Legislature(2007 - 2008)CAPITOL 124

03/01/2007 03:00 PM OIL & GAS

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Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSHB 128(O&G) Out of Committee
                    ALASKA STATE LEGISLATURE                                                                                  
             HOUSE SPECIAL COMMITTEE ON OIL AND GAS                                                                           
                         March 1, 2007                                                                                          
                           3:01 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Kurt Olson, Vice Chair                                                                                           
Representative Jay Ramras                                                                                                       
Representative Ralph Samuels                                                                                                    
Representative Mike Doogan                                                                                                      
MEMBERS ABSENT                                                                                                                
Representative Vic Kohring, Chair                                                                                               
Representative Nancy Dahlstrom                                                                                                  
Representative Scott Kawasaki                                                                                                   
OTHER MEMBERS PRESENT                                                                                                         
Representative David Guttenberg                                                                                                 
COMMITTEE CALENDAR                                                                                                            
HOUSE BILL NO. 128                                                                                                              
"An Act relating to allowable  lease expenditures for the purpose                                                               
of determining  the production tax value  of oil and gas  for the                                                               
purposes of the oil and gas  production tax; and providing for an                                                               
effective date."                                                                                                                
     - MOVED CSHB 128(O&G) OUT OF COMMITTEE                                                                                     
HOUSE BILL NO. 89                                                                                                               
"An Act providing  for the use of petroleum  production and other                                                               
facilities  by additional  entities; amending  the powers  of the                                                               
Alaska Oil and  Gas Conservation Commission; relating  to oil and                                                               
gas  properties  production  taxes  and  credits;  providing  for                                                               
production tax adjustments to increase  the amount of tax at high                                                               
oil  prices, reduce  the amount  of tax  at low  oil prices,  and                                                               
reduce  the  amount  of  tax  on the  production  of  heavy  oil;                                                               
relating to the  determination of the gross value of  oil and gas                                                               
at  the  point of  production;  and  providing for  an  effective                                                               
     - HEARD AND HELD                                                                                                           
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB 128                                                                                                                  
SHORT TITLE: OIL & GAS PRODUCTION TAX: EXPENDITURES                                                                             
SPONSOR(s): REPRESENTATIVE(s) OLSON                                                                                             
02/12/07       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/12/07       (H)       O&G, RES, FIN                                                                                          
02/22/07       (H)       O&G AT 3:00 PM CAPITOL 124                                                                             
02/22/07       (H)       Heard & Held                                                                                           
02/22/07       (H)       MINUTE(O&G)                                                                                            
03/01/07       (H)       O&G AT 3:00 PM CAPITOL 124                                                                             
BILL: HB  89                                                                                                                  
SHORT TITLE: OIL & GAS PRODUCTION TAX                                                                                           
SPONSOR(s): REPRESENTATIVE(s) GARA, CRAWFORD, GUTTENBERG                                                                        
01/16/07       (H)       PREFILE RELEASED 1/12/07                                                                               
01/16/07       (H)       READ THE FIRST TIME - REFERRALS                                                                        
01/16/07       (H)       O&G, RES, FIN                                                                                          
02/22/07       (H)       O&G AT 3:00 PM CAPITOL 124                                                                             
02/22/07       (H)       Heard & Held                                                                                           
02/22/07       (H)       MINUTE(O&G)                                                                                            
03/01/07       (H)       O&G AT 3:00 PM CAPITOL 124                                                                             
WITNESS REGISTER                                                                                                              
MICHAEL HURLEY, Director                                                                                                        
State Government Relations                                                                                                      
ConocoPhillips Alaska, Inc. ("ConocoPhillips")                                                                                  
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified in opposition to HB 128.                                                                         
MICHAEL FRAILEY, Counsel                                                                                                        
Alaska Taxation                                                                                                                 
ConocoPhillips Alaska, Inc. ("ConocoPhillips")                                                                                  
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified in opposition to HB 128.                                                                         
JASON BRUNE, Executive Director                                                                                                 
Resource Development Council for Alaska, Inc. (RDC)                                                                             
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified in opposition to HB 128.                                                                         
JOHN K. NORMAN, Commissioner/Chair                                                                                              
Alaska Oil and Gas Conservation Commission (AOGCC)                                                                              
Department of Administration (DOA)                                                                                              
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered a question regarding HB 128.                                                                      
ROBERT E. MINTZ, Attorney at Law                                                                                                
Kirkpatrick & Lockhart Preston Gates Ellis LLP                                                                                  
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions regarding HB 128.                                                                       
STEVEN MULDER, Chief Assistant Attorney General - Statewide                                                                     
Section Supervisor                                                                                                              
Environmental Section                                                                                                           
Civil Division (Anchorage)                                                                                                      
Department of Law (DOL)                                                                                                         
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  During discussion of HB 128, answered                                                                      
questions regarding an investigation of the Trans-Alaska                                                                        
Pipeline System (TAPS) shutdown by BP Exploration (Alaska) Inc.                                                                 
KEVIN BANKS, Acting Director                                                                                                    
Central Office                                                                                                                  
