Legislature(2007 - 2008)HOUSE FINANCE 519
10/25/2007 10:00 AM House OIL & GAS
| Audio | Topic |
|---|---|
| Start | |
| HB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB2001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
October 25, 2007
10:06 a.m.
MEMBERS PRESENT
Representative Kurt Olson, Chair
Representative Nancy Dahlstrom
Representative Mark Neuman
Representative Jay Ramras
Representative Ralph Samuels
Representative Mike Doogan
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
OTHER MEMBERS PRESENT
Representative Bob Buch
Representative Andrea Doll
Representative Bryce Edgmon
Representative Anna Fairclough
Representative Les Gara
Representative Berta Gardner
Representative Carl Gatto
Representative Lindsey Holmes
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
COMMITTEE CALENDAR
HOUSE BILL NO. 2001
"An Act relating to the production tax on oil and gas and to
conservation surcharges on oil; relating to the issuance of
advisory bulletins and the disclosure of certain information
relating to the production tax and the sharing between agencies
of certain information relating to the production tax and to oil
and gas or gas only leases; amending the State Personnel Act to
place in the exempt service certain state oil and gas auditors
and their immediate supervisors; establishing an oil and gas tax
credit fund and authorizing payment from that fund; providing
for retroactive application of certain statutory and regulatory
provisions relating to the production tax on oil and gas and
conservation surcharges on oil; making conforming amendments;
and providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB2001
SHORT TITLE: OIL & GAS TAX AMENDMENTS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
10/18/07 (H) READ THE FIRST TIME - REFERRALS
10/18/07 (H) O&G, RES, FIN
10/19/07 (H) O&G AT 1:30 PM HOUSE FINANCE 519
10/19/07 (H) Heard & Held
10/19/07 (H) MINUTE(O&G)
10/20/07 (H) O&G AT 12:00 AM HOUSE FINANCE 519
10/20/07 (H) Heard & Held
10/20/07 (H) MINUTE(O&G)
10/21/07 (H) O&G AT 1:00 PM HOUSE FINANCE 519
10/21/07 (H) Heard & Held
10/21/07 (H) MINUTE(O&G)
10/22/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
10/22/07 (H) Heard & Held
10/22/07 (H) MINUTE(O&G)
10/23/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
10/23/07 (H) Heard & Held
10/23/07 (H) MINUTE(O&G)
10/24/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
10/24/07 (H) Heard & Held
10/24/07 (H) MINUTE(O&G)
10/25/07 (H) O&G AT 10:00 AM HOUSE FINANCE 519
WITNESS REGISTER
CLAIRE FITZPATRICK, Commercial Senior Vice President
BP Exploration (Alaska) Inc.
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
KEVIN MITCHELL, Vice President
Finance & Administration
ConocoPhillips Alaska, Inc. (ConocoPhillips)
POSITION STATEMENT: Testified during the hearing on HB 2001.
PATRICK GALVIN, Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Testified in support of HB 2001.
MARK HANLEY, Public Affairs Manager, Alaska
Anadarko Petroleum Corporation (Anadarko)
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
DAN E. DICKINSON, Certified Public Accountant; Certified
Management Accountant
Anchorage, Alaska
POSITION STATEMENT: Testified in his capacity as a consultant
to the Legislative Budget & Audit (BUD) committee.
RICHARD RUGGIERO, Consultant
Gaffney, Cline & Associates Inc., (Gaffney, Cline)
Houston, Texas
POSITION STATEMENT: Testified in his capacity as a consultant
to the Department of Revenue.
STEVE PORTER, Consultant
Tehachapi, California
POSITION STATEMENT: Testified in his capacity as a consultant
to the Legislative Budget & Audit (BUD) committee.
ACTION NARRATIVE
CHAIR KURT OLSON called the House Special Committee on Oil and
Gas meeting to order at 10:06:42 AM. Representatives Dahlstrom,
Samuels, Neuman, Ramras, Doogan, Kawasaki, and Olson were
present at the call to order. Also in attendance were
Representatives Buch, Doll, Edgmon, Fairclough, Gara, Gardner,
Gatto, Holmes, Roses, Seaton, and Wilson.
HB2001-OIL & GAS TAX AMENDMENTS
10:06:51 AM
CHAIR OLSON announced that the only order of business would be
HOUSE BILL NO. 2001, "An Act relating to the production tax on
oil and gas and to conservation surcharges on oil; relating to
the issuance of advisory bulletins and the disclosure of certain
information relating to the production tax and the sharing
between agencies of certain information relating to the
production tax and to oil and gas or gas only leases; amending
the State Personnel Act to place in the exempt service certain
state oil and gas auditors and their immediate supervisors;
establishing an oil and gas tax credit fund and authorizing
payment from that fund; providing for retroactive application of
certain statutory and regulatory provisions relating to the
production tax on oil and gas and conservation surcharges on
oil; making conforming amendments; and providing for an
effective date."
10:09:08 AM
CHAIR OLSON further announced that the format of the meeting
would be an informal round table discussion of HB 2001 by
administration representatives, industry representatives, and
legislative consultants. He requested that each speaker address
what is a "must-have" and what is a "deal-breaker" in the
proposed bill, and to state their likes and dislikes of the bill
in general.
10:09:31 AM
CLAIRE FITZPATRICK, Commercial Senior Vice President, BP
Exploration (Alaska) Inc., began by relating that BP supports a
net tax. She opined that the current law, the Petroleum Profits
Tax (PPT), was designed to stimulate investment, and that she
then said that she is not sure that BP is in a position to say
that the PPT has not been effective. In fact, she pointed out
that additional revenue to the state in the amount of $1 billion
was generated in the last fiscal year. Ms. Fitzpatrick stated
that the PPT should be given the opportunity to meet the
objectives required by the state.
10:10:57 AM
MS. FITZPATRICK, in further response to Chair Olson, opined that
she has concerns with most, if not all, of the provisions of HB
2001. The provisions of the legislation that are of lesser
concern are the administrative provisions, such as those which
provide information to the state that will result in more
accurate forecasting. She explained BP's concern with providing
information is to ensure that the appropriate processes and
procedures are in place. Confidentiality must be maintained to
prevent breeches of the U.S. Securities and Exchange Commission
(SEC) fair disclosure requirements; the Federal Energy
Regulatory Commission (FERC) regulations regarding shippers
versus producers; and anti-trust regulations. She commented
that she is sure that the Department of Revenue (DOR) and the
Department of Natural Resources (DNR) are perfectly able to
ensure that [the state] does not run afoul of any anti-trust
provisions.
10:12:52 AM
KEVIN MITCHELL, Vice President, Finance & Administration,
ConocoPhillips Alaska, Inc., responded to Chair Olson's question
by saying that there is not a deal-breaker in the bill.
However, tax policy drives behavior and there will be
implications on investment levels and activity. He warned that
provisions of HB 2001, that have a significant impact on
investment, will drive changes in behavior.
10:13:35 AM
MR. MITCHELL opined that his company is supportive, in
principle, of the administrative audit provisions and additional
transparency in HB 2001. However, ConocoPhillips believes that
the net, PPT type, [tax] structure is the right structure
because it provides both a balance between the incentives
necessary to develop more challenging fields and increased take
to the state during periods of high profit margins.
10:14:47 AM
CHAIR OLSON invited comments from Commissioner Galvin.
10:14:55 AM
PATRICK GALVIN, Commissioner, Department of Revenue, explained
that his department recognizes that reasonable people can come
to different conclusions. The intent of HB 2001 is to provide
the legislation that provides the state the tools necessary to
protect the state's interest in implementing the net tax.
