Legislature(2011 - 2012)HOUSE FINANCE 519

03/14/2011 08:00 AM FINANCE

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08:02:31 AM Start
08:04:37 AM HB110
09:13:52 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Time Change --
Heard & Held
+ Presentation by Dept. of Revenue TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 14, 2011                                                                                            
                         8:02 a.m.                                                                                              
8:02:31 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Stoltze called the House Finance Committee meeting                                                                     
to order at 8:02 a.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Bill Thomas Jr., Co-Chair                                                                                        
Representative Anna Fairclough, Vice-Chair                                                                                      
Representative Mia Costello                                                                                                     
Representative Mike Doogan                                                                                                      
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative David Guttenberg                                                                                                 
Representative Reggie Joule                                                                                                     
Representative Mark Neuman                                                                                                      
Representative Tammie Wilson                                                                                                    
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Representative Mike Hawker; Bryan Butcher, Commissioner,                                                                        
Department of Revenue; Bruce Tangeman, Deputy Commissioner,                                                                     
Department of Revenue.                                                                                                          
HB 110    PRODUCTION TAX ON OIL AND GAS                                                                                         
          HB 110 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
HOUSE BILL NO. 110                                                                                                            
     "An  Act relating  to the  interest rate  applicable to                                                                    
     certain amounts due for fees,  taxes, and payments made                                                                    
     and property  delivered to  the Department  of Revenue;                                                                    
     relating  to  the  oil and  gas  production  tax  rate;                                                                    
     relating to  monthly installment payments  of estimated                                                                    
     oil and  gas production  tax; relating  to oil  and gas                                                                    
     production  tax   credits  for   certain  expenditures,                                                                    
     including  qualified capital  credits for  exploration,                                                                    
     development,   and   production;    relating   to   the                                                                    
     limitation  on assessment  of  oil  and gas  production                                                                    
     taxes;  relating to  the determination  of oil  and gas                                                                    
     production  tax values;  making conforming  amendments;                                                                    
     and providing for an effective date."                                                                                      
8:04:37 AM                                                                                                                    
BRYAN   BUTCHER,   COMMISSIONER,  DEPARTMENT   OF   REVENUE,                                                                    
provided a PowerPoint presentation  titled: "CS HB 110 (RES)                                                                    
Introduction, Proposed  Changes to the Oil  & Gas Production                                                                    
Tax."  He discussed  that  HB 110  was  related to  Alaska's                                                                    
future and that its goal was  to make changes to the current                                                                    
tax  system that  would make  Alaska  more competitive  both                                                                    
nationally and globally, to produce  more jobs for Alaskans,                                                                    
and to  increase Alaska's oil production.  He discussed that                                                                    
a recent projection  that North Dakota would  pass Alaska in                                                                    
oil production  in the  next five years,  was a  real wakeup                                                                    
call  for   Alaska.  The  state   needed  to   maximize  the                                                                    
production  on  its  state  lands  given  that  the  federal                                                                    
government had been a deterrent  to development in the Outer                                                                    
Continental Shelf  (OCS) and on  federal lands. Many  of the                                                                    
credits and incentives  that had been created  over the past                                                                    
few years  had helped  but production continued  to decline.                                                                    
He  delineated  that there  continued  to  be a  significant                                                                    
amount of  oil available  for development on  Alaska's state                                                                    
lands.  The  two  main  goals  of  HB  110  related  to  the                                                                    
development of unexplored oil fields  and to the increase of                                                                    
production from  the legacy  fields that  currently provided                                                                    
over  80 percent  of the  oil to  the Trans  Alaska Pipeline                                                                    
System (TAPS). He  stated that oil provided  over 85 percent                                                                    
of  the  revenue  that  was  required  to  run  the  state's                                                                    
government. He explained that  the challenge was significant                                                                    
and that the bulk of the  easiest to recover oil had already                                                                    
been extracted. The  state was looking at  the production of                                                                    
viscous oil,  heavy oil, and  development in areas  that had                                                                    
very little  to no infrastructure; therefore,  the challenge                                                                    
was greater  than it  had been previously.  This was  a main                                                                    
component  of the  administration's multi-tiered  process in                                                                    
order  to   increase  TAPS  production.  The   process  also                                                                    
involved  the   Department  of  Transportation   and  Public                                                                    
Facilities  (DOT) Roads  to Resources  program; improvements                                                                    
to  and   expediting  of  the  permitting   process  by  the                                                                    
Department  of Natural  Resources  (DNR);  focus on  federal                                                                    
road  blocks by  the Department  of Law  (DOL); work  by the                                                                    
Department  of Labor  and  Workforce  Development (DLWD)  to                                                                    
train Alaskans for  additional work that would  arise in the                                                                    
future;   and,  continued   work   by   the  Department   of                                                                    
Environmental Conservation (DEC)  to ensure that development                                                                    
would  continue  to  be done  in  an  environmentally  sound                                                                    
Commissioner  Butcher  discussed  that  the  bill  aimed  to                                                                    
improve the  investment climate for existing  players on the                                                                    
slope and  to invite new  entrants. The bill also  worked to                                                                    
create  jobs for  Alaskans and  to  increase production  and                                                                    
extend the life of TAPS.  There had been a pipeline shutdown                                                                    
in January 2011  for almost one week and due  to the extreme                                                                    
cold  on the  North Slope  it had  been eye-opening  and was                                                                    
very evident just  how fragile the pipeline  really was. The                                                                    
pipeline could  have frozen  and the fact  that it  was only                                                                    
one-third  full drew  attention to  the production  level in                                                                    
the state and to the  potentially limited longevity of TAPS.                                                                    
Once the pipeline  reached a point where it  could no longer                                                                    
provide the work  that needed to occur,  the pipeline system                                                                    