Division of Oil & Gas                                                                                                           
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions regarding CSHB 128.                                                                     
JONATHAN IVERSEN, Director                                                                                                      
Anchorage Office                                                                                                                
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions regarding HB 128.                                                                       
DON BULLOCK, Attorney,                                                                                                          
Legislative Legal Counsel                                                                                                       
Legislative Legal and Research Services                                                                                         
Legislative Affairs Agency (LAA)                                                                                                
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Speaking as the drafter, answered questions                                                                
regarding CSHB 128.                                                                                                             
REPRESENTATIVE LES GARA                                                                                                         
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  As joint prime sponsor of HB 89, provided a                                                                
PowerPoint presentation.                                                                                                        
ACTION NARRATIVE                                                                                                              
VICE CHAIR KURT  OLSON called the House Special  Committee on Oil                                                             
and Gas meeting  to order at 3:01:46 PM.   Representatives Olson,                                                             
Samuels, Ramras,  and Doogan were  present at the call  to order.                                                               
Representative Guttenberg was also in attendance.                                                                               
HB 128-OIL & GAS PRODUCTION TAX: EXPENDITURES                                                                                 
3:02:01 PM                                                                                                                    
VICE  CHAIR OLSON  announced  that the  first  order of  business                                                               
would be HOUSE BILL NO. 128,  "An Act relating to allowable lease                                                               
expenditures for  the purpose of  determining the  production tax                                                               
value  of  oil and  gas  for  the purposes  of  the  oil and  gas                                                               
production tax; and providing for an effective date."                                                                           
[Before the  committee was a  proposed committee  substitute (CS)                                                               
for  HB 128,  Version  25-LS0561\M, Bullock,  2/22/07, which  had                                                               
been adopted as the work draft on 2/22/07.]                                                                                     
3:02:52 PM                                                                                                                    
MICHAEL   HURLEY,    Director,   State    Government   Relations,                                                               
ConocoPhillips  Alaska,  Inc.  ("ConocoPhillips"),  informed  the                                                               
committee that ConocoPhillips  opposes HB 128.   He recalled that                                                               
last  year  effort,  time,  and  energy  were  spent  developing,                                                               
debating,  and passing  the production  profits tax  (PPT).   The                                                               
result of  the passage of  the PPT  was a tremendous  increase in                                                               
production taxes  for the industry.   Furthermore, ConocoPhillips                                                               
does  not  believe  that  the PPT's  tax  credit  incentives  are                                                               
sufficient  to encourage  new exploration  and keep  the industry                                                               
healthy.  However,  he said, he is here today  to testify against                                                               
HB 128.   Most of the  discussion regarding this bill  is focused                                                               
on  BP   Exploration  (Alaska)  Inc.   (BP),  and   the  problems                                                               
associated  with the  pipeline shutdown  in August,  2006.   Yet,                                                               
ConocoPhillips  will be  heavily  impacted  by this  legislation.                                                               
Mr. Hurley  said he deems  HB 128 bad  public policy and  bad tax                                                               
policy for the state.                                                                                                           
3:06:07 PM                                                                                                                    
MICHAEL   FRAILEY,  Counsel,   Alaska  Taxation,   ConocoPhillips                                                               
Alaska,  Inc.  ("ConocoPhillips"), explained  why  ConocoPhillips                                                               
opposes HB  128.   The first  reason, he  said, is  that it  is a                                                               
targeted  tax, aimed  at the  situation [pipeline  shutdown] last                                                               
year in  Prudhoe Bay.   A generally applicable tax  policy should                                                               
not be  written in response  to a specific set  of circumstances.                                                               
Additionally, he  continued, amending the PPT  before regulations                                                               
are  complete will  create  an atmosphere  of  instability.   Mr.                                                               
Frailey  emphasized that  the PPT  statute  already protects  the                                                               
interests  of   the  state;  for  example,   AS  43.55.165(e)(6),                                                               
introduces legal standards that  limit the deduction of "certain"                                                               
costs.   Furthermore, AS 43.55.165(e)(8) disallows  the deduction                                                               
of  any legal  costs producers  may accrue  against the  state or                                                               
against   other  working   interest  owners.     Alaska   Statute                                                               
43.55.165(e)(16)  specifically disallows  the deduction  of lease                                                               
expenditures related  to an oil  spill clean-up.  He  offered his                                                               
belief  that AS  43.55.165(e)(18),  enacted  after the  [pipeline                                                               
shutdown]  at  the  Prudhoe  Bay Unit,  addresses  the  issue  of                                                               
improper  maintenance.   Mr. Frailey  referred to  Dr. Pedro  van                                                               
Meurs's letter of  August 5, 2006, addressed to  the Alaska state                                                               
legislature.  He said the following could be found on page 5:                                                                   
     Another  concern that  is regularly  expressed is  that                                                                    
     the  state should  not permit  the  deduction of  costs                                                                    
     relating  to  replacing   equipment  that  is  becoming                                                                    
     defective or  gathering lines that need  to be replaced                                                                    
     because of  corrosion or other problems.   The argument                                                                    
     is   that  these   assets  should   have  been   better                                                                    
     maintained in the first place.                                                                                             
MR. FRAILEY then  referred to Dr. Pedro van  Meurs's letter dated                                                               
August 8,  2006, addressed to  the Alaska state legislature.   He                                                               
     Should  companies  receive  a  tax  deduction  and  tax                                                                    
     credit together  for [40 percent]  of the  value (under                                                                    
     the  20/20 system)  for replacing  a pipeline  that was                                                                    
     defective   and   not    properly   maintained....   My                                                                    
