02/22/2007 03:00 PM House OIL & GAS
| Audio | Topic |
|---|---|
| Start | |
| HB128 | |
| HB89 | |
| HB128 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 128 | TELECONFERENCED | |
| *+ | HB 89 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
February 22, 2007
3:03 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Kurt Olson, Vice Chair
Representative Jay Ramras
Representative Ralph Samuels
Representative Scott Kawasaki
Representative Mike Doogan
MEMBERS ABSENT
Representative Nancy Dahlstrom
OTHER LEGISLATORS PRESENT
Senator Tom Wagoner
Representative Bob Roses
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."
-HEARD AND HELD
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
date."
-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
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
WITNESS REGISTER
KONRAD JACKSON, Staff
to Representative Kurt Olson
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Introduced CSHB 128, Version M, on behalf
of the prime sponsor Representative Olson.
DON BULLOCK, Attorney
Legislative Legal and Research Services
Legislative Affairs Agency (LAA)
Juneau, Alaska
POSITION STATEMENT: Answered questions on HB 128.
JON IVERSEN, Director
Tax Division
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Answered questions on HB 128.
GARY ROGERS, Production Audit Manager
Tax Division
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: During hearing of HB 128 answered questions
on petroleum tax issues.
JUDY BRADY, Executive Director
Alaska Oil and Gas Association (AOGA)
Anchorage, Alaska
POSITION STATEMENT: Testified in opposition to HB 128.
REPRESENTATIVE LES GARA
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Speaking as the sponsor, introduced HB 89.
TOM WILLIAMS, Tax Attorney
BP Exploration (Alaska) Inc. (BP)
Anchorage, Alaska
POSITION STATEMENT: Expressed concern with HB 128.
ACTION NARRATIVE
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 3:03:22 PM. Representatives Kohring,
Doogan, Kawasaki, Olson, and Samuels were present at the call to
order. Representative Ramras arrived as the meeting was in
progress. Representative Dahlstrom's absence was excused.
Senator Wagoner and Representative Roses were also in
attendance.
HB 128-OIL & GAS PRODUCTION TAX: EXPENDITURES
CHAIR KOHRING 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."
3:03:49 PM
REPRESENTATIVE OLSON moved to adopt CSHB 128, 25-LS0561\M,
Bullock, 2/22/07, as the working document. There being no
objection, Version M was before the committee.
3:07:07 PM
KONRAD JACKSON, Staff to Representative Kurt Olson, Alaska State
Legislature, sponsor of HB 128, reviewed the changes embodied in
the proposed committee substitute. Version M changes the
language on page 3, line 21, such that the commissioner of the
Department of Natural Resources (DNR) and all of the board
members of the Alaska Oil and Gas Conservation Commission
(AOGCC) are part of the consulting group. On page 3, line 22,
the language relying on was replaced with taking into
consideration in order to make the language more general and
ease the adoption of the regulations. Mr. Jackson noted that on
page 3, line 24, the language subparagraph (A), beginning on
line 24, improperly maintained property or equipment was and
replaced with property or equipment that was not maintained or
was improperly maintained, for the purpose of clarifying
subsection (a) to ensure "not maintained" or "not maintained at
all" is also established as criteria. In addition, on page 3,
line 27 the language a lack of was added to clarify subsection
(b) such that improper or no maintenance is included. The final
change was on page 3, line 29, where subparagraph (C) was
replaced with the following language: incremental operating
expenses incurred as a result of operating facilities or
equipment at diminished capacity when that diminished capacity
is caused by the lack of or improper maintenance of property or
equipment. These changes were implemented after discussions
between the sponsor of the Senate version of this bill, Senator
Wagoner, and Representative Olson. Also consulted were the DNR,
the Department of Revenue (DOR), and the AOGCC. The effects of
the changes, Mr. Jackson explained, are to tighten some
loopholes in the petroleum profits tax (PPT). In the sponsor's
opinion, as the PPT is currently written, the people of the
State of Alaska would ultimately be responsible for the cost of
repairs due to "improper or no maintenance." Mr. Jackson
emphasized that it is not the intention of the sponsors of HB
128 or the companion bill SB 80, to open discussion of changes
to the tax structure of the PPT.
3:10:49 PM
REPRESENTATIVE OLSON commented that the issues addressed in HB
128 were not settled before enactment of the PPT last year.
