Legislature(2005 - 2006)

07/31/2006 03:09 PM House FIN


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03:09:01 PM Start
03:09:24 PM HB3001
05:06:45 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                  HOUSE FINANCE COMMITTEE                                                                                       
                       July 31, 2006                                                                                            
                         3:09 P.M.                                                                                              
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Chenault called the House  Finance Committee meeting                                                                   
to order at 3:09:01 PM.                                                                                                       
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Mike Chenault, Co-Chair                                                                                          
Representative Kevin Meyer, Co-Chair                                                                                            
Representative Bill Stoltze, Vice-Chair                                                                                         
Representative Mike Hawker                                                                                                      
Representative Jim Holm                                                                                                         
Representative Reggie Joule                                                                                                     
Representative Mike Kelly                                                                                                       
Representative Beth Kerttula                                                                                                    
Representative Carl Moses                                                                                                       
Representative Bruce Weyhrauch                                                                                                  
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Richard Foster                                                                                                   
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Robyn  Wilson,  Director,  Division  of  Tax,  Department  of                                                                   
Revenue;  Dr.  Pedro Van  Meurs,  Consultant,  Office of  the                                                                   
Governor;   William  Corbus,   Commissioner,  Department   of                                                                   
Revenue                                                                                                                         
                                                                                                                                
REPRESENTATIVES:                                                                                                              
                                                                                                                                
Representative Ethan Berkowitz                                                                                                  
Representative Crawford                                                                                                         
Representative Nancy Dahlstrom                                                                                                  
Representative Les Gara                                                                                                         
Representative Berta Gardner                                                                                                    
Representative David Guttenberg                                                                                                 
Representative Pete Kott                                                                                                        
Representative Gabrielle LeDoux                                                                                                 
Representative Mark Neuman                                                                                                      
Representative Ralph Samuels                                                                                                    
Representative Paul Seaton                                                                                                      
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Robert Mintz, Assistant Attorney  General, Department of Law,                                                                   
Anchorage;   Roger  Marks,   Petroleum  Economist,   Economic                                                                   
Research  Section,  Tax  Division,   Department  of  Revenue,                                                                   
Anchorage                                                                                                                       
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 3001   An Act relating to the production tax on oil and                                                                      
          gas   and  to  conservation   surcharges   on  oil;                                                                   
          relating   to  criminal  penalties   for  violating                                                                   
          conditions   governing   access  to   and  use   of                                                                   
          confidential    information    relating   to    the                                                                   
          production  tax; amending  the definition  of 'gas'                                                                   
          as that  definition applies in the  Alaska Stranded                                                                   
          Gas Development Act;  making conforming amendments;                                                                   
          and providing for an effective date.                                                                                  
                                                                                                                                
          HB 3001 was heard and HELD in Committee for                                                                           
          further consideration.                                                                                                
                                                                                                                                
HB 3003   An Act relating to oil and gas properties                                                                             
          production  taxes; providing  for a production  tax                                                                   
          adjustment  to increase the  amount of tax  at high                                                                   
          oil  prices  and  a production  tax  adjustment  to                                                                   
          decrease  the tax on  the production of  heavy oil;                                                                   
          providing for  an exclusion of a certain  amount of                                                                   
          oil and  gas from the  gross value at the  point of                                                                   
          production;  relating to  the determination  of the                                                                   
          gross  value  of  oil  and  gas  at  the  point  of                                                                   
          production; and providing for an effective date.                                                                      
                                                                                                                                
          HB 3003 was SCHEDULED but not heard.                                                                                  
                                                                                                                                
HB 3004   An Act relating to oil and gas, and to the oil and                                                                    
          gas  properties production  (severance)  tax as  it                                                                   
          applies  to  oil; providing  for  an adjustment  to                                                                   
          increase the  tax collected when oil  prices exceed                                                                   
          certain  amounts and  to reduce  the tax  collected                                                                   
          when  oil   prices  fall  below  $16   per  barrel;                                                                   
          providing  for relief from  the tax when  the price                                                                   
          per   barrel   is   low  or   when   the   taxpayer                                                                   
          demonstrates  that   a  reduction  in  the  tax  is                                                                   
          necessary  to establish  or reestablish  production                                                                   
          from an oil field or  pool that would not otherwise                                                                   
          be  economically feasible;  delaying until  July 1,                                                                   
          2016,   the   deadline  for   certain   exploration                                                                   
          expenditures  that  form  the  basis for  a  credit                                                                   
          against  the tax  on oil  and gas  produced from  a                                                                   
          lease  or  property  in  the  state;  amending  the                                                                   
          powers  and  duties  of  the  Alaska  Oil  and  Gas                                                                   
          Conservation  Commission;   and  providing  for  an                                                                   
          effective date.                                                                                                       
                                                                                                                                
