Legislature(2007 - 2008)HOUSE FINANCE 519
10/19/2007 01:30 PM House OIL & GAS
| Audio | Topic |
|---|---|
| Start | |
| HB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB2001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
October 19, 2007
1:35 p.m.
MEMBERS PRESENT
Representative Kurt Olson, Chair
Representative Nancy Dahlstrom
Representative Mark Neuman
Representative Jay Ramras
Representative Ralph Samuels
Representative Mike Doogan
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
OTHER MEMBERS PRESENT
Representative Bob Buch
Representative John Coghill
Representative Brice Edgmon
Representative Anna Fairclough
Representative Berta Gardner
Representative Carl Gatto
Representative David Guttenberg
Representative John Harris
Representative Lindsey Holmes
Representative Wes Keller
Representative Mike Kelly
Representative Beth Kerttula
Representative Bob Roses
Representative Woodie Salmon
Representative Paul Seaton
Representative Bill Stoltze
Senator Green
Senator Huggins
COMMITTEE CALENDAR
HOUSE BILL NO. 2001
"An Act relating to the production tax on oil and gas and to
conservation surcharges on oil; relating to the issuance of
advisory bulletins and the disclosure of certain information
relating to the production tax and the sharing between agencies
of certain information relating to the production tax and to oil
and gas or gas only leases; amending the State Personnel Act to
place in the exempt service certain state oil and gas auditors
and their immediate supervisors; establishing an oil and gas tax
credit fund and authorizing payment from that fund; providing
for retroactive application of certain statutory and regulatory
provisions relating to the production tax on oil and gas and
conservation surcharges on oil; making conforming amendments;
and providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB2001
SHORT TITLE: OIL & GAS TAX AMENDMENTS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
10/18/07 (H) READ THE FIRST TIME - REFERRALS
10/18/07 (H) O&G, RES, FIN
10/19/07 (H) O&G AT 1:30 PM HOUSE FINANCE 519
WITNESS REGISTER
PATRICK GALVIN, Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: During hearing of HB 2001, testified in
support of the proposed Alaska's Clear and Equitable Share
(ACES) option, presented the opening segments of a three day
presentation on ACES, and responded to questions.
JONATHAN IVERSEN, Director
Tax Division
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: During the hearing on HB 2001, testified in
support of the Alaska's Clear and Equitable Share (ACES) option,
presented the Information Use/Reporting/Sharing segments of the
proposal, and responded to questions.
BOB GEORGE, Consultant
Gaffney, Cline and Associates
Houston, Texas
POSITION STATEMENT: During hearing on HB 2001, presented the
Information Reporting Standards in Other Countries segment of
the Alaska's Clear and Equitable Share (ACES) model, and
responded to questions.
RICH RUGGIERO, Consultant
Gaffney, Cline and Associates
Houston, Texas
POSITION STATEMENT: During hearing on HB 2001, presented the
Information Reporting Standards in Other Countries segment of
the Alaska's Clear and Equitable Share (ACES) model, and
responded to questions.
KEVIN BANKS, Acting Director
Division of Oil and Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: During hearing of HB 2001, responded to
questions.
ACTION NARRATIVE
CHAIR KURT OLSON called the House Special Committee on Oil and
Gas meeting to order at 1:35:09 PM. Representatives Olson,
Doogan, Kawasaki, Dahlstrom, Neuman, Samuels, and Ramras were
present at the call to order. Also present were Representatives
Buch, Coghill, Edgmon, Fairclough, Gardner, Gatto Guttenberg,
Harris, Holmes, Keller, Kelly, Kerttula, Roses, Salmon, Seaton,
and Stoltze, and Senators Green and Huggins.
1:35:31 PM
HB2001-OIL & GAS TAX AMENDMENTS
1:36:24 PM
CHAIR OLSON announced that the only order of business would be
HOUSE BILL NO. 2001, "An Act relating to the production tax on
oil and gas and to conservation surcharges on oil; relating to
the issuance of advisory bulletins and the disclosure of certain
information relating to the production tax and the sharing
between agencies of certain information relating to the
production tax and to oil and gas or gas only leases; amending
the State Personnel Act to place in the exempt service certain
state oil and gas auditors and their immediate supervisors;
establishing an oil and gas tax credit fund and authorizing
payment from that fund; providing for retroactive application of
certain statutory and regulatory provisions relating to the
production tax on oil and gas and conservation surcharges on
oil; making conforming amendments; and providing for an
effective date."
CHAIR OLSON stated that this series of meetings would begin with
a presentation by the governor's Production Tax Team, and he
made clear his intent to conduct committee meetings throughout
the week until all questions on the topic of the petroleum
production profits tax (PPT) have been exhausted.
1:37:53 PM
PATRICK GALVIN, Commissioner, Department of Revenue (DOR),
stated that the DOR presentations, are meant to clarify how the
Alaska's Clear and Equitable Share (ACES) option was developed.
The petroleum profits tax (PPT) was evaluated and alternatives
considered to bring this option as a viable alternative. Some
of the information to be brought forward was not available to
the committee, when the PPT was passed a year ago.
1:40:16 PM
COMMISSIONER GALVIN directed attention to the committee handout
titled: The Palin-Parnell Administration presents ACES
(Alaska's Clear and Equitable Share), last updated 10/18/07, and
stated that the ACES proposal is about investment in two
different ways: via new oil development, and via investing
today's surpluses and saving them for tomorrows needs He noted
that by adopting the PPT a fundamental shift in the state's
relationship with the oil and gas industry occurred. Under the
system of PPT, he explained, companies can reduce their tax
bill, and pay less money to the state, or receive a payment from
the state in the amount between 40 and 52.5 percent of their
investment dollars. This effectively makes the state of Alaska
the single largest investor in new development on the North
Slope. Also through this system, the oil companies are allowed
to make the investment decisions, while the state assumes the
fiscal risks associated with the developments.