3:11:26 PM
CHAIR KOHRING asked if there has been a legal opinion written on
whether the retroactivity or negligence issues addressed in the
bill are constitutional.
MR. JACKSON deferred to Mr. Bullock.
DON BULLOCK, Attorney, Legislative Legal and Research Services,
Affairs Agency, Legislative Affairs Agency, responded that there
are precedents of retroactivity of taxes; for example, the PPT
is retroactive, and Version M is drafted to coincide with the
PPT.
3:13:15 PM
CHAIR KOHRING further asked if the committee should not move
Version M until inquiries into the pipeline shutdown [on August
8, 2006 by BP Exploration (Alaska) Inc.] by the Department of
Environmental Conservation (DEC) and other agencies, are
completed and the issue of negligence has been established.
MR. BULLOCK noted that the timing issues need to be taken under
consideration. He pointed out that the first filing of the PPT
for taxpayers is April 1, 2007, which begins the period of time
for audits and the filing of amended tax returns. As directed
in Version M the commissioners of DOR, DEC, DNR, and the board
members of AOGCC are the knowledgeable parties who will apply
the standard of expected practices of the industry and make a
determination of what is the expected behavior for maintenance.
3:15:47 PM
MR. JACKSON, in response to a question, informed the committee
that the sponsor of HB 128 is not concerned with the
determination of gross negligence, fraud, or misconduct.
Instead, this bill is one more tool to enable the State of
Alaska auditors to audit taxpayers' returns. Mr. Jackson, in
response to a question from Chair Kohring, said that he believes
a federal investigation into [BP's] negligence is in progress.
3:17:20 PM
CHAIR KOHRING again asked the about the possibility of
proceeding with HB 128 after the results of the federal
investigations into the [pipeline shutdown] are known.
MR. JACKSON responded that the legislative process, promulgation
of regulations, completion of tax audits, and filing of amended
returns will take time and by then the existing deadlines may
not allow for more delay.
3:18:36 PM
REPRESENTATIVE SAMUELS related his assumption that the state
will perform an inquiry into whether BP reached the gross
negligence or willful misconduct standard and will file suit for
the state's lost money. He recalled that then attorney general
David Marquez indicated that the state would move forward with
an investigation. Representative Samuels inquired as to the
status of the state investigation.
MR. BULLOCK informed the committee that the same issues can be
dealt with by various forms; therefore, it is not unusual for
DOR to be looking at the same issues as DEC. Other departments
of the state and federal agencies are not contingent "one on the
other" he said. With regard to tax, it is important for the
state to determine what the legislature can appropriate.
Therefore, time is of the essence, he opined.
3:20:06 PM
REPRESENTATIVE OLSON highlighted that CSHB 128 is not new as it
was proposed in August, 2006.
REPRESENTATIVE RAMRAS related the definitions of "improper" and
"maintain" from Black's Law Dictionary. He went on to say that
as a co-sponsor of HB 128, he is pleased with the language in
the bill and believes the court system will determine the
appropriateness of the term "negligence" in future proceedings.
REPRESENTATIVE DOOGAN recalled that the phrase "improper
maintenance" in the original bill was of concern for DNR and
asked if that language had been removed or improved in Version
M.
3:23:58 PM
MR. JACKSON assured the committee that the intention of the
sponsor is to give to the commissioners of DOR, DNR, DEC, and
the board of directors of the AOGCC the authority to determine
the meaning of "improper maintenance" and whether credit
deductions will be allowed.
MR. BULLOCK added that the additional language in Version M
makes clear that to "do nothing" is also "improper maintenance",
and expense deductions may not be allowed.
REPRESENTATIVE RAMRAS related the definition of "res ipsa
loquitur" from Black's Law Dictionary.
3:25:58 PM
REPRESENTATIVE SAMUELS recalled that during testimony last year
on the PPT, the Alaska Oil and Gas Association (AOGA) wanted
defining language added to the bill. The legislature rejected
these additions to the PPT on the basis that future adjustments,
if needed, were easier to correct by changes to the regulations
rather than in statute. He asked:
Are [BP's] expenses going to be allowed or are they
not going to be allowed? What do the regulations say
and what is position of the Department of Revenue on
the piece of legislation? ... We specifically wanted
the regulators to have the control so that they could
be more flexible.... If [the expenses] are going to
allowed or not going to be allowed, are there any more
regulations regarding the commercial involvement
between BP and ExxonMobil [Corporation] and between BP
and Conoco[Phillips Alaska, Inc.]? ... If Exxon
refuses to pay BP does that automatically kick them
out of our system where we would not be allowed until
that lawsuit between those private entities is
resolved? If Exxon and Conoco determine that there is
a problem, what is going to happen commercially
between the parties and does that play into the
regulatory environment for the state?