     suggestion is to disallow the  first [30 cents] per BTU                                                                    
     equivalent barrel as "lease expenditures".                                                                                 
MR. FRAILEY explained  that the result of the  30-cent tax credit                                                               
exclusion is that  the industry will pay between  $40 million and                                                               
$42.5  million   every  year  to   provide  for  the   repair  or                                                               
replacement of   improperly  maintained equipment  or facilities.                                                               
Therefore, HB 128  is addressing a problem that  has already been                                                               
solved  and  ConocoPhillips, he  emphasized,  is  opposed to  re-                                                               
opening the tax regulations of the PPT.                                                                                         
3:11:56 PM                                                                                                                    
VICE CHAIR  OLSON, sponsor  of HB 128,  assured Mr.  Frailey that                                                               
the  legislative intent  of  HB 128  is not  to  re-open the  PPT                                                               
statutes.  The  intent is to address the application  [by BP] for                                                               
a tax credit  exception for costs due to gross  negligence.  Vice                                                               
Chair Olson  relayed that this  issue was not addressed  prior to                                                               
the passage of the PPT.                                                                                                         
MR. FRAILEY stated that the  fourth reason ConocoPhillips opposes                                                               
HB  128  is that  the  bill  proposes  language that  is  without                                                               
history  in jurisprudence.   The  term "improper  maintenance" is                                                               
not  a legal  concept  or  term and  its  interpretation will  be                                                               
determined by  the Department of Revenue  (DOR).  ConocoPhillips,                                                               
Mr.  Frailey  continued,  does not  consider  legal  language  or                                                               
industry  standards  to  be  in the  DOR's  field  of  expertise.                                                               
Finally,  under HB  128, similarly  situated  taxpayers could  be                                                               
treated differently by  auditors, he said.  For all  of the above                                                               
reasons,  Mr. Frailey  concluded, ConocoPhillips  opposes HB  128                                                               
and it believes  that to encourage investment in  the state, laws                                                               
should be equitable, administrable, and stable.                                                                                 
3:15:21 PM                                                                                                                    
REPRESENTATIVE  RAMRAS questioned  whether ConocoPhillips  was an                                                               
advocate of "fiscal certainty on oil" last year.                                                                                
MR. HURLEY affirmed that "fiscal  certainty" was part of what was                                                               
in "that particular contract."                                                                                                  
3:16:12 PM                                                                                                                    
REPRESENTATIVE RAMRAS  recalled that fiscal certainty  was not an                                                               
issue  for ConocoPhillips.   He  said that  ConocoPhillips was  a                                                               
good corporate  citizen of the state  but that it will  be judged                                                               
by  the  collective  merits  of   the  oil  producing  companies.                                                               
Representative  Ramras said  that  although he  is empathetic  to                                                               
ConocoPhillips, he will help move HB 128 out of committee.                                                                      
3:18:30 PM                                                                                                                    
REPRESENTATIVE   SAMUELS   asked   Mr.  Frailey   the   following                                                               
questions:     What   is  the   commercial  arrangement   between                                                               
ConocoPhillips and  BP?   If ConocoPhillips  refuses to  pay [its                                                               
share of the  pipeline shutdown], what will BP do?   What are the                                                               
arrangements between the  [members of the] Prudhoe Bay  Unit?  If                                                               
the operator proposes to spend $100  million on a project, do the                                                               
other owner  companies need to  agree?  Will  ConocoPhillips file                                                               
suit  for  its  share  of  costs?    Has  ConocoPhillips  made  a                                                               
corporate decision that those deductions will not be taken?                                                                     
MR.  FRAILEY  stated  that  [the   repair  of]  each  segment  is                                                               
evaluated as an individual business  case and if it is justified,                                                               
ConocoPhillips  will  pay its  share.    The [pipeline  shutdown]                                                               
situation is  being evaluated by ConocoPhillips.   Ultimately, if                                                               
ConocoPhillips  believes there  was  gross negligence  or [if  BP                                                               
was] an  imprudent operator ConocoPhillips's corporate  policy is                                                               
to not pay.                                                                                                                     
3:20:22 PM                                                                                                                    
MR. HURLEY added that within  the Prudhoe Bay Unit, the operators                                                               
are  required to  get approval  for major  expenditures from  the                                                               
interest  owners.   The  plans to  repair  and replace  [pipeline                                                               
transmission  lines]  will  be  sorted  out  amongst  the  owners                                                               
following the normal policy on expenditures.                                                                                    
REPRESENTATIVE SAMUELS asked:                                                                                                   
     What's a timeline?  ... [If] you decide  that we're not                                                                    
     going to  pay ..., what  does it  do to the  statute of                                                                    
     limitations?  ... Does  BP attempt  to take  the entire                                                                    
     amount off?   How  much of  a quagmire  do we  get into                                                                    
     when Exxon and [ConocoPhillips]  tell BP ... the owners                                                                    
     are not going to pay their fair share?                                                                                     
MR. HURLEY answered that the  decision process within the Prudhoe                                                               
Bay  Unit should  not extend  beyond  the normal  DOR three  year                                                               
audit  process.   He  added that  a petition  to  stay the  audit                                                               
deadline can be filed, if necessary.                                                                                            
3:22:51 PM                                                                                                                    
REPRESENTATIVE DOOGAN remarked:                                                                                                 
     I want to make sure  that I understand ConocoPhillips's                                                                    
     position,  here.   You'll be  more heavily  impacted if                                                                    
     these are  not allowable  deductions because you  got a                                                                    
     bigger  share of  the action  there.   You're going  to                                                                    
     have to pay more of the  cost to repair it; ... but you                                                                    