          HB 3004 was SCHEDULED but not heard.                                                                                  
                                                                                                                                
3:09:24 PM                                                                                                                    
HOUSE BILL NO. 3001                                                                                                           
                                                                                                                                
     An Act  relating to  the production tax  on oil  and gas                                                                   
     and  to  conservation  surcharges  on oil;  relating  to                                                                   
     criminal  penalties for  violating conditions  governing                                                                   
     access to  and use of confidential  information relating                                                                   
     to the production tax; amending  the definition of 'gas'                                                                   
     as that  definition applies  in the Alaska  Stranded Gas                                                                   
     Development  Act;  making   conforming  amendments;  and                                                                   
     providing for an effective date.                                                                                           
                                                                                                                                
Co-Chair  Chenault noted  that there  was a conceptual  draft                                                                   
amendment for HB  3001 in the Committee member's  files.  The                                                                   
amendment is in  the form of a WORK DRAFT (copy  on file). He                                                                   
stated that  the committee substitute  would be  available on                                                                   
8/01/06.    He hoped  that  the  work  draft would  help  the                                                                   
Legislature  come to  an agreement and  address the  problem.                                                                   
He stated that it was a produce or pay program (POP).                                                                           
                                                                                                                                
3:11:52 PM                                                                                                                    
                                                                                                                                
DR.  PEDRO VAN  MEURS, CONSULTANT,  OFFICE  OF THE  GOVERNOR,                                                                   
provided members  with a handout: Produce or  Pay (POP), July                                                                   
31, 2006  (copy on  file). He  said the questions  concerning                                                                   
PPT are  whether or not  the tax break  would in  fact create                                                                   
more investment and if there is  not investment shouldn't the                                                                   
tax rate be higher.  The concept  of produce or pay addresses                                                                   
both issues.                                                                                                                    
                                                                                                                                
3:15:02 PM                                                                                                                    
                                                                                                                                
Dr. Van  Meurs referenced Page  3. He introduced  the produce                                                                   
or  pay  concept.  He  noted  the  difficulty  in  separating                                                                   
existing production from incremental production.                                                                                
                                                                                                                                
Dr. Van Meurs referenced Page 4.                                                                                                
                                                                                                                                
In  the  Produce  or Pay  concept,  the  production  of  each                                                                   
company is split into:                                                                                                          
                                                                                                                                
   · Base production                                                                                                            
   · Incremental production                                                                                                     
                                                                                                                                
   The base production is determined on the basis of the                                                                        
   2005 production in terms of barrels equivalent.                                                                              
                                                                                                                                
Dr. Van Meurs  compared the situation to Kuwait.  He observed                                                                   
that  the  situation facing  Kuwait  is  similar to  that  of                                                                   
Alaska.  Kuwait has  produced  for many  years, fields  below                                                                   
cost,  but now  they  face a  period  where  fields are  more                                                                   
costly due to  water invasion and required  recovery factors.                                                                   
He went  on to say that  in response to their  concerns there                                                                   
was  a   simple  decline  curve   established  on   the  base                                                                   
production  whereby  any  incremental  production  over  that                                                                   
decline  curve could  be  taxed differently.    As a  result,                                                                   
Kuwait  drafted  a contract  where  the base  production  was                                                                   
taxed more  than the incremental  production. He  stated that                                                                   
this was the example he used to  bring forth the idea of base                                                                   
production and incremental production.                                                                                          
                                                                                                                                
3:18:37 PM                                                                                                                    
                                                                                                                                
Dr. Van Meurs defined "base production".  The base production                                                                   
uses a  defined and identifiable  starting point.  [Alaska's]                                                                   
base production was  determined by taking 75  percent of each                                                                   
company's 2005  production. For 2006  and future years,  a 5%                                                                   
decline  per  year would  be  used  relative  to 2005  on  an                                                                   
exponential  basis.  This  matches the way  in which  oil and                                                                   
gas fields  typically decline.   Any production of  a company                                                                   
in excess of  the base production is  incremental production.                                                                   
If actual  production is less  than the base  production, all                                                                   
production  is  considered base  production.    He said  this                                                                   
concept has worked successfully in other nations.                                                                               
                                                                                                                                