would shut  down. Up  to that point  an increased  amount of                                                                    
work  and money  would  be required  for  heating and  other                                                                    
items to  keep the oil  flowing. It would be  more expensive                                                                    
and would cut  into funds that would have gone  to the state                                                                    
Representative   Gara  referred   to   the  term   "pipeline                                                                    
shutdown"  and  did  not  think  that  a  reduction  to  the                                                                    
pipeline volume  was in the state's  best interest; however,                                                                    
a number of years earlier  TAPS owners conducted a number of                                                                    
retrofits  to  allow the  pipeline  to  operate at  a  lower                                                                    
Co-Chair Stoltze informed the  committee that there would be                                                                    
a thorough conversation at the end of the week.                                                                                 
Commissioner Butcher  discussed Page 4 titled:  "North Slope                                                                    
Production."  The chart  showed  the sharp  increase in  oil                                                                    
production that  occurred in  1977 and peaked  in FY88  at a                                                                    
little over two million barrels  of oil per day. It detailed                                                                    
the  rather quick  production decline  that occurred  in the                                                                    
years that followed  FY88. He emphasized that  from the peak                                                                    
in 1988  through 2010 that  the barrels per day  had dropped                                                                    
over 68  percent. From  that point the  decline had  been an                                                                    
average of five  percent to six percent on  an annual basis.                                                                    
The legacy  fields continued to decline;  however, the state                                                                    
expected that half  of its oil production  would continue to                                                                    
come from  these fields in  2020. It was important  to focus                                                                    
on new field development and  on the continued production at                                                                    
existing   legacy  fields.   He   discussed   that  Page   5                                                                    
"Forecasted  ANS  Production FY  2010  -  2020," provided  a                                                                    
forecast  from  the  Department   of  Revenue's  (DOR)  fall                                                                    
forecast  book  from  2000  through  2020.  The  light  gray                                                                    
portion of  the chart  represented that  currently producing                                                                    
fields followed  the traditional decline curve  and were the                                                                    
easiest  and most  certain for  DOR to  predict. The  darker                                                                    
gray section  represented fields  such as Liberty  that were                                                                    
under  development  for  expected  production  in  the  next                                                                    
couple of  years and were currently  receiving a significant                                                                    
amount of  money and work.  The most speculative  were areas                                                                    
that  were under  evaluation for  potential development  and                                                                    
were represented by the dark  black section on the chart. He                                                                    
delineated that the bill could  potentially be very valuable                                                                    
to oil fields that were  under evaluation and to other areas                                                                    
that had  not been seriously  considered due to  the current                                                                    
tax regime. More detail on the  chart would be provided at a                                                                    
production forecast meeting  with DOR's production economist                                                                    
Frank Molly that was scheduled later in the week.                                                                               
Commissioner Butcher discussed a  chart titled: "North Slope                                                                    
Development Drilling" (Page 6)  that provided information on                                                                    
development and  service wells.  Development wells  aided in                                                                    
the development  of existing fields, whereas,  service wells                                                                    
were  injection  wells  that  helped  development  wells  to                                                                    
recover more oil from the fields.  A green line on the chart                                                                    
represented  the  Alaska North  Slope  West  Coast (ANS  WC)                                                                    
price.  Through  the early  2000s  the  price was  close  to                                                                    
$200.00 then  it slowly  dropped and  popped up  slightly in                                                                    
2010 with the price of oil.                                                                                                     
8:14:14 AM                                                                                                                    
Commissioner Butcher  addressed the chart on  Page 7 titled:                                                                    
"North Slope Exploration Drilling"  that provided a snapshot                                                                    
of  exploration  well locations.  There  had  been 18  wells                                                                    
drilled  in  2007  at  the  time  that  Alaska's  Clear  and                                                                    
Equitable  Share (ACES)  legislation passed.  When the  bill                                                                    
passed at the end of  2007 the locations for exploration had                                                                    
already been decided for 2008 and  as a result the number of                                                                    
locations dropped to  nine in 2009 and four in  2010. Two of                                                                    
the four wells were not  in the true exploration category as                                                                    
they  were   drilled  in  the  previously   developed  Point                                                                    
Thompson field. He communicated  that DNR expected that only                                                                    
one exploratory well would be drilled in 2011.                                                                                  
Commissioner Butcher discussed Page  8 titled: "There's Lots                                                                    
of Oil Left  in Alaska." The cumulative  production from the                                                                    
beginning of TAPS  through 2010 was 16  billion barrels. The                                                                    
Department   of  Natural   Resources   estimated  that   the                                                                    
remaining  North   Slope  reserves  exceeded   five  billion                                                                    
barrels;  however,  geology  based estimates  of  total  oil                                                                    
volumes  were  much  higher.  He  explained  that  the  five                                                                    
billion  to six  billion  barrels in  the  forecast did  not                                                                    
include approximately  20 billion barrels in  the giant Ugnu                                                                    
deposit  or offshore  volumes from  the Chukchi  or Beaufort                                                                    
Seas.  The  Ugnu deposit  would  be  factored into  the  DOR                                                                    
revenue forecast  when it became  economic to  produce heavy                                                                    
Commissioner  Butcher addressed  Page  9  titled: "Areas  of                                                                    
North  Slope are  Underdeveloped"  that showed  oil and  gas                                                                    
activity in 2010 and 2011. The  dark shaded areas at the top                                                                    
of  the map  represented  the primary  oil production  areas                                                                    
from the past few decades,  such as Prudhoe Bay and Kuparuk.                                                                    
The  lighter  gray   area  that  was  circled   in  red  was                                                                    
indicative of  areas that  had not  experienced exploration.                                                                    
The undeveloped  area included much  of what  the developers                                                                    
Armstrong,  Repsol, and  Great Bear  Petroleum were  focused                                                                    
on.  The governor  believed that  the 15  percent oil  taxes                                                                    
could be  of benefit in  the unexplored fields and  that the                                                                    
