Legislature(2005 - 2006)HOUSE FINANCE 519
04/29/2006 01:00 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 | |
HOUSE FINANCE COMMITTEE
April 29, 2006
1:21 p.m.
CALL TO ORDER
Co-Chair Chenault called the House Finance Committee meeting
to order at 1:21:09 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 Reggie Joule
Representative Mike Kelly
Representative Beth Kerttula
Representative Carl Moses
Representative Bruce Weyhrauch (via teleconference)
Representative Jim Holm (vial teleconference)
MEMBERS ABSENT
None
ALSO PRESENT
Judy Brady, Executive Director, Alaska Oil and Gas
Association (AOGA); Caleb Steward, Juneau; Representative
Woodie Salmon; Representative Ethan Berkowitz;
Representative Kurt Olson; Representative Paul Seaton; Wayne
Stevens, President, Alaska State Chamber of Commerce,
Juneau; Dixie Hood, Juneau; Sean Purvis, Juneau;
Representative Kurt Olson; Representative Paul Seaton;
Representative Vic Kohring; Representative John Coghill;
Senator Gene Therriault; Representative Ethan Berkowitz; Dr.
Tony Finizza, Special Consultant, Econ One, Research,
Contractor, Legislative Budget and Audit Committee.
PRESENT VIA TELECONFERENCE
Mike Koy, Anchorage; Jerry McCutcheon, Anchorage; Paul
Liard, Alaska Support Alliance, Anchorage; Dave Rees,
Anchorage; Maynard Tapp, Anchorage; Dr. Paul B. Simons,
Anchorage; David Landry, Anchorage; Matt Fagnani, Nenanna
Oil Development, Anchorage; David Gottstein, Backbone Two,
Anchorage; Tadd Owens, RDC, Anchorage; Reed Christensen,
Anchorage; Eric Dompeling, Anchorage; Lynn Johnson, Alaska
Support Alliance, Anchorage; Dave Laymon, Anchorage, Kay
Lahdenpera, Anchorage; Vic Fisher, Anchorage; Ron Doshler,
Anchorage; Mark Hylen, Kakivik Asset Management, Anchorage;
Jim Plaquet, Fairbanks; Mike Walleri, Fairbanks; George
Berry, Fairbanks; William McAmis, Fairbanks; Rhonda Boyles,
Vice Chair, Alaska Republican Party, Fairbanks; Mark Sharp,
Fairbanks; Chris Johansen, Fairbanks; Ron Kovalik,
Fairbanks; Luke Hopkins, Fairbanks Assembly, Fairbanks;
David James, Fairbanks; Derrick Dieringer, Fairbanks;
Lindsey Clark, Kenai; Blake Johnson, Kenai; William
Phillips, Soldotna; Mike Milligan, Kodiak; Jim Sykes,
Palmer; George Trabits, Trabits Group, Wasilla; Donna
Shantz, Regional Citizens Advisory Council, Valdez; Jim
Pfeiffer, Seward; Merrick Pierce, Bright Future for
Fairbanks, Fairbanks; Tom Lakosh, Anchorage; Ed Martin,
Hawaii; Richard Hahn, Soldotna; George Meeker, Homer; Lois
Wier, Wasilla; Bill Warren, Kenai; Timothy Mayberry,
Fairbanks;
SUMMARY
Public Testimony on SB 305
CSSB 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."
CSSB 305 (FIN) am was heard and HELD in Committee
for further consideration.
1:21:41 PM
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."
JUDY BRADY, EXECUTIVE DIRECTOR, ALASKA OIL AND GAS
ASSOCIATION (AOGA), related that AOGA is a non-profit trade
association whose 17 member companies represent the majority
of oil and gas exploration, production, transportation,
refining and marketing activities in Alaska. AOGA has
proposed 6 new technical amendments to CSSB 305 (FIN) am.
She noted that she has provided written testimony (copy on
file.) The purpose of the amendments is to clarify issues
that could become audit matters in the future. She provided
the history of the ELF tax and related disputes. In order
to prevent disputes over the PPT, the amendments are offered
to clarify many issues. She proposed that the earliest
effective date be July 1.
1:26:15 PM
Ms. Brady spoke to the issue of production and the tests
that will be coming up regarding the bill. The first test
will be in the boardrooms of the oil companies and the
second test will be from pension investors coming to Alaska
this summer. She expressed hope that the bill would do what
it is intended to do, raise more money for the state and
provide for new investment.