3:21:17 PM                                                                                                                    
                                                                                                                                
Dr.  Van Meurs  referenced Page  6. The  graph illustrates  a                                                                   
typical base  production curve  calculated on  a 5%  per year                                                                   
decline.                                                                                                                        
                                                                                                                                
3:22:38 PM                                                                                                                    
                                                                                                                                
Dr.  Van Meurs  referenced  Page  7:  Base Production.    The                                                                   
geological  and engineering evidence  indicates that  current                                                                   
actual decline  curves for oil  and gas are steeper  than 5%.                                                                   
Current  actual  decline  of the  various  mature  reservoirs                                                                   
under a  "do nothing" scenario  may range  from 8% to  12% or                                                                   
more.  With  current levels of ongoing  investment, companies                                                                   
may be  able to reduce  the decline  rate of 5%.   Therefore,                                                                   
the 5% decline  rate is based on the fact that  oil companies                                                                   
need to continue  the current levels of re-investment  in the                                                                   
State.                                                                                                                          
                                                                                                                                
3:24:13 PM                                                                                                                    
                                                                                                                                
Dr. Van Meurs referred to Page  8: Tax Rates.  The produce or                                                                   
pay is proposed to have the following tax rates:                                                                                
                                                                                                                                
   · Base production:  25%                                                                                                      
   · Incremental production:  Initially 15% going up to 5%                                                                      
     per year from 2012 onwards until by 2031 the two rates                                                                     
     are merged at 25%.                                                                                                         
                                                                                                                                
Dr.  Van  Meurs  said  that  typically  base  production  and                                                                   
incremental  production  are   used  during  a  time  when  a                                                                   
government  is attempting  to stimulate  new investment.   He                                                                   
maintained that building in increase  in government take is a                                                                   
good idea for  Alaska and emphasized that an  incremental tax                                                                   
can keep Alaska competitive.                                                                                                    
                                                                                                                                
3:27:03 PM                                                                                                                    
                                                                                                                                
Dr. Van  Meurs evaluated  the  concept as listed  on Page  9.                                                                   
Five  oil production  scenarios  were developed  to test  the                                                                   
weighted average tax rates on an Alaska wide basis.                                                                             
                                                                                                                                
   · 500,000 bopd                                                                                                               
   · 700,000 bopd                                                                                                               
   · 900,000 bopd                                                                                                               
   · 1,000,000 bopd                                                                                                             
   · 2,000,000 bopd (ANWR)                                                                                                      
                                                                                                                                
3:28:15 PM                                                                                                                    
                                                                                                                                
Dr.  Van  Meurs  referenced  page  10,  which  provides  five                                                                   
production  scenarios,  including  an  ANWR  scenario  of  an                                                                   
increase of up to 2 million barrels per day.                                                                                    
                                                                                                                                
3:28:48 PM                                                                                                                    
                                                                                                                                
Dr. Van Meurs  pointed out that Page 11 provides  the Alaska-                                                                   
wide blended rate  based on a 5% decline.  If  the Alaska oil                                                                   
industry would  rapidly develop  further oil production,  the                                                                   
blended  rate may  reach  as low  as  20%.   If  they do  not                                                                   
actively pursue further developments,  the blended rate would                                                                   
not decline below 22.5%.                                                                                                        
                                                                                                                                
3:31:30 PM                                                                                                                    
                                                                                                                                
Dr. Van Meurs reviewed Page 12.                                                                                                 
                                                                                                                                
Page 12  indicates the effect  on individual companies.   The                                                                   
blended  rate of individual  existing  oil and gas  producers                                                                   
would vary more than the Alaska  wide rate depending on their                                                                   
efforts:                                                                                                                        
                                                                                                                                
    · Companies, which pursue a harvesting approach, would                                                                      
      rapidly pay a blended rate of 25%;                                                                                        
    · Companies which let production decline at a 5% rate                                                                       
      would pay 22.5% going up to 25%; and                                                                                      
    · Companies   that   strongly    maintain   or   increase                                                                   
      production would benefit from a rate less than 22.5%                                                                      
      for up to two decades until the rate goes up to 25%.                                                                      
                                                                                                                                
3:32:28 PM                                                                                                                    
                                                                                                                                
Dr.  Van Meurs  referenced  page 13  noting  that though  the                                                                   
examples  reflected  are  the  extreme,  they  show  a  clear                                                                   
example  of the  produce  or pay  concept.    He outlined  in                                                                   
further detail  with examples.   He  said that if  production                                                                   
doesn't increase  the tax  rate will  provide revenue  and if                                                                   
there  were greater  production  this would  provide  revenue                                                                   
into the future.                                                                                                                
                                                                                                                                