3:29:14 PM
JON IVERSEN, Director, Tax Division, Department of Revenue,
informed the committee that the first round of regulations for
the PPT has been adopted by the commissioner of DOR and is now
subject to review and change by the Department of Law (DOL) and
the lieutenant governor. However, this round of regulations
does not expressly address the deductions that are at issue in
CSHB 128, Version M. Alaska Statute 43.55.165 addresses
exclusions due to gross negligence and ordinary and necessary
expenses, and will be addressed in the next set of regulations.
Furthermore, he said, regulations are not written to address any
specific instance or event [such as the pipeline shutdown].
3:31:10 PM
REPRESENTATIVE SAMUELS asked when the second set of regulations
will be written and reviewed.
MR. IVERSEN stated that the completion of both rounds of
regulations will take eight months to one year. The first
round, which addresses the structure for filing, will be done by
March, and implemented in April. Round two will address the
lease expenditure issue. The DOR has not made any conclusions
about the deductibility of BP's [pipeline shutdown] cost. At
this time, BP has not submitted claims for expenditure
deductions. In addition, Mr. Iversen emphasized, claims are
confidential information unless under appeal to the State of
Alaska Superior Court. Referring to the commercial relationship
between the parties, Mr. Iversen said that he could not comment
on possible litigation; however, DOR will consider whether costs
due to a non-operating working interest owner, or another party,
are allowed under that agreement.
GARY ROGERS, Production Audit Manager, Tax Division, Department
of Revenue, in response to a question, explained to the
committee that in the PPT legislation, DOR is allowed to draft
regulation regarding joint interest operating agreements. The
auditors will take under consideration the fact that one party
is refusing to pay until a legal dispute regarding allowable
expenses is settled. The DOR auditors may need some legal
advice from the Department of Law; however, the fact that
parties are involved in a lawsuit is something that an auditor
has the authority to examine.
MR. IVERSEN assured the committee that DOR supports CSHB 128,
Version M.
3:36:39 PM
REPRESENTATIVE KAWASAKI asked, "How much power does [DOR] tax
division have to currently allow or disallow the deductions like
the ones we are addressing here in today's bill?"
MR. IVERSEN answered, "At this point the regulations have not
been drafted ... it is based on the language of the statute and
our regulations will be implementing and interpreting that."
3:37:27 PM
REPRESENTATIVE KAWASAKI then inquired a to whether taxpayers are
assessed penalties for disallowed deductions.
MR. ROGERS explained that the auditors will review deductions
claimed, the unit operating agreements, and the joint interest
billings to obtain as much source information as possible. He
remarked:
Our normal audit process is to propose adjustments,
write an assessment report and if it appears to be
contentious we will get the Department of Law for
review prior to issuance. ... We issue the
assessments and they go up through the appeals
process. Tax law is something ... that is always open
to some interpretation, which is why we audit.
REPRESENTATIVE DOOGAN asked Mr. Bullock about the possibility of
drafting a bill to directly address the problem of BP applying
for deductions to repair the corroded transmission lines.
3:39:47 PM
MR. BULLOCK responded that the Constitution of the State of
Alaska contains a prohibition against local and special acts.
He continued to say:
The section that this bill proposes to amend is in
Section 25 of the PPT bill. Transition language that
was enacted at the same time as the PPT says that
notwithstanding any contrary provisions of the
Administrative Procedure Act regulations adopted by
the department to implement, interpret, make specific
or otherwise carry out the provisions of sections of
the act that include this deductibility of lease
expenditures may apply retroactively to April 1, 2006.
If the DOR expressly designates in the regulations
that the regulation applies retroactively to that
date, some of these regulations may be applied
retroactively if they state that in their
[regulations].
