Legislature(2007 - 2008)CAPITOL 124
02/08/2007 03:00 PM House OIL & GAS
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| Presentation: Department of Revenue - Ppt Update | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
February 8, 2007
3:07 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Kurt Olson, Vice Chair
Representative Jay Ramras
Representative Ralph Samuels
Representative Mike Doogan
Representative Scott Kawasaki
MEMBERS ABSENT
Representative Nancy Dahlstrom
OTHER LEGISLATORS PRESENT
Representative Lindsey Holmes
Senator Joe Thomas
COMMITTEE CALENDAR
PRESENTATION: DEPARTMENT OF REVENUE - PPT UPDATE
HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
JONATHAN IVERSEN, Director
Tax Division
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Provided the presentation on state revenue
and the petroleum profits tax.
CHERIE NIENHUIS, Petroleum Economist
Tax-Economic Research Group
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Provided a presentation and responded to
questions regarding fiscal year 2007 projected revenue.
GARY ROGERS, Production Audit Manager
Tax Division
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Answered questions.
ACTION NARRATIVE
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 3:07:37 PM. Representatives Kohring,
Samuels, Doogan, and Kawasaki were present at the call to order.
Representatives Olson and Ramras arrived as the meeting was in
progress. Representative Lindsey Holmes and Senator Joe Thomas
were also in attendance.
^Presentation: Department of Revenue - PPT Update
3:08:14 PM
CHAIR KOHRING announced that the only order of business is the
presentation by the Department of Revenue (DOR) on the petroleum
production profits tax (PPT) update.
JONATHAN IVERSEN, Director, Tax Division, Department of Revenue
(DOR), offered his assistance in answering questions that were
posed at the previous House Special Committee on Oil and Gas
meeting [held January 25, 2007], and in updating information
regarding the petroleum profits tax (PPT) and the oil revenue
picture for the State of Alaska.
CHERIE NIENHUIS, Petroleum Economist, Tax-Economic Research
Group, Department of Revenue (DOR), recommended to committee
members the use of the Fall 2006 Revenue Sources Book issued by
DOR, as a guide to sources of revenue for the State of Alaska in
the near future.
MS. NIENHUIS began the presentation by listing the sources of
projected income for fiscal year 2007 (FY 07). She identified
income from the four major parts of oil revenue as: royalties,
bonuses, and rents of approximately $1.5 billion; production
taxes of approximately $2.1 billion; corporate income taxes of
approximately $650 million; and property taxes of approximately
$51 million. After adding the projected non-oil income of
$580.8 million, the unrestricted general fund budget for FY 07
totals $4.9 billion, of which $4,331.5 billion, or 88.2 percent,
is oil revenue. The forecasted price for FY 07 was $70.00 per
barrel in July. By March, and continuing for the remainder of
FY 07, the forecasted price is $52.50 per barrel. This
adjustment is the result of the decline in the price of oil.
Ms. Nienhuis described variances in the forecast as the year-to-
date changes from the fall forecast; for example, the actual
prices of oil per barrel for FY 07 have been 3.3 percent above
the forecasted prices and the Arctic North Slope (ANS) crude oil
production has been at 1.4 percent below the forecasted
production.
3:16:33 PM
REPRESENTATIVE RAMRAS referred to [pending] lawsuits against BP
Exploration (Alaska) Inc. (BP), and inquired as to whether [the
Trans-Alaska Pipeline (pipeline) shut down] and subsequent
increase in production due to "flushing" is reflected in the
variance of production volume. He defined "flushing" as an
increase in production after a capped field is re-opened.
MR. IVERSEN advised the committee that DOR cannot comment on
possible damages to the State of Alaska.
MS. NIENHUIS informed the committee that she believes the
production decline [due to the pipeline shut down] is reflected
in the volumes of the present forecast. Therefore, if the
production continues at 750,000 to 800,000 barrels a day (b/d),
the forecast will be accurate.
REPRESENTATIVE RAMRAS asked: "Has there, in fact, been flushing
in the field ... after it had been capped for awhile because
of the incident [pipeline shut down]?"
MS. NIENHUIS relayed that she will check with the DOR petroleum
engineer to answer that question.
3:19:16 PM
MR. IVERSEN began an overview of the PPT by reviewing the PPT
tax calculation general formula which is: PPT Tax Liability =
[(Value - Costs)] x Tax Rate) - Credits. In this formula, the
value equals the volume of oil and gas produced multiplied by
the wellhead value. He described the wellhead value as the
value of oil on the West Coast less transportation expenses.
The cost factors in the formula are capital expenditures plus
operating expenditures. The base tax rate is equal to 22.5
percent plus the progressivity factor.
REPRESENTATIVE DOOGAN questioned if the capital expenditures are
counted once, as a cost, and again as an additional 20 percent
credit.