3:33:54 PM                                                                                                                    
                                                                                                                                
Dr. Van Meurs referenced page 14.                                                                                               
                                                                                                                                
He explained  that because new  investors start at  zero base                                                                   
production  they would be  taxed at  the incremental  rate of                                                                   
15%.  He  noted   that  this  was  considered   to  encourage                                                                   
investment and reinvestment.                                                                                                    
                                                                                                                                
The previous PPT did not address  the concerns for investment                                                                   
and reinvestment,  or  the harvester  only scenario,  the POP                                                                   
addresses both  by establishing both  a base rate as  well as                                                                   
an incremental rate.                                                                                                            
                                                                                                                                
He  further  noted  that  the   state  continues  to  collect                                                                   
corporate income tax, property taxes, and royalties.                                                                            
                                                                                                                                
3:38:09 PM                                                                                                                    
                                                                                                                                
Dr. Van  Meurs said that due  to current circumstance  in the                                                                   
world,  oil  prices  in  the   future  are  uncertain.    The                                                                   
provision  in the  POP  to reevaluate  in  2011 protects  the                                                                   
state from being locked in.                                                                                                     
                                                                                                                                
He responded to  earlier concerns regarding  the soundness of                                                                   
the  government's   ability  to   audit.    He   stated  that                                                                   
modifications  made to  the bill  strengthen  the concept  of                                                                   
non-deductible costs and auditing procedures.                                                                                   
                                                                                                                                
3:41:05 PM                                                                                                                  
                                                                                                                              
Representative Kelly asked what  would happen under a harvest                                                                   
only  scenario regarding  companies  getting  quickly to  the                                                                   
25%.   Dr. Van  Meurs said  the base  rate is established  by                                                                   
taking 75% of the total production.   If that declined by 5%,                                                                   
incremental  oil  would always  be  25% and  base  production                                                                   
would be 75% so you would maintain  a rate of 22.5%.  He went                                                                   
on to say that the natural decline  of a mature oil reservoir                                                                   
is 12%.  At a 10% decline rate,  after 4 to 5 years, you have                                                                   
no  more incremental  production  because the  5% cushion  is                                                                   
used up.   All production would then become  base production.                                                                   
If a company makes  no investment they are up to  25% in 5 to                                                                   
6 years.  The incremental  goes away  quickly because  of the                                                                   
strong decline  rate of the  total production while  the base                                                                   
production continues to decline at 5%.                                                                                          
                                                                                                                                
Representative Kelly asked about  freezing the original base.                                                                   
Dr.  Van  Meurs explained  that  the  incremental  production                                                                   
declines also.  If a company does  nothing, there would be no                                                                   
more  incremental  production.   Base  production  is  always                                                                   
locked in  at 5% decline  rate.  That  is why companies  that                                                                   
are only harvesters would be faced with the 25% rate.                                                                           
                                                                                                                                
3:44:45 PM                                                                                                                    
                                                                                                                                
Representative  Kelly thought  if  the 5%  was  close to  the                                                                   
average,  and it  was ridden  down,  the rate  would stay  at                                                                   
22.5%.  He questioned  the balance behavior and  asked if the                                                                   
scenario stated would be an unusual case.                                                                                       
                                                                                                                                
Dr. Van  Meurs stated it  would not be  an unusual case  in a                                                                   
typical mature oil  field during the final 10 to  20 years of                                                                   
that oil  field.   Oil production,  at a  10% decline  is the                                                                   
normal average.   On the North  Slope, the base  decline rate                                                                   
without  well work  and  supplemental investments  is  faster                                                                   
than  5%.   This  illustrates  the point  that  if a  company                                                                   
continues  to make  investments  to maintain  production  the                                                                   
decline rate is maintained at 5%.                                                                                               
                                                                                                                                
3:47:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ETHAN  BERKOWITZ inquired  if  the POP  could                                                                   
work with both the gross and net tax.                                                                                           
                                                                                                                                
3:47:59 PM                                                                                                                    
                                                                                                                                
Dr. Van Meurs stated  the concept of produce or  pay could be                                                                   
applied to any fiscal framework.   It can be related to gross                                                                   
or net.                                                                                                                         
                                                                                                                                