     have, I  would assume, the  opportunity to try  to make                                                                    
     BP pay the  whole thing by arguing that  they didn't do                                                                    
     the job that you were paying them to do ...?                                                                               
MR. HURLEY concurred.                                                                                                           
3:23:46 PM                                                                                                                    
REPRESENTATIVE DOOGAN then asked  Mr. Hurley why ConocoPhillips's                                                               
believes that the  PPT in its current form will  not lead to more                                                               
investment by the oil producers.                                                                                                
MR. HURLEY  explained that ConocoPhillips  considers the  rate of                                                               
the  PPT  and  the  windfall  profits  tax  [30-cent  tax  credit                                                               
exemption]  to be  excessive.   The costs  saved by  the PPT  tax                                                               
credits are insufficient  to be an incentive  for new development                                                               
and also to mitigate the negative effects of the taxes.                                                                         
3:24:57 PM                                                                                                                    
VICE  CHAIR OLSON  pointed out  that  on February  22, 2007,  the                                                               
committee   requested  maintenance   records  from   BP.     This                                                               
information, including  the date  that the  feeder lines  [at the                                                               
Prudhoe Bay Unit] were last pigged, has still not been provided.                                                                
JASON  BRUNE, Executive  Director,  Resource Development  Council                                                               
for Alaska, Inc. (RDC), informed the  committee that the RDC is a                                                               
business organization  that has  a very  diverse membership.   On                                                               
behalf  of  RDC's members  he  said  he  is testifying  today  in                                                               
opposition to  HB 128.   The  RDC believes HB  128 is  bad public                                                               
policy  and  may set  a  precedent  for  other industries.    The                                                               
passage of  the PPT  legislation has  tripled the  oil production                                                               
taxes collected  by the  State of Alaska  from the  oil industry.                                                               
The PPT  legislation allows producers  to deduct  operating costs                                                               
from their oil  taxes.  Mr. Brune pointed out  that taxpayers are                                                               
also  allowed  to  take  a  20 percent  tax  credit  for  capital                                                               
investments as an  incentive for improvements to  the North Slope                                                               
infrastructure.   Further,  the PPT  statutes mandate  that lease                                                               
expenditures  do not  include costs  arising from  fraud, willful                                                               
misconduct, or gross negligence.   He reminded the committee that                                                               
HB  128   would  preclude  lease  expenditures   associated  with                                                               
improper maintenance  of property or equipment;  however, it does                                                               
not define  improper maintenance, he  said.  Mr.  Brune continued                                                               
to say that  the state has the protection it  needs for instances                                                               
of gross negligence.   Another major concern for  RDC members, he                                                               
said, is  that HB  128 will create  ongoing disputes  between the                                                               
state and the  oil producers.  Mr. Brune  concluded his testimony                                                               
by asking that HB 128 not be moved out of committee.                                                                            
3:29:20 PM                                                                                                                    
REPRESENTATIVE  RAMRAS  asked  Mr.  Brune  whether  the  RDC  has                                                               
prevailed  upon BP  to pay  for  the costs  associated [with  the                                                               
pipeline shutdown].   He asked whether  the RDC has talked  to BP                                                               
about  corporate citizenship  and  how  its decision  jeopardizes                                                               
future  development around  the  Artic  National Wildlife  Refuge                                                               
(ANWR) and in the Bristol Bay Fisheries Reserve."                                                                               
MR. BRUNE answered no.                                                                                                          
3:31:15 PM                                                                                                                    
REPRESENTATIVE  SAMUELS called  the committee's  attention to  HB                                                               
128 page 3, line  21.  He noted that the chair  of the Alaska Oil                                                               
and Gas  Conservation Council (AOGCC),  in consultation  with the                                                               
commissioners  of  the  Department   of  Revenue  (DOR)  and  the                                                               
Department  of Environmental  Conservation (DEC),  will determine                                                               
the standard of  what is "improperly maintained."   He then asked                                                               
John Norman if he is concerned about this responsibility.                                                                       
3:31:54 PM                                                                                                                    
JOHN  K. NORMAN,  Commissioner/Chair,  Oil  and Gas  Conservation                                                               
Commission   (AOGCC),   Department   of   Administration   (DOA),                                                               
responded  that  the  AOGCC does  foresee  complexities  in  this                                                               
responsibility.   He referred to  his letter to  Senator Wagoner,                                                               
dated February 16, 2007, that  expressed the AOGCC's concerns and                                                               
pointed  out the  absence of  guidelines for  industry standards.                                                               
Mr. Norman agreed  that the determination of  the allowable costs                                                               
will  be  a complicated  assignment.    However, he  assured  the                                                               
committee that  the AOGCC will  be able to complete  its required                                                               
3:32:47 PM                                                                                                                    
REPRESENTATIVE  SAMUELS asked  Robert Mintz  if he  could improve                                                               
the vague language in HB 128.                                                                                                   
ROBERT E. MINTZ, Attorney at  Law, Kirkpatrick & Lockhart Preston                                                               
Gates Ellis  LLP, stated that  he did not have  language prepared                                                               
to  improve  the   bill;  however,  he  said   he  would  provide                                                               
assistance to the Department of  Law (DOL) regarding this matter.                                                               
Mr. Mintz  said there could  be improvement in the  language that                                                               
might  make it  easier to  administer  HB 128  and still  clearly                                                               
address the  committee's concern about  the vague language.   The                                                               
term  "improper,"  he  said,  may not  connote  "the  failure  to                                                               
3:34:33 PM                                                                                                                    
REPRESENTATIVE SAMUELS asked Steven  Mulder if he had information                                                               
about DOL investigations [into the pipeline shutdown].                                                                          
STEVEN  MULDER,  Chief  Assistant Attorney  General  -  Statewide                                                               
