Legislature(2009 - 2010)HOUSE FINANCE 519
03/31/2010 09:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB7 | |
| HB229 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 7 | TELECONFERENCED | |
| + | HB 229 | TELECONFERENCED | |
| + | TELECONFERENCED |
6HOUSE FINANCE COMMITTEE
March 31, 2010
9:06 a.m.
9:06:49 AM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 9:06 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas Jr., Vice-Chair
Representative Allan Austerman
Representative Mike Doogan
Representative Anna Fairclough
Representative Neal Foster
Representative Les Gara
Representative Reggie Joule
Representative Mike Kelly
Representative Woodie Salmon
MEMBERS ABSENT
None
ALSO PRESENT
Tom Wright, Staff, Speaker Chenault; Mary Siroky, Special
Assistant, Department of Transportation; Tom Wright, Staff,
Speaker Mike Chenault; Carri Lockhart, Production Manager,
Marathon Oil Company; Marcia Davis, Deputy Commissioner,
Department of Revenue
PRESENT VIA TELECONFERENCE
None
SUMMARY
HB 7 ROBERT E. BUSH VETERANS' MEMORIAL BRIDGE
CS HB 7 (TRA) was REPORTED out of Committee
with a "do pass" recommendation and the
previously published fiscal note: FN1 (DOT)
HB 229 GAS EXPLORATION\DEVELOPMENT TAX CREDIT
CS HB 229 (RES) was HEARD and HELD in
Committee for further consideration.
9:07:00 AM
HOUSE BILL NO. 7
"An Act naming the bridge over the Kasilof River on
the Sterling Highway the Robert E. Bush, Jr.,
Veterans' Memorial Bridge."
9:07:28 AM
TOM WRIGHT, STAFF, SPEAKER CHENAULT, explained that the
Uncle of Robert E. Bush, Jr. requested the bridge be named
for Robert E. Bush, Jr. Robert Bush passed away on July 12,
2007, after serving in the US Army during Operation Desert
Storm. When he returned home upon his discharge, he was
diagnosed with Type 1 Diabetes, which eventually claimed
his life. His children drove the Kasilof River Bridge
daily, and naming the bridge in his honor would remind his
family and the public of his contribution to the community
and country. He stated that there are petitions from
members of the community of Kasilof signed in favor of the
bridge naming.
9:08:40 AM
Representative Kelly asked if anyone in Kasilof was opposed
to the bridge naming. Mr. Wright responded that there were
some who opposed the name change, but there was no official
testimony in opposition.
Co-Chair Stoltze closed public testimony.
9:09:55 AM
MARY SIROKY, SPECIAL ASSISTANT, DEPARTMENT OF
TRANSPORTATION explained the fiscal note for the street
signs and installation. The signs would be brown, in
compliance with historic and recreation sign custom, and
noted they will be on both sides of the street.
Co-Chair Stoltze asked if this would be consistent with
other memorial signs. Ms. Siroky indicated yes.
9:11:26 AM
Vice-Chair Thomas MOVED to Report CS HB 7 (TRA) out of
Committee with individual recommendations and the
accompanying fiscal note. There being NO OBJECTION, it was
so ordered.
CS HB 7 (TRA) was REPORTED out of Committee with a "do
pass" recommendation and the previously published fiscal
note: FN1 (DOT)
9:12:10 AM
HOUSE BILL NO. 229
"An Act amending and extending the exploration and
development incentive tax credit under the Alaska Net
Income Tax Act for operators and working interest
owners directly engaged in the exploration for and
development of gas for delivery and sale from a lease
or property in the state; providing for an effective
date by amending the effective date for sec. 2, ch.
61, SLA 2003; and providing for an effective date."