state should  encourage the  development and  exploration of                                                                    
oil in the region.                                                                                                              
Commissioner Butcher pointed to Page  10 titled: "How Can We                                                                    
Reverse  the Trend?"  The list  of sample  investor criteria                                                                    
included  prospectivity or  opportunities  that existed  for                                                                    
oil   companies;  geopolitical   stability,   which  was   a                                                                    
tremendous  benefit  to  the U.S.;  regulations,  access  to                                                                    
resources,     development     permitting,     environmental                                                                    
constraints, which had all been  a challenge federally; and,                                                                    
operations,  the location  of  the existing  infrastructure,                                                                    
experienced  workforce   availability,  costs,   and  market                                                                    
proximity.    He    explained    that    Alaska's    limited                                                                    
infrastructure  and  workforce  availability  combined  with                                                                    
expensive  transportation costs  due  to  its distance  from                                                                    
market, made  production in Alaska more  challenging than in                                                                    
Texas, North  Dakota, and  many of  the other  oil producing                                                                    
states.  Given all  of the  challenges in  Alaska, the  bill                                                                    
focused on  making a change  to the tax regime.  He believed                                                                    
that  the   difficulties  contributed  to  the   decline  of                                                                    
investment in Alaska's oil industry  and as the price of oil                                                                    
had  increased  over  the  past few  years  there  had  been                                                                    
increasing investment  in North  Dakota, Texas, and  in many                                                                    
other states and countries.                                                                                                     
8:19:20 AM                                                                                                                    
Representative Doogan asked whether  there would be a chance                                                                    
to ask questions about the presentation.                                                                                        
Co-Chair Stoltze responded that  they would see whether time                                                                    
allowed for  questions during the  meeting. He  informed the                                                                    
committee  that  there  would  be  time  for  questions  the                                                                    
following day.                                                                                                                  
Commissioner  Butcher  moved  to Page  12:  "Production  Tax                                                                    
Overview." He explained that the  production tax value (PTV)                                                                    
was  the   market  price   less  transportation   costs  and                                                                    
allowable lease  expenditures. Allowable  lease expenditures                                                                    
included  both  operating   and  capital  expenditures.  The                                                                    
current PTV  base tax rate was  25 percent and it  would not                                                                    
change   under  the   proposed   legislation.  The   current                                                                    
progressive surcharge  rate was  triggered when  a company's                                                                    
PTV  reached  $30.00  per barrel.  He  explained  that  from                                                                    
$30.00  dollars   per  barrel  to  $92.50   per  barrel  the                                                                    
surcharge  added  0.4  percent  to  the  tax  rate  of  each                                                                    
additional  $1.00  increase  until  the  combined  tax  rate                                                                    
equaled  50  percent. He  relayed  that  the additional  tax                                                                    
applied to the entire cost  of the barrel; therefore, higher                                                                    
progressive  rates experienced  marginal tax  rates with  93                                                                    
percent  government   take  and  the  cost   of  the  barrel                                                                    
increased by 1 percent.                                                                                                         
Commissioner  Butcher explained  that the  bill would  shift                                                                    
from progressivity  to a  bracket system,  where a  tax rate                                                                    
would  be  applied with  each  additional  bracket. The  tax                                                                    
increase would  only apply  to a  particular portion  of the                                                                    
barrel  and would  result in  a  more gradual  progressivity                                                                    
slope. The state would continue  to take a higher share when                                                                    
oil  prices were  high. He  discussed that  from $92.50  per                                                                    
barrel  and $342.50  per barrel  the surcharge  dropped from                                                                    
0.4  percent  to  0.1  percent  for  each  additional  $1.00                                                                    
increase  in PTV  until the  combined tax  rate reached  the                                                                    
maximum of  75 percent. The bill  would reduce the cap  to a                                                                    
maximum of 50 percent. He  relayed that the department would                                                                    
provide  a  comparison  between  the  current  law  and  the                                                                    
changes that would take place under HB 110.                                                                                     
Commissioner  Butcher   addressed  a  second   page  titled:                                                                    
"Production Tax  Overview" (Page 13). He  explained that the                                                                    
total  tax  before  credit  was  calculated  by  adding  the                                                                    
progressive  surcharge  rate  that   was  applied  above  30                                                                    
percent, to  the base  tax rate of  25 percent.  A company's                                                                    
final  tax bill  was calculated  by subtracting  the credits                                                                    
that had been  applied against the taxes from  the total tax                                                                    
before  credit.  Page  14  titled:  "FY  12  Production  Tax                                                                    
Projected,"  provided  detail  on   the  FY12  fall  revenue                                                                    
forecast that totaled $82.67 per  barrel with the production                                                                    
estimate  at  622,182  barrels.  He  pointed  out  that  the                                                                    
numbers would change in the  revised spring revenue forecast                                                                    
that would be  released in the last few days  of March or in                                                                    
early April.  He explained that the  annual production value                                                                    
of $18.774  billion was determined by  multiplying the price                                                                    
per  barrel  and the  number  of  barrels. The  royalty  and                                                                    
federal barrels were not taxed  and were subtracted from the                                                                    
$18.774  billion,  which  resulted  in  $15.9  billion.  The                                                                    
$1.229 billion  ANS marine transportation and  tariff on tax                                                                    
cost was  subtracted from  the $15.9  billion. The  FY12 PTV                                                                    
was estimated  to be  $9.675 billion  and was  determined by                                                                    
subtracting the deductible  operating expenditures that were                                                                    
estimated at slightly under $2.5  billion and the deductible                                                                    
capital expenditures  that were  estimated at  slightly over                                                                    
$2.5 billion.  The total $2.754  billion production  tax for                                                                    
FY12  was determined  by subtracting  the base  tax rate  of                                                                    
$2.4 billion, the progressive tax  rate of $785 million, and                                                                    
the  estimated tax  credits of  $450 million.  He reiterated                                                                    
that  the  numbers  would  change   in  the  spring  revenue                                                                    