COMMISSIONER GALVIN drew attention to page 4, to illustrate
production levels as tracked from 2000, and forecast through the
year 2020. The chart indicates the expected trends, as compiled
by DOR, comparing status quo operations, under development
projects, and projects under evaluation. Commissioner Galvin
stressed that the tax system should provide incentives to the
oil companies for investment in the forecasted projects. A
critical needs exists, he opined, to "get these projects going."
The object of ACES is to provide desired incentives while
seeking a fair share of oil revenues for the states current and
future fiscal needs. Calling attention to pages six, seven, and
eight, of the handout, he explained how revenue shifting could
occur to provide a balanced economic future for the state using
the ACES model.
1:45:38 PM
COMMISSIONER GALVIN explained that DOR has separated the ACES
structure into three modules, to be heard over the next three
days. He began with the section titled "Tools to Protect the
State."
1:48:21 PM
REPRESENTATIVE DOOGAN stated that the tax policy proposal of
ACES is considered an investment in North Slope oil, and asked
how the viability of this investment is to be judged by the
legislature.
1:49:05 PM
COMMISSIONER GALVIN stated that Sunday's presentation,
"Investment Climate and Sectional," will address this type of
question. How the question relates to expected return and
whether or not a project can go ahead without state assistance,
does relate to this part of the presentation. He provided an
analogy of the tax system adjustments to a television with
electronic tuning knobs. He stressed the importance to imbed
the ability for the state to effect economics via "fine tuning"
the controls. Each economic factor plays a part in the tuning
aspect, with varying effects across the board. The Sunday
presentation will go into depth on these economic tuning
"knobs," exploration incentives, and the ACES sectional overview
of where they appear in the bill itself. He said:
On Sunday we're going to talk about the exploration
incentive programs. We recognize that the new
entrants that could come in and look at the fields
that are unattractive to the current incumbents are
... key if not a ... vital aspect of the state's
economic future. And we believe that, through the
ACES program, building on what exists within PPT,
we're actually making Alaska probably one of the most
attractive places in the world for companies to ...
come in ... and begin an exploration opportunity.
1:56:09 PM
REPRESENTATIVE SAMUELS clarified that DOR expects this model to
make Alaska attractive to new exploratory companies.
COMMISSIONER GALVIN responded: "Yes."
1:56:33 PM
REPRESENTATIVE SAMUELS paraphrased a quote by Mr. Galvin, as
reported from a town meeting, that, "ACES is not about
investment; we're not making the investment climate better."
COMMISSIONER GALVIN responded that the statement was made during
a press conference. It was a statement which he made in
response to a question regarding whether ACES was to improve the
investment climate for the legacy fields. He clarified this
statement as meaning that by creating ACES, DOR was not claiming
to improve the investment climate, but to preserve the
opportunity for investment in projects that appear to be going
forward, "with those particular areas ... units." Further, he
proclaimed that the PPT provides a disproportionate benefit to
incumbents as opposed to explorers. With ACES, DOR is
attempting to provide a level balance and create an investment
climate that may be unmatched elsewhere in the world.
1:58:38 PM
REPRESENTATIVE RAMRAS, directing attention to page 5, opined
that the governor has "pegged her political capital" to
reorganize the tax structure, but not maintained a balance with
the POMV (percent of market value), or other aspects that
require attention. If this is about balancing to investment
interests, he queried, is state spending being regarded as an
investment interest. Restated his question for clarification,
and asked: "Balancing to investments interests, what are those
two investment interests?"
COMMISSIONER GALVIN stated that the investment interests are:
investing in North Slope development through tax credits, with a
tax structures that encourages continued development; and
investment of current oil revenue excesses to cover future
deficits.
2:02:39 PM
REPRESENTATIVE RAMRAS capsulated the argument before the
committee to be an ongoing discussion about the duality of
philosophy based on how oil industry dollars are handled. On
the short term horizon, dollars can be shifted from the oil and
gas industry, into the state treasury without hurting the long
term prospects or investment climate; or by shifting these short
term dollars the image of this state as a positive investment
climate, may be tarnished.
COMMISSIONER GALVIN opined that disagreement stems from whether
or not the state's oil revenue share, in the current time frame,
can be accomplished while maintaining the same level of
investment interests.
2:04:51 PM
REPRESENTATIVE HARRIS referred to page five and asked where the
administration is intending to invest surplus revenues; has that
been determined. He stated that a 50:50 split between the
permanent fund and the state employee retirement system would be
his choice, and asked if concepts would be brought forward for
consideration.
COMMISSIONER GALVIN replied that the investment topic would not
be addressed during this special session.
2:06:27 PM
REPRESENTATIVE HARRIS continued on page 5, and read the bullet
point, "Protect Economy from Future (Sales or Income) Taxes."
He asked whether these surplus revenues are expected to occur
for only a short time, and is this program anticipated to stave
off taxes for an extended period of time.
COMMISSIONER GALVIN responded that it all depends on when the
shortfalls begin to kick in and when the price of oil begins to
drop. However, he stressed that during this premium price time,
the state should be reaping the benefits and planning for future
needs.
2:07:50 PM
REPRESENTATIVE HARRIS referred to the final bullet on page 5,
"Provides Stability for Diversification of Alaska's Economy,"
and stressed that the oil and gas industry is providing 87
percent of the state's revenues. He asked: "How in the world,
are we going to replace that, if we don't increase the volume?"
COMMISSIONER GALVIN pointed out that the premise is to change
the terms in order to take advantage of the currently available
share; it is not being proposed to bring in more money in order
to replace the fall in production. By bringing the money in
from the oil sector now, funds can be captured and invested to
provide money for the future. This strategy will utilize
today's oil and gas revenues to provide a shelter for new,
diversified industries that the state may foster in the future.