Commissioner Galvin said that reactions to the bill have been
generally favorable. He expressed his belief that the
reassessment of fiscal terms is necessary, based upon the new
analysis and refinement of information gathered in the past
year. The effect of the tax policy must be a balance between
getting the needed investment to keep production high and
ensuring that the state gets its fair share. The process will
include discussion of all aspects of the bill with all of the
parties. However, he stated that he cannot identify one must-
have provision in the bill.
10:16:57 AM
MARK HANLEY, Public Affairs Manager, Alaska, Anadarko Petroleum
Corporation (Anadarko), expressed Anadarko's support of the net
profits approach to tax policy. He stated that the net tax is
appropriate because it takes into account the costs of higher
cost fields and lower taxes when profits are low. Mr. Hanley
pointed out that the state [tax] system is a combination of
taxes when royalties and property taxes are considered. House
Bill 2001 is a combination of policies and it is very difficult
to pick out any one deal-breaker. He stated that the tax rate
change was the biggest negative impact to Anadarko; the next
most significant is the change in the progressivity factor, and
third is the early elimination of the Transitional Investment
Expenditure (TIE) credits. He opined that having good auditors
is good for industry and the state, and that a change in this
policy is not a huge issue for Anadarko. However, the two-year
credit will result in more accounting and he questioned whether
the benefit is worth the cost of more accounting work for the
industry and the state. Mr. Hanley noted that, although HB 2001
improves existing law by creating the ability to purchase
credits from a pool, the bigger problem remains that credits may
be applied immediately to income, but a company without income
must spend additional money to qualify. He stressed that this
is an example of one of the many facets of the legislation that
needs to be debated.
10:23:09 AM
MR. HANLEY also pointed out that there are pages of little
things [in the bill] that should be addressed, such as the
expansion of [earned income] credits with additional qualifying
requirements, and the elimination of the suspension of wells for
credits. He referred to his previous testimony and warned that
while the focus is on the philosophical issues of the bill, many
important issues that add up to a lot of money are going to be
swept aside.
10:23:53 AM
REPRESENTATIVE SAMUELS called attention to the confusion
regarding the joint interest billings. He expressed his
understanding that, if BP is not claiming one-third of an
expense because they think ExxonMobil Corporation (Exxon) is,
and if Exxon does not claim it, the language that previously
allowed the auditor to consider this expense has been excluded
by HB 2001.
10:26:05 AM
COMMISSIONER GALVIN responded that the recommendation to remove
those two provisions in reference to joint interest billings
came from the auditor section of DOR. The intent was to
maximize the auditor's ability to use the joint interest
billings in compliance with the law. The concern was that the
provisions added a level of complexity bound by those factors to
determine compliance. Their view was that if you remove those
provisions that have a mandatory aspect, and keep the general
language, then DOR can use whatever tools appropriate to assess
the joint interest billings.
10:27:35 AM
DAN E. DICKINSON, Certified Public Accountant; Certified
Management Accountant, expressed his agreement with Commissioner
Galvin's analysis, and further clarified that he supported the
idea that gives the state the authority to determine that joint
interest billings are the only allowable costs for a unit.
Joint interest billings for costs, such as overhead, are
allowable. Mr. Dickinson indicated that this policy could work
if the state created this provision through regulation. The
other provision was a complex scheme suggested as part of the
gas line negotiations that concerning single interest owners.
He opined that the second provision would probably not be
successfully implemented.
10:29:56 AM
COMMISSIONER GALVIN informed the committee that the proposed
bill changes the focus of the section that deals with defining
lease expenditures. ACES provides for the state to define lease
expenditures through regulation; this process will provide some
sort of an outer limit. The two procedures together will
provide DOR with the ability to define the outer limit by
regulation and in a way that the auditors feel is appropriate.
10:30:52 AM
MR. DICKINSON observed that the language will clearly show that
the lawmakers intended that the joint interest billing would
become a starting point; the state would then move on from
there. He emphasized that nothing in the current statute
requires DOR to go beyond the two findings required; that the
agreement under which the joint interest billings occur is
clearly defined by the state as a direct cost, and that the
audits are conducted by those who have the means and the
incentive to make a significant effect on cost.
10:32:44 AM
REPRESENTATIVE SAMUELS relayed that a complaint he heard is that
if a company does not use the joint interest billing now, it may
be assessed a fine in the future.
10:33:26 AM
MR. MITCHELL opined that a workable and logical tax structure
will have a starting point that is the joint interest billing.
Specific exclusions, the natural tension between parties, and
the audit function between the joint interest owners keeps
things in check.
10:34:56 AM
MS. FITZPATRICK agreed with Mr. Mitchell. She noted that
complying with the law for tax filings is in BP's interest. She
expressed concern that not using the joint interest billing as a
starting point, with current and future exclusions, will result
in more complexity in the future. She affirmed that joint
operator billings serve a healthy purpose around the world and
to ignore that process and re-create past transactional details
would be impractical and expensive.
10:37:06 AM
RICHARD RUGGIERO, Consultant, Gaffney, Cline & Associates Inc.,
(Gaffney, Cline), informed the committee that he has experience
managing joint venture interests. He stated that his company
relied on the joint venture statements as a starting point to
police each party's rights and to ensure that data is provided.
From a tax perspective, though, there are a number of issues
that come up. Corporate overhead can become a contentious issue
when you are conducting business in other parts of the world,
particularly when there are caps put on overhead expenses, as in
Alaska. He gave an example of a company that submitted a nine
figure intellectual property charge in an attempt to evade the
cap on overhead expenses. Mr. Ruggiero pointed out that joint
interest billings are a good starting point, but he stressed
that commercial and intellectual property costs are coming
through joint interest statements. The industry must be clear
on the costs that the state will, or will not, allow when they
file their full return.
10:39:30 AM
MR. DICKINSON encouraged the committee to look at the most
recent unit operating agreements to see the specific caps on
intellectual property and intangibles, and how costs are being
squeezed out of "the other places the toothpaste is coming out
of the tube."
10:40:03 AM
REPRESENTATIVE DOOGAN indicated that he is not convinced that
the PPT is the right law, and that he is examining a broader set
of options. He asked for reasons to vote for a net tax when the
perspective of the people's interest in his district is for the
state to make more money. More money to the state will provide
more services to his constituents over a longer period of time.
Representative Doogan opined that a gross tax will provide the
following: the certainty of a simple tax; and accounting that
cannot be manipulated. The results of a net tax on industry's
investment decisions are of an unknown effect because of
changing prices. He pointed out that there is a tradeoff of
money and certainty for increased investment. Representative
Doogan then asked for Commissioner Galvin's level of confidence
that this is a good tradeoff, and whether increased investment
will result in revenue equal to, or greater than, that from a
gross tax.
10:43:41 AM
COMMISSIONER GALVIN responded by saying that DOR began to
develop this proposal with the goal to maximize the state's
revenue this year, as well as next year. This goal is balanced
by the desire to ensure production and revenue for the next ten
to twenty years, so the impact on investment by the industry is
a counter to that goal. Commissioner Galvin then said that the
other aspect of it is that the comparison of gross to net is not
similar to that of polar opposites. What you are really talking
about is weighing the sense of certainty and the risk of having
bad information for forecasts, versus having a tax that is
flexible to the actual economics of the field and investment
decisions by the industry. He opined that, as DOR looked
through the options, it recognized that a gross tax has no
options of accounting responsibility, and will not address the
variety of field economics, particularly on the North Slope.