9:12:24 AM
TOM WRIGHT, STAFF, SPEAKER MIKE CHENAULT, presented an
overview of the HB 229. He explained that the bill would
amend and extend the exploration and development incentive
tax that was originally enacted in 2003. The tax credit
would continue to apply under the Alaska Net Income Tax Act
for operators and working interest owners, who are directly
engaged in the exploration for and development of natural
gas in the Cool Inlet, to more strongly encourage companies
to invest additional capital in new gas reserves. The
legislation would make the following changes to current
law: it would increase the amount of credit from 10 percent
to 25 percent of the amount of qualified capital investment
and qualified services spending; it would remove the 50
percent limitation on the amount of credits in a single
year, which would increase the time value of money for the
credit; it would remove the successful efforts requirement
that disallows the credit for wells that are drilled with
all the same cost, but end up being non-productive; it
would clarify that credits can be taken in a current tax
return, a timely filed tax return, or a timely tax return
filed for the year immediately following the year the
qualified tax investment was made; it would clarify that
credits can be applied to a gas reserve, regardless of
whether or not there was previous gas production in the
area; it would clarify that credits apply to North Slope
gas that has been brought into South-central Alaska; and it
extends the sunset date of the investment tax credit from
January 1, 2013 to January 1 2020. The bill makes no
changes to definitions of qualified capital investments or
qualified services. The annual natural gas production and
supply in the Cook Inlet was in decline, but demand was
increasing. He remarked that the original investment tax
credit was only a modest success; he stressed expanding the
tax credit to allow for much greater success in
development. He hoped the changes outlined in the bill
would achieve that goal. He pointed out that under Alaska
Statute (AS) 4320-043, which was the original bill that was
passed in 2003, there was no allowance for double tax
credits, or "double dipping."
9:15:56 AM
Representative Gara wondered why someone would choose the
10 percent credit in the bill, over a 20 percent credit
written in current legislation. Mr. Wright deferred to
Carri Lockhart.
Representative Fairclough remarked that one bill requires a
disclosure of all geological and technical information, and
the other bill does not.
9:17:19 AM
Representative Gara remarked that explorers and developers
wait for supply contracts to expire, so a new market opens
up. He wondered how that scenario would relate to the need
for tax credits. Mr. Wright deferred to Carri Lockhart.
Vice-Chair Thomas referred to current legislation regarding
an in state gas pipeline, and wondered if that might have
an impact on the proposed tax credit sunset date of January
1, 2020. Mr. Wright explained that the hope for HB 229
would be a stop-gap measure, because gas line production
was still unsure. He remarked that there were not many well
defined fields in the Cook Inlet, so it is expensive to
drill and explore the broad areas for the gas pockets.
9:21:05 AM
CARRI LOCKHART, PRODUCTION MANAGER, MARATHON OIL COMPANY,
stated that the focus of Marathon Oil Company's Alaska
Operation is natural gas production operations, limited to
the Cook Inlet. In 2009, natural gas sales from Alaska
averaged about 87 million cubic feet a day. It sold to
local utilities: En-Star Electric, Chugach Electric,
Tesoro, and the Department of Defense. It also provided
natural gas to the Conoco Philips Marathon LNG plant.
Marathon had been in business for Alaska for over 55 years,
and she stressed that the company is committed to South-
central Alaska's natural gas needs through current
contractual commitments. She remarked that tax incentives
are imperative, because of the long-term decline in natural
gas reserves and deliverability. She remarked that it is
unlikely that Cook Inlet reserve additions would replace
annual production on an ongoing long-term basis. As such,
natural gas reserves and deliverability were at risk for
continued decline at Cook Inlet, which could result in
exposure to unmet utility needs. There is a history of
oversupply of natural gas from the Cook Inlet, which kept
the price of gas below the lower 48 indexed prices. As of
late, the regulatory processes and deterioration in market
availability have added to project uncertainty. She pointed
to key issues to ensure the reliability of natural gas in
South-central Alaska: storage; market access and certainty;
and economic projects. She believed HB 229 would impact
economic projects. She noted that Marathon projects in
Alaska compete globally for finite funding, and stated that
HB 229 would level the playing field between Alaska
projects and other investment opportunities. Marathon
believed that HB 229 is one part of the equation to enhance
Cook Inlet exploration and development activities. She
reiterated that in order to qualify for the investment tax
credit, the producer must make capital investments, which
would add value back to the state.
9:26:40 AM
Representative Austerman queried the impact of the tax
incentive in decisions Marathon might make in new
explorations. Ms. Lockhart replied that a 25 percent tax
credit on expenditures does have an impact on overall
expenditures, but was unsure if it would be influential
enough for projects to compete at the corporate level.
Representative Austerman Ms. Lockhart responded that there
was a portfolio of projects that Marathon assesses from a
risk management perspective. She noted that those
portfolios change, depending on wells that are drilled in
advance. Some wells have continuing projects, based on the
success of the well; some projects get eliminated, if the
wells fail. Whether a project materializes in the near
future is based on market availability. Marathon is
attempting to secure new contracts. If those contracts are
not secured the tax incentive may not matter, because there
would be no market for the gas.
9:30:10 AM
In response to a question by Representative Kelly, Ms.