Section  Supervisor,   Environmental  Section,   Civil  Division,                                                               
(Anchorage)  Department  of  Law (DOL),  answered  that  although                                                               
there is an  ongoing investigation, no litigation  has been filed                                                               
at  this  time.   He  said  that  former Attorney  General  David                                                               
Marquez formed a task force that  is in the process of evaluating                                                               
the  documents  collected  after  [the pipeline  shutdown].    In                                                               
answer to a  question, Mr. Mulder said he is  unable to predict a                                                               
timeline for the  DOL to make a recommendation  about whether the                                                               
state  can  recover  losses  of  revenue  due  to  [the  pipeline                                                               
shutdown].   He  further explained  that  the DOL  will not  have                                                               
receipt of all of the documents  under subpoena from BP and other                                                               
producers for 60 days or longer.                                                                                                
3:37:23 PM                                                                                                                    
REPRESENTATIVE  SAMUELS  expressed  his concern  that  deductions                                                               
[for the pipeline  shutdown] will have been taken  and five years                                                               
may  pass without  the settlement  of a  [possible] lawsuit.   He                                                               
asked how  the passage of time  would affect a lawsuit  if HB 128                                                               
is not passed.                                                                                                                  
3:38:01 PM                                                                                                                    
MR. MULDER said he is unable to answer that question.                                                                           
REPRESENTATIVE SAMUELS  asked Mr. Mulder  whether he is  aware of                                                               
federal litigation [regarding the pipeline shutdown].                                                                           
MR.   MULDER  confirmed   that  there   is  an   ongoing  federal                                                               
investigation in process but that no litigation has been filed.                                                                 
3:38:46 PM                                                                                                                    
REPRESENTATIVE  SAMUELS  inquired as  to  whether  there are  any                                                               
criminal investigations being conducted by the state.                                                                           
MR. MULDER confirmed that the  Criminal Division of the DOL began                                                               
an investigation  in August,  2006, but he  did not  have further                                                               
REPRESENTATIVE SAMUELS  asked whether, if  HB 128 does  not pass,                                                               
and ConocoPhillips  and ExxonMobil  Corporation refuse to  pay BP                                                               
their portion of costs [of  the pipeline shutdown], can BP deduct                                                               
the entire amount.                                                                                                              
KEVIN BANKS, Acting  Director, Central Office, Division  of Oil &                                                               
Gas,  Department  of  Natural  Resources  (DNR),  said  that  his                                                               
understanding  is that  the grounds  for non-payment  between the                                                               
owners of the  Prudhoe Bay Unit Operating Agreement  are the same                                                               
standards that apply under the  PPT statute.  If gross negligence                                                               
is the  case, the same  standards apply and the  deductions would                                                               
not be an allowable cost.                                                                                                       
3:41:36 PM                                                                                                                    
REPRESENTATIVE SAMUELS remarked:                                                                                                
     If  ...  [ConocoPhillips]  and Exxon  do  not  pay  BP.                                                                    
     Because [of]  their claim of gross  negligence ... they                                                                    
     make a deal  internally.  Is that subject  to review by                                                                    
     the state,  or do you  have access to  the information?                                                                    
     ...  To avoid  the gross  negligence term  being thrown                                                                    
     out  there by  a  ruling of  a court  in  a civil  suit                                                                    
     between the two entities. ...  If BP filed suit against                                                                    
     the  owners of  the  [Prudhoe Bay]  unit  to get  [its]                                                                    
     money  back.   Because  they  are  going to  spend  the                                                                    
     money,  they're not  going to  have  to get  permission                                                                    
     first, ... to  do either resleeving or the   new pipe -                                                                    
     what happens in a lawsuit  between three of the largest                                                                    
     corporations in the world ten  years from now when [the                                                                    
     state looks]  back on whether  it was deducted  or not?                                                                    
     ... Does that  create any kind of a  problem whether we                                                                    
     do or do not pass the bill?                                                                                                
3:42:55 PM                                                                                                                    
MR. BANKS advised  the committee that in  allowing or disallowing                                                               
costs in the course  of an audit, whether or not  a partner in an                                                               
operating agreement  has paid another  partner for  costs, serves                                                               
as evidence  of a disallowed  cost.  Therefore, the  auditor will                                                               
review  a  charge  made  by   the  operator  that  has  not  been                                                               
reimbursed by its  partners.  Mr. Banks continued  by saying that                                                               
there are statutes  of limitations on tax cases.   If three years                                                               
were  to  pass  after  the  event  and  a  settlement  or  formal                                                               
resolution was reached, the matter  would be closed and the state                                                               
may not have an opportunity to recover.                                                                                         
REPRESENTATIVE DOOGAN  asked what the PPT  auditing process would                                                               
be if  HB 128 does  not pass.  He  also asked whether  an auditor                                                               
would  review  BP's  application   for  deduction  and  make  the                                                               
determination as  to whether  BP can  deduct the  costs resulting                                                               
from a [pipeline shutdown].                                                                                                     
3:47:17 PM                                                                                                                    
JONATHAN  IVERSEN,  Director,  Anchorage  Office,  Tax  Division,                                                               
Department of  Revenue (DOR), answered  that the  DOR regulations                                                               
allow for a three-year time period  in which to conduct an audit.                                                               
In the case of a dispute at the  end of that time the parties can                                                               
execute  an  extension   or  the  state  can   issue  a  jeopardy                                                               
assessment to preserve the state's  claim.  Mr. Iversen confirmed                                                               
that  the effect  of a  dispute  between the  interest owners  is                                                               