His department continued to look at providing capital credits,
or adjustments, for heavy oil and realized that the gross tax
has more "audit risk." Audit risk is the risk of the state
receiving a tax payment that is less than it should be and the
difference then being determined through an audit. He explained
that, as additional cost-related adjustments are being added to
the gross tax, the gross tax did not meet the ultimate goal of a
tax system that actually reflects the economics of the fields.
There was a point where, to get the so-called gross taxes to
reflect the economic impact of the net, there were so many
adjustments that it made the audit risk comparable to continuing
with a net tax. At that point, the tax system was a quasi-gross
tax that had some gaps in its ability to actually reflect the
economic reality of a particular field, and it became an
artificial net tax. Therefore, the choice was not between a net
and a gross, but between two net-like tax systems. Commissioner
Galvin continued to say that when you get down to making a
choice between two alternatives, it is important to not stick to
a label but to consider audit risk, economic flexibility, and
the expectation of changes in cost and production in the next
five years.
10:48:51 AM
COMMISSIONER GALVIN then advised the committee that he would not
say whether a so-called net tax is better than a gross tax.
However, of the taxes studied that had equivalent impacts on the
investment side and the durability to reflect economic changes,
the tax system structured similarly to the current one seemed to
provide the best balance.
10:50:23 AM
MR. HANLEY stated that the gross tax seems best to constituents,
due to its simplicity. He then said that his answer to
Representative Doogan's question is that a gross system does not
maximize revenue returns to state because it over taxes some and
under taxes others. He explained that applying a gross rate for
the most profitable field to all fields will make many fields
uneconomic. Furthermore, setting a gross rate in the middle
means insufficient revenue from profitable fields. He opined
that a gross system, with credits, becomes as complex as a net
system.
10:52:32 AM
MR. DICKINSON pointed out that, although state government jobs
are one-third of Alaska's job market, there are no jobs in
Alaska that are not directly or indirectly affected by the oil
industry. He reminded Alaska voters of the importance of oil to
the state's economy. He pointed out that, under a gross tax,
some have said all that matters is how much volume is produced
and the price. However, there are three questions to consider:
volume, price, and how much investment is being made. If state
take is the biggest piece of revenue to be taken from a field,
more should be measured than just the volume.
10:54:20 AM
MR. MITCHELL stated his agreement with the previous speakers and
added that $80 to $90 per barrel oil prices would seem to
indicate extremely high profits for the industry. However, the
reality is that costs are rising too, and during periods of
increased margins the PPT performs just like a high gross tax.
With progressivity in place, the PPT is taxing at a rate of 27
percent to 28 percent on top of the royalty and corporate taxes.
In fact, during times of high profits, the PPT proves that the
state can collect its fair share, and at the same time offer
incentives for growth.
10:56:18 AM
REPRESENTATIVE DOOGAN remarked:
... assuming ... we pass a tax and things go on, how
is it that I know that ... the return I get in terms
of investment, which we're only really interested in
... primarily, for us, in terms of increased
production, right? I mean there's some economic
benefit to what gets spent, in the exploration ... how
do I know that that's going to be worth more than what
I give up if I leave that rate at twenty-two and one-
half percent?
10:57:34 AM
COMMISSIONER GALVIN acknowledged that this is an excellent point
and one that DOR had to consider. He opined that from previous
experience he knows that geologists will disagree about the
future of oil development and exploration on the North Slope.
At this time, the majority feel that there are tremendous
amounts of oil yet to be found. He expressed his optimism about
future exploration by new companies with new technology. The
root of the question as to whether investment in the North Slope
will result in an equal, or greater, return depends on an one's
outlook. He is personally optimistic about the possibilities of
new technology and new interest in the North Slope from smaller
companies. For example, the Gulf of Mexico and the United
Kingdom are enjoying new discoveries on legacy fields. He
stressed the importance of providing an environment to encourage
new explorers.
11:00:56 AM
MR. RUGGIERO commented that if you get too prescriptive on a
system that is based on a series of predictions, and things go
in the favor of the oil industry, profits will go to them. If
profits are slim, the state will suffer and the industry may ask
for changes in terms, prior to making investments, citing that
the tax system is too onerous. One of the key reasons to choose
a net system; it matches the industry's investment decision
making. The other reason is that a net system will self-adjust
to changing oil prices. [The rate] can be set at a high or low
of the state's choosing, and the state does not have to predict
production costs for changing conditions. There will not be a
problem if facility costs or tariffs go up. A net system will
bring the stability the state needs because it is robust across
a wider range of scenarios.
11:03:49 AM
STEVE PORTER, Consultant, observed that all of the speakers
agree on a net tax. One of the main reasons for agreement is
that a net tax structure allows for the potential of a bigger
"pie" to be shared. The flexibility of a net tax accommodates
large and small scale development, more costly development, and
future changes in price and cost. Whereas, a gross tax system
is less flexible and less desirable.
11:05:13 AM
MR. DICKINSON referred to Representative Doogan's second
question and said, "If you are asking an investment question ...
what you are really asking is ... 'Do I have a better
alternative for those dollars, and, in my portfolio, do I want
to put everything in one basket or do I want to have multiple
returns?'" He suggested that one way to answer this question is
to plot the rate of return against the Alaska Permanent Fund
Corporation, the stock market, or other investments in the
state. It is an investment question and is not a question of a
guaranteed rate of return.
11:06:17 AM
MR. PORTER noted that there has been a lot of discussion about
whether 22.5 percent or 25 percent is the right tax rate figure.
He opined that tax is a "broad brush" and the impacts of smaller
changes will have an influence over decision making; however,
for most projects, the difference of 2.5 percent is not
catastrophic. It is known that when taxes move up and down in
broad ways, the net tax system works better than gross. In
contrast, Mr. Porter stated that the 10 percent floor can very
quickly impact decisions and has a potential for a negative
effect on heavy oil projects, and he recommended eliminating
that.
11:08:36 AM
REPRESENTATIVE DOOGAN expressed his frustration at bouncing from
discussion of the details of the bill to philosophical
abstractions. He stated that if net present value models are
possible for oil industry investments, net present value models
for income to the state should be possible as well. He referred
to the editorial in the Anchorage Daily News newspaper where an
attempt was made to create a forecast. The theory behind the
presentation of this tax seems to be that it is the only tool
available; however, further testimony talks about prices,
availability of resources, and geology. Once again, this tax is
presented as the "be-all, end-all" policy for investment
decisions in Alaska. He pointed out that the credits are income
that will be left on the table and in return there is only the
possibility of investment. Furthermore, 64 percent "give-backs"
to explorers will not result in an equity interest for the
state. Representative Doogan asked to see numbers on the
credits, when compared to prospective investment, and stated
that it seems like the state should be able to generate those
numbers to study.
11:11:21 AM
COMMISSIONER GALVIN explained that DOR can take a revenue
generation model with a certain tax and make an assumption based
upon the investment response. Then, based upon that response,
an assumption can be made on the success rate of production. A
further assumption would be made as to the "yes or no" choice.
He then said that, as a legislator, he would not want to make a
decision based on that kind of a model because the assumptions
can be intentionally built in the model to affect the outcome.
Commissioner Galvin stressed that committee members need to get
a sense from testimony as to whether the change in tax rate will
influence the industry's risk assessment. He then referred to
Mr. Ruggiero's statement comparing the difference between a net
and a gross tax system and indicated that when a gross tax is
applied to a wide variety of [oil] fields and such, the margin
of error is extremely small in the sense that, if the
assumptions are wrong, there will be a dramatic effect. So,
when it came down to the options before us, the risks associated
with a net tax system held less severe outcomes. The risk of
being wrong in a gross tax system significantly outweighed the
risk of being wrong on the audit, or net tax system, side. He
pointed out that DOR searched for an empirical test for the
right answer and consulted with experts. However, expert's
assumptions can still be completely wrong and the choice is
between systems more or less severely impacted by those
assumptions.