3:49:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KERTULA asked if  deductions and  credits are                                                                   
allowed, could  a company have  enough credits that  it would                                                                   
undercut the requirement  of more production, to  get a lower                                                                   
tax.   Dr.  Van Meurs  explained  that 20%  tax credits  only                                                                   
apply if companies actually invest.  The loss carried forward                                                                   
tax credits  were also set in  the bill at 20%  and therefore                                                                   
are not really affected.  The  blended rate, the loss carried                                                                   
forward  tax credit  is also set  at 20%  to avoid  excessive                                                                   
interaction between  the possible  blended rate and  the loss                                                                   
carried forward.                                                                                                                
                                                                                                                                
3:52:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  LES GARA commented  on the incentive  and the                                                                   
rate  itself.     He  stated  that  in   earlier  discussions                                                                   
regarding  the tax  for new investors  there  was a 25%  rate                                                                   
then a  20% tax rate and  now a 15%  tax rate.  He  asked Dr.                                                                   
Van Muers  to explain  the decrease  in rate.  Dr. Van  Meurs                                                                   
responded  by  clarifying  the  concept.   He  supported  the                                                                   
concept by saying that companies  would get a blended rate on                                                                   
the extra  25% over  the base production.   He contends  that                                                                   
this would stimulate long-term investment in Alaska.                                                                            
                                                                                                                                
3:56:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  PAUL SEATON  asked  if a  separate base  rate                                                                   
should  be applied for  the Alaska  National Wildlife  Refuge                                                                   
(ANWR).  He  voiced concern that the most  significant source                                                                   
of oil would be taxed at an incremental  rate rather than the                                                                   
base, which would not realize  maximum return.  Dr. Van Meurs                                                                   
responded that  technically, there would be  no limitation on                                                                   
regions  that can be  created with  separate base  production                                                                   
and incremental production.  He  referenced the graph on page                                                                   
11.   He went  on to say  that even  if [ANWR] were  declared                                                                   
open in  2007, it would  take considerable time  before there                                                                   
is  production, possibly  8 to  10 years.   At  the point  of                                                                   
actual production  the State would  realize the  blended rate                                                                   
of  25%.    He  concluded  with  a  recommendation  that  the                                                                   
proposed tax rates  stay intact and that the  legislature not                                                                   
establish a different base rate for ANWR.                                                                                       
                                                                                                                                
4:01:15 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer  asked  if  there   was  a  bias  toward  new                                                                   
investors.   Dr. Van Meurs  responded by clarifying  that the                                                                   
POP   system  encourages   new  investors,   but  over   time                                                                   
establishes  a level  playing field  for all  producers.   He                                                                   
further  maintained  that  there  is  no  difference  between                                                                   
incremental investments and new production.                                                                                     
                                                                                                                                
4:03:42 PM                                                                                                                    
                                                                                                                                
Dr.  Van  Meurs  reported  that it  is  common  for  existing                                                                   
production  to be subject  to a  higher government  take than                                                                   
subsequent  production  and  is   not  seen  as  an  inherent                                                                   
discrimination.                                                                                                                 
                                                                                                                                
REPRESENTATIVE BERTA  GARDNER inquired that if  the system is                                                                   
known and encourages reinvestment,  why was the original bill                                                                   
set at 20/20 PPT.                                                                                                               
                                                                                                                                
Dr. Van  Meurs replied  that it  is his  desire to  propose a                                                                   
simple system, but often the political  process makes it more                                                                   
complex.  He  opined  that the  previous  system  would  have                                                                   
worked,  but   that  there  was  an  additional   concern  to                                                                   
incentivize investment.   The  proposal will assure  Alaskans                                                                   
that investment is attained.                                                                                                    
                                                                                                                                
4:10:16 PM                                                                                                                    
                                                                                                                                
Representative  Stoltze asked how  open the process  with the                                                                   
Administration is.   He wanted to make sure that  the door is                                                                   
open and the effort is "good faith".                                                                                            
                                                                                                                                
WILLIAM   CORBUS,   COMMISSIONER,  DEPARTMENT   OF   REVENUE,                                                                   
reported  that the  Governor introduced  the  20/20 PPT  last                                                                   
session and is interested in seeing the process go forward.                                                                     
                                                                                                                                
Representative  Stoltze asked if  the Administration  is open                                                                   
to looking at the alternative  proposal.  Commissioner Corbus                                                                   
encouraged the Legislature to  come forward with legislation.                                                                   
                                                                                                                                
