Legislature(2005 - 2006)HOUSE FINANCE 519
07/25/2006 10:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
July 25, 2006
10:17 a.m.
CALL TO ORDER
Co-Chair Chenault called the House Finance Committee meeting
to order at 10:17:10 AM.
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
Dr. Pedro Van Meurs, Consultant, Office of the Governor;
Robynn Wilson, Director, Division of Tax, Department of
Revenue; Roger Marks, Petroleum Economist, Economic Research
Section, Tax Division, Department of Revenue; Ken Griffin,
Deputy Commissioner, Department of Revenue; William Corbus,
Commissioner, Department of Revenue; Representative Les
Gara; Representative Ethan Berkowitz; Representative Ralph
Samuels; Representative Kurt Olsen; Representative Jay
Ramras; Representative Paul Seaton; Representative Berta
Gardner; Senator Charlie Huggins
PRESENT VIA TELECONFERENCE
Roger Marks, Petroleum Economist, Economic Research Section,
Tax Division, Department of Revenue; Robert Mintz, Assistant
Attorney General, Department of Law
SUMMARY
Oil and Gas Production Tax: Gross vs. Net
10:17:32 AM
Co-Chair Chenault introduced the presenters on the topic of
net versus gross regarding the oil and gas production tax.
He noted that Mr. Larry Carr was invited to speak before the
committee, but declined.
Co-Chair Chenault turned the gavel over to Representative
Stoltze.
Co-Chair Chenault brought up a point of personal privilege.
He referred to an editorial in the Juneau Empire by former
member of the House, Mayor Jim Wittaker, of Fairbanks,
regarding legislative conflict of interest. Co-Chair
Chenault stated that his integrity, along with Co-Chair
Meyer's and Representative Hawker's, has been impugned. He
noted that they all had declared a conflict of interest at
the beginning of the committee process, which is not
required by Mason's Manual. He emphasized that it is his
job to represent his district and therefore he is obligated
to vote on gas and oil bills. He took issue with the
article and maintained that the committee is within legal
and moral rights when acting on oil and gas legislation. He
stated that the article is a personal attack.
10:22:59 AM
Co-Chair Meyer agreed with Co-Chair Chenault's comments
regarding the newspaper article. He recalled that a legal
opinion was requested on the issue of declaring a conflict
of interest. The conclusion was that at the committee level
declaring a conflict of interest is not required. He
maintained that the House Finance Committee has gone the
extra mile, declared conflicts, and kept open meetings.
10:26:28 AM
Representative Hawker requested an opportunity for a point
of personal privilege. He concurred with Co-Chair Meyer and
Co-Chair Chenault's comments. He expressed disappointment
and sadness over Mayor Whitaker's comments. He dispelled
allegations from the article and clarified that his
association with Arctic Slope Regional Corporation was
severed ten years ago. He termed the allegations in the
article "factual inaccuracies". He requested that committee
members disassociate themselves from the impugning of the
character of the co-chairs and himself.
10:28:38 AM
Representative Holm reported that he found the mayor's
comments inappropriate. He opined that all members have a
history of involvement in businesses and industry in Alaska.
He said that Mason's Rules allows for disclosures of areas
of expertise, which all members have. He disassociated
himself from Mayor Whittaker's comments.
10:30:52 AM
Representative Kelly commented that conflict of interest
rules in government are different from those in the private
sector. In the legislature, conflicts are first declared
with Alaska Public Offices Commission (APOC) and then on the
floor of the House. There was a requirement for the three
legislators who declared conflicts of interests to
participate in voting. He concluded that there is a
difference between private and legislative models.
10:34:32 AM
At-ease.
10:34:49 AM
Representative Weyhrauch added that legislators'
affiliations are reported by the legislative ethics
committee through APOC and are part of a public record, and
declarations of conflicts of interest are not necessary.
Representative Joule reported that he represents three
regional corporations with interest in the oil business and
owns stock in them. He said the small population of Alaska
is conducive to many possible conflicts of interest.
10:37:03 AM
ROBYNN WILSON, DIRECTOR, DIVISION OF TAX, DEPARTMENT OF
REVENUE, defined net and gross, two aspects of heavy oil
exploration economics. She compared gross and net tax to
building and selling a house. Gross tax is a percentage of
how much the house sold for. She defined tax on net as
building expenses subtracted from the gross. Indirect costs
are not allowed, whereas direct costs are. She gave
examples of indirect and direct costs related to the oil
industry. Tax on net and gross are useful shorthands to
talk about the PPT system. ELF or the Economic Limit Factor
is commonly referred to as a tax on gross, which is not
completely true. The PPT bill is often referred to as a tax
on net, which is not completely accurate. She emphasized
the need to be more specific about allowable expenditures.