Lockhart stated that the amount of regulations on the
marketing side is a challenge for producers. She remarked
that there are not many service providers in Alaska, so
competition for service is high; therefore services often
come from the lower 48.
9:32:54 AM
Representative Gara illuminated that there was not a
current over-supply issue, and wondered if that was a
benefit to Marathon. Ms. Lockhart stated that if supply and
demand market functions in Alaska were the same as those in
the lower 48, then it would likely benefit Marathon.
Furthermore, the regulations in Alaska restrict the
benefits. If producers do not have a return on their
investment, they will choose not to invest, and the decline
will continue.
In response to a question by Representative Gara, Ms.
Lockhart stated there are many factors that gauge the
marketability of gas. She pointed to complex technologies,
risks, and deterioration of reservoirs. There was a higher
cost for resource recovery, because there was not as much
gas as there used to be.
9:35:42 AM
Representative Gara asked how long the contracts will last
for the Cook Inlet. Ms. Lockhart responded that she was
unsure, but stated that she had seen a study revealing a
gap starting in the next two years highlighting utility
needs.
Representative Gara wondered if utilities wait for their
contracts to expire, before they ask for more exploring.
Ms. Lockhart replied that utilities are proactive in
seeking new supply contracts, at the same time producers
are proactive in securing outlets.
9:37:38 AM
Co-Chair Hawker asked if utilities in South-central Alaska
were frustrated by the regulatory commission. Ms. Lockhart
responded that there had been three contracts before the
regulatory commission; two of which were long term
contracts, and were denied. She remarked that these denials
had created uncertainty in Marathon's business. Because
contracts have been denied, Marathon has cut back its
investment in Cook Inlet.
In response to a question by Representative Gara, Ms.
Lockhart declared that Marathon would be drilling, if the
contracts were not denied by the regulatory commission.
Representative Gara wondered if Marathon was confident they
would fine a gas supply, even though gas resources are
unsure. Ms. Lockhart replied that Marathon would have made
a commitment investment to be sure the needs of the
utilities were met.
9:40:29 AM
Co-Chair Hawker queried the success rate of current
drilling operations. Ms. Lockhart stated that was never a
100 percent success rate. Some levels of hydro carbon are
encountered in most cases, but economic expectations are
most often not met. Expectations are based on the reservoir
and risks related to the drilling projects.
Co-chair Hawker asserted that there is risk in drilling.
Ms. Lockhart agreed, and explained that as exploration of
reservoirs encroach the borders, the wells become higher
risk.
9:42:21 AM
Representative Fairclough reported that she was involved in
the Regulatory Commission of Alaska (RCA) rulings, when the
two contracts were denied, as well as discussions with
utilities. In those meetings, it was acknowledged that gas
supply in 2012 would be greatly depleted. The Regulatory
Commission of Alaska believed the investment required to
meet the gas requirement was too high for the consumers in
Anchorage. Because of that observation, she believed the
denial was based on cost to the consumer. She specifically
asked for an explanation of the complexities of geological
and technical data that was released under production tax.
9:44:37 AM
Ms. Lockhart replied that under the current production tax
incentives, geological data must be disclosed. The data is
equated to a trade secret of a company. It is collected
over years, and it is analyzed and interpreted in order to
determine an assessment. After a certain period of time,
that data is released for public viewing. Marathon has a
problem with giving the public access to their private
trade secrets. There are two sets of data: geophysical and
well-log data. Current statute requires well-log data be
released to the public domain after 24 months, and
geophysical data is released after 10 years. She remarked
that 10 years is a very short period of time.
9:46:59 AM
Representative Austerman wondered if doing away with
Regulatory Commission of Alaska, rather than passing the
bill might result in more drilling. Ms. Lockhart chose to
treat the inquiry as rhetorical.
Representative Fairclough stated that while she was in
Regulatory Commission of Alaska discussions, she did not
see the data the Regulatory Commission of Alaska used to
make its final decision. Ms. Lockhart stated that over past
18 months, there had been extensive dialogues. She pointed
out that are many different roles to fix the problem:
Regulatory Commission of Alaska, utilities, producers, and
the state. The common goal is to meet the demand and
reliability. She remarked that the Regulatory Commission of
Alaska has approved projects, and they carefully consider
strategic implications on tactical decisions. She said that
HB 229 would further progress development, but it is not
the sole answer to the fuel shortage.
9:50:26 AM
Representative Gara asked if the denied contracts would
have met En-star's five and ten year demand. Ms. Lockhart
believed that the five year contract would have fulfilled
unmet needs through 2016, but could not reply regarding the
10 year contract.