8:26:08 AM                                                                                                                    
Commissioner Butcher pointed to  the "Production Tax Credits                                                                    
Overview" on  Page 15 that listed  numerous current credits.                                                                    
The  qualified capital  expenditure credit  was 20  percent,                                                                    
and a 40 percent credit  for well lease expenditures outside                                                                    
the  North  Slope had  been  implemented  to encourage  more                                                                    
development  in Cook  Inlet. When  a company  had a  carried                                                                    
forward  annual  loss  it received  a  25  percent  carried-                                                                    
forward  annual loss  credit or  net  operating loss  credit                                                                    
(NOL). The  small producer and  new area  development credit                                                                    
was up  to $12 million per  year for small producers  and up                                                                    
to  $6 million  per year  for production  outside the  North                                                                    
Slope   and  Cook   Inlet.   The   alternative  credit   for                                                                    
exploration  was  30  percent  to  40  percent  of  eligible                                                                    
exploration  expenditures  provided  that  certain  criteria                                                                    
were met. The Cook Inlet  jack-up rig credit was 100 percent                                                                    
to 90 percent to 80  percent for the first three exploration                                                                    
wells drilled using a jack-up  rig in Cook Inlet. He relayed                                                                    
that  the  jack-up rig  credit  had  motivated companies  to                                                                    
explore in  the Cook  Inlet area and  that Escopeta  Oil and                                                                    
Buccaneer  Energy were  currently working  to bring  jack-up                                                                    
equipment into the state.                                                                                                       
Commissioner Butcher  discussed that the bill  was comprised                                                                    
of three  major components and  that it would make  a number                                                                    
of   smaller   changes   to  state   statute.   First,   the                                                                    
progressivity  rate would  be changed  to  a bracket  system                                                                    
that would  have a similar  structure to the  federal income                                                                    
tax system.  He used  federal income tax  as an  example and                                                                    
explained that  an income of  $0.00 to $30,000 would  have a                                                                    
10 percent  tax, income of  $30,000 to $40,000 would  have a                                                                    
13 percent tax, and that  the tax would continue to increase                                                                    
as  income  increased.  He explained  that  the  higher  tax                                                                    
bracket  was not  applied  to the  entire  amount of  earned                                                                    
income from  the year and  a person  would still pay  the 10                                                                    
percent rate  on the first  $30,000 that they  earned. Under                                                                    
the current oil tax system the  taxes picked up a higher and                                                                    
higher percentage of the entire barrel of oil.                                                                                  
Co-Chair Stoltze noted that  petroleum economist Roger Marks                                                                    
would present to  the committee the following  day and would                                                                    
be available for questions on bracketing.                                                                                       
Commissioner  Butcher   discussed  Page  17   titled:  "Main                                                                    
Proposed  Changes." The  base tax  rate would  remain at  25                                                                    
percent;  however,  in  order  to  motivate  production  and                                                                    
exploration  the base  tax  rate would  be  reduced from  25                                                                    
percent  to 15  percent for  exploring leases  or properties                                                                    
that  had  not  been  unitized or  producing  on  or  before                                                                    
December 31, 2010. The bill  would reduce the maximum cap on                                                                    
the  tax rate  from 75  percent to  50 percent  and for  the                                                                    
unexplored fields  the rate would  decrease from  50 percent                                                                    
to 40 percent.  He delineated that the tax  rate would start                                                                    
10 percent lower  and would be capped 10  percent lower. The                                                                    
third  major  component of  the  bill  would extend  the  40                                                                    
percent  North Slope  well lease  expenditure tax  credit in                                                                    
order  to motivate  additional development  on the  existing                                                                    
fields.  The  current  20  percent  well  lease  expenditure                                                                    
credit was  increased to  40 percent for  areas south  of 68                                                                    
degrees north  latitude. Under  the legislation  tax credits                                                                    
could  be claimed  in  one year  and  would benefit  smaller                                                                    
independent  companies  that  had   cash  flow  issues.  The                                                                    
current process  required tax credits  to be claimed  in two                                                                    
years  and  made it  difficult  for  DOR  to deal  with  the                                                                    
credits  because  they  had  to  split  multiple  years.  He                                                                    
explained  that  annually  the  department  dealt  with  the                                                                    
second year of  a previous tax credit and the  first year of                                                                    
the new  two-year credit. Ultimately the  revenue effect was                                                                    
negligible  given that  the amount  of money  the department                                                                    
would  handle  would not  change  under  the one-year  claim                                                                    
period. The  bill also changed  the monthly  tax calculation                                                                    
that was impacted  by short term price and cost  peaks to an                                                                    
annual tax calculation that was  based on average prices and                                                                    
costs.  The  annual  calculation   was  easier  for  DOR  to                                                                    
administer and  helped the  industry to  move away  from the                                                                    
peaks  and   valleys  that  were  present   in  the  monthly                                                                    
calculations. He  directed attention to the  effective dates                                                                    
that would  be implemented  as a  result of  the legislation                                                                    
(listed on  the right-hand side  of Page 17).  The effective                                                                    
date of the change  from progressivity to brackets, new-area                                                                    
15 percent tax, and the  yearly calculation would be January                                                                    
1, 2013 and  would give DOR time to work  on regulations and                                                                    
to prepare the tax for  implementation. The extension of the                                                                    
well lease  credits from 20  percent to 40 percent  would be                                                                    
January 1,  2012 and  did not  require the  preparation time                                                                    
that was required for the other modifications.                                                                                  
8:33:06 AM                                                                                                                    
Commissioner Butcher  relayed that Page 18  titled: "Nominal                                                                    
Production Tax  Rates" showed the current  ACES nominal rate                                                                    
(in  blue).  Changes that  would  occur  under HB  110  were                                                                    
indicated with  a red line that  represented unitized fields                                                                    
nominal rates and a green line  that was 10 percent less and                                                                    