3:41:41 PM
MR. IVERSEN, in response to a question regarding the possible
redundancy of this bill, replied that he is unable to answer
because the DOR has not begun the second phase of drafting
regulations. He went on to say that the second phase involves
the concepts that are currently in statute, which are: gross
negligence, typical industry practices, ordinary and necessary
business expenses, and expenses that would or would not be
allowed. In response to a question from Representative Samuels,
Mr. Iversen further explained that the existing statute does not
expressly give the authority for DOR to write regulations that
specifically apply to the present situation with BP and its
corroded transmission lines [pipeline shutdown]. He stated that
DOR supports CSHB 128, Version M, because it will more clearly
define the authority given to the DOR.
3:44:40 PM
JUDY BRADY, Executive Director, Alaska Oil and Gas Association
(AOGA), provided testimony which she said represents all the
members of AOGA. She began by noting that the PPT was passed
with the first goal of increasing taxes due to the state during
periods of higher oil prices. This, she continued, has been
accomplished; in fact, BP's projected tax revenue has increased
from $180 million to over $500 million in nine months. The
second goal of the PPT was to encourage new oil and gas
exploration and production by offering credits from the state to
taxpayers, thereby sharing the risks and costs. The resulting
tax structure in Alaska is unique in the world. There were many
questions raised about the PPT: what standards of review will
be used, what costs are included, how to decide if a cost was
appropriate, how the credit should be used, what the tax rate
should be, and when should the progressive factor apply. On
August 6, 2006, BP discovered a leak and closed Flow Station 2
of the Trans-Alaska Pipeline System (TAPS). The authorities
were notified of the leak and BP suspended production for the
entire field. The Alaska State Legislature House of
Representatives was informed of the problem prior to passage of
the PPT; however, further details of the spill raised lawmakers'
concern that under the new law the State of Alaska would have to
pay for the costs of a spill. As a result, the legislation
regarding the identification of lease expenditures and the
standards for review were closely scrutinized.
MS. BRADY continued her testimony by pointing out that final
standards are based on the words that have meaning in law:
fraud, willful misconduct, or gross negligence. Also not
included in lease expenditures are costs of containment,
control, cleanup, or removal associated with any unpermitted
release of oil or hazardous substance. On August 9, 2006, the
Senate Special Committee on Natural Gas Development reviewed an
amendment similar to Version M, and addressed these similar
difficulties: what does improperly maintained mean, what does
diminished capacity mean, is there an industry standard, does an
auditor decide, how can commissioners without special expertise
make these determinations, does there have to be an incident
like a spill, or does the state begin to regulate costs of
maintenance in any circumstance. Ms. Brady pointed out that
this, and a similar amendment, did not pass last session. She
referred to another amendment based on a written opinion from
Dr. Pedro van Meurs that suggested that maintenance costs are a
reasonable deduction from PPT; however, a solution may be to
have a 30 cents per barrel of oil exclusion, which is to be paid
by every producing taxpayer whether there is an incident or not.
The exclusion will mean that individual decisions would not have
to be made about improper maintenance as the exclusion would be
the gross negligence standard. This amendment was adopted. Ms.
Brady pointed out that the legislature is not debating whether
or not to again amend the PPT to drop the 30 cent per barrel
exclusion. What is being proposed, she continued, is a per-
activity decision about whether maintenance was proper in
addition to the flat surcharge. The PPT was passed and industry
would like to work with lawmakers to understand and implement
the existing law. The AOGA is concerned about CSHB 128, Version
M. for the following reasons: the state is already protected
from being inappropriately charged with lease expenditures that
are the result of a spill; there are potentially significant
implications for the entire state; it is an ex post facto law;
and it creates ambiguity of language related to cost and
credits. She also noted that the bill is being written based on
the assumption that the transition lines [at Prudhoe Bay] were
improperly maintained by BP. This assumption constitutes a
judgment of conduct by BP and Atlantic Richfield without ruling
by the court or the results of federal and state regulators.
The members of AOGA believe that companies, like individuals,
are innocent until proven guilty. She then commended BP on its
long and successful history in Alaska.
