Legislature(1999 - 2000)
03/04/1999 10:07 AM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 4, 1999
10:07 a.m.
MEMBERS PRESENT
Representative Jim Whitaker, Chairman
Representative Fred Dyson
Representative Gail Phillips
Representative Scott Ogan
Representative John Harris
Representative Allen Kemplen
Representative Harold Smalley
Representative Brian Porter
MEMBERS ABSENT
Representative Tom Brice
COMMITTEE CALENDAR
* HOUSE BILL NO. 58
"An Act relating to certain audits regarding oil and gas royalty
and net profits and to audits regarding costs relating to
exploration incentive credits and oil and gas exploration licenses;
and providing for an effective date."
- HEARD AND HELD
(* First public hearing)
PREVIOUS ACTION
BILL: HB 58
SHORT TITLE: OIL & GAS AUDITS
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
Jrn-Date Jrn-Page Action
1/22/99 65 (H) READ THE FIRST TIME - REFERRAL(S)
1/22/99 65 (H) OIL & GAS, RESOURCES, FINANCE
1/22/99 65 (H) 2 FNS (DNR, REV)
1/22/99 65 (H) GOVERNOR'S TRANSMITTAL LETTER
WITNESS REGISTER
KEVIN BANKS, Petroleum Market Analyst
Division of Oil and Gas
Department of Natural Resources
550 W. 7th Avenue #800
Anchorage, Alaska 99501
Telephone: (907) 269-8781
POSITION STATEMENT: Provided information on HB 58.
DAN DICKINSEN, Director
Oil and Gas Audit Division
Department of Revenue
550 W. 7th Avenue #570
Anchorage, Alaska 99501
Telephone: (907) 343-9225
POSITION STATEMENT: Provided information on HB 58.
ACTION NARRATIVE
TAPE 99-11, SIDE A
Number 0001
CHAIRMAN JIM WHITAKER called the House Special Committee on Oil and
Gas meeting to order at 10:07 a.m. Members present at the call to
order were Representatives Whitaker, Dyson, Phillips, Harris,
Kemplen, Brice, Smalley and Porter. Representative Ogan arrived at
10:15 a.m.
HB 58 - OIL & GAS AUDITS
Number 0089
CHAIRMAN WHITAKER stated that the agenda for the meeting was over
House Bill No. 58, "An Act relating to certain audits regarding oil
and gas royalty and net profits and to audits regarding costs
relating to exploration incentive credits and oil and gas
exploration licenses; and providing for an effective date."
Number 0133
KEVIN BANKS, Petroleum Market Analyst, Division of Oil and Gas,
Department of Natural Resources, stated that HB 58 transfers the
authority to audit royalty and net profit share revenues from the
Department of Revenue (DOR) to the Department of Natural Resources
(DNR). It is a housekeeping bill that changes what the legislature
had enacted in 1980.
MR. BANKS further stated that the oil and gas resources that the
state owns generate bonuses, rents, royalties and net profit
shares. It's the royalties in that profit share that are subject
to audit. The DNR also enters into agreements with oil refineries
to sell some of their royalty oil, and those contracts occasionally
need to be audited. The other responsibilities that the DNR has,
that involves auditing, is the provisions to provide for
exploration incentive credits. Auditors examine the records of the
producers to determine how much was spent on exploration activity
allowed under those credits. Those credits are applied toward
royalties and taxes to provide the incentives for exploration.
Number 0277
MR. BANKS continued, since 1980 the DOR has acted as the audit
contractor. The process is as follows; each year the DNR prepares
a wish list, prior to the beginning of the fiscal year, and asks
the DOR to conduct several audits. As the audit is conducted, the
DNR participates, and is frequently called upon for input. When
the DOR finishes the audit, the DNR is given the opportunity to
review the work and suggest changes. Ultimately, the DOR completes
a final audit and issues it to the DNR, who then take it to the
lessee to start pursuing the claim. He called attention to the
amount of time and costs that go into the process, which includes
staff time and photocopying.
MR. BANKS stated that in 1980, when the legislature gave the DOR's
audit authority to the DNR, there was a lot of overlapping in
responsibilities between the agencies. He referred to a brief,
titled "DNR Analysis of HB 58", that he sent to the committee,
which describes why the overlapping responsibilities occurred.
There were two reasons. One, production taxes and royalties were
due on all of the production, so there might be some savings gained
in conducting a tax audit by gathering information that would be
useful for a royalty audit. Two, the way severance, production and
royalty taxes were calculated was the same, but now there are some
changes. The DNR has entered into a lot of settlement agreements.
The lease language that the DNR uses to define the value of royalty
has changed and the calculation of royalty values is unique to each
of the lessees. On the other hand, the calculation for the value
for severance taxes is the same for every lessee.
Number 0583
MR. BANKS continued, the economic limit factor (ELF) has
contributed to some change in the overlap of responsibility. The
ELF means that in some cases no taxes are due, but royalty revenues
are still required.
MR. BANKS concluded, that by placing the audits back into DNR it
would clear up some of the red tape that exists between the
departments and lead to more efficiency. The DNR staff is familiar
with the process, there is one chain of command guiding the audit
and there will be less interdepartmental recording requirements.
In this way, the audits will be done more quickly and the
information won't become stale. Lastly, the fiscal notes, that
have been submitted to the committee, show that three positions
will be transferred from the DOR to the DNR at no additional cost.