MR. IVERSEN confirmed that there is a deduction on the cost side
and the credit against qualified expenditures is also allowed.
MR. IVERSEN continued with the presentation by defining the
credits in the PPT tax calculation formula as 20 percent of
capital expenditures plus 20 percent of eligible transition
expenditures, also known as transition investment expenditures,
plus a base allowance that is determined by the production
volume of the company.
REPRESENTATIVE DOOGAN requested that Mr. Iversen give an example
of an eligible transition expenditure.
MR. IVERSEN explained that transition investment expenditures
are capital investments that were made five years prior to the
passage of the PPT.
REPRESENTATIVE SAMUELS advised that the intent of the transition
investments expenditures credit is that a $2 credit of capital
investment made today would be the equivalent to $1 spent in the
past.
3:25:23 PM
MS. NIENHUIS added that 20 percent of five years of expenditures
credit can be taken over a seven year period; therefore the
equivalent is not quite $2 to $1.
MR. IVERSEN described the PPT true-up payment as the difference
between the estimate of taxes based on the PPT, which was
effective on April 1, 2006, and the estimate of taxes based on
the economic limit factor (ELF). He pointed out that from April
to December 2006, the taxpayers have been paying taxes based on
the ELF. Therefore, due at the end of March will be a true-up
payment that DOR has estimated to be $0.95 billion, and for FY
07, this difference is projected to be $1.2 billion, which also
includes the months of April and May 2006.
REPRESENTATIVE RAMRAS commented on the dramatic increase in
projected oil tax revenue resulting from the passage of the PPT.
MR. IVERSEN spoke of several questions posed during the drafting
of the PPT draft regulations and informed the committee that the
final review is expected to be completed by the end of March.
Expected implementation of the first round of regulations is
anticipated for April and the second regulation project will
begin in the spring of 2007.
3:32:04 PM
CHAIR KOHRING referred to a letter from Mahoney & Associates,
LLC of Anchorage, Alaska (Mahoney), that outlines serious
concerns about the proposed regulations. He requested that Mr.
Iversen provide the committee with DOR's reaction to the
concerns expressed in the letter.
MR. IVERSEN assured committee members that comments from all
sources are considered during the drafting of regulations. Mr.
Iversen then turned to the questions posed by Representative
Ramras during the previous committee meeting of January 25,
2007. He began by addressing the question as to whether any new
activity has been seen by small producers since the passage of
the PPT. Mr. Iversen relayed that because exploration plans are
made well in advance, the PPT probably will not have a dramatic
effect for FY 06 or FY 07. However, some taxpayers have sought
credits under AS 43.55.025, Oil and Gas Exploration Production
Credit Program, enacted in 2003. Taxpayers have submitted
approximately $253 million in exploration expenditures for
approval with tax credit claims of about $91 million.
MR. IVERSEN then addressed the question regarding the complexion
of oil and gas exploration since the passage of PPT. He noted
that new explorations and exploratory drilling plans by smaller
companies were discussed in a recent article published by the
Anchorage Daily News. The smaller companies mentioned were:
Eni Petroleum, FEX LLC, Alaska Venture Capital Group/Brooks
Range Petroleum Corporation, Anadarko Petroleum Corporation, and
Pioneer Alaska, Inc.
MR. IVERSEN continued with the following question: "If, when
the state opens the envelope on March 31st and it discovers that
PPT did not work ... does DNR [tax division] have a plan to
remedy the problem with the legislature?" He advised the
committee that to his knowledge no specific plan has been made,
although a legislative remedy can not be ruled out.
3:37:49 PM
MR. IVERSEN, in response to the question of an estimate of BP's
deferred maintenance cost for rehabilitating the inline
transmission lines, commented that BP Exploration (Alaska) Inc.
(BP) has estimated $250 million in capital costs. Furthermore,
BP has indicated on its web site that it will spend a total of
approximately $550 million over the next two years for
"integrity management," including replacement of the 16 miles of
pipeline. He reiterated that he could not comment on how BP's
costs will affect state tax revenue.
REPRESENTATIVE DOOGAN asked if the state will still realize the
$1.3 billion surplus indicated in the governor's budget bill for
FY 07.
MS. NIENHUIS assured Representative Doogan of her confidence in
DOR's FY 07 forecast of $4.9 billion in total revenue.
REPRESENTATIVE DOOGAN ascertained that the PPT tax calculation
credits of 20 percent of capital expenditures and 20 percent of
eligible transition expenditures are calculated per year.
MR. IVERSEN confirmed that the credits are calculated at 20
percent per year, but pointed out that amount can not be greater
than 10 percent of the capital expenditures for the same year.