11:16:27 AM
MR. PORTER informed the committee that he can model what
Representative Doogan requested. The model will have capital
and operating expenses, price, production, tax, and
progressivity; modeling the sensitivities of each one of those
through a broad range will reveal the relative importance of
each to the future of the state and how much money is generated.
What the model cannot do is indicate in a tighter world what is
going to happen because each one is a continuum from A to Z with
six components. In addition, one of the six components will
exceed the model. He said that the best that could be provided,
from a modeling standpoint, is the relative importance of each
continuum.
11:18:13 AM
MR. MITCHELL opined that a simple answer to the question is
whether members believe that the industry is capable of making
good decisions. If the industry is making good decisions, then
the state is participating in the cost of investments, by
credits and deductions, and is taking a share of the profits.
The state should want those investments to happen, assuming they
are good investments, and should be aligned with industry in
these decisions.
11:19:23 AM
REPRESENTATIVE DOOGAN responded to Mr. Mitchell's statement by
saying that he has great faith in the industry making good
decisions about investments with a quick and high rate of
return. However, those investments may not be in Alaska. In
addition, Representative Doogan also expressed his faith that
industry lawyers and accountants are top notch people. The
state experience with the oil industry is that there have been,
and will continue to be, long disputes over taxes, royalties,
and tariffs. Some of these disputes have ended with settlements
of pennies on the dollar. He concluded by saying that the
question of investment is in a big box, but [legislators] are
talking about it like it is in a small box, and the state is
left to determine its tolerance for risk.
11:21:36 AM
COMMISSIONER GALVIN agreed that, in the end, members must
identify the balance of risk and reward with which they are
comfortable. He distributed a memo from Spencer Hosie regarding
possible future legal disputes over the tax system.
11:24:05 AM
REPRESENTATIVE NEUMAN referred to Mr. Hanley's statement
regarding the use of credits for one year or two years. He
noted that industry representatives have said two years is not a
good thing. In fact, one company stated that the delay would
mean the difference of drilling four, versus five, wells next
year. Representative Neuman then asked Commissioner Galvin for
the reason for the change.
11:25:15 AM
COMMISSIONER GALVIN replied that taxpayers always like their tax
credits up front. He acknowledged that taxpayers will have to
factor this discount into their economic decisions. The state's
perspective is the value of a cost profile. He explained that
if you look at a situation where you could have big capital
expenditures one year and not another, that "lumpiness" is going
to have an impact on the state's revenue and revenue
projections. When, in one year the state is getting more
revenue than in another, the state's ability to respond to
revenue shifts is affected. This change will mean that state
projections and forecasts will be more accurate and the overall
swings will be diminished.
11:27:45 AM
MR. PORTER affirmed that he has heard the administration's
statements and that he understands the concern about
projections. However, he asked for the administration to look
for a way to capture both values. He suggested that the state
can actually anticipate the uncertainty coming toward it by
recognizing the costs associated with the relative price of the
wells. Mr. Porter maintained that the administration has
requested some projections from the producers and knowing these
plans reveals the relative costs. He concluded by saying that
85 percent to 90 percent of the information the administration
needs for forecasting can be captured by understanding future
projections, and without having a negative financial impact on
the industry.
11:29:58 AM
MR. DICKINSON also expressed his disagreement with Commissioner
Galvin on this issue and stated that a calendar year versus a
fiscal year basis will make a difference in projections. In
fact, the increased predictability from a two year split is
minimal because a taxpayer will be deducting one-twelfth of its
credits in a calendar year. A fiscal year splits into two
calendar years, therefore only one-quarter of a calendar year
can be used to forecast. In response to a question, Mr.
Dickinson stated that the effect on the industry is a half-year
time value of money.
11:32:45 AM
MR. MITCHELL provided ConocoPhillips's perspective that this
change is a small erosion of value when evaluating investments.
Although the company is not an advocate of tax increases, this
provision is a small erosion of value that, when added to
others, add up overall.
11:33:55 AM
COMMISSIONER GALVIN agreed with the characterization that this
is not a big dollar item. However, he added that the cost
information that the state is asking for is valuable and this
change was made for balance to the tax system.
11:34:52 AM
MR. RUGGIERO commented that the distinction is between a great,
and a fantastic, program for exploration. When compared to
other tax systems, with the immediate write-offs and the ability
to monetize credits and losses, what the state is offering is a
world-class opportunity to explorers.
11:35:28 AM
REPRESENTATIVE NEUMAN expressed his belief that Alaska's future
depends on the smaller, independent, explorer and that he wants
to make sure that they have a good investment climate in Alaska.
He asked for Commissioner Galvin's opinion on attracting smaller
explorers to Alaska.
11:36:19 AM
COMMISSIONER GALVIN agreed that encouraging smaller explorers is
on the right track for Alaska. The possibility of many smaller
companies operating on the North Slope is a vision that needs to
get a foothold; the state can provide that foothold by
attracting investment with a world-class tax system.
11:37:07 AM
MR. HANLEY noted that Anadarko's previous testimony in
opposition to the two year delay of tax credits indicated that
these credits are valuable in reducing its costs, but will not
make a huge difference. He commented that this year Anadarko
had a slight improvement in its exploration economics and this
is another reason to support the net tax system; exploration
takes longer in Alaska than in other parts of the world and the
net present value issue was a challenge. The system, with
credits, is of significant value for up-front costs. He opined
that the net tax system is absolutely the way to go and resulted
in the slight improvement in Anadarko's economics. Mr. Hanley
said that Anadarko sees a lot of potential in Alaska, but it
tends to be in the smaller fields, as the U.S. Government Survey
(USGS) maps show. He clarified that his company characterizes
the PPT as a slight improvement, but not as a fantastic tax
system.
11:39:32 AM
REPRESENTATIVE NEUMAN acknowledged that there are many pieces to
this legislation.
11:39:48 AM
REPRESENTATIVE HOLMES said that a lot of legislators are trying
to find certainty and predictability and from the testimony
heard the state will never get certainty; however, if [the
legislature] makes the wrong choice it will quickly be known.
If the legislature makes the right choice, that may never be
know. She opined that if a choice is made between 22.5 percent
and 23 percent, the industry will know whether marginal projects
were cancelled, but [the legislature] will probably never know.
She then asked about the wisdom of making changes now, versus in
2011, when further information is available. Representative
Holmes said, "What on earth am I really going to know in 20ll,
that's going to help me then decide whether or not 22.5 versus
25 is right; and whether progressivity should go up and down?"
11:42:06 AM
MR. PORTER explained that, during the debate on PPT, there were
two major issues that put pressure on the discussion. One issue
was the gas contract, which may come up again, and the other was
the [corruption] trials. Mr. Porter opined that the question of
undue influence on the current law will remain until the tax is
re-evaluated, and the debate now, during the special session,
will resolve this question. In addition, during a special
session there is only one issue to be considered, thus the
pressure of holding votes "hostage" is gone. He stated that
today is the best opportunity for a clean re-evaluation of the
PPT, even if no changes are made. In 2011, the pressures will
be gone and the legislature can verify the tax and move forward.
11:45:10 AM
COMMISSIONER GALVIN remarked, "The root of your question is 'Is
the debate going to be any different in 2011 than now?' The
answer is probably not." He continued to explain that the
debate will revolve around the same issues, as it did in the 70s
and 80s. However, making a statement now, that there will be no
changes until 2011, undermines the purpose. The reason is that
the [oil] companies look at stability and anticipate that there
may be a change after an investment is made. The argument that
the state is making changes after just one year, and will
continue to do so, contributes to the perception of uncertainty.