MS. BRADY reiterated AOGA's concerns about HB 128. She
remarked:
AOGA's concerns are as follows:
1. The state is already protected from being
inappropriately charged with lease expenditures as a
result of spill incidents under the current law. It
specifically disallows costs arising from fraud,
willful misconduct, or gross negligence. This bill,
in contrast, would introduce a completely new
subjective term for judging whether maintenance
related costs would be lease expenditures and this new
term would be "improperness" of the maintenance in
question. The already existing statutory terms,
willful misconduct, gross negligence, ordinary
necessary costs, direct cost of exploring, developing,
producing, are already clearly defined.... To the
extent that the concept of improper maintenance is
encompassed by any or all of these other, already
existing, statutory terms it is superfluous; to the
extent it may mean something different than the term
that is already in statute the concept of improper
maintenance is ambiguous.... These implications go
statewide. Prudhoe Bay marks the 30th anniversary of
the start of production; Cook Inlet has fields [in
production] for 40 or 50 years. Corrosion is not a
problem unique to the fields on the North Slope. But
is a challenge everywhere you have structures and
facilities made of iron and steel. ... There are
operations in the [Cook] Inlet area that will need to
be replaced or significantly repaired in order to
remain in operation. ... HB 128 does nothing to
protect them from claims that they were improperly
maintained ... the uncertainty could lead to fields of
facilities being permanently shut in instead of
remaining in production.... The third [concern] is
that ex post facto legislation is forbidden under the
federal and Alaska constitutions. I will quote
Black's Law Dictionary "[Ex post facto] is a law
passed after the occurrence of a fact or commission of
an act which retrospectively changes the legal
consequences or relations of such a fact or act." We
know that HB 128 has two sections that are retroactive
and, again, that is something the Department of Law
will have to take a look at.
House Bill 128 refers to the standard of practice that
is never used in terms of how you decide how something
was done or not because it changes all the time. ...
The question of what costs are deductible is central
to the concept of the PPT as an incentive to
investment and new production. ... If HB 128 passes
the question of what costs are deductible become open
at each audit. Auditors will be obligated to test
each cost submitted under a standard of improperly
maintained or diminished capacity. ... The legal
analysis will be huge, costly, and will not get you
where you want to go.... AOGA wants to avoid long
years of court battles over the application and
interpretation of statue and regulations... We [the
state] need to be able to write legislation and
regulations that are clear and workable.
4:03:45 PM
REPRESENTATIVE RAMRAS thanked Ms. Brady for her testimony and
then remarked:
The reason we [passed] the PPT is because we were
looking for the "fiscal certainty on oil" piece. ...
I have asked BP repeatedly to do the right thing....
Frankly, I find that the behavior of BP and their
posture now to charge off these expenses or to count
on litigation is reprehensible behavior. I do not
think that they are demonstrating good corporate
citizenship and I do not think that they are honoring
the intent of the PPT. HB 128 may not be necessary if
BP will step up and do the right thing and recognize
that there was a gap in maintenance and that they
behaved poorly and that they should own up and take
care of the lines and not charge them off as a special
PPT credit. I hope this bill moves to the floor so we
can have whatever litigation test that we are going to
have. ... I would encourage AOGA to go back and
pass, without dissent, a request to have BP pledge to
do the right thing in this case and that would address
and remedy this problem.
4:07:29 PM
MS. BRADY responded by saying that to assign guilt and write law
before the Department of Transportation & Public Facilities
(DOT&PF) and DEC release findings creates a very serious
problem. Until the facts are known about what happened on the
North Slope, she stressed, it is irresponsible to pass a law at
this point, especially a law that creates chaos and serves to
negate the process of law that is already written.
4:10:30 PM
REPRESENTATIVE RAMRAS recalled that the Exxon Valdez oil spill
settlement (EVOS) determined that ExxonMobil Corporation
employees were responsible for their actions. He noted that
sometimes a large organization has to pay the price for one weak
link in the chain.
REPRESENTATIVE OLSON opined that there is a pattern of poor
maintenance by BP on the North Slope and system wide.
REPRESENTATIVE DOOGAN asked Ms. Brady to explain how the 30 cent
per barrel of oil tax credit exclusion will offset the costs of
the [pipeline shutdown].
MS. BRADY replied that the purpose of the 30 cents per barrel
tax credit exclusion is to tax for capital expenditures that are
a part of everyday operations. This tax exclusion acts like a
flat tax and is a common remedy in other parts of the world.