REPRESENTATIVE HARRIS surmised that this program is basically
attempting to minimize taxes to future, developing industries.
COMMISSIONER GALVIN said, "That is correct."
2:10:45 PM
REPRESENTATIVE NEUMAN commented that the bullet on page 5, "To
Meet the State's Current Fiscal Needs," has been pointed out by
previous industry representatives as being "exactly what scares
industry." That is, government increasing taxes on an industry
for the primary reason of covering fiscal needs. He asked how
the state can measure investment in taxes, how is it considered
in ACES, and "what if that doesn't work, where are we going to
go?"
COMMISSIONER GALVIN responded that the impact of the tax system
on the investment decisions being made, will be the main topic
of the presentation/discussion on Sunday. Considering to what
level taxes can be raised before companies begin to withdraw
their investment dollars, is a critical component to the ACES
model. At what point will an oil and gas company change an
investment decision from a yes to a no, based on the tax
structure that has been employed by the state government, will
be the center of the discussion on Sunday [October 21, 2007].
2:14:43 PM
REPRESENTATIVE NEUMAN inquired whether Sunday's presentation
will provide projections to compare the PPT and ACES, side by
side.
COMMISSIONER GALVIN answered that PPT will be illustrated as the
status quo with the ACES comparisons being made point by point.
2:15:27 PM
REPRESENTATIVE SAMUELS asked whether, save the auditor's pay,
the DOR budget is expected to be flat for FY07.
COMMISSIONER GALVIN cited the auditor contracts and the
information management systems, for data availability, as the
variables.
2:16:09 PM
REPRESENTATIVE SAMUELS requested that a projection be made to
indicate how long the CBRF (capital budget reserve fund)
depletion, as indicated for 2013, page 7 graph can be "staved
off." Obviously, given a six percent decline in revenue
sources, the CBRF may be dipped into within seven or eight
years, he predicted. Additionally, he asked:
What are the consequences of [DOR] being wrong, and
investment did get effected; and how much risk is the
state taking then ... what are the consequences to the
economy as a whole.
2:19:18 PM
REPRESENTATIVE DOOGAN provided three questions for the Sunday
discussion: What will this investment cost the state; what will
the state receive in return; and how likely is it that the
investment will be made without realizing the expected return.
He said that by "essentially leaving money on the table in our
tax policy, ... that's an investment [and] I'm going to want it
analyzed as an investment."
2:20:06 PM
COMMISSIONER GALVIN directed attention to the page 12 bullets,
and read the four major categories identified as necessary to
protect the states interests: "Information; Auditors; Lease
expenditures; and Credit adjustments." The information aspects
of ACES are three pronged: collecting the data from the tax
payers, using it within the state system, and providing for a
level of public disclosure. Continuing on page 14, he stated
that the PPT provides for minimal reporting of information,
primarily available on an annual basis with a tax return. This
reporting is not commensurate with other world-wide net-tax
jurisdictions, and will be elaborated on in the forthcoming
Gaffney-Cline presentation. From the states perspective the
administration becomes more difficult to manage, when the tax is
based on the gross vs. net value with costs considered a primary
component of the tax calculation. Information disclosure from
the taxed companies ceases to be a clear cut entity and disputes
may occur. Consequently, he said, the authority of the agency
comes into question, which may lead to delays and conflicts with
the taxpayers.
2:23:12 PM
REPRESENTATIVE HARRIS asked whether requesting a statutory
change effecting information disclosure is a current issue with
the [oil] producers.
COMMISSIONER GALVIN replied that it is primarily evident when
requesting forecasting information. Having the reporting
expectations "clearly spelled out" would help to stream line the
communication realm.
REPRESENTATIVE HARRIS requested a demonstration of how this is
handled globally.
COMMISSIONER GALVIN responded that it will be reported on in
this presentation.
2:24:25 PM
REPRESENTATIVE NEUMAN suggested that it would be important for
state departments to work interdepartmentally via policy
procedures versus statutory regulations.
COMMISSIONER GALVIN offered that this issue will be addressed
during the presentation.
2:25:24 PM
COMMISSIONER GALVIN continued by reading the page 5 bulleted
outline for reporting, "Annual statement must be filed by all
producers and explorers regardless of whether a tax payment is
due; Expands the list of specific information requirements for
returns; and Explorers and producers that have lease
expenditures or credits but no production must file with the
department, all relevant expenditures, adjustments, and
credits." He stressed the need for this information to be
reported in a useable format; compatible with the state system.
2:26:48 PM
COMMISSIONER GALVIN moved to page 16 bulleting the DOR
authority. The statutory changes in ACES provide that: DOR may
require a producer, explorer, or operator to file monthly
reports with information necessary to administer the tax; and
authority to require producers, explorers, and operators to file
reports or records needed to forecast state revenue. This will
bring Alaska on par as a partner in the information sharing
realm with the companies, and allow better forecasting and
revenue planning by state authorities.
2:28:22 PM
REPRESENTATIVE HOLMES asked if this reporting level will require
comparable effort from all exploration companies; major/minor.
COMMISSIONER GALVIN responded that every operator should already
have this information available, and it should not cause an
undue burden on any company.
REPRESENTATIVE HOLMES queried whether this information will be
of significant use to the state, without placing additional
reporting burdens on any individual companies.
COMMISSIONER GALVIN answered that it will provide a benefit to
the state on the forecasting of revenues, and it also provides a
leg-up on trends. Additionally, it should be noted that other
countries are provided this type of information already by oil
and gas companies who are mutual operators in Alaska.
2:31:27 PM
REPRESENTATIVE RAMRAS read the filing format bullet on page 17:
"Information currently filed with department is extremely
variable and inconsistent." If this is correct, he asked, how
is it to be known that the forecast for the failure of PPT is
not mistaken.