Commissioner Galvin expressed his belief that a change now in
tax policy, without the influence of the gas contract in
particular, will establish a law based on open discussion of the
state's interest. The companies can make their assessments of
the risks to investment. A delay of this decision will allow
questions to fester in the public consciousness. In addition,
the oil industry will not want to make investments in a climate
that they know will change.
11:48:52 AM
MR. MITCHELL expressed his understanding that the 2011 date was
to be a review, and not a rewrite, of the PPT. He agreed with
Representative Holmes that the committee will never really know
if you got the right answer, and said that he believes the PPT
is the right tax structure. He pointed out that, even with the
passage of HB 2001, the 2011 review remains in effect.
11:50:06 AM
MS. FITZPATRICK indicated that she would like the PPT to be
reviewed based on "what is the policy that the State of Alaska
wants to have, what is the objective that it is trying to
achieve." All around the world her company must determine the
fiscal policy within the oil and gas arena. There is no
guarantee, unless there is a contract, that there will not be a
change and that is a part of doing business. She stated that
her company assesses the policy, whether the PPT meets that
policy, and whether the state will make any changes that
increase or decrease the risk of meeting its policy objective.
She pointed out that the legislation is lengthy, may contain
unintended consequences, and must be reviewed. Ms. Fitzpatrick
concluded by saying that the starting point is whether or not
the existing PPT meets the state's policy.
11:52:16 AM
MR. HANLEY stated his agreement that a positive to the special
session is that everyone is focused; however, the time for
discussion is limited and legislation of this type may need two
sessions to be reviewed. He noted that the dollar per barrel
impact on USGS numbers is not perfect, but those numbers, when
equated with a tax increase to $3 per barrel, result in more
uneconomic oil. This could be modeled to get a sense of
government take versus risk, reward, and potential. Mr. Hanley
pointed out that, within this timeframe, the impact of the PPT
is not known. Some data, such as the number of wells, will be
more available with this [proposes] tax system. He opined that,
eventually, [the legislature] will have some idea of whether the
PPT is working. He then turned to a discussion about gas.
Anadarko's opinion is that this is too much take on gas; its
advisors will be back to testify within two years on a gas
pipeline. The risk factor of repeated negotiations on gas taxes
will not be a deal-breaker, but investment decisions get tougher
when there is no guarantee of set tax systems. He added that
additional discussion in the next two years may not only be
about gas because oil will undoubtedly be brought into it.
11:56:35 AM
MR. DICKINSON stressed that there is one very important piece of
information that the commissioner will be able to present to
committee members two years from now and that is accurate costs.
The industry's costs have been very different from the cost
estimates used by DOR during the 2006 legislative session. Mr.
Dickerson said that these inaccuracies may have been due to: a
law that was poorly written, cost inflation, the success of the
PPT, or a random boon in investment. An audit is not going to
answer all those questions, especially whether an increase in
costs is closely tied to an increase in prices. Mr. Dickinson
expressed his hope that in two years the link between costs and
oil market price will be known.
11:58:30 AM
COMMISSIONER GALVIN observed that there has been a lot of
discussion on the cost projections and costs reported. Based on
the testimony of the operators of the two largest fields sitting
here at the table, there is more confidence in the cost
estimates for this year. He requested that the industry correct
the state's estimates when they are known to be inaccurate. He
expressed his frustration that the state's models are corrected
only when the numbers are overstated, and questioned the idea
that the tax change should wait for two years until more
accurate data is available from audits.
12:00:21 PM
MS. FITZPATRICK responded that BP provides monthly PPT and
forecasting information. She confirmed that the forecasting
information required by HB 2001 will be provided as soon as the
administrative questions are answered. However, in terms of
costs last time, she said there was public testimony from the
companies and she said she will provide the dates of that
testimony. In terms of current costs and assumptions, there may
be areas of the forecasts where DOR disagrees, but it does all
come down to the assumptions and models. Ms. Fitzpatrick said
it is a valid exercise to have that [information] shared and to
improve forecasts for the future.
12:02:27 PM
Mr. Ruggiero recalled BP's presentation to the Senate and said
that his recollection is not that the Senate asked BP to qualify
the numbers, but to provide numbers to DOR so DOR could make
more accurate projections. He said that he was aghast that the
commissioner did not have the data to do his job and that this
is the first place he has worked in the world where the
government did not have the specific data that the companies
possess. In addition, it was surprising that the companies did
not bring more accurate data regarding the $800 million
discrepancy. The industry was aware of this situation and did
not bring more accurate data to the special session to assist
with clearing up this question. It is not expected that this
data would be disclosed to the public, but he said that he would
have expected that data that is shared between companies would
have been provided to [DOR]. He suggested that this information
could be signaled to the government to ensure accurate
projections. Mr. Ruggiero noted that the only signal he saw was
in a footnote of a report from the Alaska Oil and Gas
Association (AOGA) report and he opined that this was not being
offered in a very cooperative manner. He explained that his
experience is working in regimes where business was best when
the industry worked with the government as a partner. He
concluded by saying that he would have expected that there would
have been more of the accurate data, that [industry] people know
about the relationship between investment, barrels, and cost
projections, offered to the government.
12:06:38 PM
MR. MITCHELL stated that speakers have discussed the information
about actual costs, deductions, projections, and economic
modeling. With the recent change in the net structure brought
by the PPT, all parties have been caught by surprise that there
was not the information exchange that the state needed.
Industry is also not seeing the information that is needed to
understand what is happening. He assured the committee that
more information is being provided now, although it might not be
exactly what DOR needs. Mr. Mitchell said that there is a
common interest in supplying the administration with adequate
information.
12:08:17 PM
REPRESENTATIVE DAHLSTROM suggested committee members lock the
door and have everyone sign disclosure statements, but of
course, she said, that will not happen. In a perfect world the
industry could protect its confidential information while
legislators protect their constituents. She relayed that her
constituents are asking about the revenue that was not received
and inquired as to whether the expected revenue was backed-up
with [supporting documents]. Representative Dahlstrom also
expressed her surprise at the lack of data provided to the
state. She said that it is amazing to know that some companies
are sending the state a check with no back-up with it, and
applauded the companies that are providing the needed
documentation. She explained that her personal tolerance for
risk depends on the length of time needed to see results. The
responsibility of a legislator is providing stability to the
people of Alaska, including stability for the businesses here
that provide jobs to Alaskans, and to keep the money that is
generated in the state. She asked Commission Galvin to further
explain about the discrepancy in expected revenue.
12:13:27 PM
COMMISSIONER GALVIN said that he agreed with Representative
Dahlstrom's starting point. The expected revenue figure was
published to demonstrate what was expected and what experience
is showing now. The $800 million is based upon the difference
between the assumptions that went into the fiscal note,
primarily costs, and the assumptions we have now, based on
actual costs from the companies. All else being equal, that
difference, at the $60 dollar [per barrel] price, equals $800
million. It is merely a reflection of the difference between
the costs estimates of a year ago and our experience since then.
It is important to note that the estimate is a matter of
freezing the other variables, thus one can not accept figures
based solely on the increase in price and have a clear and
analytical tool.
12:16:09 PM
MR. DICKINSON recalled answering Representative Doogan's
question a couple of days ago and thinking about revenue
sufficiency. To determine revenue sufficiency, when a budget is
being debated, one can compare dollars or one can look at an
analysis of costs. Clearly, if costs have essentially doubled,
then our predictions, based on $2 billion, are now doubled to $4
billion and the deficit is roughly $750 million. Mr. Dickinson
passed out a work-sheet to show his calculations.