10:42:36 AM
Ms. Wilson related that there are two variables under ELF to
account for. The first consideration is how much the oil is
worth, which is measured when it is sold at market generally
on the West Coast. To determine wellhead value, shipping
costs to market have to be considered. The ELF is a tax on
the value at the wellhead, but also somewhat of a net tax
because transportation costs have been backed out.
The second consideration is the Economic Limit Factor, which
is applied to the tax rate and was designed as a proxy for
the cost of getting the oil out of the ground. She noted
that producers could petition the Department of Revenue to
use something other than ELF if it was shown that their
actual costs were materially different from the proxy. It
is called a tax on gross because there's no specific
deduction for the cost to get the oil out of the ground or
to separate the oil from the water or sediment. The PPT, on
the other hand, is a tax on net, which uses the actual cost
of getting the oil out of the ground. PPT is important
because there has been inadequate investment on the slope.
PPT focuses on encouraging investment by recognizing costs
and capital credits. It is particularly important with
respect to heavy oil costs.
10:45:46 AM
Ms. Wilson reported that the main concern she has heard
regarding PPT is that the oil companies may manipulate costs
associated with the tax. She referred to auditing
procedures already in place for transportation costs, which
total over $1 billion. There is general agreement that
capital credits are a good stimulus for investment. Capital
investments are as easy to audit as transportation costs.
10:47:17 AM
Ms. Wilson referred to a handout entitled "Sale at Market"
(copy on file.) She drew attention to slide 1, which
demonstrates the proportion of cost versus the tax base. It
shows the gross market value of oil in 2005 at $43 per
barrel, $14.5 billion of North Slope oil for 334 million
barrels. It also shows $300 million of Cook Inlet oil, $40
million of North Slope gas, and $700 million of Cook Inlet
gas.
Slide 2, gross value at point of production, depicts the
same calculations with transportation costs of $1.7 billion
subtracted. These are costs that are already audited.
Slide 3, net value or production tax value, shows $1.1
billion as operating costs, $1.7 as capital costs, and $1.7
for transportation to market. The capital costs involve
auditing. The operating costs would be the distinguishing
factor between the tax on gross and the tax on net and would
not be audited under a gross tax, but would under a net tax.
Slide 4, net value or production tax value, is based on a
previous version of the PPT with a 22.5 percent tax. Even
if the operating costs were 50 percent wrong, they would not
have a large effect on the tax base.
Slide 5, the tax before credits, shows $2.4 billion, and
Slide 6, the tax after credits, shows $1.7 billion. Ms.
Wilson noted that this is based on an old credit rate, and
at 20 percent it would be smaller. This version had a TIE
or transitional investment credit of 1.7 and is a small
slice of the tax. It is based on a barrel equivalent
credit. She noted the proportional slice being taken away.
10:53:29 AM
Slide 7, tax after credits, shows a tax of $1.7 billion
based on oil of $43 per barrel, which is a very conservative
view. Tax under the status quo would be less than $.9
billion.
Ms. Wilson concluded that fewer costs would be deducted
under a gross tax, but more investment would be encouraged
under a net tax.
10:54:55 AM
Co-Chair Chenault recognized Representatives Seaton, Ramras,
Berkowitz, Coghill, and Olson, and Senator Huggins. He
agreed to take questions from members outside of the
committee.
REPRESENTATIVE ETHAN BERKOWITZ asked if the burden of proof
for showing capital credits would lie with the state or with
the oil company. Ms. Wilson replied that it would rest with
the company claiming the credits. Representative Berkowitz
asked who would bear the costs. Ms. Wilson replied that the
taxpayers would have the burden of proof.
10:57:33 AM
Representative Kerttula thought that the state would be
responsible for accepting the information. In some
instances the information is supplied and is not much of a
burden to the company. Ms. Wilson asked if Representative
Kerttula was talking about the contract. Representative
Kerttula offered to find the section which supported her
idea.
Representative Kerttula noted that information applied to
the "operator situation". Ms. Wilson suggested it pertained
to the reliance on the operator's records but that there
still is a burden of proof requirement. Representative
Kerttula said there was not much of a burden of proof
because there is no way to audit internal operations.