Number 0698
REPRESENTATIVE KEMPLEN asked why the areas for auditing were being
limited. He referred to page 4 of HB 58, lines 6 through 8, where
it reads (deleted text bracketed), "or memoranda bearing upon tax
matters [OR MATTERS RELATING TO OIL AND GAS ROYALTY OR NET PROFITS
UNDER CONTRACTS, AGREEMENTS, OR LEASES UNDER AS 38.05]". He said
that it seems that a relatively broad authority is being narrowed
to focus just on tax matters. If the responsibility is moved from
the DOR, whose main mission is to ensure that the state of Alaska
gets its fair share of money, to the DNR, whose responsibility is
to promote development, there is the risk of producing a situation
where the state of Alaska, in its interest to promote development,
overlooks some areas having to do with revenue.
Number 0847
DAN DICKINSEN, Director, Oil and Gas Audit Division, Department of
Revenue, replied that the language that is pertinent to the royalty
audits is being removed from the DOR's purview, but the tax audit
portion remains. The question of whose looking at DNR and if DNR
is suppose to encourage development may need to be looked at.
MR. DICKINSON stated that he wanted to talk about audits in
general. When an audit is done, the auditor is looking for
evidence of a specific assertion. In the royalty audits that the
DOR performs, the DOR is basically asking if the royalty payer paid
the correct amount under the agreement reached with the department.
The DOR has not been asked to ask any of the larger questions , for
example, whether or not the agreement set up by the DNR was an
appropriate one or whether or not there was too much given away to
encourage development.
Number 0974
REPRESENTATIVE PHILLIPS said that she has no problem with the
intent of the bill, but wanted to bring into question line 3 on
page 2 of HB 58, which reads (deleted text in brackets), "The
Department of Revenue may obtain from the department [INSPECT ALL
REPORTS AND OTHER] information." In the past it has included the
word inspect. The troubling issue has to do with confidentiality;
information staying within the department. If there is a hard copy
it could be used against one company for the benefit of the other
company. The confidentiality issue seems to be lessened in the
language of HB 58.
Number 1052
MR. BANKS stated that in some respects the bill strengthens the
confidentiality provisions, at least from the perspective of the
DNR. Under the present statute, information can be held
confidential by the DNR at the request of the industry, but there
is no criminal penalty should that information be revealed. In
rewriting HB 58, when an audit is handled, even a royalty audit,
there is a criminal penalty imposed on agents of the DNR. Section
2 and 3 of HB 58 change the relationship between the departments to
provide for a better flow of information. He asked the legislature
to consider that the DNR's job, under the constitution, is to
collect revenues and maximize benefits to the people of Alaska,
therefore, by pocketing information into two different departments
and not letting one review or obtain information that is related to
the other business could be a risk.
REPRESENTATIVE PHILLIPS said that she feels the information needs
to be available to the DNR, but she is still questioning the
confidentiality.
Number 1177
REPRESENTATIVE PORTER asked Mr. Banks if the industry
representatives will be subject to any new requirements in this
audit procedure.
MR. BANKS replied, no.
MR. DICKINSON added that the people who were formerly doing these
audits will be in the same positions, so no institutional knowledge
will be lost, there will just be a layer of bureaucracy cut out.
REPRESENTATIVE KEMPLEN followed up, in Section 5 it reads (deleted
text bracketed), "The department may examine the books, papers,
records, or memoranda of any person to ascertain the correctness of
a return filed or to determine whether a tax [OR A PAYMENT FOR OIL
OR GAS ROYALTY OR NET PROFITS SHARES UNDER A CONTRACT, AGREEMENT,
OR LEASE UNDER AS 38.05] is due", it seems that the DOR is being
limited by the deletion of the language in brackets. He asked if
Mr. Dickinson would explain where the issues related to oil and gas
royalty or net profit shares will be in the statutes and who will
cover that.
Number 1333
MR. DICKINSEN said that he did not think the state of Alaska was
being limited by the removal of the language, because the language
is simply being transferred from AS 43.05 to AS 38.05. There has
been some additional change to the language, but the general idea
is that anything to do with royalties and net profit shares is
being transferred from the DOR to the DNR.
REPRESENTATIVE KEMPLEN asked Mr. Dickensen where that transfer is
occurring.
MR. DICKINSEN referred to page 1, Section 1, and noted that the
department being referred to is the Department of Natural
Resources.
REPRESENTATIVE KEMPLEN asked where the language being deleted from
Section 5 is being inserted in Section 1.
MR. DICKINSEN said that Representative Kemplen is correct, in that
it is not the exact same language, but the phrase that is going to
stay in Section 1 is, "royalty and net profits under this chapter
and regarding costs related to oil and gas exploration licenses."
The intent of the draft was to have them cover the same thing even
though they are not the same language, except for the exploration
incentive credit, which was not in the old statute.
REPRESENTATIVE PHILLIPS commented on the analysis of the fiscal
note, saying that it looks like people are getting the idea that
results based budgeting is a good thing.
CHAIRMAN WHITAKER said that the intent is to hear HB 58 again on
Thursday, March 11, 1999, which gives the industry an opportunity
to speak with regards to some of the concerns raised in the present
meeting. [HB 58 was held over]
ADJOURNMENT
CHAIRMAN WHITAKER adjourned the House Special Committe on Oil and
Gas at 10:33 a.m.
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