represented the  nominal rates  of non-unitized  fields that                                                                    
were  not  currently  producing   or  being  developed.  The                                                                    
brackets  were set  up on  the same  progressivity curve  as                                                                    
ACES  but  increases would  not  be  applied to  the  entire                                                                    
barrel and would only impact the brackets.                                                                                      
Representative Gara  wondered where  the loss was  under the                                                                    
bracketed system. He communicated  that at $90.00 per barrel                                                                    
the  ACES  nominal  rate  and the  HB  110  unitized  fields                                                                    
nominal rate were  not the same. He remarked  that the chart                                                                    
made it look like the tax  rate would be the same under each                                                                    
system,  but that  Commissioner Butcher  had explained  that                                                                    
the  rates  would  not be  the  same.  Commissioner  Butcher                                                                    
responded that the  tax rates would be at the  same place at                                                                    
$90.00 per barrel.                                                                                                              
BRUCE TANGEMAN, DEPUTY  COMMISSIONER, DEPARTMENT OF REVENUE,                                                                    
explained that the bracket for  the particular section would                                                                    
cover a range  of $80.00 to $92.50;  therefore, $92.00 would                                                                    
be  slightly different  when comparing  ACES to  the bracket                                                                    
Representative  Gara asked  whether there  was a  chart that                                                                    
showed the actual  tax rate at $90.00 per barrel  for all of                                                                    
the oil  under the new law  compared to the actual  tax rate                                                                    
under the old law.                                                                                                              
Co-Chair  Stoltze asked  the department  to  have the  chart                                                                    
available for a future hearing.                                                                                                 
Representative  Hawker  reported   that  Roger  Marks  would                                                                    
discuss the  difference between nominal and  effective rates                                                                    
in the meeting the following day.                                                                                               
Commissioner  Butcher addressed  Page  19 titled:  "Marginal                                                                    
Government  Take." He  explained that  marginal referred  to                                                                    
the  percentage  taken  by government  for  each  additional                                                                    
$1.00 that  the price  of oil  increased. He  explained that                                                                    
the  slope of  the ACES  marginal take  increased at  a much                                                                    
sharper  rate  given  that  under   the  current  system  an                                                                    
increase applied to  the entire barrel of oil.  Under HB 110                                                                    
the  government share  would continue  to increase  with the                                                                    
price of  oil; however,  the rate increase  would not  be as                                                                    
extreme as it was under ACES.  He relayed that at $92.50 the                                                                    
PTV of  the federal  and state government  take would  be 93                                                                    
percent  and  the  producer  take would  be  7  percent.  He                                                                    
discussed   the  concern   that  producers   had  over   the                                                                    
distribution  between  government  and producer  take  given                                                                    
their front-end  financial contribution to  exploration. The                                                                    
prospect of receiving  very little on the  back-end when oil                                                                    
prices were  high made investment in  Alaska less attractive                                                                    
than it was in other locations.                                                                                                 
Commissioner  Butcher discussed  Page 20  titled: "Share  of                                                                    
Total Profit  - ACES" that  related to the  percentage share                                                                    
of the profit under ACES that  was based on the price of oil                                                                    
that  ranged  from  $40.00  to   $265.00.  He  reminded  the                                                                    
committee that  when oil production  first began off  of the                                                                    
North  Slope  that  former  Governor  Jay  Hammond  and  the                                                                    
legislature  had believed  in  an "even  share" between  the                                                                    
producers,  the  state,  and   the  federal  government.  He                                                                    
relayed that the  state did not currently  have control over                                                                    
the federal  share, but  that it did  have control  over its                                                                    
own share. He  discussed that using the recent  oil price of                                                                    
$115.00 per barrel,  the state's share would  be 57 percent,                                                                    
the producer's  share would be  28 percent, and  the federal                                                                    
share would  be 15 percent.  At the current price  the state                                                                    
would  earn  between  half and  two-thirds  of  the  profit,                                                                    
producers would receive less than  one-third and the federal                                                                    
government would  receive less  than the producer  share. He                                                                    
discussed  that  under HB  110  at  $115.00 per  barrel  the                                                                    
state's  share would  be 45  percent,  the producer's  share                                                                    
would  be 35  percent, and  the  federal share  would be  19                                                                    
percent. The share of the  total profits would increase with                                                                    
the price  of oil  and the state  would continue  to receive                                                                    
its fair  share under  the governor's  proposed legislation.                                                                    
Page  22 titled:  "Share of  Total Profit  CS HB  110 (RES):                                                                    
Non-Unitized  Fields,"  outlined   the  non-unitized  fields                                                                    
where no exploration had occurred.  To provide incentive for                                                                    
producers  when oil  was  at $115.00  per  barrel the  state                                                                    
would  receive   a  smaller  portion  at   38  percent,  the                                                                    
producers would  receive 40 percent,  and the  federal share                                                                    
would be  22 percent. He  explained that an increase  in oil                                                                    
price  would increase  the state's  share  and decrease  the                                                                    
producer's share.                                                                                                               
8:40:11 AM                                                                                                                    
Commissioner  Butcher reiterated  that the  goals of  HB 110                                                                    
were to  improve the  investment climate  for the  state, to                                                                    
increase  production, and  to create  jobs for  Alaskans. He                                                                    
relayed that  increased oil prices  over the past  few years                                                                    
had  encouraged  significant  development in  Texas  despite                                                                    
that  it was  a far  more  mature oil  producing state  than                                                                    
Alaska. The administration believed  that a reduction in the                                                                    
upper  level  tax  rates would  contribute  to  an  improved                                                                    
investment climate  that would  in turn  increase production                                                                    
and create jobs in Alaska.                                                                                                      
Representative Doogan wondered when  the committee would see                                                                    
actual numbers that would illustrate  how the changes in the                                                                    