MS. BRADY referred to a memorandum from Dr. Pedro van Meurs to
Senator Wagoner dated August 5, 2006. Dr. van Meurs wrote:
Another concern that is regularly expressed is that
the state should not permit the deduction of costs
related 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 maintained in
the first place. It should be noted that most oil and
gas fields' assets will have to be replaced after the
technical life of such assets has expired. Therefore,
such replacements are reasonable lease expenditures
and are required to protect the health and safety of
the workers and to protect the environment.
Nevertheless, it is possible to exclude them from the
lease expenditures if this is politically desirable.
... Companies that re-invest strongly are therefore
harmed less by this provision than typical harvesters.
4:17:56 PM
MS. BRADY concluded by advising the committee that, unlike HB
128, the 30 cent per barrel tax credit exclusion will pay for
assets that need to be replaced, except in a case of gross
negligence.
[HB 128 was brought up again later in the meeting.]
HB 89-OIL & GAS PRODUCTION TAX
4:19:15 PM
CHAIR KOHRING 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
date."
REPRESENTATIVE LES GARA, Alaska State Legislature, sponsor of HB
89, informed the committee that there are two major ways to tax
oil. The first is by taxing the taxpayers on the profit from
production and the second is to tax on a percentage of the sales
value of the oil. The latter system is known as "taxing on the
gross." With budget deficits approaching, he explained, "taxing
on the gross" is the best way to obtain the maximum possible
benefit for Alaskans from resource development. He said he
believes there are several reasons to support HB 89. First,
when compared to the world average tax rate on oil, the PPT will
result in tax revenue to the state of about $1 billion less per
year. Secondly, Alaska's political stability is a benefit to
the producers; there is no threat of a coup or nationalization
of assets. Additionally, the PPT allows the North Slope
producers to deduct the cost of developing gas production
facilities before the production of gas begins. The estimated
cost of the development of the gas field is $9 billion;
therefore, a 40 percent gas line development deduction is
estimated to equal between $200 million and $300 million per
year. This amount will be subtracted from oil tax revenue
during the development years. Representative Gara observed that
once a gas pipeline is built there is no reason to give a
company a subsidy for developing its gas field, as there will be
no risk to do so. Finally, the development and exploration
deductions allowed under the PPT are unknown, unpredictable, and
will impact revenue income for the state. The PPT is a profit-
based tax that allows the opportunity for companies to deduct
costs, thereby reducing tax revenue due to the state.
Representative Gara described HB 89 as a law designed to
determine a tax rate closer to the world average, to provide
fair incentives for new exploration, and to address the problem
of facilities access. Regarding the problem of facilities
access, he reported that initial data from DNR suggests that
more oil can be developed on the North Slope if independent
companies had access to the existing processing facilities. The
North Slope processing facilities are filled to capacity with
high water content oil from older fields. ConocoPhillips
Alaska, Inc., ExxonMobil Corporation, and BP own most of the
facilities and are unwilling to provide access to their
competitors who are producing higher oil content oil from newer
fields. This bill, Representative Gara acknowledged, may not be
the best way to address the facilities access issue. However,
HB 89 includes production incentives, one of which is a tax
exemption of the first 7,500 barrels per day produced by smaller
fields. Representative Gara said that the tax rate set by HB 89
is designed to raise tax revenue at higher oil prices. The tax
rate begins at 15 percent gross tax when the price of oil is at
$35 per barrel of oil. For every $1 increase in the price of
oil per barrel there is an approximate increase of one-third in
the tax rate percentage. If the price of oil falls to below $20
per barrel, the tax rate percentage will decrease
proportionately. In conclusion, Representative Gara urged the
committee to consider the following: HB 89 seeks to tax the oil
producers at the world average in a verifiable way; it will not
encourage surprise deductions for questionable expenditures; and
it will not require hiring a team of accountants for
implementation and enforcement. The PPT, Representative Gara
emphasized, will increase tax revenue in the short term;
however, it provides for a $4 million subsidy to build the gas
pipeline. This subsidy, he cautioned, will come at a time of
reduced state revenue; furthermore, it is only available to
major North Slope lease owners.
CHAIR KOHRING stated his support of the concept of HB 89;
however, he said he is strongly opposed to greatly increasing
taxes to the oil producing industry. He announced that HB 89
would be held over for public testimony.
HB 128-OIL & GAS PRODUCTION TAX: EXPENDITURES
CHAIR KOHRING returned the committee's attention to HB 128.