Representative Gara wondered how one commits to a five year
gas supply contract, when the gas is not already available.
Ms. Lockhart stated that it is a risked business. Various
factors go into determining portfolios. Production profiles
constantly change, and are considered when determining
contract commitments.
Representative Gara wondered what happens if the gas that
is promised is not recovered. Ms. Lockhart replied that the
producer can purchase gas from other companies or keep
drilling.
9:53:18 AM
Representative Fairclough shared that in her experience
with the Regulatory Commission of Alaska the utilities
typically do not request contracts from only one producer.
Utilities normally submit multiple contracts with various
producers, to ensure availability of the resource. She
mentioned that the Regulatory Commission of Alaska recently
faced an issue pertaining to the high cost of gas for the
consumer, and that the Regulatory Commission of Alaska did
not approve the contracts because of the cost.
9:54:48 AM
Representative Gara thought it would be in the best
interest of his constituents and Alaska to receive the
geophysical data if Marathon was to receive a tax credit.
That way, sustainability knowledge is maintained. He
asserted that the legislature's purpose is not to protect
the interest of the industry, but for the protection of the
gas supply for consumers. Ms. Lockhart replied that the
state is benefited from the additional resource and reserve
production. She restated that the release of the
geophysical and well-log data is problematic for the
producer.
9:58:43 AM
Representative Doogan wondered how the corporate income tax
credit would be used by the producer. MARCIA DAVIS, DEPUTY
COMMISSIONER, DEPARTMENT OF REVENUE, stated that the 25
percent credit is based on the capital expenditures and
services. Once that volume is determined, the 25 percent is
used to offset up to 100 percent the corporate income tax,
until the credit expires.
Representative Doogan asked how the tax credit is applied
pertaining strictly to drilling attempts. Ms. Davis replied
that if the producer avails themselves of the 25 percent
corporate income tax credit, they would not be able to use
the same expenditures under a production or exploration tax
credit.
10:02:48 AM
Representative Doogan wondered if one might be eligible for
future credits, once the 25 percent corporate income tax
credit is used. Ms. Davis replied that one particular well
may have many different tax credits applied to it, because
different kinds of expenditures will be used through the
life of the well.
10:05:04 AM
Representative Austerman referred to the current 10 percent
tax credit currently written in law. He queried the money
that had been used against the 10 percent tax credit, and
requested an extrapolation against the proposed increase to
the 25 percent tax credit. Ms. Davis replied that the only
way to do a history of who has utilized the 10 percent tax
credit, tedious physical examinations of corporate income
tax returns and calculations would be required.
Representative Austerman would like to know the dollar
value to previous tax credit bills, not limited to gas
related tax credit bills. He emphasized the importance of
obtaining that information, in order to determine the
fiscal impact on the state. Co-Chair Stoltze agreed.
Representative Austerman assumed the Department of Revenue
(DOR) was tracking all of the tax credit information. Ms.
Davis reiterated that DOR was not tracking the tax credits,
because they did not have the capabilities to manually
examine and calculate every corporate income tax return.
She remarked that DOR is at a disadvantage when supporting
the legislature, because they are without that information.
She asserted that Representative Austerman's request for
calculations and data were reasonable, but DOR was without
that resource.
10:08:13 AM
Co-Chair Hawker remarked that approximately $3 million
dollars was appropriated three years prior, for the purpose
of accumulating the requested data. He wondered why that
money had not been used. Ms. Davis responded that the $3
million was used to upgrade motor fuel, excise tax, and
corporate income tax. The $3 million would not be
inadequate to provide a system requested by Representative
Austerman.
Co-Chair Hawker pointed out that when HB 61 passed in the
2003 Legislature, DOR affirmed that they would provide a
complete report in 2009 on the effect of the tax credit
under HB 61. He asked if that report was completed. Ms.
Davis affirmed that the report was completed, and agreed to
provide the report at a later time.
Representative Austerman wondered if DOR looks at every
piece of legislation pertaining to corporate income tax.
Ms. Davis replied that there were many current bills that
affect either production or corporate income tax, and DOR
carefully examines the data, as is feasible with man power.
Representative Austerman stressed providing DOR with more
money and capabilities to extrapolate data related to the
production and corporate income tax.
10:10:42 AM
Co-Chair Hawker argued that the legislature faces decisions
based on revenue generation and decisions based on the
public good. He emphasized that half the population is in
need of natural gas, and that a balance should be made when
determining what money can be used towards a greater good.