1:28:01 PM
Representative Stoltze asked about the retroactive provision
in ELF in 1989. He wondered about the outcome of the
litigation. Ms. Brady said she could get that information.
She recalled that in 1989, the ELF was not a hugely
different tax regime from what already existed. The big
issue was that the state was broke because prices had
crashed.
1:29:59 PM
CALEB STEWART, JUNEAU, maintained that the oil in Alaska
belongs to the people. He spoke of the North Slope of
Alaska Facility Sharing Study from 2004. He referred to
page 55, which says that the largest obstacle to successful
negotiations is lack of trust. He asked the members not to
trust the big companies and to protect the citizens'
resources.
1:34:09 PM
MIKE KOY, ANCHORAGE, testified against SB 305. He spoke as
someone who has had experience working for the oil
companies. He listed many reasons why he agrees with the
governor's PPT tax proposal.
1:37:11 PM
JERRY MCCUTCHEON, ANCHORAGE, related that there is no
urgency in passing the gas pipeline contract because it has
no connection to the PPT. He termed the gas contract
meaningless. He said it makes no sense to construct another
gas pipeline from Prudhoe Bay. He suggested that there
would be litigation if PPT passes.
1:39:45 PM
PAUL LIARD, ALASKA SUPPORT ALLIANCE, ANCHORAGE, testified
that higher taxes equals less investment. The tax rate in
SB 305 is too high. He testified against the passage of SB
305 and in favor of the governor's proposed tax rate.
1:42:08 PM
DAVE REES, ANCHORAGE, said he has worked in the oil industry
for the past 30 years. He mentioned that there are numerous
jobs to be filled in the oil industry and a need for
training programs.
MAYNARD TAPP, ANCHORAGE, recommended a production tax of 15
percent to create a healthy investment climate. He spoke
against SB 305.
1:47:46 PM
DR. PAUL B. SIMONS, ANCHORAGE, emphasized that the committee
should not rush into this matter, but do what is right for
Alaska. He said he does not trust the governor. He spoke
about the role of heavy oil in countries around the world.
He suggested ways to use carbon dioxide in heavy oil
recovery. He spoke in favor of 25/20.
1:53:24 PM
DAVID LANDRY, ANCHORAGE, spoke against SB 305 and in favor
of the 25 percent tax rate with the progressivity component.
He agreed with the analysis of Dr. Van Meurs and Mr.
Johnston.
1:55:39 PM
MATT FAGNANI, NENANNA OIL DEVELOPMENT, ANCHORAGE, stated
that the oil tax must pass now. He requested that the focus
should be on increasing production on the North Slope. He
spoke against a high PPT tax and in support of the
governor's tax proposal.
2:00:13 PM
DAVID GOTTSTEIN, BACKBONE TWO, ANCHORAGE, urged the
committee not to pass the oil tax until they have seen the
gas pipeline contract. He spoke against aspects of the
governor's bill. He suggested that stranded gas needs to be
further examined.
2:03:00 PM
TADD OWENS, RDC, ANCHORAGE, spoke against the high tax rate
and progressivity in SB 305. He urged the committee to
create a system that creates increased stability in the
state by passing a lower tax rate.
2:05:18 PM
REED CHRISTENSEN, ANCHORAGE, urged the committee to keep the
oil tax simple. He spoke in favor of the governor's bill
and against a higher PPT.
2:08:47 PM
ERIC DOMPELING, ANCHORAGE, spoke of high gas prices at the
pumps, but maintained that market fluctuations are cyclical.
He suggested that the legislature focus on a fiscal plan and
not on higher oil taxes.
2:12:02 PM
LYNN JOHNSON, ALASKA SUPPORT ALLIANCE, ANCHORAGE, testified
in favor of the governor's original PPT proposal to ensure
that investment continues. He encouraged the members to
think long and hard before making changes to the Governor's
proposal.
2:14:52 PM
DAVE LAYMON, ANCHORAGE, spoke of his experience working for
the oil industry the past 30 years. He expressed concern
that an increase in taxes would reduce Alaska's
competitiveness. He encouraged construction of a gas
pipeline.
2:17:01 PM
KAY LAHDENPERA, ANCHORAGE, spoke in opposition to SB 305.
She emphasized that the profits of Alaskan resources should
benefit all Alaskans. She urged members to not pass PPT
until they see the gas pipeline contracts. She maintained
that it would be against the constitution to bind future
legislatures. She spoke against a net profit tax. She
thought that ELF should be repealed. The tax rate for gas
and oil should be the same. The Department of Revenue
should be given the ability to audit. She encouraged
legislators to listen to consultants and not be rushed. She
did not think that producers would pull out of Alaska.