bill would impact Alaska.  Commissioner Butcher replied that                                                                    
there would  be an  in depth discussion  on the  fiscal note                                                                    
during the department's time in  front of the committee that                                                                    
week. They would  discuss the short-term impacts  as well as                                                                    
different   investment   scenarios   for  the   future.   He                                                                    
communicated  that it  was impossible  to determine  exactly                                                                    
what the figures  would be, but a number  of scenarios would                                                                    
be provided.                                                                                                                    
Representative Doogan  queried whether DOR would  be able to                                                                    
tell  the committee  what the  cost  of the  bill would  be.                                                                    
Commissioner  Butcher responded  that  the department  would                                                                    
provide  estimates on  the short-term  costs; however,  they                                                                    
would  not be  able  to provide  the  exact production  that                                                                    
would  result 10  years in  the  future. He  added that  the                                                                    
administration  could outline  its solution  to the  problem                                                                    
and it  could lay out  various scenarios; however,  it would                                                                    
ultimately  be the  industry's responsibility  to present  a                                                                    
compelling  case to  the legislature  on why  it believed  a                                                                    
material change was necessary to do business in the state.                                                                      
Representative Doogan  wondered when the committee  would be                                                                    
able to ask specific questions about the presentation.                                                                          
Co-Chair Stoltze responded that  the committee would be able                                                                    
to ask questions over the  next couple of days. He explained                                                                    
that it  would be helpful  for committee members  to provide                                                                    
complex  questions  ahead  of  time in  order  to  give  the                                                                    
department time to prepare.                                                                                                     
Vice-chair  Fairclough referred  to  Page  7 titled:  "North                                                                    
Slope   Exploration  Drilling."   She  requested   that  the                                                                    
administration provide its perspective  on why only one well                                                                    
had  been drilled  in 2003.  She  also wanted  to hear  from                                                                    
producers or  others on why  they believed the  2003 decline                                                                    
had occurred.                                                                                                                   
Representative Gara  wondered whether  DOR planned  to amend                                                                    
fiscal  notes  based on  information  that  had surfaced  in                                                                    
prior  testimony.  He  relayed  that  prior  committees  had                                                                    
determined  there  would  be  a  cost  associated  with  the                                                                    
governor's proposal to tax on  an annual basis as opposed to                                                                    
a  monthly basis.  Under the  proposed legislation  the cost                                                                    
would have  been approximately $600 million  in lost revenue                                                                    
three  years   earlier.  He  referenced   that  Commissioner                                                                    
Butcher  had  stated  the  average  lost  revenue  could  be                                                                    
approximately $200 million; however  there was no reflection                                                                    
of  the  loss  in  the  fiscal  note.  Commissioner  Butcher                                                                    
responded  that  DOR  would   provide  a  slide  that  would                                                                    
estimate  the  future  loss. He  communicated  that  it  was                                                                    
possible  to account  for the  fact that  2008 was  the most                                                                    
volatile oil  price year in history,  but it would not  be a                                                                    
reflection of the norm. He  stated that the department would                                                                    
provide the information to the committee.                                                                                       
8:46:16 AM                                                                                                                    
Representative  Gara  wondered  whether  there  would  be  a                                                                    
fiscal note related  to the cost. He observed  that a fiscal                                                                    
note was  typically required  when there was  a cost  to the                                                                    
state. Commissioner  Butcher replied  that the  figure would                                                                    
be  listed in  the fiscal  note and  an adjustment  would be                                                                    
made in the department's  spring revenue forecast that would                                                                    
be released in several weeks.                                                                                                   
Representative Joule  knew that it  was hard to  project all                                                                    
of  the  variables  looking into  the  future;  however,  he                                                                    
wondered how  the bill would  have applied looking  back for                                                                    
the past couple  of years. He asked how the  bill would have                                                                    
impacted taxes historically.  Commissioner Butcher responded                                                                    
that DOR would provide the  information to the committee. He                                                                    
added that  the department  would only be  able to  show how                                                                    
the reduction in  tax would have impacted the  state and not                                                                    
what the state would have  seen in increased production as a                                                                    
result of the tax.                                                                                                              
Representative  Wilson  asked  why  the  federal  government                                                                    
share of total  profits that was shown on  Pages 20-22 would                                                                    
increase   extensively.  She   wondered   why  the   federal                                                                    
government  would   receive  as  much  profit   as  the  oil                                                                    
companies. Commissioner  Butcher replied that  oil companies                                                                    
were  able to  deduct the  percentage of  their state  taxes                                                                    
from their  federal taxes. He  explained that a  lower state                                                                    
tax would  increase a company's  federal taxes  because they                                                                    
would lose  the ability to  deduct the state tax  from their                                                                    
federal   tax.  He   offered   to   provide  more   detailed                                                                    
information at a later time.                                                                                                    
Representative  Wilson  asked   the  department  to  provide                                                                    
additional information in the future.                                                                                           
Representative Neuman  asked for  detail on  the restoration                                                                    
and  redevelopment wells  that  were included  in the  chart                                                                    
titled: "North Slope Development  Drilling" (Page 7). He did                                                                    
not believe  that the rediscovery  and redevelopment  of old                                                                    
wells  with new  technologies  should be  classified as  new                                                                    
exploration.  He   thought  the   breakout  would   help  to                                                                    
differentiate  the new  exploration  wells  from wells  that                                                                    
already existed.  He believed  that the  differentiation was                                                                    
relevant to the  portion of the bill  that discussed credits                                                                    
or  improvements  towards   the  expansion  of  development,                                                                    