4:12:50 PM                                                                                                                    
                                                                                                                                
ROBYNN  WILSON,  DIRECTOR,  DIVISION OF  TAX,  DEPARTMENT  OF                                                                   
REVENUE, identified  changes in the WORK  DRAFT[L1].  She said                                                                  
that in addition  to the variable rates there  are four areas                                                                   
that  represent change  from the  original bill.   The  first                                                                   
change is  to the type of reports  DOR is to prepare  and the                                                                   
time frame they are due.  The  reports are more comprehensive                                                                   
and include the  effects of tax rates and all  credits.  This                                                                   
                   st                                                                                                           
report is due the 1 legislative day in 2011.                                                                                    
                                                                                                                                
Secondly,  she  pointed  out the  requirement  of  an  annual                                                                   
filing  by companies  with  monthly installment  payments  or                                                                   
estimated tax  payments. She noted  that this  guards against                                                                   
cash flow issues.    Transportation costs would  be estimated                                                                   
and paid at the end of the year.                                                                                                
                                                                                                                                
4:16:33 PM                                                                                                                    
                                                                                                                                
Thirdly, the  changes clarified  language in  the bill.   Ms.                                                                   
Wilson  referenced Section  160 noting  that this section  is                                                                   
now broken in to 3 parts to make  it easier to read.  It does                                                                   
not  change  intent.    She  said  there  are  also  improved                                                                   
language  additions  to  clarify intent,  in  particular  the                                                                   
section explaining  lease expenditures.   She said  she would                                                                   
further  highlight these  changes  as she  moved through  the                                                                   
bill.                                                                                                                           
                                                                                                                                
4:18:14 PM                                                                                                                    
                                                                                                                                
Ms. Wilson referred  to a matrix, "Limited Comparison  of PPT                                                                   
Bill Versions and POP draft WORK  DRAFT" (copy on file.)  She                                                                   
reviewed the  tax rate.  She  said the capex credit  rate has                                                                   
not  changed.  The  capex section  has  been  renumbered  and                                                                   
reordered.                                                                                                                      
                                                                                                                                
She also  noted that  the bill  maintains language  regarding                                                                   
the  ELF tax  ceiling  on Cook  Inlet.   The  structure  also                                                                   
remains for various regions.                                                                                                    
                                                                                                                                
Ms.   Wilson    noted   that   the   particulars    regarding                                                                   
progressivity surcharge are still under discussion.                                                                             
                                                                                                                                
She explained the  credit for annual loss.   The mechanism of                                                                   
a loss is  converted into a  credit for use in  the following                                                                   
years.   It is accomplished at  the base tax rate  (20%). She                                                                   
pointed out  that though  there was a  credit usage  floor in                                                                   
the conference committee  version, there is none  in the WORK                                                                   
DRAFT.    The  bill  maintains   the  language  for  the  TIE                                                                   
(Transitional Investment Credit).                                                                                               
                                                                                                                                
Ms.  Wilson drew  attention  to  the base  allowance  credit,                                                                   
which had been in the previous  version of the bill to assist                                                                   
smaller, newer producers.  In the WORK DRAFT,  this credit no                                                                   
longer appears, as it was seen  as a duplication of incentive                                                                   
with the incremental  production tax.  She discussed  the new                                                                   
area development credit of $6 million.                                                                                          
                                                                                                                                
4:23:37 PM                                                                                                                    
                                                                                                                                
Ms. Wilson talked about the lease  expenditures: authority of                                                                   
industry practices.  She reported  that there are a number of                                                                   
language  changes in  the lease  expenditures. These  changes                                                                   
provide for  improvement and  clarity regarding  nonallowable                                                                   
expenditures.  As an  example, overhead  allowance will  be a                                                                   
percentage of direct costs.                                                                                                     
                                                                                                                                
She  stated  that  in  the  WORK   DRAFT  the  Department  of                                                                   
Revenue[L2] reports to the  legislature. She  noted that  the                                                                   
language regarding  this starts on page 33 of  the WORK DRAFT                                                                   
rather than  page 34 as noted  in the handout.   She reported                                                                   
on the  effective date, the tax  returns date, and  said that                                                                   
there is no safe harbor for payments  due. She went on to say                                                                   
that  installment payments  and  estimated  tax payments  are                                                                   
based on the  federal tax rates rather than  state tax codes.                                                                   
Under  the federal  tax code  there are  different rules  for                                                                   
underpayments  and  over  payments.   She  said  in  previous                                                                   
versions there was  a 10-month transition payment  on the old                                                                   
system, which would true up on  3/31/07. With new version the                                                                   
producer would  pay under the  old system through  January of                                                                   
2007 and then at the end of February  the first estimated tax                                                                   
payment would be due.                                                                                                           
                                                                                                                                