COMMISSIONER GALVIN provided that two different levels of detail
need to be considered regarding this statement and the PPT
forecast. The filing format has to do with receiving
information in a form compatible with the department information
management database. However, the information used to forecast
the deficit was based on calculations from information provided
directly to the department and brought to the legislature. The
operating expenditures were significantly higher than expected,
and the capital expenditures in the past calendar year were less
than predicted. The impacts realized between operation and
capital expenditures are interactive; the impact on the capital
expenditures serves to dampen the overall impact on the
operational expenditures. What has happened this year is that
the capital expenditures are going to far exceed what was
expected and, he said:
We're going to have a double whammy. ... They're not
providing us with their monthly statements but those
payments are matching our model in terms of the costs
that we were expecting for this fiscal year. So it
would appear that we're pretty close ... to what we
have modeled and that gap between what was included a
year ago and what we are experiencing now ... it's
real.
2:35:01 PM
REPRESENTATIVE RAMRAS provided a scenario as an example of
capital investment choices, and how that has effected his
private sector business. He suggested that investing in
operating expenses is a worthwhile focus and creates new
infrastructure. Additionally, he said, "If costs are going up,
you're punishing the [oil] industry for doing exactly what we
designed the PPT to do."
COMMISSIONER GALVIN concurred that costs are rising, and the
costs are fully deductible. The relationship between operating
and capital expenses is being respected in ACES, he pointed out
but maintained that at the time this was discussed [for PPT] the
numbers provided were incorrect.
2:38:28 PM
REPRESENTATIVE HARRIS asked, "If a gross tax system were in
place would this information be necessary?"
COMMISSIONER GALVIN responded that it would depend on the nature
of the system being utilized. Most of the systems currently
under discussion have included a component for a deduction in
capital expenditures; specific information would be needed for
that model, as well.
REPRESENTATIVE HARRIS interjected, "That wouldn't be a gross
system, though."
COMMISSIONER GALVIN suggested, "At some point along the line we
can talk about the use of language and the use of whether gross
versus net is an accurate description of the choices that
exist."
REPRESENTATIVE HARRIS restated, "I didn't say a modified gross,
I said a gross. Merely based upon a value of a certain product
at a certain point, period."
COMMISSIONER GALVIN answered, "If anybody were proposing a
strict gross with no deductions for any additional costs, then
the discussion about what information we needed is probably
mute."
2:39:41 PM
REPRESENTATIVE SAMUELS expressed a fear that these numbers could
continue to fluctuate, requiring continuous adjustments by
future governors and commissioners. Setting a tax system at a
target number appears to be an inappropriate method, he said,
and could prove to be too high or too low at any given time;
continuing the stability question. "We're going to have another
tax fight, on gas, right before the open season," he predicted.
COMMISSIONER GALVIN disagreed that a fight would be a forgone
conclusion; only if the economics proved it necessary, he said.
2:41:20 PM
REPRESENTATIVE SAMUELS referred to his previous question
regarding the accuracy of DOR's predictions.
COMMISSIONER GALVIN opined that it is important to realize that
with better information being received, fine tuning can occur
that has not been possible before. He expressed confidence in
understanding that Information which drove the system one year
ago has been matured by experience and found to be in error. A
higher level of intelligence is now achievable by those in
administration.
2:43:15 PM
REPRESENTATIVE SAMUELS admonished: "The next administration is
going to think exactly the same thing."
COMMISSIONER GALVIN advised that there is no way to counter
today, how a future administration will enter into the
situation. The important work, he said, is to create the best
system possible for today. The global market, he opined, will
perceive the states reassessment of the situation as a
legitimate adjustment based on current information vs. making a
change three years from now, which could be construed as a
systemic problem in the state system.
2:45:20 PM
COMMISSIONER GALVIN turned to page 18, to explain the necessary
format for the oil companies to submit their information;
designed to improve the means by which to manipulate and utilize
the massive amounts of expected data. He elaborated on the
three bulleted aspects, which read: Electronic reporting form
would feed into database where information would be readily
available and usable for regulatory purposes, including
auditing, forecasting, responding to inquires, and generating
reports; Will accommodate ELF-based [economic limit factor] data
and will be integrated with the division's accounting systems;
and Will collect on volumes, wells and production, and will
include profit-based data, including tracking credits, required
under ACES.
2:46:21 PM
COMMISSIONER GALVIN expanded on DOR-DNR information sharing
needs and issues. As bulleted on page 19, the ACES model:
Clarifies DOR authority to share with DNR information contained
in tax returns; maintains DOR confidentiality requirements under
current law; Clarifies DNR authority to share with DOR oil and
gas leasing information - maintains DNR confidentiality
requirements under current law; and Allows each agency to be
fully informed and be more responsive to dynamic industry needs
- helps to facilitate informed policy making and analysis. He
emphasized the need to clarify statute for state agency access
versus what is provided to public entities.
2:49:04 PM
CHAIR OLSON asked if the confidentiality and information
security are only state issues, or constituting a potential SEC
[Security Exchange Commission] problem.
COMMISSIONER GALVIN answered, "No."
2:49:26 PM
REPRESENTATIVE SAMUELS asked why this has not already occurred,
and opined that a valid reason for the current status may exist.
COMMISSIONER GALVIN offered that the confidentiality statutes
were initially written without agency sharing issues in mind.
The oversight has become apparent through the evolution of the
relationship between the state agencies.
REPRESENTATIVE SAMUELS suggested that the downside of changing
statute could be an inherently adversarial relationship between
departments, if one agency were to gain the upper hand
politically speaking. Also, he cautioned, it is not the
responsibility of DOR to establish policy on royalty reductions.
COMMISSIONER GALVIN said it is up to the governor to oversee
that state agencies are undertaking their respective roles
appropriately. In further response, he maintained that it has
been an evolutionary process between the agencies, not an
intentional, or optimal means of operation.