12:18:55 PM
MR. DICKINSON continued to say that the general point he wanted
to make is that revenue sufficiency is one issue; how we raise
money for the state. The other issue is the mechanics of the
tax. Clearly, if costs are higher because the system is
designed to encourage costs, there are huge effects on the tax.
He stated that the questions to be figured out are: Are the
costs what were permitted? What is the effect of localized
inflation? Why are the costs higher? Should the costs have
been anticipated?
12:20:06 PM
COMMISSIONER GALVIN acknowledged that, when discussing the rate
for the future and with the encouragement of an increased level
in costs as a factor in the new system, lower than estimated
revenue is an accepted outcome. But that is not what happened a
year ago. The department did not have an unexpected change in
the environment; it had the wrong number to put in the economics
models. The way the projections work is that the rate is set
and the revenue expectation follows. Previously, there was a
lot of discussion about what is the crossover point when the
economic limit factor (ELF) and the PPT are equivalent, and at
what price will the new tax exceed the existing tax. This was a
very important part of the analytical discussion one year ago.
Because the cost assumptions were wrong, the crossover point was
incorrectly predicted. The cost deviation did not happen
because we did not predict the future well; the cost deviation
happened because the department did not have realistic numbers
at that moment. Commissioner Galvin acknowledged Mr.
Dickinson's point that when one accepts forecasting, one accepts
variability due to unexpected results; however, that implication
ignores that Alaska is a resource development state and when the
values go up expected revenue from the sale of resources goes
up.
12:23:31 PM
MR. DICKINSON agreed with most of what Commissioner Galvin said
except for the notion that we can take a set of costs at $70 to
$80 per barrel, with lifting costs of $20, and expect lifting
costs to remain at $20 per barrel if oil prices retreat to
levels of 1986 through 1999.
12:24:53 PM
REPRESENTATIVE DAHLSTROM asked whether the numbers were wrong
because [the state] did not have the data from industry, or due
to a mistake by a state agency.
12:25:15 PM
COMMISSIONER GALVIN answered that we do not know. The companies
were consulted one year ago and provided with the cost
estimates. Overall, the estimates were accepted with a few
comments, however, different costs were submitted with tax
returns. Some possible reasons are: higher costs associated
with the corrosion issue; inflation; or the possibility that the
tax returns were padded.
12:26:34 PM
REPRESENTATIVE DAHLSTROM repeated her question for industry
representatives.
12:26:40 PM
MR. HANLEY assured the committee that Anadarko did not pad the
bills. He opined that there will be honest disagreements over
some issues, and without the adoption of the regulations
assumptions are going to be made by the companies. In addition,
he guaranteed that there will be disputes over allowable
deductions. Mr. Hanley pointed out that there are two ways to
drive up costs; one is to spend more, and the other is that the
cost of goods went up. The tax system proposed encourages
taxpayers to spend more, and he reminded members that when
explorers make investments their tax burden can go down to
almost zero; that is the state's goal. Furthermore, the
assumptions on the models must be agreed to by the parties for
meaningful discussions to take place. He added that increased
costs for drilling and production resulted in the state's
revenue going down; thus, returns to the industry went down
also. This fact has not been adequately discussed; in fact,
profit projections were not met by the industry due to increased
drilling, steel, and labor costs.
12:31:10 PM
MR. MITCHELL said that ConocoPhillips does business throughout
the world and does not operate by padding bills. He also
acknowledged areas of dispute; however, the dollar value of the
disputes is relatively small in comparison to the total tax due.
He stressed that the calculation of taxes is done under the
company's best interpretation of the law. He added that cost
projections were at 2004 levels and there have been significant
increases since then. Mr. Mitchell opined that information
presented during last year's debate of the PPT was misleading.
12:33:25 PM
MS. FITZPATRICK suggested that the discussion might be more
constructive if the parties would agree to discuss the present
situation and the state's policy for Alaska's economic future.
12:34:17 PM
COMMISSIONER GALVIN remarked:
Mr. Chair, just because there were two references to
2004 as if the numbers that were presented last year
were presented as 2004 numbers, and that somehow, you
know, we didn't expect that things had changed so
drastically from 2004 to 2007, or 2006. That's not
the nature of it. Last year they were brought forward
as the assumptions of the 2006 numbers. Now, the last
numbers that the companies had shown us were 2004,
that's true. But in discussions with the companies it
was, 'Are these representative of the current costs?'
so, they weren't brought forward as 2004 numbers and
we made a poor assumption about how much they had
increased. So, just to make sure that that's clear on
the record. I think that, um, it is a valid point
that we, we have spent, I believe, far too much time
talking about what happened a year ago. I think we do
need to talk about where we go from here. And what I
agree with, um, Ms. Fitzpatrick about is we just need
to make sure that we are on the same page today and
maybe we can get confirmation that the cost numbers
that we are using in our current projections are
reflective of, of the numbers that they are
anticipating ... We've got the numbers now that
there's agreement that those reflect today's
expectations, and those are the appropriate ones for
us to be using in our modeling, for, for both of us
going forward.
12:35:53 PM
REPRESENTATIVE DAHLSTROM asked:
"...if we don't know what was wrong with those
numbers, how do we know that the numbers we're dealing
with today are right? ... I would rather hear, "This
is the area that we missed, or here is where we
miscalculated, or we left this off the table, and now
we've got it all." ... I want to do this right, I
believe the companies want to do this right, I believe
that the Commissioner of Revenue ... wants this right.
... How can we learn from our mistake?"
12:36:51 PM
COMMISSIONER GALVIN answered that the primary difference is that
now the department has information directly from the companies
on their certified statements of costs under the tax law. A
year ago the department was dealing with consultations with the
companies. In addition, DOR was using building blocks to make
assumptions that were not sophisticated. Today, the numbers are
reported, and he assured the committee that the department will
go back and ensure that the costs are properly deductable. He
acknowledged that the department may not be able to discern the
incorrect assumptions from last year.
12:38:45 PM
REPRESENTATIVE DAHLSTROM asked whether each of the company
representatives agreed that 2006 numbers have been submitted and
that accurate information has been given to DOR.
12:39:16 PM
MR. MITCHELL said yes.
12:39:26 PM
MS. FITZPATRICK asked Representative Dahlstrom to confirm the
question.
12:39:37 PM
REPRESENTATIVE DAHLSTROM said:
"The question I'm asking is if the statement ... that
Commissioner Galvin made is correct, that all the
companies have complied with providing the accurate,
complete, information that they had for 2006, so that
we're all on the same page looking at the same
numbers.
12:40:01 PM
MS. FITZPATRICK said,
Forgive me if I'm just checking on ... which question
I'm actually answering. Um, if this is a case of you
know, have we complied ... filed our sort of
information as requested in respect of 2006
information, to the Department of Revenue, the answer
is yes.
12:40:19 PM
MR. HANLEY asked whether the reference was to the estimates of
costs based in 2006, or for the tax year 2006.
REPRESENTATIVE DAHLSTROM clarified that the question was for the
tax year of 2006.
MR. HANLEY repeated, "Did we provide the data that was
requested".
REPRESENTATIVE DAHLSTROM said that the committee has been told
that those are the numbers that everybody is working with.
12:40:56 PM
MR. HANLEY remarked:
Did we provide information in 2006, for 2006? ... I
don't know what information, to be honest with you,
we've provided, so I can't, I can get ...
12:41:07 PM
MR. DICKINSON said that, as he understood the question, for nine
months of 2006, the PPT was in effect; under the current law
that is the one time period for which returns with actual costs
are required. Thus, the only data that has no estimation in it
will be from March 1, 2006 through December 31, 2006.