TOM WILLIAMS, Tax Attorney, BP Exploration (Alaska) Inc. (BP),
informed the committee that he was previously employed by the
State of Alaska and he wrote many of the original oil and gas
tax regulations. In addition, he and former Alaska Attorney
General Wilson Condon developed the theory that the value of oil
and gas is different than the price at which the producers sell
it. As former commissioner of DNR, Mr. Williams related that he
was responsible for administering all tax laws for the state,
but he said he is here today to represent BP and to testify
regarding HB 128. Mr. Williams expressed his belief that the
decline in the production of oil is a long-term menace for the
state. The future challenge that faces the oil and gas
production industry and the state is how to deal with the
decline. The only answer is for the producers to spend more
money in the following ways: to recover more from the existing
fields; to explore for new fields; to explore for heavy and
viscous oil; and to explore for natural gas. Mr. Williams
explained that the reason the state developed the economic limit
factor (ELF) tax, instead of a flat tax on the gross revenue,
was to compensate for the higher cost of extracting oil from
older oil fields. Early production at Prudhoe Bay began with an
average of 1.2 million barrels a day from 120 wells; production
now averages about 400,000 barrels a day from about 1,000 wells.
Mr. Williams pointed out that more gas and water is mixed with
the oil from older fields, which increases production cost.
With the passage of time, the ELF is no longer an accurate
representation of the economics of oil production. This is
especially true, he said, during periods of higher oil prices
because the costs of production do not vary in direct proportion
to the cost of oil.
4:42:36 PM
REPRESENTATIVE RAMRAS acknowledged Mr. Williams' expertise and
then asked:
How much money are we talking about addressing here
with HB 128? ... What is the dollar amount on the
table that we are discussing if we use just as a
hypothetical number $200 million ... [after] you get
the federal deduction and then the question is about
taking the second deduction as a credit to be applied
... How much [in savings to BP] are we talking about
if [BP's deduction] is $200 million?
MR. WILLIAMS responded that BP's share of the deductions and
credits associated with the cost of inspection, business
resumption, and replacement of the oil transit lines will result
in a total deduction of around $11 million in 2006.
4:46:11 PM
REPRESENTATIVE RAMRAS requested that Mr. Williams provide
computations of the cost to the industry in 2006, 2007, and 2008
as a result of the impact of HB 128.
4:47:13 PM
MR. WILLIAMS answered that there would be an $11 million savings
for BP from the PPT. He advised that the value of the deduction
from federal income tax is a savings of 35 percent of $11
million.
REPRESENTATIVE DOOGAN asked Mr. Williams to also include in the
computations requested by Representative Ramras an estimate of
the portion of the costs that are credits.
4:48:39 PM
MR. WILLIAMS reminded the committee that tax materials are
confidential and the disclosure of BP's tax records is limited.
REPRESENTATIVE DOOGAN opined that that the full disclosure [of
BP's tax position] is in the interest of all parties.
4:50:00 PM
MR. WILLIAMS said:
If the $11 million were all capital expenditure and
this is purely a figure that reflects the value as a
deduction, then 20 percent of the capital expenditure
is also a credit. So that would be $2.2 million, that
is the most it could be, that is assuming that the $11
million figure is only the value of the deduction and
does not already include the credit and assumes that
all of the money that gave rise to the $11 million
figure was capital in nature, to the extent that there
is operating cost there; those would not give rise to
a credit.
REPRESENTATIVE SAMUELS asked:
If your [unit agreement] partners disallow their ...
portion of the expense, is BP then on the hook for the
entire amount? ... Would BP be able to deduct the
entire thing and pass the expenses on to them ... do
they pay a portion of the total expense? If [Exxon
and Conoco] refuse to pay what happens to your tax
bill?
4:51:31 PM
MR. WILLIAMS explained that if a taxpayer has incurred an
expenditure, the expenditure can be deducted. If the unit
partners have not paid, an expense has not been incurred. He
stressed that BP wants to calculate the right amount of taxes
and deductions and pay its share. He then returned to the
subject of the PPT and assured the committee that the PPT is
working as intended. The regulations are being finalized and
the process by which credits and deductions are calculated is in
place. The industry knows what the requirements are and will be
able to comply with the PPT on March 31, 2007. At this time, he
said, the revenue BP paid under the PPT increased to over $500
million. Mr. Williams noted that the primary purposes of the
PPT were to increase the tax rate and to encourage new
investments by the taxpayers; however, the industry does believe
that the tax rate is too high. This belief is supported by the
fact that Alaska has adopted the highest marginal tax rate in
North America.