4:28:25 PM                                                                                                                    
                                                                                                                                
Representative Stoltze  asked about interest rates  for under                                                                   
payments and over payments and  whether this impacts the rate                                                                   
for disputed payments.   Ms. Wilson replied that  it makes no                                                                   
changes in  the state  rate. Federal  rates would apply  from                                                                   
the date of installment payments  until March 31; on March 31                                                                   
the state rate of 11 ¼% would be applied.                                                                                       
                                                                                                                                
4:29:30 PM                                                                                                                    
                                                                                                                                
Representative  Holms asked  what the  cost to  the State  of                                                                   
Alaska  would  be  if the  severance  tax  problem  were  not                                                                   
solved.                                                                                                                         
                                                                                                                                
4:29:50 PM                                                                                                                    
ROGER  MARKS,   (TESTIFIED  VIA  TELECONFERENCE),   PETROLEUM                                                                   
ECONOMIST,   ECONOMIC   RESEARCH   SECTION,   TAX   DIVISION,                                                                   
DEPARTMENT OF  REVENUE, ANCHORAGE, responded to  the question                                                                   
by referencing the graph handout.  (Copy on File).                                                                              
                                                                                                                                
Mr. Marks said that the under  the ELF, with no change at $60                                                                   
a barrel the loss would be approximately  1.1 billion.  Under                                                                   
the POP system set forth by Dr.  Van Meurs and Ms. Wilson the                                                                   
gain is  approximately 2.6 billion,  leaving a  difference in                                                                   
loss of $1.5 billion dollars per year.                                                                                          
                                                                                                                                
Representative Holms  asked if it were possible  for the next                                                                   
legislature  to  make this  policy  retroactive.   Mr.  Marks                                                                   
advised  that  constitutionally  there  is not  an  issue  of                                                                   
retroactivity within  the same year.  He went on  to say that                                                                   
if retroactivity where to go much  beyond that it could raise                                                                   
policy  issues  regarding the  stability  and  health of  the                                                                   
business environment.                                                                                                           
                                                                                                                                
4:32:28 PM                                                                                                                    
                                                                                                                                
ROBERT  MINTZ,  (TESTIFIED  VIA   TELECONFERENCE),  ASSISTANT                                                                   
ATTORNEY GENERAL,  DEPARTMENT OF  LAW, ANCHORAGE,  added that                                                                   
there was  no specific  verbiage regarding retroactivity.  He                                                                   
went on to say the when the courts  have upheld retroactivity                                                                   
in tax  law it was  with regard  to relatively short  periods                                                                   
within the same calendar year.                                                                                                  
                                                                                                                                
He  furthered  the  point  by saying  the  longer  period  of                                                                   
retroactivity,  the  more  risk  of  constitutional  problems                                                                   
could  be   found  by   the  court.     He  reiterated   that                                                                   
retroactivity  is usually  handled within  the calendar  year                                                                   
without any legal challenges.                                                                                                   
                                                                                                                                
4:34:01 PM                                                                                                                    
                                                                                                                                
Representative   Kelly   expressed  concern   regarding   the                                                                   
accuracy of  a 5% decline rate.   He questioned whether  a 3%                                                                   
decline might be more appropriate.                                                                                              
                                                                                                                                
Dr. Van Meurs referenced page  11 of the POP handout:  Alaska                                                                   
Wide blended rate. He pointed  out that though there might be                                                                   
a dip  to 22% or  21½% tax rate  around 2011, the  rate would                                                                   
increase   relatively   strongly   because   of   a   steeper                                                                   
decline[L3], thus reaching the 25% rate.                                                                                        
                                                                                                                                
On  the 3%  decline  rate scenario  companies  would have  to                                                                   
realize  massive  additional  investment  effort,  but  would                                                                   
remain  at the  25% tax  rate,  losing the  incentive of  the                                                                   
incremental rate[L4].  He agreed that the decline  curve is a                                                                   
sensitive  feature,  but  maintained  that  5%  is  the  most                                                                   
reasonable and fair level of decline.                                                                                           
                                                                                                                                
4:42:18 PM                                                                                                                    
                                                                                                                                
Mr. Marks added that the North  Slope base decline rates have                                                                   
investment backing it up.                                                                                                       
                                                                                                                                