2:20:51 PM
VIC FISHER, ANCHORAGE, referred to the Governor's statements
that a gas contract would be provided on May 10, 2006. He
felt that it would be unreasonable to expect the legislature
to make a decision before seeing the contract. He observed
that industry is requesting a 30-year certainty for fiscal
stability. He looked to the Legislature to deal fairly with
levels of taxation. He added that adding surplus revenues
into the permanent fund are not wasted.
2:28:05 PM
RON DOSHLER, ANCHORAGE, observed that a gas pipeline is a
huge investment and a huge risk. He asked the Committee to
reconsider the investment aspect of the proposal.
2:30:16 PM
MARK HYLEN, KAKIVIK ASSET MANAGEMENT, ANCHORAGE, noted that
the oil industry benefits Alaska. He expressed concern with
the impact of new taxes. He maintained that PPT is, by
nature, a progressive tax. He preferred to focus on a state
fiscal plan.
2:34:51 PM
JIM PLAQUET, FAIRBANKS, speaking as a member of the oil
industry, related the ways that the industry has been
beneficial to his area. He testified in favor of the
governor's bill.
2:37:31 PM
MIKE WALLERI, FAIRBANKS, spoke in opposition to the
governor's proposal. He suggested waiting to see the gas
contract before the oil tax is completed. He suggested
slowing down the process. He said Alaska should be looking
at tax rates from a competitive viewpoint. He suggested
tying tax credits with investment and employment.
2:39:52 PM
GEORGE BERRY, FAIRBANKS, suggested that the tax rate should
be high and comparable to world market prices. He suggested
sticking with the 25 percent tax rate. He opined that the
oil tax issue is the most important decision of our age.
2:43:46 PM
WILLIAM MCAMIS, FAIRBANKS, emphasized that oil is a non-
renewable resource. He suggested taking time on the bill
and to not lock the tax bill in for 30 years.
2:47:11 PM
RHONDA BOYLES, VICE CHAIR, ALASKA REPUBLICAN PARTY,
FAIRBANKS, spoke in favor of the governor's bill. She
mentioned a resolution sent by the Fairbanks Chamber of
Commerce (copy on file.)
2:49:41 PM
MARK SHARP, FAIRBANKS, thanked the committee for their
questions to the oil companies. He noted that the
constitution has charged the legislature with managing the
state's resources. He spoke in agreement with Mr. Johnston
and Senator Therriault's testimony. He spoke against
resource giveaways.
2:54:12 PM
CHRIS JOHANSEN, FAIRBANKS, testified as a member of the oil
industry. He spoke in support of a 20 percent tax rate and
against progressivity. He disagreed with a retroactive
effective date.
2:56:24 PM
RON KOVALIK, FAIRBANKS, agreed with Vic Fisher's comment.
He urged the legislature not to rush into this tax. He
testified against the oil industry. He urged the committee
to get the best price for the commodity of oil. He opined
it is not a tax issue.
3:01:09 PM
LUKE HOPKINS, FAIRBANKS ASSEMBLY, FAIRBANKS, spoke against
SB 305. He urged the committee to get more information. He
urged the committed to obtain figures by the Department of
Revenue, which were used when making the tax models.
3:03:59 PM
DAVID JAMES, FAIRBANKS, said he understands the oil
companies' perspective. He maintained that the state owns
the crude oil. He asked the legislature to negotiate in the
state's best interest. He spoke against the Senate version
of the oil tax and in favor of the 25 percent tax.
3:07:00 PM
DERRICK DIERINGER, FAIRBANKS, spoke of his family's history
with oil companies. He suggested getting a fair share of
revenue from the oil and gas industry. The most important
issue is to get a gas line contract. He spoke as a future
Alaskan voter.
3:10:05 PM
LINDSEY CLARK, KENAI, spoke as a person who has worked for
the oil industry for 31 years. He stated support for a fair
and balanced PPT as depicted in the governor's bill. He
urged special consideration for Cook Inlet.
3:11:50 PM
BLAKE JOHNSON, KENAI, urged caution when dealing with oil
companies. He suggested that the oil companies are not good
neighbors. He spoke in favor of the 25/20 proposal.
WILLIAM PHILLIPS, SOLDOTNA, said he has sympathy for the
non-profits that have to deal with oil companies. He
suggested that the oil companies testify under oath.