REPRESENTATIVE DAHLSTROM concurred.
12:41:59 PM
MR. HANLEY responded that, due to joint filing, most of
[Anadarko's] expenses are at Alpine Oil Field. He opined that
Anadarko filed what it was supposed to file for 2006 and that he
will get the right answer. He said that he does not do the
filing, but assured the committee that the 2006 taxes were paid.
12:42:45 PM
COMMISSIONER GALVIN added that, as far as he knew, Anadarko
filed, but that he was not in the position of knowing if what
they filed is accurate or not. He said that he felt the
important confirmation from the discussion today is that the
companies agreed that the forecast today is based upon the
reported costs that are an accurate reflection of what they have
provided to the state.
12:43:42 PM
MS. FITZPATRICK remarked:
... one further clarification, I absolutely agree with
what the Commissioner has said in terms of the
information that is in, sort of, the data we have been
looking at ... we all agree ... we need to provide
some other information going forward to enable them to
forecast beyond that ... I've made comments elsewhere,
we see our costs going up, so I just want to ensure
that if in 2008 ... the numbers will not hold true for
many years, it's a one year only view.
12:44:26 PM
REPRESENTATIVE DAHLSTROM asked for any estimate on what the
difference is going to be in the costs that the companies are
going to incur, in order to provide the additional information
needed by the state.
12:44:53 PM
MS. FITZPATRICK expressed her hope that there would be no
additional administration costs incurred to provide the
requested information. She based this on her confidence that
DOR will work with the companies to provide a process to provide
the right information, but that does not create an inordinate
amount of work.
12:45:49 PM
REPRESENTATIVE DAHLSTROM gave an example of a request that asks
for the cost to an oil company to produce a barrel of oil. The
[legislature] would then know what the state gets back and the
transportation and maintenance costs.
12:46:39 PM
REPRESENTATIVE SAMUELS stated that he disagreed with
Representative Holmes about whether [the legislature] will know
if it gets [the tax rate] wrong. He referred to the weakening
real estate market in Juneau and the low consumer confidence of
Juneau residents. He also noted that the industry in Juneau is
government and that the government has less operating and
capital monies going into the community. Representative Samuels
told the committee that his district, District 29, is middle
income and borders more affluent neighborhoods. He revealed
that his personal choice is not to put his disposable income in
his home. He asked the speakers whether each would take the
risk of making the commitment to buy his home, at today's
appraisal price, seven years from now. He then stated that if
investments are made in Alaska, the value of his home will
increase. However, if the economy deteriorates, owning a home
is an individual risk and that is what he needs to consider; not
theory, but the real effect of the legislature's actions on his
constituents.
12:50:54 PM
MR. DICKINSON said no.
MR. HANLEY said yes.
MR. RUGGIERO said yes.
COMMISSIONER GALVIN said yes.
MR. MITCHELL said yes.
MS. FITZPATRICK responded that she will answer after further
analysis of the pros and cons.
MR. PORTER asked whether the pipeline is proceeding.
REPRESENTATIVE SAMUELS replied that the deal is applicable only
under today's conditions.
MR. PORTER added that the DOR is projecting a substantial
decline in revenue five years; however, four or five years of
appreciation will probably allow the property to weather the
resulting recession.
12:53:04 PM
REPRESENTATIVE SAMUELS recalled that ten years ago in Ketchikan
and Wrangell, citizens were probably confident about the value
of their homes, but a federal government policy passed at the
change of administration ended the timber industry. He opined
that, sooner or later, he must consider the personal risk to
Alaskan homeowners. Representative Samuels concluded that the
confidence of Juneau residents is low because their industry is
not investing in Juneau.
12:54:36 PM
MR. HANLEY commented that the risk is manageable if money is
invested today and he is confident about the next couple of
years. The bigger question on buying a house, he said, is
whether the seller can change their mind on the price. So the
risk is harder to manage when the price, or tax rate, can be
changed. In this case, the stability of the tax system is an
influence on the risk.
12:55:48 PM
REPRESENTATIVE SAMUELS added that world events will have an
impact on Alaska's oil economy. If Alaska's economy was
certain, then voting for a higher tax rate would not be
questioned. He concluded that future world events are uncertain
and he must consider his constituent whose wealth is in her
home.
12:56:50 PM
REPRESENTATIVE RAMRAS said that consumer confidence is also low
in Fairbanks; he has decided, as a private citizen, not to make
further capital investments in his community. He expressed his
disappointment with ExxonMobil Corporation's statement that the
current tax rate is too high, and again requested that
Commissioner Galvin generate a risk delta to facilitate the
committee's consideration of the bill.
12:59:10 PM
COMMISSIONER GALVIN said O.K.
12:59:14 PM
REPRESENTATIVE RAMRAS reminded the committee that the $800
million in increased costs deducted by the industry did not go
from the state to someone else's pocket. Because that money
represents a deduction, it went back in the economy to pay for a
good or service, and became a profit item for an oil field
service company, or somebody along the chain. He stressed that
the oil industry in Alaska generates $12 to $20 billion in gross
revenue and is by far the largest contributor to the state's
budget of $4 billion. Looking at the incremental gain from the
tax rate increase is similar to the production of wheat or
potatoes, that, as commodities, are interchangeable. The fact is
that Alaska's commodity is oil, and like other commodities, it
must be produced and transported to the marketplace in the
cheapest manner. Representative Ramras recalled that Dr. Pedro
van Meurs testified that the gas pipeline may no longer be
economical and Mr. Porter stated that the legislature must begin
to save its money. He also recalled that there was an editorial
in the Alaska Daily News that suggested saving and investing the
$600 million; it will grow to $4.5 billion in five years. He
advised the committee that if, in his business, he has a choice
of taking a sale now, or later, he will take it now.
Representative Ramras recalled discussion last August regarding
the production loss from the corrosion of the BP pipelines; the
consensus was that some of the lost oil will be flushed up by
the reservoir when production resumes, and some will be
recovered at the end of production from that field. He then
asked whether the incremental gain in taxes is worth the risk of
not being able to potentially collect as much oil out of the
ground now. In addition, he asked whether the new, proposed,
tax regime brings us closer or further from bridging a way to a
necessary, second, and more robust income stream.
1:06:19 PM
COMMISSIONER GALVIN answered yes. He stated that the increased
tax rate will provide the bridge in two ways: by the savings of
the additional tax revenue; and by getting the investment that
will result in increased production in later years.
1:07:14 PM
MR. PORTER informed the committee that the bill does not help
the legislature increase savings in any way, and does nothing to
enhance investment. The PPT is more helpful to investment; this
bill takes additional increments out of industry's pockets,
albeit hurting some parties less than others.
1:09:05 PM
MR. MITCHELL agreed with Mr. Porter and added that any form of
tax increase, such as in this proposal, will cause investments
to deteriorate and be at risk.
1:10:11 PM
MS. FITZPATRICK opined that the bill moves Alaska further away
from a more robust revenue. She further stated that the bill
chips away from projects that may currently be marginal, and
increases the risk [to] achieving the state's objective.
1:11:04 PM
MR. DICKINSON stated that he believes that the state has a
negative time value of money. He explained that a $1.4 billion
general spending budget means that, in the near future, the
state will prefer to have a dollar after the next price
correction than the equivalent dollar today. He encouraged the
state to get less revenue today, in order to secure investment,
and thus, receive higher revenue tomorrow. He concluded by
saying that the governor's proposal will increase the immediate
take, but will decrease the relative value of investment and
will shift the balance to fewer dollars down the road.