evidence  for an  audit  and  that a  settlement  reached by  the                                                               
parties will  not control  the tax  division's actions  during an                                                               
3:49:28 PM                                                                                                                    
REPRESENTATIVE  DOOGAN asked,  "The state  can contest  deduction                                                               
claims on its own hook, can't it?"                                                                                              
3:49:57 PM                                                                                                                    
MR. IVERSEN affirmed  that the DOR will disallow  a claim through                                                               
the  assessment and  audit process.   The  taxpayer can  agree or                                                               
file an  informal appeal  that begins  within the  department and                                                               
ends with  a formal  ruling before  an administrative  law judge.                                                               
In necessary,  the taxpayer  can then submit  a formal  appeal to                                                               
the Alaska Superior Court.                                                                                                      
3:50:59 PM                                                                                                                    
REPRESENTATIVE SAMUELS  recalled that the  DOR is in favor  of HB                                                               
128, but  asked if there  was a conflict  with the DOL  about the                                                               
bill's language.                                                                                                                
MR. IVERSEN  indicated that the  DOR is interested  in addressing                                                               
the  issues of  improper  maintenance.   The  DOR, he  continued,                                                               
supports the  change in Version M,  at page   3,  line 22,   from                                                               
"relying on"  to "taking  into consideration",  standard industry                                                               
3:52:47 PM                                                                                                                    
REPRESENTATIVE SAMUELS expressed his  interest in knowing whether                                                               
the  settlement or  ruling  in  a civil  case  could  be used  as                                                               
evidence of a subsequent criminal case.                                                                                         
MR. MULDER acknowledged that this  is an evidentiary question and                                                               
that he would need to consult  with the DOL criminal division for                                                               
an answer.                                                                                                                      
3:55:44 PM                                                                                                                    
MR. MINTZ, provided an answer  to an earlier question regarding a                                                               
dispute or settlement between interest  owners.  He said that the                                                               
basic elements of the PPT  relate to the term lease expenditures;                                                               
specifically, the  costs that are  deductible in  calculating the                                                               
production  tax.    Alaska  Statute  43.55.165(a)  defines  lease                                                               
expenditures as  the ordinary  and necessary  costs that  are the                                                               
direct costs of  exploring for, developing, or  producing oil and                                                               
gas deposits.   Mr. Mintz  explained that in  determining whether                                                               
costs  are  lease expenditures,  the  DOR  will consider  typical                                                               
industry   practices   revealed   in  existing   unit   operating                                                               
agreements  and   the  DNR's  regulations   on  what   costs  are                                                               
deductible for  net profit  share leases.   During the  audit the                                                               
department  will be  responsible  for  determining whether  costs                                                               
meet  the  general definition.    He  continued  to say  that  AS                                                               
43.55.165(e)  cites 18  exclusions; however,  in subsections  (c)                                                               
and  (d)  the DOR  is  allowed  to  rely on  operating  agreement                                                               
billings  to determine  what are  deductible lease  expenditures.                                                               
If the  DOR decides to  use the operating agreement  billings for                                                               
determining  lease expenditures  under  subsection  (d), the  DOR                                                               
will  rely  on  interest  owners to  accept  or  dispute  amounts                                                               
indicated in billings.  Mr.  Mintz concluded that if lease owners                                                               
refuse to  pay, then those costs  will not be considered  a lease                                                               
expenditure and will not be deductible.                                                                                         
4:02:04 PM                                                                                                                    
DON  BULLOCK, Attorney,  Legislative  Legal Counsel,  Legislative                                                               
Legal and  Research Services,  Legislative Affairs  Agency (LAA),                                                               
speaking as the  drafter of HB 128, added his  opinion that under                                                               
the  PPT  statute,  the legislature  makes  policy  decisions  on                                                               
allowable  credits and  deductions and  that [the  bill] makes  a                                                               
policy decision  about the  level of care  expected from  a field                                                               
operator and which costs the state is willing to share.                                                                         
4:03:24 PM                                                                                                                    
REPRESENTATIVE SAMUELS,  requested clarification of  Mr. Hurley's                                                               
estimate on the amount of time  needed for the interest owners to                                                               
decide  whether payments  will be  made to  BP for  [the pipeline                                                               
4:04:24 PM                                                                                                                    
MR. HURLEY  offered his belief  that there are several  stages of                                                               
decisions to  be made by  the interest  owners.  The  first stage                                                               
will  be the  submission  of   an  authorization for  expenditure                                                               
(AFE) by the  operator  to the interest owners  for approval.  If                                                               
the AFE  is approved, the  operator will,  at a later  time, bill                                                               
the  costs to  the  working  interest owners.    The approval  or                                                               
disapproval  of an  AFE  quite often  takes  several months,  Mr.                                                               
Hurley said.                                                                                                                    
REPRESENTATIVE SAMUELS asked whether BP  has begun the process of                                                               
submitting  to the  interest  owners its  AFE  for the  [pipeline                                                               
4:07:26 PM                                                                                                                    
MR. HURLEY  replied that ConocoPhillips  has not received  an AFE                                                               
from  BP as  of February  23,  2006.   He  added that  an AFE  is                                                               
similar to a proposal and is not always public information.                                                                     
4:08:29 PM                                                                                                                    
REPRESENTATIVE  DOOGAN  offered  his belief  that  ConocoPhillips                                                               
opposes HB  128 because  it thinks  the bill  is targeted  at BP.                                                               
However,  he  noted,  the  legislature must  write  the  laws  of                                                               