3:17:30 PM
MIKE MILLIGAN, KODIAK, spoke about concern for local
taxpayers. He spoke highly of ARCO, when they were in
Alaska. He referred to the Constitution's charge to manage
resources. He suggested bringing in medium-sized oil
companies. He wondered where big oil will go if they leave.
3:20:51 PM
JIM SYKES, PALMER, agreed with Mr. Johansen's comments. He
urged the committee to take their time with this issue. He
suggested exploring other ideas such as royalties. He urged
the state to get its fair share. He disagreed with the idea
that lower taxes means more investment. He suggested
amending SB 305 to 30 percent tax and changing incentives.
3:27:30 PM
GEORGE TRABITS, TRABITS GROUP, WASILLA, said his business is
directly dependent on the oil and gas industry. He
testified against SB 305 because increased taxes will make
development less desirable and hurt small businesses.
3:29:18 PM
DONNA SHANTZ, REGIONAL CITIZENS ADVISORY COUNCIL, VALDEZ,
said she represents those affected by the oil spill. She
stated that her interest is in preventing oil spills. She
stated that RCAC supports SB 305 with respect to Sections 27
and 29 regarding the surcharge to fund spill preventions
using the 470 Fund. She urged the committee to continue the
funding of the 470 Fund.
3:31:15 PM
JIM PFEIFFER, SEWARD, spoke of his career in the oil
industry. He said he is concerned about the current
proposed tax structure. He spoke in favor of the governor's
original proposal.
3:33:21 PM
MERRICK PIERCE, BRIGHT FUTURE FOR FAIRBANKS, FAIRBANKS,
spoke against the governor's bill. He spoke of many
concerns with the original PPT. He concurred with the
testimony of Daniel Johnston. He urged the committee to
include strong progressivity in the bill.
3:39:09 PM
TOM LAKOSH, ANCHORAGE, concurred with many of the previous
testifiers. He compared oil in the ground to the permanent
fund. He maintained that progressivity is a necessary part
of the legislation.
3:43:10 PM
ED MARTIN, HAWAII, suggested that Alaska turn from taxing to
sharing profits with oil producers. He encouraged members
to table the current legislation. He stressed that the
Permanent Fund was not borne in one session of the
legislature.
3:48:41 PM
RICHARD HAHN, SOLDOTNA, stressed that it is impossible to
figure the net affect to Alaska from the legislation. He
maintained that there is no risk of taxing the oil companies
out of business. He spoke strongly against the 30-year
provision in the bill. He urged the legislature not to act
until they have seen the gas pipeline contract. He warned
against the oil companies' acceptance of the governor's PPT
tax amount.
3:52:49 PM
GEORGE MEEKER, HOMER, thought that the state should adjust
the income on oil actually produced at the wellhead, on the
gross income, not the net. There should be no connection
between the gas pipeline and the Alaska taxing process. He
added that if the pipeline is to be profitable, it will be
built. The Legislature cannot make an intelligent decision
without the information from the Governor. He urged that
Exxon first pay their part of the oil settlement.
3:55:31 PM
LOIS WIER, WASILLA, echoed previous comments. She stressed
that the legislators have the right to make the final
decision. The oil companies should not get their way. They
will not leave Alaska. She added that 30 years would be too
long for a contract. Net profit is something that can be
manipulated.
3:59:00 PM
BILL WARREN, KENAI, said he appreciated the previous
testimony. He urged that the gas contract be considered
before PPT. He opposed running the natural gas line to
Canada. He stressed that Alaskan needs should be considered
and should be competitive with worldwide prices. In the
world, oil and gas resources are "gold" and "we can't lose
unless we give it away".
4:02:06 PM
TIMOTHY MAYBERRY, FAIRBANKS, commented that the recent
commercials by the oil companies imply that Alaskans are
ignorant. He noted that resources should not be taken away
from Alaskans. He commented that investment should be
encouraged, however, not given away. It is time for
Alaskans to benefit from the proposals. He did not support
comments made by Governor Murkowski.
4:04:45 PM
WAYNE STEVENS, PRESIDENT, ALASKA STATE CHAMBER OF COMMERCE,
JUNEAU, stated support for a change from ELF to PPT, with
tax incentives and reinvestment at level which best
maximizes investment by the oil and gas industry. Through
the PPT legislation, the Legislature has the opportunity to
help define the pace of North Slope oil production. If the
Legislature chooses a tax rate higher than that proposed by
the Governor, the State Chamber has serious concerns about
impacts on exploration and investment. He thought there
could be long-term damage for the citizens of Alaska with
higher taxes. He also supported a long-term fiscal plan
that would make Alaska a more stable economy attractive to
private sector investment.