Representative Kelly asked if  different base and incremental                                                                   
rates were  calculated, specifically a  20-25 rate.   Dr. Van                                                                   
Meurs stated  that different  rates were  looked at  and that                                                                   
there  are infinite  combinations.   He  went on  to say,  by                                                                   
making a differential  between the base rate  and incremental                                                                   
rate too  low, the system is  not strong enough  to encourage                                                                   
investment.                                                                                                                     
                                                                                                                                
4:46:14 PM                                                                                                                    
                                                                                                                                
Representative Kelly asked if  they froze the FY05 base rate,                                                                   
making a zero decline.  Dr. Van  Meurs stated that many rates                                                                   
were used.  He  emphasized that it is best to  take a decline                                                                   
rate that is  similar to average oil industry  behavior.  The                                                                   
5% decline rate reflects that average.                                                                                          
                                                                                                                                
4:48:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KELLY commented  on the  upcoming decade  and                                                                   
pointed out  that the opportunity  to capture value  would be                                                                   
higher.  He asked if Dr. Van Meurs  would be surprised if the                                                                   
model performed like a 20% tax  and if so would he be pleased                                                                   
because additional  production had  occurred.  Dr.  Van Meurs                                                                   
responded by  referencing the graph  on Page 11,  (Produce or                                                                   
Pay).   The sensitivity of  the graph illustrates  what would                                                                   
happen in the case of major production increase.                                                                                
                                                                                                                                
4:52:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  RALPH SAMEULS  commented on the  difficulties                                                                   
of establishing rates.   He noted that in all  scenarios they                                                                   
were basing  their projections  on corporate behavior,  which                                                                   
is not necessarily a predictable  variable in the future.  He                                                                   
concluded  by  supporting the  idea  of keeping  the  decline                                                                   
curve as an average rather than taking averages per field.                                                                      
                                                                                                                                
4:56:30 PM                                                                                                                    
                                                                                                                                
Representative Hawker  commented on the reconfiguring  of the                                                                   
Trans-Alaska Pipeline System (TAPS)  and how the capacity for                                                                   
TAPS is  less than a million  barrels a day.   In conclusion,                                                                   
he  said  that  though  the  extremes  scenarios  (2  million                                                                   
barrels a day) are useful they  have other realistic barriers                                                                   
such as the case with TAPS.                                                                                                     
                                                                                                                                
4:57:44 PM                                                                                                                    
                                                                                                                                
Representative  Gara questioned  whether the  state would  be                                                                   
rewarding companies  for doing  what they are  already doing.                                                                   
Dr. Van Meurs noted that was an  important point.  If the oil                                                                   
[L5]industry continues to produce at  the current  level, the                                                                   
decline rate  is roughly 5%.   [L6]With a 5% decline of total                                                                   
production  and  5% decline  of  base production,  the  ratio                                                                   
between  base  production and  incremental  production  would                                                                   
always stay the same.  Such a  company would pay, until 2012,                                                                   
an average of 22.5%.   After that, the blended  rate would go                                                                   
up from 22.5% to 25%.  The goal  of the proposed scheme is to                                                                   
make distinction between existing  production and incremental                                                                   
production.  There is a  penalty for companies  in[L7] blended                                                                  
rate that decline  steeper than 5% and a reward  to companies                                                                   
that decline  less than 5%. There  is a strong reward  on the                                                                   
blended rate to companies that double production.                                                                               
                                                                                                                                
5:01:42 PM                                                                                                                    
                                                                                                                                
Representative  Gara   asked  about  companies   artificially                                                                   
reducing the rate  of production, thereby staying  under a 5%                                                                   
loss.   Ms. Wilson  stated that  the tax  rate the  next year                                                                   
does not calculate  with respect to that lower  deduction; it                                                                   
is still calculated with respect to the decline line.                                                                           
                                                                                                                                
5:03:32 PM                                                                                                                    
                                                                                                                                
Representative  Kerttula  asked what  geological  information                                                                   
has been  ascertained to determine  rates of production.  Dr.                                                                   
Van  Meurs stated  that  many  presentations  have been  made                                                                 
regarding the  decline rate in the  North Slope.  He  went on                                                                   
to say that  in a state  of mature decline, rates  could vary                                                                   
between 8-12%.  These rates are  generally accepted as normal                                                                   
international decline rates.                                                                                                    
                                                                                                                                
5:06:45 PM                                                                                                                    
                                                                                                                                
HB 3001 was HELD in Committee for further consideration.                                                                        
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 5:07 P.M.                                                                                          
                                                                                                                                
                                                                                                                                

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