03/01/2007 03:00 PM House OIL & GAS
| Audio | Topic |
|---|---|
| Start | |
| HB128 | |
| HB89 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 89 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 128 | TELECONFERENCED | |
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
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
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
quoted:
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
tasks.
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
maintain."
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
information.
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
audit.
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
practices.
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
shutdown].
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
shutdown].
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
committee.
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
date."
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
world.
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
percent.
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
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 4:39
p.m.
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