4:07:03 PM
DIXIE HOOD, JUNEAU, spoke in support of a comprehensive
fiscal policy. She urged that the Legislature act in the
public's interest. She objected to the Administration's,m./
withholding contract information from citizens and the
legislature. She disagreed with the proposal to change from
taxing production to taxing net profit. Corporate
accountants are too likely to "cook the books". Providing
incentives is not appropriate. International demand is
increasing at a significant rate and profits are reaching
all-time highs. Oil consultants have ridiculed the choices
of the legislature. She urged that the Legislature act on
behalf of Alaska and its citizens.
4:10:03 PM
SEAN PURVIS, JUNEAU, urged the Legislature to set aside
partisan politics and make considerations that protect the
Alaska Constitution.
Representative Chenault closed the public testimony.
RECESSED: 4:27:53 PM.
RECONVENED: 4:29:06 PM
MEMBERS ABSENT
Representative Jim Holm
Representative Richard Foster
Representative Bruce Weyhrauch
Co-Chair Chenault asked for clarification from Dr. Finizza,
of the various tax rates on gas production under different
tax systems. He noted concern on the 1/3 gas revenue
reduction scenario.
DR. TONY FINIZZA, SPECIAL CONSULTANT, ECON ONE, RESEARCH,
CONTRACTOR, LEGISLATIVE BUDGET AND AUDIT COMMITTEE,
discussed the risk of the credit rate in terms of the view
of the future. He said that oil companies are using a
distribution of prices when planning, which has a central
value around $40 WTI, plus or minus $15, to get to the P 20
and P 80. That is consistent with Dr. Van Meurs' data. He
pointed out that there is no one view of the future. He
said, "You really have to think of these things in terms of
distribution." He speculated that it could amount to $25 or
$50. Also, the central tendency might be closer to $40.
Dr. Finizza discussed his analysis of three types of fields
using a distribution of prices, which estimates the
probability of a negative tax position. The first field was
for new exploration. It is likely that small field would be
found, given the fact that ANWR is not open and that the
distribution of fields in the Central North Slope and NPRA
are likely to be smaller fields. He said there could be a
non-economic development and the possibility of a negative
credit in new exploration. He estimated that probability at
35 percent at the 20 percent credit, with a 25 percent
credit that probability might go up 5 percent. He opined
that moving to a 25 percent credit doesn't do that much more
damage, given the already high-risk situation.
4:35:26 PM
Dr. Finizza looked at a satellite field under this future
price distribution. The chance of the state having a
negative tax position is 25 percent at a 20/20 rate. He
also applied that same data to a legacy field wedge and
found only a 5 or 6 percent chance of a negative tax. He
stated that there is a huge risk already at 20 percent
credit and going to 25 percent would boost the risk only a
little bit.
4:37:12 PM
Dr. Finizza related that there is a natural protection at
low prices, because there would be little exploration. The
advantage of the credit system is when exploration takes
place at $40 and then the price of oil drops to $20. He
maintained that 25 percent does no more damage than 20
percent.
Dr. Finizza addressed the progressivity feature. He
emphasized that it is important to strike a balance between
the upside and the downside. He suggested $50, which is
above the central tendency. He voiced a concern that the
progressivity rate is in nominal dollars and could harm
producers when costs rise. He suggested various thresholds,
especially one that is sensitive to changes in costs. He
opined that SB 305 should have a cap on progressivity.
4:41:36 PM
Dr. Finizza thought that a 25 percent tax rate was
appropriate. He noted that investment should rise when
prices rise, which should produce more investment. He
predicted that there would be more investment under PPT at
today's prices.
Dr. Finizza referred to legacy fields and the decline rate.
He maintained that PPT helps lower the effective severance
tax rate by 3 to 4 percent at $40.
4:46:02 PM
Representative Kerttula asked how high the tax risk is at 20
percent. Dr. Finizza replied that a satellite field would
have a 25 percent chance of losing money, but the large
legacy fields would have a much lower rate of 3 to 4
percent. The higher the credit, the more likely chance of a
negative tax. He restated his position that the risk is
already high at 20 percent, so 25 percent is not that much
greater.
Representative Kelly concluded that Dr. Finizza is less
concerned than the governor or Dr. Van Meurs about the level
of credit going from 20 to 25 percent. Dr. Finizza
rephrased Representative Kelly's question to ask if there is
risk to investors that would prevent investing in Alaska.