"Burden of proof" is not meaningful in that circumstance.
Ms. Wilson offered to return to the subject later.
11:00:13 AM
Representative Kelly asked when something is challenged, if
the payment is continued during the challenge. Ms. Wilson
said it could work either way. Disallowance of the cost
could be assumed by the state. There is no requirement to
"pay to play", however, interest would accrue.
11:01:57 AM
ROGER MARKS, PETROLEUM ECONOMIST, ECONOMIC RESEARCH SECTION,
TAX DIVISION, DEPARTMENT OF REVENUE, discussed two aspects
of gross vs. net as they apply to heavy oil and to
exploration economics. He related that there are currently
net profit share leases on the North Slope, of which
upstream costs are audited without any problem. He referred
to when separate accounting was enforced effectively between
1978 and 1981. He maintained that auditing litigation
issues in the early 80's were philosophical issues.
11:04:05 AM
Mr. Marks referred to a handout entitled "Gross vs. Net: Two
Aspects: (copy on file.) He discussed the difficulties with
heavy oil and explained why it is more expensive to produce.
He compared light oil to heavy oil on page 2. He related
that when West Coast ANS price is $40, the net value is
$15.63 for heavy oil versus $23.13 for light oil due to
higher upstream costs being twice as high.
Mr. Marks figured that a rate of 15 percent on gross would
be 33.6 percent tax, as percent of net for heavy oil, and
22.7 percent for light oil. Under this type of system,
heavy oil, which is the most expensive to produce, is taxed
at a much higher rate. He maintained that the provisions
under such a tax structure would be impossible to
administer. Heavy oil units are produced out of a common
production facility and it is impossible to determine how
much heavy oil comes out of the spectrum of gravities. He
compared Kaparuk and Tarn fields and the difficulty of
determining how much heavy oil comes out of each one.
11:09:35 AM
Mr. Marks discussed, on page 3, the issue of exploration
economics in terms of gross versus net. He spoke of the
cost of exploration and the percentage of success. If the
state can reduce or share exploration costs, then there
would be more likelihood for drilling. He focused on the
hypothetical situation on page 3. The field target size or
number of barrels is 40 million with a net price of $10.
The total value would be $400 million with a discount factor
of 0.4. The net present value would be $160 million. With
a probability of finding oil at 15 percent, the expected
value is $24 million.
Under the status quo, the expected value is $24 million, the
exploration cost is $20 million, and the full cycle expected
value is $4 million. If the state is sharing the costs
under a net tax, it would be less expensive to drill and the
full cycle expected value would be $12 million due to the
credits and deductions. The net tax could be key in
encouraging new exploration of oil.
11:15:13 AM
Representative Kerttula said she has heard that the net
profit tax has been more difficult to administer and
monitor. Mr. Marks countered that he has heard the
opposite. He suggested asking for DNR's opinion.
11:16:38 AM
REPRESENTATIVE LES GARA noted that Mr. Marks is comparing
incentives under a gross tax to a gross tax that has no
incentive provisions. He wondered how incentives would look
under a gross tax with incentive provisions such as a credit
mechanism. He commented that companies on the North Slope
spend about $1 billion a year on investments no matter what
the price of oil. He inquired about adding a credit
mechanism for money that was intended to be spent anyway.
He called that a flaw of PPT.
11:18:05 AM
Mr. Marks replied if a credit is issued based on a company's
spending, the spending would have to be audited and there
are concerns about auditing. Referring to the first
question, Mr. Marks responded that in the past few years
there have been high prices and low taxes with no increase
in investment. He maintained that taxes could be reduced by
investing under a net system.
Representative Gara repeated that the net cash flow
increased, but investment did not. He asked why Mr. Marks
believes that a 40 percent tax credit/deduction is going to
change that behavior. He questioned whether that was a
subsidy for money already planned for investment.
Mr. Marks said if taxes can be reduced by investing, it
stands to reason that a company will invest. He maintained
that during exploration, 85 percent of the time there will
be no oil to sell regardless of the price. A tax on net
would be higher than one on gross.
11:20:51 AM
Representative Berkowitz mentioned the 85 percent failure
rate with long-term oil price at $30 and at $70. He opined
that the higher price would influence investment decisions
regardless of the failure rate. Mr. Marks observed that it
gets watered down by the probability of failure.
Representative Berkowitz summarized that there is less
adversity to risk at higher oil prices and Mr. Marks agreed.
