development more economic.
2:49:32 PM
Representative Holm inquired the logic for the increased
investment production indicated on Slide 3. Mr. Walker
explained it had resulted from large investments in the
Alpine and North Star. Representative Holm asked the
incentive for capital investment in Prudhoe Bay over that
time. Mr. Walker observed that two large undeveloped fields
led to the investment and there are no fields of that
capacity waiting to be developed.
2:51:34 PM
Representative Holm thought a good price should be paid for
that commodity, especially if a large pool for oil
development is available. He asked if the price affects the
value of investment. Mr. Walker stated that industry will
invest as much as they can on economic projects; in the
current environment that amount is about $1 billion dollars
a year, with the exception of the two large fields at Alpine
and North Star. He expected that level of investment if oil
prices remain high. Representative Holm argued that there
has not been $1 billion dollars invested in Alaska during
recent years.
2:53:42 PM
Mr. Walker referenced Slide 3, explaining the history of the
capital axis.
In response to a query by Representative Kerttula regarding
high prices, Mr. Walker pointed out that the industry does
not forecast price, but instead takes price risk.
Representative Kerttula commented that Congress might be
rewriting some of the federal tax provisions regarding the
write-off of geology studies surrounding exploration. She
questioned if such federal action could impact profit under
the proposed plan. Mr. Walker was not aware of that
proposal.
AT EASE: 2:56:08 PM
RECONVENE: 3:03:26 PM
CONOCO-PHILLIPS, ALASKA
BRIAN WENZEL, VICE PRESIDENT, FINANCE AND ADMINISTRATION,
CONOCO-PHILLIPS, ALASKA, stated that Conoco-Phillips does
not support the legislation as passed from the Senate as it
does not adequately encourage increased investment or long-
term production.
Mr. Wenzel provided a choice of three alternatives:
· Focusing on maximizing short term tax revenues
· Balancing significant increases in short term revenues
with an eye toward long-term investment
· Focusing primarily on long-term to encourage investment
by the industry
Mr. Wenzel addressed an increase to production tax and how
that affects investment; Alaska, currently, is running a
budget surplus. He recommended that a balance be struck
including tax credits as proposed by the Governor. The
industry recognizes the Legislature's authority & obligation
to set fiscal policy, and the industry agreed with the
Administration on that proposal. They agreed to support a
20/20 proposal. Alaska must take a long-range view for
maximizing State revenue.
3:08:32 PM
Mr. Wenzel encouraged the Legislature to create a vibrant &
healthy oil and gas industry leading to more production and
jobs for Alaskans. ConocoPhillips does not support the
Senate version of the bill, as it will result in lower
investment throughout Alaska. The Department of Revenue
forecast is based on a level of investment that outstrips
recent investment. He emphasized that to achieve production
levels, it is important to encourage investment.
3:11:48 PM
Mr. Wenzel addressed the process and project evaluations
with broad range of prices considered. Models are run
multiple times to determine the expected value of each
project. The list determines capital investment ranking
order each year. To increase taxes in Alaska could shift
industry projects down in rank of priority, which could
become investment loss to Alaska. The bottom-line changes
asset order from project happening around the world.
3:13:47 PM
To encourage further investment in Alaska, Mr. Wenzel
recommended:
· Bringing the tax rate back to the 20%
· Eliminating the windfall profits surcharge element or
if added, it should be based on a net provision
· The trigger threshold should be inflated & must change
in value over time
3:16:45 PM
· An effective date of January 1, 2007. Once
regulations are in place through drafting & public
review, taxpayers can read the regulations to apply to
the Department of Revenue for approval for tax filing.
3:17:51 PM
Mr. Wenzel advised that ConocoPhillips investors expect
their stock to make profits. The best way for Alaska to
maximize benefits and share in that success is to take risks
and design a fiscal system so that profits increase. That
is what the Governor's PPT accomplishes. Higher tax rates &
additional progressivity would be counter to the goal of
encouraging investment.
3:20:09 PM
Co-Chair Meyer asked about credit amounts. Mr. Wenzel
thought that a tax credit amount of 20% could encourage
investment. He indicated that the tax rate is the most
important feature.
3:21:47 PM
Representative Kerttula commented on the 20% rate with no
progressivity and a decline in production. Mr. Wenzel
responded that the provision to exclude 2/3 of the gas
revenue could be a good solution. That would be a policy
call.
Representative Hawker asked if that solution could eliminate
the need to allocate costs between oil and gas. Mr. Wenzel
said yes.