MS. NIENHUIS further explained by giving the example of a
company that spent $50 million during each of the five years of
the transition period [five years prior to the passage of the
PPT] would accrue a total of $250 million in expenditures. The
total expenditures the company would then be able to claim as a
credit, if qualified, would be 20 percent of the $250 million.
3:41:05 PM
REPRESENTATIVE DOOGAN inquired as to how the first PPT payments
will be made in March if the regulations are not in place until
April.
MR. IVERSEN informed the committee that DOR will do its best to
coordinate [payments] with the taxpayers.
REPRESENTATIVE DOOGAN said:
I understand that one of the considerations in the
regulation may be allowing the taxpayer some period of
time to revise their taxes ... [and if so] we won't
know the true effect of the PPT for whatever that
period is because there may be changes ... then we
won't know until the end of that period what the real
effect of the PPT is going to be ... Is that
correct?
MR. IVERSEN reminded the committee that until the regulations
are final the possibility of a revision period for tax returns
is unknown. However, he assured members that reasonable terms,
to address difficulties in the regulations, will be negotiated
with the taxpayers.
CHAIR KOHRING requested that Mr. Iversen provide the committee
with information on the proposed time limit [revision period]
for filing amended tax returns. He further inquired about a
possible change to the accounting method of the PPT, from
calculations based on gross profits to calculations based on net
profits, that is being considered by the Palin Administration.
3:44:25 PM
MR. IVERSEN informed the committee that he could not anticipate
legislation proposed by the Palin Administration.
CHAIR KOHRING announced to the committee that Representative
Gara has sponsored [HB 89], which addresses the issue of the PPT
tax calculations based on gross versus net revenue. He then
asked: "Is it clearly in the statue that [regulations] would
allow [BP], if they choose to ... in fact, deduct those costs
[to replace the corroded lines]?"
MR. IVERSEN replied that DOR has not made a determination about
the replacement costs.
REPRESENTATIVE RAMRAS requested a further explanation of the
relationship between the forecasted prices and the expected
amount of the true-up payment from June to December. He asked
the presenters to provide DOR's estimate of the amount of
revenue that can be expected from the PPT component versus the
ELF measurement through the remaining months of FY 07.
3:50:06 PM
MS. NIENHUIS explained that the true-up payment is the
difference between the ELF and the PPT for the period of April
1, 2006, through the end of the 2006 calendar year. At the end
of March, the taxpayers will calculate taxes under the PPT and
compare that amount to what has been paid under the ELF and the
difference will be the projected true-up payment of $950
million. Revenue from the production months of January through
May 2007, is incorporated in the total estimate of revenue for
FY 07 of $2.067 billion and estimated revenue under the ELF is
approximately $860 million; therefore, the true-up estimate is
$950 million and the remaining amount is production [tax] from
June through May.
3:52:17 PM
REPRESENTATIVE RAMRAS asked:
[What] is the specific month-to-month comparison [of
the PPT and the ELF] when [the price of oil] was at
$78.00 [per barrel]? Maybe 80 percent of that
variance between the PPT and the ELF was realized in
the summer months of June, July, and August and only
20 percent of that variance is realized in the other
eight or nine months that make up this fiscal year ...
At $55.00 a barrel WTI [West Texas Intermediate crude
oil price], I don't think the economics of PPT were
that much more remarkable than the economics of ELF.
MS. NIENHUIS confirmed that the difference between the ELF and
the PPT was much greater during the period of higher oil prices.
She further explained that the progressivity [component] of the
PPT goes into effect when the net income per barrel of oil is
about $40.00. After an allowance for transportation cost is
added, the state will see a tax rate increase when prices are
about $55.00 per barrel of oil. She suggested the committee
members consider the graph on page 85 of the Fall 2006 Revenue
Sources Book which illustrates the additional increase to
revenue when oil prices are at, or above, $55.00 per barrel.
GARY ROGERS, Production Audit Manager, Tax Division, Department
of Revenue (DOR), addressed Representative Ramras' question
regarding the effect of the PPT on exploration by pointing out
that much of the recent exploration is due to the exploration
production tax credit enacted in 2003. A period of months or
years will pass, he continued, before the effect of the PPT is
seen. However, since the inception of the exploration
production tax credit, one quarter of one billion dollars in
exploration tax credit claims has been submitted. He added that
the sunset [expiration date] of the exploration tax credit
legislation has been extended to 2016.
3:58:57 PM
CHAIR KOHRING requested that DOR provide the committee the
following: a model or comparison of the estimated revenues from
the PPT based on gross instead of net earnings, reaction to the
questions posed by the authors of the letter from Mahoney,
clarification of the statutes regarding the deductibility of the
expenses for upgrading the network of pipes on the North Slope,
and the response from the petroleum engineer to Representative
Ramras' question regarding an [increase of oil production due to
"flushing"].
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 4:00
p.m.
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