Representative Austerman agreed that he was not arguing
health and safety issues, and understood that gas is
needed. He just wanted to be given accurate information, so
he understood the fiscal impact of his decisions.
Representative Gara asked if DOR had an estimate of how
much money had been received for corporate income tax from
Cook Inlet over the two years prior. Ms. Davis agreed to
provide that information. She furthered that that the
information would only be rough estimate, because corporate
income tax is done on a proportionate basis of global
income based on a factor analysis.
Co-Chair Hawker queried how the state apportions world-wide
income. Ms. Davis replied that corporate income tax from
oil and gas is a ratio of the corporate global income. The
return is a a fraction of the Alaska payroll, a fraction of
Alaska properties against total property, and other
incorporating factors. Once that ratio is determined, it is
multiplied by the total income to determine Alaska's share
of the income.
10:13:58 AM
Representative Gara wondered if the credits can be combined
with other deductions or royalty modifications. Ms. Davis
replied the production tax is determined by applying the
tax rate against the net income. The costs are lease
expenditures in subtracting costs out of the proceeds, to
determine the production tax value. The tax rate is then
applied against the tax value. Therefore, the lease
expenditures are used in deriving the tax value, which
determines the oil and gas production tax under Alaska's
Clear and Equitable Share (ACES).
In response to a question by Representative Gara, Ms. Davis
stated that tax payers in Cook Inlet pay the Economic Limit
Factor (ELF) rate, rather than the calculated rate under
the production tax.
Representative Gara wondered if there were any other
expenditures derived from the royalty. Ms. Davis replied
royalty relief negotiations would occur before new costs
are incurred. Production costs would not impact the royalty
costs.
In response to a question by Representative Gara, Ms. Davis
believed that royalty relief can occur anywhere in the
state.
10:17:49 AM
Representative Joule asked how the tax credit would impact
the work force. Ms. Davis responded that any time there is
a credit, money is spent. The credit was formulated, in
order to encourage production and spending. The target of
the bill is Cook Inlet gas development, and the state is
essentially giving the producers a discount on the
production costs. The state would lose a bit of its
corporate income tax due to the 25 percent tax credit, but
the 75 percent of the cost incurred by the company, is used
to presumably hire employees and continue to operate and
produce oil.
10:21:28 AM
Co-Chair Hawker wondered if a tax payer avails themselves
of the investment tax credit under HB229, they would be
prohibited from receiving royalty modifications provided
under any other title. Ms. Davis affirmed that is correct.
Co-Chair Hawker surmised that anyone who avails themselves
of investment tax credit against the corporate income tax
under HB229 would be prohibited from claiming any other tax
credit or royalty modification under any other statute. Ms.
Davis replied that is correct.
CSHB 229 (RES) was HEARD and HELD in Committee for further
consideration.
ADJOURNMENT
The meeting was adjourned at 10:24 AM
| Document Name | Date/Time | Subjects |
|---|---|---|
| Petition.pdf |
HFIN 3/31/2010 9:00:00 AM |
HB 7 |
| Robert Bush Obituary 2.docx |
HFIN 3/31/2010 9:00:00 AM |
HB 7 |
| Sponsor Statement-TRA.pdf |
HFIN 3/31/2010 9:00:00 AM |
HB 7 |
| AS 43.20.043.docx |
HFIN 3/31/2010 9:00:00 AM |
HB 229 |
| Chapter 61, SLA 2003.pdf |
HFIN 3/31/2010 9:00:00 AM |
|
| HB229 Testimony 3.15.10[1].pdf |
HFIN 3/31/2010 9:00:00 AM |
HB 229 |
| HB 229 Report from DOR 3.15.10[1].pdf |
HFIN 3/31/2010 9:00:00 AM |
HB 229 |
| PRA Study Final (3).pdf |
HFIN 3/31/2010 9:00:00 AM |
HB 229 |
| Sectional Analysis (RES).pdf |
HFIN 3/31/2010 9:00:00 AM |
HB 229 |
| Sponsor Statement (RES).pdf |
HFIN 3/31/2010 9:00:00 AM |
HB 229 |
| HB 229 GARA Handout DNR Incentive Grid.pdf |
HFIN 3/31/2010 9:00:00 AM |
HB 229 |
| HB 229 DOR Report Gas Exploration Tax Credit.pdf |
HFIN 3/31/2010 9:00:00 AM |
HB 229 |
| Cook Inlet Well Example 5Apr10.pdf |
HFIN 3/31/2010 9:00:00 AM |
HB 229 |