drilling,  and   access  to  Alaska.   Commissioner  Butcher                                                                    
replied that DOR would provide  the detail to the committee.                                                                    
The  Department of  Natural Resources  would  be present  at                                                                    
future meetings  and would  be able  to answer  questions as                                                                    
Co-Chair Stoltze  noted that DOR  was carrying the  bill for                                                                    
the administration and that it  would be the conduit for the                                                                    
other departments.                                                                                                              
Representative Guttenberg  hoped that DOR would  provide the                                                                    
rationale  on why  and how  the  changes in  the bill  would                                                                    
result   in  modified   industry   behavior  and   increased                                                                    
production  and  development.  He  asked what  had  led  the                                                                    
department  to  believe  that  the  proposed  changes  would                                                                    
result in the  desired outcome. He wondered  what changes to                                                                    
historical tax scenarios  would have created a  shift in the                                                                    
behavior  of  the  industry  when  they  were  or  were  not                                                                    
conducting  development. Commissioner  Butcher replied  that                                                                    
DOR  would do  their best  to  get that  information to  the                                                                    
committee. He  believed that there  was not  historical data                                                                    
related to all  of the changes given that oil  taxes had not                                                                    
been reduced before.                                                                                                            
Representative  Guttenberg  emphasized   that  there  was  a                                                                    
certain  amount of  evidence of  historical information.  He                                                                    
communicated that at different times  the tax rates had been                                                                    
different  and  they  did  not  always  stay  the  same.  He                                                                    
referred to the chart  titled "North Slope Production" (Page                                                                    
4) that showed  a spike in production in 1977  and a decline                                                                    
in later years.  He said that the state had  been faced with                                                                    
the issue of production decline  in the past and many people                                                                    
had  asked what  the  tax  rates had  been  and why  further                                                                    
development was  not underway. He remarked  that Alyeska had                                                                    
looked  at  what their  capabilities  would  be in  advance.                                                                    
Commissioner  Butcher replied  that the  questions would  be                                                                    
good  ones for  the industry.  He discussed  that there  had                                                                    
been  questions  about  the  dip  at the  tail  end  of  the                                                                    
Economic Limit  Factor (ELF). There were  many elements that                                                                    
played  into  the dip  and  that  the  price  of oil  and  a                                                                    
company's forecast were important  to factor in. He believed                                                                    
that  in light  of the  spike in  oil prices  over the  past                                                                    
several years that it was  shocking Alaska had not increased                                                                    
production spending like other states had.                                                                                      
Representative  Edgmon wondered  whether the  administration                                                                    
would make  budget plans and  projections for items  such as                                                                    
corrections,  energy,  education,   and  everything  on  the                                                                    
spending side  that may not  be discussed in depth  like the                                                                    
revenue  and economic  development side.  He discussed  that                                                                    
when the operating  budget had recently reported  out of the                                                                    
committee  the  co-chair had  discussed  that  a handful  of                                                                    
state agencies, retirement funds,  and debt service expenses                                                                    
were  driving   about  75  percent  of   the  general  fund.                                                                    
Commissioner Butcher replied that  DOR would present a slide                                                                    
that would provide its view  of the revenue picture overlaid                                                                    
with its view of the  state budget. He communicated that the                                                                    
department  was working  with the  Office of  Management and                                                                    
Budget (OMB) and  that there would be  a reasonable increase                                                                    
in the budget due to items such as Medicaid and other.                                                                          
8:55:16 AM                                                                                                                    
Representative  Edgmon  wondered   whether  there  would  be                                                                    
detailed fiscal planning related  to the expenditure side of                                                                    
the legislation.  He understood  that in  order to  plan for                                                                    
the legislation to  take effect that there  was a projection                                                                    
forward  that included  assumptions on  the exploration  and                                                                    
the  revenue side.  Commissioner Butcher  did not  know what                                                                    
OMB was factoring in specifically  and would be surprised to                                                                    
find that they had looked at  details at that level. In work                                                                    
with OMB the  department had examined what  would make sense                                                                    
based on  historical terms  to determine  a snapshot  of the                                                                    
budget  that was  as accurate  as possible.  He communicated                                                                    
that  the department  would  ask  OMB to  follow  up on  the                                                                    
Representative Gara  thought that the commissioner  had made                                                                    
conflicting  statements  about  current  oil  production  in                                                                    
Texas. He  wondered whether  production had  been increasing                                                                    
or   whether  it   had  maintained   at   the  same   level.                                                                    
Commissioner Butcher  responded that  the amount  of company                                                                    
spending  in Texas  had been  increasing but  production had                                                                    
plateaued   and  was   currently  down   approximately  five                                                                    
Representative Gara relayed that in  2006 when ELF had still                                                                    
been  in place,  15 out  of 19  oil fields  had paid  a zero                                                                    
percent  to  less  than  one   percent  production  tax.  He                                                                    
communicated  his  intention  to  ask about  that  point  in                                                                    
history given that  it appeared to be a model  of what would                                                                    
occur under a lower tax structure.                                                                                              
Representative Neuman wondered whether  there would be a way                                                                    
to  model how  changes  in tax  rates  applied to  different                                                                    
production levels. He  surmised that there was  not really a                                                                    
cost to  the bill but a  change in tax rates.  He referenced                                                                    
earlier  questions  about  plans related  to  future  budget                                                                    
shortfalls and hoped  that the changes to  the tax structure                                                                    
would result  in increased production and  a neutral revenue                                                                    
stream.  He provided  an  example about  bread  at a  Carr's                                                                    