1:13:06 PM
REPRESENTATIVE DOOGAN commented that this is an argument against
the existence of the Alaska Permanent Fund Corporation.
1:13:19 PM
REPRESENTATIVE NEUMAN referred to Commissioner Galvin's opening
statement that the legislature must analyze the testimony from
all parties and decide the tax rate. He relayed that he was
trying to understand all of the information and gave an example
of comparing the situation to that of a farm. He expressed his
feeling that Alaska is an owner state with a citizen
legislature, and legislators must explain the testimony from all
of the parties to their constituents. He asked Commissioner
Galvin whether this was an accurate way to simplify the oil tax
situation.
1:17:17 PM
COMMISSIONER GALVIN advised two things: Alaska chose not to
have the kind of a relationship with the oil companies that a
farmer would have with a company that produces and markets his
hay by a production sharing contract; and Alaska leases its land
to the oil companies on a royalty basis. Thus, the royalty
contract provides a certain amount that the state will get as
the owner, and the additional part as a tax. This is a
different kind of relationship where there is on-going
discussion about the sharing of profits, although this
discussion would not happen very often. Furthermore, the owner
must be careful about price competition. Thus, the question is
not so much about a breach of contract, because there is no
contract, but the responsibility of the owner to reassess and
reapply expectations. He stressed that a contract with set
terms is not the relationship that the state has with the
companies.
1:20:27 PM
REPRESENTATIVE NEUMAN affirmed that his constituents are no
different than anyone else's, and that they want the most
revenue possible; however, he re-stated his question to ask
whether the farmer can get more hay or more money for the same
hay.
1:21:17 PM
COMMISSIONER GALVIN further explained that the state is looking
at both worlds; a system that encourages newcomers to take
advantage of opportunities, and an opportunity to identify and
reassess that share in such a way that industry opts to re-
invest because the value of the hay is driving the profit
decision. The change in share will not change industry's
decisions because those decisions are based on its opportunities
for profit. He said that profit margins are high and this is an
opportunity for the state to ensure that it can meet its future
obligations. Furthermore, HB 2001 is a revenue bill, not an
appropriations bill, and the department is fully aware that it
will not determine where the revenue goes or whether it is
saved. However, the first step to saving money is the
administration's obligation to bring in the state's fair share.
1:24:18 PM
CHAIR OLSON invited Representatives Buch and Fairclough to ask
questions.
1:25:35 PM
REPRESENTATIVE FAIRCLOUGH recalled previous testimony regarding
the possibility that industry padded the bills for deductions on
its tax returns. She pointed out that there are contingency
funds built into every project for cost overruns, and asked
whether the companies have cost overrun contingency accounts to
meet cost overruns on the oil fields.
1:27:25 PM
MR. MITCHELL responded that the notion of a cost contingency
overrun is something ConocoPhillips looks at when evaluating a
project. He affirmed that sometimes there are some forms of
contingencies; however, they are not always accurate and the
actual costs of engineering services and raw materials can be
much higher. What ConocoPhillips actually spends does not
necessarily go into a cost overrun account; the actual cost of a
well is accounted as the cost, no matter what the estimates
were. He explained that his company has internal controls
around expenditures if a project overruns its authorization.
1:29:55 PM
REPRESENTATIVE FAIRCLOUGH stated that, for large projects in
Alaska with which she is familiar, steel and transportation
prices have increased 25 percent. Also, she suggested that
corporate structures, such as vacancy factors, can be used to
balance budgets. She then asked:
Explicitly, did the Department of Revenue receive that
in the cost estimates that came forward because it's
not necessarily an accounting code that you would
quantify to bring forward to the Department of
Revenue. So, you'd estimated a project, you have some
kind of contingency for normal, normal response, do we
have that?
1:31:03 PM
MR. MITCHELL answered that the detailed information given to DOR
is a reflection of the 2006 tax return and it reports what his
company actually spent.
1:31:29 PM
REPRESENTATIVE FAIRCLOUGH further asked whether the percentage
basis used is significant.
1:31:52 PM
MR. MITCHELL clarified that Representative Fairclough was asking
whether the 2006 results are indicative of the 2007 projections.
1:32:15 PM
REPRESENTATIVE FAIRCLOUGH confirmed that she is trying to
determine the percentage difference. She assumed that
ConocoPhillips has submitted accurate information; however, she
asked whether the variable is large enough that the state will
still be incorrect in forecasting and open to exposure to the
risk of cost overruns.
1:32:55 PM
MR. MITCHELL replied that, as we put in place the right process
for data sharing and information, we need to ensure that this
information is reflected.
1:33:20 PM
MS. FITZPATRICK added that when BP is looking at contingencies
it would be for the bigger development. Contingencies make
prudent business sense. She said that for this year's and next
year's numbers, the level of uncertainty around a contingency is
smaller when BP is more certain about the planned activity, or
when there is a track record to review. Sharing more forecast
information must include making sure that DOR actually
understands what the information is to prevent a disparity.
1:34:58 PM
MR. HANLEY added that, for Anadarko, as an explorer with
partners, the numbers for estimates and contingencies are the
best estimates for the costs. There is no incentive for the
company to not give the best guess and there will be no separate
contingencies. He pointed out that there will be discrepancies,
partly because total approval from its partners often comes
after estimates are submitted to DOR. He warned that future
estimates, particularly on exploration, will be helpful but will
be all over the board for projects beyond this next winter.
1:37:18 PM
MS. FITZPATRICK added that forecast information provided to DOR
will be a best estimate done in good faith, and not a promise.
1:37:47 PM
REPRESENTATIVE SAMUELS asked the commissioner whether he was
willing to give [the committee] everything DOR's consultants
advised even when he disagreed or decided against its inclusion
in the bill.
1:39:08 PM
COMMISSIONER GALVIN answered that the nature of [DOR's]
relationship with its consultants was different than from
previous administrations. He said that the department did not
ask its consultants to provide a tax rate or structure. The
consultants provided data; in that regard he said he could not
think of any advice that was provided in a report, or some other
form, that was ignored. He stated that most of the data went
directly to the economic team that produced the reports.
1:40:59 PM
REPRESENTATIVE SAMUELS assumed that the department would comment
on data from the consultants.
1:41:15 PM
COMMISSIONER GALVIN said that the department did not use its
consultants in that way.
1:41:28 PM
MR. RUGGIERO gave an example: [Gaffney, Cline's] role in
assisting the commissioner included interpretation of what is
being said between the lines during presentations by the
producers and big oil. In addition, based on his experience in
different countries and with other regimes, Mr. Ruggiero was
able to improve the DOR responses to requested information by
expanding the responses to be more useful and robust.
1:42:49 PM
REPRESENTATIVE SAMUELS re-stated that he would like to see all
of the information provided by consultants.
1:43:19 PM
COMMISSIONER GALVIN stressed that the nature of the way that DOR
is trying to engage in this discussion will result in all of the
information coming out. He assured committee members that they
will not be presented with previously withheld information at a
later date.
1:43:50 PM
CHAIR OLSON asked each speaker whether the PPT is broken.
1:44:10 PM
MR. DICKENSON said no.
MR. HANLEY said no.
MR. RUGGIERO said it can be improved.
COMMISSIONER GALVIN said, "The answer is yes. It doesn't provide
the state the tools, and the rates that were set need to be
reevaluated."
MR. MITCHELL said no.
MS. FITZPATRICK said that there is no evidence to say that it is
broken.
MR. PORTER said it is not broken, but tweaks won't break it.
1:44:58 PM
CHAIR OLSON thanked members, guests, and speakers.
[HB 2001 was held for further discussion.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at
1:45:07 PM.
| Document Name | Date/Time | Subjects |
|---|