Co-Chair Meyer asked if it is more likely that exploration
would take place in larger fields at higher oil prices. Mr.
Marks thought it would be true much of the time, but it
depends on the numbers.
Co-Chair Meyer asked how price affects going after high risk
fields. Mr. Marks said at higher prices fields are more
attractive to drill. He added that a mechanism designed
under a gross tax where oil less than one gravity gets one
treatment, and oil greater than another gravity gets another
treatment, would be impossible to administer. Exploration
incentive programs are in place now, but have some problems
and will expire in 2007. Currently, anything less than 3
miles from a current down hole does not qualify for an
exploration incentive credit (EIC). Oil between 3-25 miles
from a down hole target only gets a 20 percent credit. Not
all exploration costs are covered in the current EIC's.
11:25:54 AM
Representative Holm asked about the effects on investment in
Alaska by the international market place as the price of oil
goes up. Mr. Marks replied that Alaska is not a good place
to do business when prices are low. Exploration, from an
international perspective, depends on geology. There are
many places where exploration costs cannot be deducted,
which is a disadvantage to Alaska.
Representative Berkowitz spoke to competitive advantages in
Alaska in certain cases. Mr. Marks agreed. Representative
Berkowitz thought that 90 percent of world's oil is under
direct control by a country.
11:29:11 AM
DR. PEDRO VAN MEURS, CONSULTANT, OFFICE OF THE GOVERNOR,
responded that the majority of oil produced in the world is
under the control of state companies. A very small number
are under the control of private companies.
Co-Chair Meyer thought that oil companies would weigh the
risks versus the benefits.
ROBERT MINTZ, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW,
offered to address burden of proof.
11:33:06 AM
Dr. Van Meurs provided committee members with a handout
entitled "Gross vs. Net Production Tax" (Copy on File). He
noted differences between HB 3004 and his 2001 proposal.
Dr. Van Meurs continued to explain page 3 of his handout
concerning the modifications of the ELF production tax:
stronger tax rates for small fields with low productivity, a
strongly price sensitive tax, provisions for heavy oil
incentives, and tax credits to encourage investment.
Dr. Van Meurs addressed, on page 4, the structure which
would gain maximum affect for the state. He emphasized that
structure and revenue are two entirely different concepts.
11:38:54 AM
Dr. Van Meurs spoke to three fiscal options on page 5: a
structure based on tax credits on statewide net revenues,
one based on gross revenues per field, or a structure based
on no or minor tax credits on gross revenues per field.
Page 6 depicts three fiscal options which result in
identical production tax revenues to the state in order to
evaluate the structures.
11:40:57 AM
Dr. Van Meurs highlighted the calibration of the 50MM-Low
high cost on page 7.
Dr. Van Meurs explained the 150MM-Low high cost option on
page 8.
Dr. Van Meurs explained the PPT variations on page 9. He
described his original PVM 2001 variations on page 10.
Dr. Van Meurs highlighted the variations of HB 3004 on page
11.
11:45:01 AM
Representative Gara commented on the discussion. He asked
about a "time-crunch" and the need to match revenue
projections. He asked if a gross bill that raised the same
amount of revenue would work. Dr. Van Meurs replied that it
would be difficult, but it can be done. HB 3003 and HB 3004
present a field by field concept. In order to arrive at the
same revenue amount, all fields would need to be matched.
PPT is an Alaska-wide concept. He thought it could be
reasonably close.
11:46:43 AM
Dr. Van Meurs explained the impact on investors for 50 MM
Low, on page 12. The PPT and PVM variations provide for a
much higher rate of return than HB 3004 because of the tax
credits. The same is true for 150 MM Low, as depicted on
page 13.
Dr. Van Meurs emphasized that tax credits and deductions
have a very large impact on exploration economics, as shown
on pages 14 and 15: EMV10 (10% Expected Monetary Value) 50
MM Low and EMV10 150 MM Low. The PPT and PVM variations
provide for a nearly identical EMV10 and HB 3004 variation
results in a much lower EMV10 for both structures.
Representative Berkowitz clarified that tax relief was
available in HB 3004.
11:50:20 AM
Dr. Van Meurs related that HB 3004 is less attractive
because if investors invest $1 million, it counts as $1
million because there are no tax deductions. Under PPT and
PMV 2001, $1 million counts as $600,000 because of credits.