grocery store that  had originally been priced  at $1.25 and                                                                    
went  on sale  for $1.00.  He  asked whether  the store  was                                                                    
losing  $0.25 or  whether it  hoped to  sell more  bread and                                                                    
provide job security for the bakery employees.                                                                                  
Representative Neuman shared that  the goal was to determine                                                                    
how changes to  the current system would result  in more oil                                                                    
production and to  extend the length of  TAPS, which equated                                                                    
to  90  percent of  the  state's  general fund  revenue.  He                                                                    
explained  that restoration  and rehabilitation  legislation                                                                    
had encouraged  more oil  exploration and  that subsequently                                                                    
the decline in TAPS had slowed  by more than one percent. He                                                                    
believed that  past events  provided some  proof on  how the                                                                    
tax changes would impact the  state. He discussed historical                                                                    
taxation, ELF  and low  tax rates,  and that  new technology                                                                    
made  it easier  for producers  to recover  some of  the oil                                                                    
that had  not been available  in the past despite  the lower                                                                    
tax rates. He emphasized that the  oil that had been easy to                                                                    
recover no longer existed in Prudhoe Bay and Kuparuk.                                                                           
Representative  Doogan  wondered what  production  increases                                                                    
the department expected under  the legislation. He expressed                                                                    
that the  proposed legislation included  significant changes                                                                    
to the current system and  that the department should inform                                                                    
the  committee   on  the  expected  impacts.   He  requested                                                                    
information  on  the  changes   beginning  with  the  bill's                                                                    
effective  date  and  moving forward.  Commissioner  Butcher                                                                    
replied that  it would  be difficult  for the  department to                                                                    
provide  its  best  guess  out  of  an  infinite  number  of                                                                    
possibilities; however, a small  range of scenarios would be                                                                    
provided to the committee.                                                                                                      
9:02:31 AM                                                                                                                    
Representative  Doogan  replied  that he  would  expect  the                                                                    
administration to defend the legislation  on both the profit                                                                    
side and the cost side.  He wondered when the industry would                                                                    
speak to the committee about the bill.                                                                                          
Co-Chair  Stoltze   replied  that   the  schedule   for  the                                                                    
remainder of the week would be completed that day.                                                                              
Vice-chair Fairclough requested a  budget model to reflect a                                                                    
scenario in which oil stopped  flowing through the pipeline.                                                                    
She opined  that there was  a risk  that the oil  flow would                                                                    
stop, but that some people  believed that the pipeline would                                                                    
continue  to  run in  perpetuity.  She  understood that  the                                                                    
pipeline had recently been shut  down and had been restarted                                                                    
despite  an  existing  hole   because  the  temperature  had                                                                    
dropped at  a faster  rate than anticipated.  She understood                                                                    
that if  the temperature  got too cold  that there  would be                                                                    
one large "piece  of licorice" that would be  required to be                                                                    
disassembled and  shipped away. She noted  that Alyeska, the                                                                    
pipeline  operator,  may have  been  able  to speak  to  the                                                                    
statement more specifically.                                                                                                    
Co-Chair Stoltze  wondered how DOR would  handle the revenue                                                                    
side of a pipeline shutdown.                                                                                                    
9:06:24 AM                                                                                                                    
Representative  Doogan asked  to hear  from the  industry on                                                                    
whether  the  introduction  of  several  additional  heaters                                                                    
could have prevented the pipeline problem.                                                                                      
Representative  Costello  was  interested  in  a  comparison                                                                    
between the nominal, effective,  and marginal tax rates. She                                                                    
wondered how  Alaska compared  to the rest  of the  world in                                                                    
the three areas.                                                                                                                
Representative Hawker discussed  the tax proposal evaluation                                                                    
process that  had taken place  in the legislature  over many                                                                    
years.  The Legislative  Budget and  Audit Committee  (LB&A)                                                                    
had been  charged with  securing and  providing professional                                                                    
consultation services  to support  the legislators  in their                                                                    
deliberation and understanding  of the issues. Approximately                                                                    
a year  and a half  earlier LB&A had undergone  an extensive                                                                    
request for  proposal (RFP) process  to secure  the services                                                                    
that  would support  gas-line  and  tax change  discussions.                                                                    
Roger Marks  had spent over  25 years as the  state's senior                                                                    
petroleum  economist and  would  be available  all week  for                                                                    
questions.  He  relayed  that  Mr.  Marks  would  provide  a                                                                    
technical  analysis of  the  governor's  bill the  following                                                                    
day.  Dan Dickinson,  the state's  former  tax director  was                                                                    
also on contract and would  be available to discuss tax code                                                                    
and statutes.  The resources  were intended  for the  use of                                                                    
the  committee and  he encouraged  anyone with  questions to                                                                    
contact his office to set up a meeting.                                                                                         
Commissioner  Butcher looked  forward  to  working with  the                                                                    
committee on the legislation.                                                                                                   
Co-Chair  Stoltze   made  his   office  available   for  any                                                                    
questions  related to  the committee  process regarding  the                                                                    
bill. He  encouraged members  to provide  detailed questions                                                                    
ahead of time to provide preparation time for presenters.                                                                       
Commissioner Butcher expressed that  DOR would be very happy                                                                    
to meet with members at anytime regarding the bill.                                                                             
HB  110  was  HEARD  and   HELD  in  committee  for  further                                                                    
9:13:52 AM                                                                                                                    
The meeting was adjourned at 9:13 AM.                                                                                           

Document Name Date/Time Subjects
CSHB110(RES)NEW FN-DOR-TAX-03-10-11.pdf HFIN 3/14/2011 8:00:00 AM
HB 110
CS HB110 (RES) - House Finance Committee - final - 20110311.pdf HFIN 3/14/2011 8:00:00 AM
HB 110