3:23:46 PM
EXXONMOBIL ALASKA
RICHARD OWEN, ALASKA PRODUCTION MANAGER, EXXONMOBIL,
presented a handout. (Copy on File). He stated that
ExxonMobil appreciates careful examination of the
legislation to ensure that a correct balance is struck
between additional government take and maintaining an active
and healthy oil and gas industry in Alaska. All of the
different versions of the PPT legislation represent a
significant tax increase on the oil and gas industry. Any
change in Alaska's fiscal regime impacts how the industry
views the stability and attractiveness of the Alaskan
investment environment, which in turn, impacts how the
ongoing investment decisions are evaluated. Tax systems
need to be carefully designed to ensure that the desired
objective of resource development is achieved. It is
critical to take into account the quality of the remaining
resource of the resulted of unintended consequences, such as
reduced investments or lower reserve recovery. To offset
current production decline, industry will need to make a
significant increase in investments. He stated that the
focus of the tax bill should be encouraging investment and
growing production.
Mr. Owen pointed out that the version before the Committee,
increases the already high base tax rate contained in the
original bill to 22.5%. He warned that higher tax rates
discourage investment. Companies are willing to accept the
risks of long-term, capital intensive investments when there
is a corresponding opportunity for upside potential. The
proposal to increase the already high tax rate as prices
increase does reduce the upside potential and will result in
the industry recalibrating investment decisions.
3:26:48 PM
Mr. Owen urged the Committee to reduce the tax rate from the
22.5% to the 20% contained within the original bill. The
industry also encourages elimination of the additional
progressive feature, which increases tax when prices are
higher.
ExxonMobil is disappointed that the provision allowing the
use of a producer's royalty settlement agreement to
determine the value of oil and gas removed. The PPT bill as
originally proposed allowed the State to value a producer's
oil and gas using the producer's royalty settlement
agreement (RSA), negotiated with and approved by the
Department of Natural Resources. The use of a producer's
royalty settlement agreement establishes a methodology to
determine the value for oil and gas that reflects current
market conditions and includes a re-opener process for
adjusting the methodology keeping it market reflective. The
result of the re-opener process creates a self-adjusting
system to determine the value of oil and gas, representative
of market conditions. That provision is important to the
industry and the State as it provides certainty to a
producer on the value on which to pay the royalty and
production taxes, while reducing the administrative and
audit costs to both the State and industry.
3:28:13 PM
Mr. Owen urged the Committee to reinstate the provision,
which allows the State to use the RSA methodology for
determining the value of the product. Most importantly for
ExxonMobil, the oil fiscal contract terms consistent with
the Administration's proposal, would provide predictability
and durability necessary to advance the gas project to the
next phase. While predictability and durability are
important, their attractiveness is lost if it comes at too
high a cost.
3:29:13 PM
Mr. Own noted that any change to the PPT legislation as
originally proposed, could potentially jeopardize the
ability to progress the gas pipeline and could require a
reexamination of the gas pipeline contract. ExxonMobil
recommends that the Committee:
· Adjust the tax rate to 20%, with an investment tax credit
rate of 20%
· Eliminate the additional progressive tax rate feature
· Provide language allowing the use of RSA
· Make the effective date for the new system July 1, 2006
3:30:22 PM
Representative Kerttula addressed the years of litigation
involved with the RSA. Mr. Owens was not familiar with the
history of the litigation. He acknowledged that there is a
different process for production taxes used at this time.
Representative Kerttula pointed out that using the
ExxonMobil royalty agreements would result in a large
revenue loss to the State of Alaska. Mr. Owen responded the
process would be self correcting. Representative Kerttula
argued that it could be a huge loss of revenue to Alaska
using the agreement. Mr. Owen had not seen those
calculations; he was aware of current arbitration
discussions.
3:33:05 PM
Mr. Owen noted that arbitration had been going on for
approximately two years.
Representative Hawker referred to language indicating that
any change to the PPT legislation [Governor's version],
could jeopardize the gas pipeline. He stressed that it was
"naïve" to assume any bill put forth by anyone, including
the Governor, would not be revised by the Legislature.
3:35:11 PM
Mr. Owen responded that changes from Economic Limit Factor
(ELF) to the PPT could be a good move with the correct
balance between industry and the State.
In response to a query by Representative Kerttula, Mr. Owen
said the industry has been working to release a gas
contract, but that it is not complete yet.
3:36:29 PM
Representative Kerttula questioned how long it would take
ExxonMobil to complete the due diligence necessary between
the oil and gas pipeline contracts. Mr. Owen explained it
would depend on the extent of the changes. He addressed
terms, predictability and stability of that contract. He
added, it could take a week or two to analyze potential
impacts.
CS SB 305(FIN) am was HELD in Committee for further
consideration.
3:37:58 PM
ADJOURNMENT
The meeting was adjourned at 3:38 P.M.
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