Dr. Van Meurs pointed out that the government ends up with
the same revenues under all three variations, because under
PPT and PVM 2001 it compensates the PPT tax savings with a
higher tax later on. This means the structure of these two
variations is more back end loaded. Under PPT and PVM the
government first levies a higher tax and then permits
reductions in order to end up with the same revenues as
under HB 3004.
11:55:01 AM
Dr. Van Meurs commented on the fiscal structure from an
international perspective. Many governments have discovered
that the best way to encourage investment is to ensure that
the net investments are low. Providing tax deductions and
tax credits is the best way to encourage re-investment.
11:57:28 AM
Representative Gara commented that the comparison was as if
there were no tax credits in HB 3004. He requested
assistance to increase the tax rate in HB 3004 and offset it
with tax credits to raise the same amount of revenue as
proposed. Dr. Van Meurs responded that it only related to
capital investments. He suggested including 40% tax credits
across the board would be similar to the governor's
legislation. That would be the same capital investment. He
reiterated the need for a 40% credit for all capital
investments.
11:59:51 AM
Representative Gara pointed out that gross tax
recommendations have been provided to prior and current
administrations. Dr. Van Meurs stated that he had proposed
recommendations to both Governor Knowles and Governor
Murkowski. Governor Murkowski was willing to tackle the
production tax concept. Consequently, in 2003 it was
updated. Dr. Van Meurs opined that the PPT idea is better.
Dr. Van Meurs provided some history as to why PPT was
recommended by the governor.
12:02:49 PM
Dr. Van Meurs pointed out, on page 22, disadvantages of a
production tax based on gross with tax credits: a short
shelf life, the need to define "field", and heavy oil
provisions - the most serious.
Dr. Van Meurs detailed the problems with the shelf life, on
page 23. Alaska already has a fiscal system that is based
on gross: the royalty, which provides about half of the
state's oil and gas income. To design a tax also largely
based on gross, in addition to the royalty, is difficult
economically.
12:05:42 PM
Representative Berkowitz asked why modifications to the
royalty component had not been included when designing the
new tax structure. Dr. Van Meurs replied that the current
PPT deducts the royalty. Many other countries do not have a
royalty. The concern of deducting the gross for royalty, if
the costs are high, is that the field becomes uneconomic,
and if the costs are low, too much money is left on the
table.
Representative Berkowitz inquired about the necessity of
distinguishing between small and large fields. Dr. Van
Meurs agreed that the distinction is necessary; however, the
matter is how profitable the field is. It is difficult to
determine a formula that adds gross to gross. Most formulas
have a shelf life for only 10-12 years.
12:10:22 PM
Dr. Van Meurs continued to address the problems of a short
shelf life. Economic and technical conditions change
rapidly and the economic basis for the formula becomes
outdated, which creates losses over time.
Dr. Van Meurs addressed the difficulties of field
definition, as depicted on page 26. He discussed the now
mature North Slope and development opportunities that no
longer qualify as a field.
12:14:32 PM
Dr. Van Meurs discussed problems regarding heavy oil and the
need for special provisions, on pages 27 and 28. He termed
heavy oil the most serious problem with a tax on gross. Not
enough is known about heavy oil to design a reliable scale
for a tax on gross. Dr. Van Meurs maintained that the
future of Alaska is linked to the international oil industry
spending billions of dollars to improve technology so that
heavy oil becomes cheap oil.
12:18:24 PM
Co-Chair Meyer discussed heavy oil, which currently exists
in Alaska. He asked if Alberta has heavy oil. Dr. Van
Meurs explained the background of heavy oil. In some places
in the world, such as Venezuela, there is only heavy oil.
The problem in the Arctic is that there is every kind of
oil, which makes it difficult to define a formula. The
spectrum in the North Slope is too wide and intermingled.
Alberta is different. They have oil sands with heavy oil in
the rock that does not float. It is mined or heat injected.
Alberta is in the same situation as Alaska today. They base
their share on net in order to determine a fair share.
12:23:14 PM
Dr. Van Meurs summarized that he recommended PPT over a
gross tax system because of the difficulties of defining a
field, with heavy oil, and with a short shelf life. A
system based on net revenues, such as PPT is easier to
administer and is more durable.
Co-Chair Meyer asked if a comparable Arctic region would be
Alberta. Dr. Van Meurs said no, but the heavy oil problem
is the same. Co-Chair Meyer asked if there were a
comparable Arctic region. Dr. Van Meurs replied that there
is nothing north of Norway that is the same as in Alaska.