2:52:29 PM
REPRESENTATIVE NEUMAN opined that sharing information between
agencies could also lead to further questions, and convoluted
paperwork. If a legislative goal were to help minimize "red
tape," this could be a step in the opposite direction.
COMMISSIONER GALVIN stated his prediction that the information
sharing will provide companies the ability to coordinate
responses and minimize duplicity. He stressed the importance of
encouraging communication, particularly between agencies charged
with overlapping responsibilities.
2:54:39 PM
REPRESENTATIVE NEUMAN asked if ACES provides regulatory
authority to DOR that will allow these issues to be addressed.
COMMISSIONER GALVIN responded that general authority exists for
the commissioner to promulgate regulations to administer
responsibilities under statute. He stated, "We need to have
the statue written in a way that directs how those regulations
are supposed to ... what the actual policy is that's being
implemented." The lack of clarity in the statute provides the
potential for the regulations to be challenged, as well as
difficulty when the agency is grappling with the legislative
intent for the regulation.
2:56:39 PM
REPRESENTATIVE NEUMAN offered that the legislature may exercise
their role of agency regulation review.
COMMISSIONER GALVIN pointed out that a part of the ACES package
asks the legislature to exercise oversight and provide DOR with
policy guidance to properly manage the regulatory faction.
2:57:30 PM
REPRESENTATIVE SAMUELS asked if, when DNR acts as a competitor
in the market place with RIK (royalty in-kind), does access to
confidential information from DOR provide an advantage; could
this become a point of litigation for unfair practices.
COMMISSIONER GALVIN recalled that this point has previously been
raised, and suggested that the answer may be found in other
testimony coming before the committee. To a follow up question,
he responded that the state agencies would not be privy to any
information that the oil and gas companies are not already
providing to other industry partners.
2:59:43 PM
REPRESENTATIVE NEUMAN asked what the current constraints are for
information sharing.
COMMISSIONER GALVIN said the constraints mentioned refer to
information shared with the public, not the state.
3:00:22 PM
CHAIR OLSON asked what the commissioner would have done
differently in developing the PPT.
COMMISSIONER GALVIN explained that he was not part of that
process, and was serving in DNR at the time the bill was
crafted.
3:01:40 PM
REPRESENTATIVE SAMUELS offered a review of what occurred during
the formation of the original PPT; present committee members and
visiting representatives were in attendance.
REPRESENTATIVE RAMRAS asked if Representatives Kott, Kohring, or
Anderson were present in the committee room, or in the offices
of the chairman.
REPRESENTATIVE SAMUELS stressed that the named representatives
were never present. He continued, stating that the nine citizen
legislatures present had a bill put before them for
consideration. Discussion points included: the rate; a
progressivity addition; an upfront, tax free deduction, as an
exploration incentive valued at $73 million; a five year claw
back; and an effective date. These five "pieces" were
considered. The outcome, he reported, resulted in the addition
of the progressive feature, removal of the $73 million from the
"big three" producers who would have used it, elimination of
three-quarters of the claw back, which was eventually eliminated
entirely, and the effective date was moved back by three months.
In rough calculations, he tallied, these adjustments to the bill
provided $500 million to the state coffers.
3:07:48 PM
COMMISSIONER GALVIN emphasized that what is being offered to the
committee today is information that was not available a year
ago; it may introduce a perspective that will lead the body to a
different conclusion.
3:08:57 PM
REPRESENTATIVE KERTTULA stated that the House Finance Committee
did request information, from the department, that was not
forthcoming. Thus, she said, the information being currently
disclosed, and the opportunity to revisit the bill is valid.
3:10:33 PM
JONATHAN IVERSEN, Director, Tax Division, Department of Revenue
(DOR), explained how the Guideline Interpretation, page 20,
would allow DOR express authority to issue advisory, non
binding, bulletins for information and guidance to producers,
explorers and other interested persons concerning DOR's
interpretation of production tax statutes and regulations. He
advised that this provision protects the dissemination of
information from being construed as a violation of the
administrative procedures act. The statute of limitations for
tax assessment , page 21, is proposed to be extended from 3 to 6
years. This, he said, would only apply to the oil and gas
production tax. The first reason for this change is "we're now
in the world of upstream costs as well as downstream costs; we
have essentially more to handle." Additionally, he said, having
reviewed how this is handled in other states, precedent has been
established. It also allows audit determinations to have the
benefit of joint interest audit findings. These findings, he
furnished, typically take several years to complete with
unresolved issues that extend beyond a 3-5 year time period.
3:12:59 PM
REPRESENTATIVE NEUMAN inquired what response this proposal has
received from the industries.
MR. IVERSEN answered that he could not recall the statute of
limitation provision having been addressed directly. However,
he speculated, it will vary depending on the tax payer. This is
because some companies are willing to waive time for audits to
be performed, others may object to this provision if it causes a
conflict with corporate policy for handling tax issues. To a
follow-up question, he responded, that the size of the company
or investor is not determinative.
3:15:18 PM
COMMISSIONER GALVIN offered that is may be an aspect of the
corporate culture, and whether a particular company operates in
a cooperative or adversarial manner.
3:16:00 PM
MR. IVERSEN directed attention to the final page of his segment,
page 22, and said this is more of a clarification rather than a
new area. He assured that the department has been, and
continues to be, sensitive to confidential information while
publishing appropriate statistics. To a question from the
committee he responded that the aggregate tax rate across the
slope is approximately 28 percent.
The committee took an at-ease from 3:17:42 PM to 3:38:16 PM.
3:40:14 PM
BOB GEORGE, Consultant, Gaffney, Cline and Associates, provided
the background of Gaffney and Cline and the scope of their
global operations that extend from consultation for various
governments, as well as technical and strategic services to the
oil and gas sector. This work, he noted, provides a broad
perspective and understanding of how the industry operates.
3:41:27 PM
RICH RUGGIERO, Consultant, Gaffney, Cline and Associates,
provided his background in the industry and as a consultant with
Gaffney Cline.