Dr. Finizza thought it was not necessary to have a safety
net.
Representative Kelly summarized that Dr. Finizza would not
favor the safety net even though there is a 35 percent
chance of high risk. He asked why the tradeoff is needed if
there is a safety net. Dr. Finizza responded that the sweet
spot in the price curve is between $25 and $50 - where the
world will be in the future. The PPT credit and tax system
will give protection on the low end and will still be ahead
on the upside. He predicted it would bring in more
exploration.
4:53:21 PM
Representative Kelly wondered where the floor should be.
Dr. Finizza replied, "When there is a 10 percent chance."
He added that he needed more time to think about it.
Representative Kelly asked about a floor for the tax when it
is approaching zero. Dr. Finizza replied that the 35
percent possibility is for new field exploration. If it is
not for the legacy fields, it would work. For legacy fields
the risk is only 3-4 percent. If a floor for exploration is
designed, tradeoff is loss of exploration. Representative
Kelly noted that he is trying to write a tax for everyone.
He requested more information.
Co-Chair Meyer commented that if oil gets down to $20,
Alaska is in big trouble. The Committee needs to keep in
mind that the government take consists of royalty, property
taxes, and corporate taxes.
4:57:57 PM
Dr. Finizza spoke to concerns about the effective tax on gas
under various systems.
Co-Chair Chenault referred to the three charts that deal
with "Illustration of Potential Effective Tax Rate on Gas
Production Under Different Tax Systems (copy on file.) The
current Senate Finance CS before the Committee contains
25/20 with gas revenue reduction to 1/3 of actual value.
Dr. Finizza addressed the issues on the graph that deals
with Senate Finance 22.5/25 Alt: With Gas Revenue Reduction
to 1/3 of Actual Value. He related that the graph shows the
downstream value of gas at $4, $6, and $8 ($MCF). Cost to
the downstream market, the wellhead value, and the taxable
wellhead value under the 1/3 scenario in Prudhoe Bay is
shown. The final column depicts the total tax under the
three tax systems after analyzing production costs, net
"profit" per taxable MCF, taxable value, and PPT Tax. He
discussed what happens when this analysis is applied to
Point Thompson and a new field. He related what would
happen under the current ELF.
5:03:58 PM
Co-Chair Chenault noted that some of the Committee's
concerns were about the actual percentages of wellhead value
at Prudhoe Bay, Point Thompson, and in new fields. The
chart depicts that there are no costs associated with OPEX
or CAPEX in Prudhoe Bay.
Dr. Finizza agreed that there would be costs associated with
that in the future. He spoke to how capital allocation
would affect Point Thompson. The capital should be
allocated in proportion to the gas.
Representative Kelly said the numbers under the 1/3 scenario
don't seem to work. Dr. Finizza said at first he thought it
was a mistake because it makes Prudhoe and ELF numbers look
the same.
5:07:42 PM
Representative Kelly thought there was an attempt to figure
whether costs were ascribed to oil or to gas. He termed it
a policy call. Dr. Finizza agreed, depending on what is
trying to be accomplished. For Point Thompson all the
capital should go to gas because oil is a by-product.
Representative Kelly said it is a problem.
Dr. Finizza agreed that more time should be taken.
Representative Kerttula echoed Representative Kelly's
concern. Dr. Finizza could not offer a number, but said 1/3
won't work.
5:10:58 PM
Representative Kerttula said the legislature was told the
effort was to help the small companies. She questioned
whether oil and gas should be treated separately.
Representative Kelly gave an example of a larger-than-
expected field discovery. He opined that the state still
has drilling potential and should group this together to
accommodate that. He suggested pursuing it further.
Dr. Finizza agreed to do more research on the topic.
Co-Chair Chenault wondered if the scenario was thrown in by
mistake.
Representative Kelly asked about the safety net and the oil
price protection point. He suggested trying to protect
Alaska at the lower price of the commodity.
Representative Kerttula asked Dr.Finizza to show the results
in dollars for the different scenarios of likely prices and
likely volumes. Dr. Finizza said he was trying not to bring
gas into the PPT scenarios. He suggested "a rule of thumb".
He suggested oil price scenarios using a ratio of market
value gas to oil, an 8 to 1 ratio, at $30, $40, and $50.
Representative Kerttula said that is what she is looking
for. Representative Kerttula also asked for volume
information.
CSSB 305 (FIN) am was heard and HELD in Committee for
further consideration.
ADJOURNMENT
The meeting was adjourned at 5:21 PM.
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