12:25:41 PM
Representative Gara commented on ways to solve these
concerns. He separated the problem into two parts: fields
that are currently being under taxed and new, expensive
production that lacks a system to prompt development. There
is also a concern about heavy oil. He suggested a gross
production tax on the existing fields and to provide the
Department of Revenue the discretion to adjust the tax rates
for future fields and heavy oil - a tiered system.
Dr. Van Meurs responded that there are a number of nations
in the world that address it in that manner. He agreed that
the "bleeding" must be stopped. To do that, the state
should use the PPT concept on existing fields. They would
automatically pay a high amount of profit and yield a large
share. PPT should be also used on the new fields; because
of the tax credits, the economics is much better. PPT fits
a wide range of situations. There is no perfect tax system
in the world.
12:30:09 PM
Dr. Van Meurs emphasized that the advantage of PPT is that
it taxes the existing fields and "stops the bleeding" of the
existing fields, which is priority number one. It also
encourages development of heavy oil.
Many nations have successfully used PPT. Norway, with its
variety of fields, uses a profit based system. Alaska can
also get a fair share using the PPT.
Dr. Van Meurs addressed cost control as it relates to PPT.
There needs to be a law that no cost can be illegally
deducted. He gave an example of a fraudulent scenario and
showed that damage to Alaska would be minimal. He felt that
PPT would be administered fairly because deductible items
would be clearly spelled out. He highlighted Section 25 of
the bill, which provides for a long list of non-deductible
costs. He pointed out that the most important non-
deductible cost is any expenditure in excess of fair market
value. Cost control is not an issue, he opined.
12:38:58 PM
Representative Gara asked if Dr. Van Meurs would be present
for upcoming meetings. Dr. Van Meurs replied that he would.
Representative Gara asked for a copy of the gross production
tax Dr. Van Meurs has written. Dr. Van Meurs stated that he
would provide a transmittal letter with that information.
Representative Gara asked if it has revenue projections.
Dr. Van Meurs replied that it does not contain revenue
projections from the past few months. He recommended that a
revenue model be provided by the Department of Revenue.
12:40:36 PM
Representative Kelly commented that his challenge was with
the rate, the lack of progressivity, and freezing the tax
rate for 30 years. Dr. Van Meurs noted that there have been
several proposals to include a progressive feature. He was
in favor of that feature and had recommended it to the
governor. He highlighted the fact that the progressive
feature added by the legislature, is being added to a system
that is already progressive.
12:43:15 PM
Co-Chair Chenault spoke to a gross tax on all fields and a
net profits tax on new fields. He asked about incentives
for a company on an old field to stop the decline rate on
production.
Dr. Van Meurs agreed that for some nations, the experience
of "old versus new fields" is not working. In the mid 70's,
it was different for old wells and new wells. It did not
work. A windfall profits tax proves that it is not easy to
have a system based on old and new fields. He highlighted
situations in Prudhoe Bay. It is done around the world, but
there are complications. He warned to be careful.
12:46:00 PM
Ms. Wilson offered to address a previous question from
Representative Kerttula regarding burden of proof.
Representative Kerttula addressed Section 25 of HB 3001,
where the department has to give substantial weight to
industry practices and standards. The initial burden would
be on the taxpayer to file, but then the burden shifts to
the department. She spoke to the shift and maintained that
it was unnecessary.
Ms. Wilson noted that in that section, the bill contains a
provision that would provide a balance. She added that the
ability to audit is not restricted. The department has
broad powers to examine through AS 43.05.
12:50:27 PM
Mr. Mintz clarified burden of proof. He referenced a
review, Chapter 5, Title 43. He agreed that the department
has broad auditing and investigation authority. He
explained how an assessment works.
Mr. Mintz continued to explain AS 43. If a taxpayer
disagrees with an assessment, a conference with the
Department of Revenue is held. He explained when the
taxpayer bears the burden of proof. He addressed the
standards the department uses in interpreting the concepts
of deductible lease expenditures. The standards don't have
anything to do with particular costs claimed by a particular
taxpayer, but deal with what was in effect before December
2005. AS 43 gives guidance to the department regarding
deductions. It is still up to taxpayer to show evidence
that claims meet the standards.
12:55:34 PM
Representative Kerttula voiced concern about the taxpayer
bearing the majority of the burden. She suggested
constructing the list up front. Ms. Wilson replied that it
would be difficult to construct such a list. It would be
easier to identify those things that should not be included.