3:42:55 PM
MR. GEORGE directed attention to the committee handout titled
"Oil and Gas Reporting and Disclosure in Selected Countries -
Focus on Cost/Field Detail Reporting," and began by stating that
oil companies around the globe are required to disclose data on
a detailed basis. This includes both historic information as
well as planning/forecast/future outlooks for wells and fields.
Responding to a question from the committee, he clarified that
the data provided to the resource manager and fiscal taxation
authorities of a government, also constitutes what is disclosed
publicly. As bulleted on page 2 of the handout, reporting, and
public disclosure are two separate issues. The government
typically receives a greater volume of consistent, routine,
management information versus the common, aggregate, summary
form provided to the public.
3:45:09 PM
MR. GEORGE directed attention to page 3, and suggested that the
name of a country or state could be interchanged in the title as
it refers to any steward of a resource, not a unique principle
for Alaska. Disclosure is imperative to fulfill budgetary and
fiscal responsibilities, and monitor feedback for proper
planning and control policy management of a resource.
3:46:47 PM
MR. GEORGE provided that the focus of this part of the
presentation is directed towards the reporting of cost
information and sharing. Typically, field level information is
collected and reported on a semi-annual or annual basis;
generally provided to the regulatory body which stewards the
resource. Some of the same information will be utilized as the
tax return basis and furnished to the relevant fiscal body.
Sharing typically occurs between the parties, however, a
separation is postured based on the field level information
relevant for planning purposes, as opposed to cost review
information necessary for taxation.
3:48:32 PM
MR. GEORGE referred to page 5 indicating what type of reporting
is typically available to the public: aggregated/summary form,
field-level summaries of reserves and capex (capital
expenditure). Operating expenditure (opex) information is
rarely disclosed at the field level; public subscription
services are the primary source of dissemination.
3:50:12 PM
MR. RUGGIERO stressed that in global venues reporting is
expected and not considered a requirement above and beyond other
expectations. The oil companies are not asked but expected to
provide this information as an essential part of the
exploitation of a resource.
3:50:59 PM
MR. GEORGE moved to examples of disclosure information,
beginning with page 7. The UK (United Kingdom), Norway,
Denmark, and Nova Scotia were used for the examples. The UK
requires data disclosure that includes a field development plan
with exploitation costs; annual and semi annual data/statistical
analysis, including detailed information on older fields subject
to petroleum revenue taxes (PRT). This information is
aggregated and available via web sites. Pages 8 and 9 are
examples of the standardized forms used to report the data. The
same information is reported on a field by field basis on an
annual time series, and indicates the production, sales volume,
capex, opex, and tariffs. This information is summarized on a
historically to complete annual income and expenditure reports.
3:56:18 PM
MR. GEORGE explained, that, as illustrated on the graph and bar
charts, pages 10 and 11 respectively, the information is not
only used for historical tax purposes but also aggregated to
provide forecasts and cost trends for the near future.
3:57:17 PM
MR. RUGGIERO interjected that the formality of this type of data
is reviewed with a regulatory body, twice a year. Discussions
focus on the health and productivity of the fields. This type
of dialogue, he opined, provides regular opportunities to set
the pace for existing and future activities, as well as to
ensure the optimum usage of facilities.
3:59:51 PM
REPRESENTATIVE NEUMAN referred to the bill Section 49, new
language on page 35, paragraph (6), addressing the assessment of
penalties for failure to report, and asked for a comparison to
the penalties imposed by the example countries.
MR. GEORGE responded that, as far as specific penalties, he
could not offer a comparison, however, for non-compliance a
company would be jeopardizing future approvals for
operations/expansions within a venue.
4:01:04 PM
MR. GEORGE pointed out that there are distinctions drawn between
the reports due for taxation purposes vs. those for regulatory
informational filings. The UK and Norway maintain a
discretionary award system, which takes into account a companies
track record on the lease application.
REPRESENTATIVE NEUMAN restated his interest to discover how any
penalties would compare.
4:02:15 PM
MR. GEORGE continued with page 12, stating that the disclosure
required by Norway is more stringent than what is required in
the UK. The companies operating there, provide the Norwegian
Petroleum Directorate (NPD)/Ministry semi annual information on
existing, as well as undeveloped fields. The information is
used by Norway for planning on a national level. He stressed
again how these requirements are built into the structure of
doing business with these countries. He explained the detailed
examples of Norway's required reporting, illustrated on pages 13
and 14, titled "Field/discovery listing of resource volumes,"
and "Detail on Field-by-field basis," respectively. The data
provides production forecasting by year, reserve recovery, total
capital investment that has historically taken place, and
ultimate investment expectations.
4:04:38 PM
MR. GEORGE continued, describing the graphs on pages 15, 16, and
17 illustrating how the information is "replayed" to generate
medium-term investment forecasts, excluding exploration costs.
He reiterated the need to differentiate between the information
that is provided for the purposes of planning and expectations.
Revising these plans, and making changes, would not be viewed as
a "crime." This is different than the requirements for filing
of tax information, and the appropriate set of rules on
disclosure established for that purpose. The investment source
graph allows Norway to determine how the country is doing in
"attracting new blood," where each company is based, and
tracking the size of the companies operating in the area.
4:06:33 PM
MR. GEORGE qualified the inclusion of Denmark as a comparison
country. Although it operates on a smaller scale, with
approximately 5 operators, it is important to acknowledge how
the field by field reporting is required, and how it is
disclosed in the public domain. This reporting is illustrated
on pages 19, 20, and 21.
4:08:13 PM
MR. GEORGE turned to page 22 to discuss the Nova Scotia example.