general  application  and  must  also  look  to  possible  future                                                               
applications.  In  addition, he continued, it  is unreasonable to                                                               
expect that laws will not  change.  Representative Doogan said he                                                               
is not convinced  by ConocoPhillips's claim that  the 30-cent tax                                                               
exemption is sufficient to address  the problem of BP's deduction                                                               
of pipeline shutdown costs.   Lastly, he continued, litigation is                                                               
inevitable  concerning oil  production taxes  due to  the subject                                                               
matter.  Representative Doogan remarked:                                                                                        
     What  we're left  with is  a bill  that right  now only                                                                    
     allows  us, really,  any latitude  on a  situation like                                                                    
     the one  on the North  Slope, in  the case of  what are                                                                    
     criminal  standards. ...  I can  imagine situations  in                                                                    
     which you  wouldn't be violating  the criminal  law and                                                                    
     yet you'd still wouldn't  want to allow the deductions.                                                                    
     And it's  my hope that's  what this bill does  and that                                                                    
     is  why I'm  going  to  be voting  to  send  it out  of                                                                    
The committee took an at-ease from 4:12 p.m. to 4:13 p.m.                                                                       
4:13:17 PM                                                                                                                    
REPRESENTATIVE RAMRAS remarked  that he is troubled  by the vague                                                               
standard in the  language of HB 128, and noted  that there is not                                                               
a   definition  of   "improper   maintenance"   in  Black's   Law                                                             
Dictionary.    He  then  referred   to  a  speech  given  by  Rex                                                             
Tillerson,  Chairman, and  Chief Executive  Officer, Exxon  Mobil                                                               
Corporation, and indicated that Mr. Tillerson said:                                                                             
     First  we must  provide  greater  understanding of  the                                                                    
     reality  of the  timeframes within  which our  industry                                                                    
     works to  deliver this uninterrupted supply  of energy.                                                                    
     These   are  timeframes   that   often  transcend   the                                                                    
     political  cycle and  most certainly  the media  cycle.                                                                    
     Many policy  makers think in  increments of  two, four,                                                                    
     or six  years based on  election cycles.   In contrast,                                                                    
     those of us in the  energy industry think in increments                                                                    
     of  two, four,  or six  decades based  on timelines  to                                                                    
     gain access to new  acreage, explore for, discover, and                                                                    
     bring to production the next sources of supply.                                                                            
REPRESENTATIVE RAMRAS  stressed that it  is the failure of  BP to                                                               
pay  the [pipeline  shutdown]  costs which  has  resulted in  the                                                               
creation of  a [HB 128].   The responsibility for  the resolution                                                               
of  this [pipeline  shutdown] problem  should not  rest with  the                                                               
legislature.  He said:                                                                                                          
     I am  troubled when  folks like  us have  to take  up a                                                                    
     bill  like   yours,  Mr.  Chairman,  and   react  to  a                                                                    
     situation that we should not  be placed in.  We've been                                                                    
     [working] ...  since this past  summer ...  and there's                                                                    
     no  resolution ...  for fixing  this problem.  ... They                                                                    
     [oil  companies] are  requiring  us  as politicians  to                                                                    
     come up  with a political  solution for what  really is                                                                    
     just  a  good corporate  citizenship  problem.   And  I                                                                    
     continue  to  be  troubled  even   as  I  vote  ...  to                                                                    
     recommend this  bill move on.   I think that BP  has it                                                                    
     well within their  power to solve this  problem and not                                                                    
     invite for the next two,  four, or six decades into our                                                                    
     energy policy  and management of Alaska's  resources, a                                                                    
     vague   standard   of   this   "improper   maintenance"                                                                    
     standard.   It's  an unknown  thing  and it's  shameful                                                                    
        that we're going to have to litigate it. ... It                                                                         
     doesn't instill a lot a goodwill.                                                                                          
4:19:35 PM                                                                                                                    
REPRESENTATIVE RAMRAS moved to report  the proposed CS for HB 128                                                               
Version  25-LS0561\M, Bullock,  2/22/07,  out  of committee  with                                                               
individual  recommendations and  the  accompanying fiscal  notes.                                                               
There being  no objection,  CSHB 128(O&G)  was reported  from the                                                               
House Special Committee on Oil and Gas.                                                                                         
The committee took an at-ease from 4:20 p.m. to 4:21 p.m.                                                                       
HB  89-OIL & GAS PRODUCTION TAX                                                                                               
4:22:05 PM                                                                                                                    
VICE CHAIR OLSON announced that  the next order of business would                                                               
be HOUSE BILL NO. 89, "An  Act providing for the use of petroleum                                                               
production and other facilities  by additional entities; amending                                                               
the powers  of the  Alaska Oil  and Gas  Conservation Commission;                                                               
relating to oil and gas  properties production taxes and credits;                                                               
providing for  production tax adjustments to  increase the amount                                                               
of tax at  high oil prices, reduce  the amount of tax  at low oil                                                               
prices, and reduce  the amount of tax on the  production of heavy                                                               
oil; relating to the determination of  the gross value of oil and                                                               
gas at  the point of  production; and providing for  an effective                                                               
4:22:33 PM                                                                                                                    
REPRESENTATIVE LES GARA, Alaska  State Legislature, sponsor of HB                                                               
89, informed the  committee that there are two  issues facing the                                                               
state regarding the production profits  tax (PPT).  The issues of                                                               
subsidies for the  gas pipeline are the first  concern.  Although                                                               
the intention was  for the subsidies to  benefit a producer-owned                                                               