4:56:19 PM
CHAIR KOHRING pointed out that Alaska's tax rate of 22.5 percent
is far above Louisiana's tax rate of 12.5 percent.
REPRESENTATIVE SAMUELS stated that the purpose of the PPT is to
increase the state's tax rate when oil prices are high and to
decrease the state's tax rate when oil prices are low.
MR. WILLIAMS confirmed that under the PPT, if the price of oil
is $20 per barrel, tax revenue for the state is zero.
4:59:16 PM
REPRESENTATIVE DOOGAN, referring to the graph provided by Mr.
Williams, asked if Alaska's 61.5 percent marginal tax includes
royalty income.
MR. WILLIAMS confirmed that this figure includes royalty income.
He then expressed his concerns with HB 128 and the draft CS.
Referring to page 3, paragraph (19) subparagraph (A), he noted
that costs related to the repair and replacement of property or
equipment that was not maintained or was improperly maintained
are disallowed. He pointed out the difficulty in interpreting
the term "related". When there is the potential for ambiguity,
he said, investments become too risky or uneconomical for
investors to make. Mr. Williams pointed out that subparagraph
(B) creates a penalty or disincentive against spending money to
maintain the operational capabilities of facilities that are
shut down; therefore penalizing a producer for getting a closed
oil field back into production. A similar disincentive to
industry is written in subparagraph (C), which disallows the
expense of incremental operating expenses incurred as a result
of operating at diminished capacity. Mr. Williams suggested
that a better way to deal with improper maintenance is to create
standards by a regulatory agency.
5:06:38 PM
REPRESENTATIVE DOOGAN asked:
Don't you suppose that when there was a mishap that
closed down the production capability of half of the
largest oil field in North America, that the decision
by the operator about whether or not to open it back
up again would be made on a basis other than what the
State of Alaska tax law might be?
MR. WILLIAMS reminded the committee that a business can not
ignore the laws of economics or the tax implications of its
decisions.
5:08:45 PM
REPRESENTATIVE RAMRAS suggested that those who are testifying in
opposition to HB 128 should contact Mr. Suttles, President, BP
Exploration (Alaska) Inc.
MR. WILLIAMS assured the committee that the executives at BP
will take action to fulfill the promises that have been made
[regarding the pipeline shutdown] to the U.S. Congress and the
people of the State of Alaska. He continued to say that HB 128
creates law that may be in effect for 30 years and should not be
enacted as a reaction to a specific incident.
5:11:31 PM
REPRESENTATIVE RAMRAS expressed his belief that HB 128 will
become the law of the land precisely because of BP's decision to
submit the costs of [the pipeline shutdown] for credit under the
PPT.
5:11:49 PM
REPRESENTATIVE OLSON remarked:
Had the lines been pigged, the feeder lines that
failed, since [BP] took them over from [Atlantic
Richfield Oil Corporation (ARCO)], we wouldn't have HB
128. ... When was the last time the feeder lines were
pigged, and were they pigged since you took them over
from ARCO? Please get an answer and provide it to our
chair.
5:13:02 PM
CHAIR KOHRING stated that he concurred with Ms. Brady's and Mr.
Williams' comments. However, considering the cost of litigation
and the proposed legislation, BP might consider looking to pay
the costs [of the pipeline shutdown].
5:14:28 PM
MR. WILLIAMS assured the committee that he only represents BP
and that his remarks are meant to call attention to the future
impact of HB 128 on Alaska. Mr. Williams closed by strongly
recommending that lawmakers wait for a five year period under
PPT to see what happens before making changes.
5:17:36 PM
REPRESENTATIVE DOOGAN stated that he feels HB 128 does not just
apply to [the pipeline shutdown] but must address what the state
must do in similar situations.
5:18:47 PM
REPRESENTATIVE SAMUELS stated that he still has questions for
the Department of Law and Mr. Iversen of the Department of
Revenue regarding HB 128.
CHAIR KOHRING announced HB 128 would be held over with public
testimony open.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 5:21
p.m.
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