Representative Kerttula suggested not allowing the
"substantial weight" standard, but rather making a
determination on the department's behalf.
12:56:57 PM
KEN GRIFFIN, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
related that the range of work at an oil field, done at the
field vs. done remotely, has changed. He said that
Representative Kerttula's comments are worth noting. It is
not in the state's best interest to determine a list of
deductible costs.
12:59:29 PM
REPRESENTATIVE PAUL SEATON commented on the concern about
overhead expenses and giving credit for it. He asked why
credit and deductions should be given for work done in other
parts of the country.
Mr. Griffin responded that the PPT tax is attempting to
incentivize investment. Individual decisions within that
framework need to be the best decisions. The state should
not interfere with them. The industry has been very strong
in local hire and local jobs, but much of the work is
incidental work not done in Alaska. Those people work in
international settings. He said it is not a rampant issue.
He spoke to deductions on unit costs and incentives to
ensure those costs are justified.
1:04:11 PM
Ms. Wilson expanded on Mr. Griffin's answer in saying that
there is a bigger goal - to increase production. Incidental
work is often justified in order to increase production.
Representative Seaton said that industry does not care where
the work is done, but the state of Alaska does. Having
people based in Alaska helps Alaska's economy. He
distinguished between the two different goals.
Ms. Wilson reiterated the ultimate goal of the bill, which
is to stimulate production, which, in turn, will improve the
economics of the state. She addressed the overhead
allowance issue, which would give a certain level of direct
expenditures.
Mr. Mintz concurred with Ms. Wilson's comments.
1:09:10 PM
Representative Hawker noted that he has spent years trying
to increase the number of in-state oil employees. He asked
if there were U.S. Commerce regulations regarding
discrimination of in-state vs. out-of-state employees.
Mr. Mintz related that there are issues regarding this
situation. He referred to a pending U.S Supreme Court
decision. He opined that the state is in a stronger
position to defend investing resources, but not as strong
when dealing with outside investments. He suggested that
the goal is being undercut.
1:13:00 PM
Representative Gara spoke to the goal of PPT to stimulate
investment. He related that the historical average of
exploration and development investment on the North Slope
has been about $1 billion, regardless of the price of oil,
without substantial credits or deductions. He suggested
limiting the credits and deductions to investment above what
is already being done. Ms. Wilson deferred to the
economists and said that is a policy call.
1:14:58 PM
Mr. Griffin commented that Representative Gara's suggestion
would treat all three companies on the North Slope as one
entity. Those companies have a variety of investment
strategies and priorities. Size has to also be considered.
It would lower the bar to justify any investment in Alaska.
From an industry perspective, most of them spend as much
money as they can manage right now. He gave an example in
Alberta.
1:17:21 PM
Mr. Gara opined that Mr. Griffin's statements just
undermined the whole principle of PPT. Mr. Griffin
clarified that on an international scale companies manage
their workload internationally and if the bar is lowered,
the investments in the state will shift relative to
investments around the world.
Mr. Gara noted that Alaska is currently the cheapest place
in the world. Mr. Griffin said there is a risk to
investment. He shared personal experience with how taxes
affect the bottom line. In 1989 when ELF was passed several
projects were shut down.
1:20:55 PM
Representative Seaton asked about exploration economics in
the gross vs. net handout. He asked about the current rate
of dry holes on the North Slope. He wondered if gas is
found instead of oil, whether that constitutes a dry hole.
Mr. Griffin replied that, historically, if gas is found
instead of oil, it is a dry hole. He reported that near
production areas the odds are higher of having a dry hole.
Raw exploration areas have lower numbers. He emphasized the
difference between a technological or geological success and
an economic success.
Representative Seaton referred to page 3, and noted that the
figure of 15 percent could be a different number. Mr.
Griffin said that the company would be looking for an
economic success, but he did not know the number.
1:23:41 PM
Representative Hawker requested clarification about the
statement that the Wood Mackenzie study concludes that it is
less expensive to conduct oil and gas operations in Alaska
than in the rest of the world. He asked if that is an
accurate statement. Representative Meyer thought that was
not a correct statement. Representative Gara reported that
the study said the total cost of doing business in Alaska is
lower. Drilling costs are higher in Alaska. Co-Chair
Chenault requested a copy of that report.
ADJOURNMENT
The meeting was adjourned at 1:24 PM.
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