This country requires a public review of field developments, the
most recent approval was granted October 3, 2007, on the Deep
Panuke off shore field. Page 23 illustrates the detail of the
sales gas forecast provided in the review data for this
development. In response to a committee question, he clarified
that this is a forecast based on volume not price. It does
include cost estimates. Further, it contains a requirement to
routinely update the information, and forecast, in the annual
production report. Page 25 provides the explicitly information
disclosure requirements.
4:10:13 PM
REPRESENTATIVE SAMUELS referred to page 23, and asked how
realistic a cost forecast projected ahead ten years could be
considered.
MR. GEORGE explained that the life of the field is a major
component, with various phases of development to be considered.
In the terms of accuracy, it would be subject to normal
forecasting probability assessments.
REPRESENTATIVE SAMUELS inquired whether there is a penalty for a
gross error in forecasting.
4:12:31 PM
MR. GEORGE answered that he is unaware of there being an
explicit financial penalty; as explorations proceed, additional
information becomes available, which allows fine tuning and
refinement of forecasts. On this basis, changes will occur as a
gradual series of adjustments, which the regulator will expect.
Some regimes will experience problems, particularly on large
projects, and penalties may be imposed as a mechanism to advance
a major change. However, daily fees have not been routinely
stipulated.
MR. RUGGIERO interjected that the expectation exists for the
forecast data to be uniform, provided to all entities/agencies
involved, and provide a level of surety.
4:14:54 PM
REPRESENTATIVE SAMUELS queried whether contractual obligations
reside in Alaska's large holding leases, regarding production
forecasting.
COMMISSIONER GALVIN suggested that "part of the problem is" that
the lease requirements contain no provisions for cost
information.
4:15:39 PM
MR. GEORGE provided page 26, as the final aspect of his
presentation. It is an abstract from a field report, publicly
available from Deloitte's subscription service. This 15-20 page
report is updated continuously to supply information on
particular fields. The report includes production forecasts and
costs, as well as cash flow for operating and capital costs.
Having information in the public domain serves several purposes,
he explained. The oil companies not only provide this type of
information but also consume it from one another. Thus, an
incoming company has the ability to assess activity in an area,
as they formulate plans for possible investment. He cautioned
that reporting information in this genre does not necessarily
conform to statutory requirements.
4:18:53 PM
MR. RUGGIERO directed attention to a GCA (Gaffney, Cline &
Associates Inc.), Memorandum, of October 19, 2007, RE: Oil and
Gas Reporting and Disclosure in Selected Countries. At the
bottom of page three, he stated, Timor-Leste is introduced as a
country with legislation that is an exception to what has been
discussed. It is important to consider to what extend different
"countries are going with respect to data acquisition and data
publication." This is also reflected by the data disclosure
trends being expected by the World Bank, and other funding
banks.
4:21:13 PM
REPRESENTATIVE NEUMAN cited that costs are rising and
historically demand has increased. However, he pointed out, in
the example of the UK expenditures, decreases are forecast.
Further, the cost is rising considerably. The Norway example
indicates a level line. The Denmark historical data on capital
investments reads flat, but the sales forecast for Nova Scotia,
in the same region, shows a mean decrease of 5.7 in 2010, to 2.7
in 2017. The October 19, 2007, memorandum asks GCA, he read,
"... to prepare a brief overview of how the acquisition,
distribution, and publication of oil company data are handled in
other oil and gas producing regimes." How, he inquired, were
these countries selected to illustrate this request.
MR. GEORGE clarified the decline and production reports
presented. If production levels are declining faster than the
inflation in the costs, an overall reduction will be seen.
REPRESENTATIVE NEUMAN reiterated that the countries used for the
examples are all indicating a declining production rate, while
the demands and costs for gas are increasing, and asked again
why these countries were chosen.
MR. GEORGE responded that the regulations and operations of this
group were considered comparable with Alaska.
REPRESENTATIVE NEUMAN offered his hope that supply and demand
for Alaska's gas is increasing.
4:24:42 PM
MR. RUGGIERO interjected that this report was compiled as an
example of data that is available, collectable, and reportable
from these chosen countries. How reports are generated by data
requested from the oil companies. These examples were not, he
emphasized, chosen to present data analysis and comparison to
Alaskan production.
MR. GEORGE offered that these countries are also significant for
the level of public disclosure provided.
4:26:00 PM
REPRESENTATIVE SAMUELS asked why areas of the U.S. were not used
in the examples, and existing reporting requirements for
companies operating in U.S. waters.
MR. GEORGE responded that the cost information disclosed
elsewhere in the U.S. does not provide for a similarly high
level, including on the Gulf of Mexico.
REPRESENTATIVE SAMUELS queried whether there are any reporting
requirements from which to draw a comparison from within the
U.S.
MR. GEORGE answered that information requested from the Internal
Revenue Service (IRS) would prove to be historic versus
forecasting data.
4:28:57 PM
REPRESENTATIVE SAMUELS asked, "Is there a problem that we have
that they don't have ... a U.S. law that ... I don't even have a
good example for you. But you didn't have an example of the
United States here."
MR. RUGGIERO offered that GCA has provided examples of
jurisdictions where oil revenues constitute the majority of the
countries overall treasury intake. These countries have a
reason to be concerned, therefore, with the direct management of
the information provided by the oil companies. Additionally, it
has been suggested that to require disclosure by private
companies is un-American. Outside of America these requirements
are expected as part of normal business practices.
REPRESENTATIVE SAMUELS asked again if there is an inherent
"problem" in the U.S. disclosure system, as it relates to the
IRS and the SEC.
MR. GEORGE responded that it is not necessarily a problem so
much as "the way it is done."
4:29:19 PM
REPRESENTATIVE DAHLSTROM inquired whether the terminology
utilized to describe oil operations is universal on a global
basis; specifically the definitions and use of "legacy field"
and "new development".
MR. GEORGE responded, "No." The legacy field concept may be the
one term used most consistently.