gas line, in fact, the subsidies  will only benefit the holder of                                                               
the  Pt. Thompson,  Alaska,  oil  lease and  those  who hold  the                                                               
current oil  leases on  the North  Slope.   The second  issue, he                                                               
said, is comparing  Alaska's oil tax rate with  the world average                                                               
oil tax rate.  Representative  Gara asked whether, when the state                                                               
is anticipating  budget deficits within two  years, should Alaska                                                               
tax at  $1 billion  to $2  billion per year  less than  the world                                                               
average.    Oil is  a  world  commodity,  he  said, and  the  oil                                                               
production  companies  in  Alaska  also produce  oil  around  the                                                               
REPRESENTATIVE GARA  continued to explain  that the oil  tax rate                                                               
is measured  by "total government  take."  According  to analyses                                                               
by consultants  Econ One  Research Inc.,  Daniel Johnston  & Co.,                                                               
Inc.,  and Wood  Mackenzie  Ltd., total  government  take is  the                                                               
portion of  the oil's  value that  [Alaska] receives  compared to                                                               
the oil  company's profit.   Daniel  Johnston estimates  that the                                                               
average world government take is  approximately 67 to 70 percent.                                                               
Wood Mackenzie  projected that the world  average government take                                                               
is approximately 71 percent, including  factors for the high cost                                                               
of  production   in  Alaska.     After  subtracting   taxes,  the                                                               
producer's net income is  approximately 30 percent Representative                                                               
Gara noted.  Under the PPT  legislation, when the price of oil is                                                               
$60  per barrel,  the  total  government take  for  Alaska is  61                                                               
percent.  Again,  when the price of  oil is at $60  per barrel, a                                                               
one percent  change in  the total government  take equals  a $200                                                               
million  loss or  gain  in  revenue.   Analysis  provided to  the                                                               
legislature last  year by Econ  One Research Inc., shows  that an                                                               
increase in  revenue of  $100 million  is produced  by increasing                                                               
total government take by .5 percent.                                                                                            
REPRESENTATIVE  GARA  pointed  out  that Alaska's  taxes  on  oil                                                               
production are  between six and  ten percent less than  the world                                                               
average tax  rate.  This difference  equals a loss of  about $1.2                                                               
billion and  $2 billion per  year to  Alaska.  He  then suggested                                                               
that  the  committee  also  consider  oil  production  companies'                                                               
profit  margins.    "ConocoPhillips Annual  Reports,  2003-2006",                                                               
indicate that  Alaska-based profits for 2005  were $2.55 billion,                                                               
which is a profit margin of 43.1  percent.  In 2006, with the PPT                                                               
legislation  in  effect  for  three-quarters  of  the  tax  year,                                                               
profits  were $2.33  billion,  which  is a  profit  margin of  37                                                               
4:31:24 PM                                                                                                                    
REPRESENTATIVE  GARA returned  to  the subject  of the  subsidies                                                               
provided by the  PPT legislation.  He said that  it provides a $3                                                               
billion,  or 42.5  percent, subsidy  for the  development of  Pt.                                                               
Thompson.  In addition, the oil  companies will be able to deduct                                                               
from their  oil tax the costs  of the development of  gas fields.                                                               
The  cost of  developing  the  gas line  on  the  North Slope  is                                                               
estimated to be $9.2 billion,  including the cost of construction                                                               
of the gas treatment plant.   Representative Gara noted that most                                                               
of the cost of   and risk taken is during  development of the gas                                                               
pipeline,  and    so  a  subsidy by  the  state  may  be  needed.                                                               
However, he  concluded, once the  pipeline is in place,  there is                                                               
no need for  Alaska to further subsidize the  construction of the                                                               
gas fields.                                                                                                                     
REPRESENTATIVE  GARA surmised  that Alaska  will be  obligated to                                                               
pay $1.2  billion of  Pt. Thomson's development  costs.   The gas                                                               
and oil  field development at  Pt. Thompson  is expected to  be a                                                               
profitable venture and legislation   is pending that provides for                                                               
additional  grant  money  for gas  line  development.    Perhaps,                                                               
Representative Gara suggested, the  subsidy under the PPT statute                                                               
is not  needed.  He  pointed out  that during the  development of                                                               
Pt.  Thompson, there  will be  no income  from the  production of                                                               
gas.  At  this same time, gas field development  costs will begin                                                               
to be deducted  from oil tax revenues.   Representative Gara said                                                               
he  feels  the  state  needs to  separate  gas  line  development                                                               
provisions from the PPT statute.                                                                                                
REPRESENTATIVE GARA then concluded with these remarks:                                                                          
     As  budget gaps  are on  their  way, ...  does it  make                                                                    
     sense to tax  [$1 billion to $2 billion]  less than the                                                                    
     world average  for our  oil commodity?   And  should we                                                                    
     allow  somewhere   in  the  neighborhood   of  ...[$1.5                                                                    
     billion  to $3  billion] worth  of deductions  from our                                                                    
     oil  taxes for  companies  developing  gas fields  once                                                                    
     they know there's going to be  a gas line in place? ...                                                                    
     I think  the answer  to both questions  is, we  need to                                                                    
     take another  look at  our oil tax  law. ...  These are                                                                    
     both billion-dollar  issues ...  and I think  we should                                                                    
     resolve  them  in  favor  of  changing  both  of  those                                                                    
     provisions in the PPT law. ...                                                                                             
[HB 89 was held over.]                                                                                                          
4:39:16 PM                                                                                                                    
There being no  further business before the  committee, the House                                                               
Special Committee  on Oil and  Gas meeting was adjourned  at 4:39                                                               

Document Name Date/Time Subjects