COMMISSIONER GALVIN suggested to hold that question until the
presentation on Saturday [October 20, 2007], when the question
of how to categorize fields could be better addressed.
4:30:56 PM
REPRESENTATIVE COGHILL observed how other countries hold lease
agreements than are considerably different than those held by
Alaska. He pointed out that Commissioner Galvin has indicated
that Alaskan authorities have already "signed leases that ...
take some of the teeth out of our ability for other information
beyond the look back for tax information." Access to further
information may be limited, and he asked for discovery of what
limits/accessibility Alaska may be under for disclosure of field
information.
MR. GEORGE granted that the issue of how countries apply the
forecasting information and the fiscal taxation process differs.
Licensing requirements may also play a significant role.
COMMISSIONER GALVIN clarified that the Alaska leases do require
specific "down hole" and well data for DNR management purposes.
However, the data for production costs and business aspects are
not a requirement. In the context of this bill, information
held relevant pertaining to the state tax structure, is a recent
development. As far as the state requesting this information,
there have been no state or federal legal barriers identified.
4:35:39 PM
REPRESENTATIVE KERTTULA asked if the state is receiving the
information necessary to make the spectrum of decisions that are
before the legislature.
COMMISSIONER GALVIN established that there are two levels to
consider: the cost issue seen in the context of the overall
revenue economics, and field specific data. The nature of the
type of information that the department is going to be acquiring
is relevant to assuring compliance with the tax system, but not
as necessary for determining what that tax system should be.
4:39:06 PM
CHAIR OLSON requested a side by side comparison "of the top
points that you are asking for," of Wyoming, Texas, Louisiana,
and Oklahoma, and perhaps four other states; we could just check
them off, whether the other states are doing this or they aren't
doing it.
COMMISSIONER GALVIN agreed to furnish the requested information,
and pointed out that each state has a tax system established on
a different basis and not analogous to how Alaska relates to the
oil and gas industry.
CHAIR OLSON suggested that the differences be footnoted.
4:42:24 PM
REPRESENTATIVE SAMUELS referred to the list on page 22 regarding
public disclosure to ask "what right now is there controversy
about that you don't disclose."
MR. IVERSEN responded that what is being asked is to have
clarification to "boil that down to an aggregate of three or
more tax payers." The department is asking to be able to create
a more meaningful data presentation on a high statistical level.
REPRESENTATIVE SAMUELS requested a further example.
MR. IVERSEN stated that it would "be akin" to what is already
being accomplished with other tax types. By reporting in the
aggregate, confidentiality concerns are satisfied, and the
anonymity of the data source is protected.
COMMISSIONER GALVIN interjected that more concrete examples will
be provided to the committee.
4:44:53 PM
MR. IVERSEN described the current auditor situation: 18 oil and
gas production auditors, including the supervisor and specialist
positions. Five of these positions are currently vacant.
Additionally, DNR has seven royalty auditor positions; two of
which are vacant. The state has suffered difficulties
recruiting and retaining auditors. An exempt status is being
sought for the oil and gas auditors to allow the wage structure
to be manipulated separately from other classified state
auditors.
4:46:10 PM
REPRESENTATIVE DOOGAN queried if this will provide the
opportunity to compensate the auditors at a higher rate than
they currently receive.
MR. IVERSEN replied, "That is correct." To a follow-up question
he stated that the ranges vary in the four classes of state
auditors. He provided the annual base pay rates from state
auditor I through Auditor IV, respectively: $47-67,000; $54-
77,000; $62-88,000; and $70-101,000. The supervisor for that
section is $77-110,000, and the Oil and Gas Tax Specialist, the
expert in that group, is $76-109,000. He estimated that an
increase of 25 percent would bring these positions into a
competitive scale in the federal and private markets.
COMMISSIONER GALVIN clarified that a competitive rate, to
attract senior/experienced workers, the high-end positions may
require an increase greater than 25 percent.
4:49:52 PM
CHAIR OLSON asked if the quoted rates reflected salary or
combined salary and benefits.
COMMISSIONER GALVIN said the numbers quoted represent salary.
4:50:24 PM
REPRESENTATIVE NEUMAN recalled that the state departments were
directed to cut their salary costs by ten percent in FY 07. He
asked if this had an effect on DOR's ability to audit.
COMMISSIONER GALVIN responded that the auditor positions were
considered priority positions and did not suffer cuts.
REPRESENTATIVE NEUMAN asked how DOR complied with the directive.
COMMISSIONER GALVIN reported that DOR was in a position to
receive additional federal funding, thus the directive was
fulfilled without a drop in DOR services.
REPRESENTATIVE NEUMAN underscored the importance of employing
proper auditors.
4:52:27 PM
REPRESENTATIVE KERTTULA referred to the open auditor positions.
MR. IVERSEN restated that currently five openings exist with a
sixth to occur soon. To a follow up question he said that DOR
has been actively recruiting to fill the positions, since he
became Commissioner, and he outlined the efforts that have been
expended.
REPRESENTATIVE KERTTULA queried whether candidates are not
accepting job offers, and what is cited as the issue; or are
acceptable candidates not being found.
MR. IVERSEN stated that pay has been an issue, and candidates
are not necessarily meeting the minimum qualifications.
REPRESENTATIVE KERTTULA asked if the state situation regarding
retirement has been a concern.
MR. IVERSEN conceded that he has not been privy to that specific
concern, however he deferred for a definitive response.
4:55:11 PM
COMMISSIONER GALVIN answered that this issue has been mentioned
in the context of overall recruitment within the division but it
cannot be identified with a specific complainant.
REPRESENTATIVE KERTTULA recalled that a classification study was
completed which indicated that there were other classes of
auditors or employees that needed to be increased.
MR. IVERSEN concurred, stating that it was completed two years
ago. The outcome was that every auditor should be increased by
two ranges.
REPRESENTATIVE KERTTULA clarified that this would separate out
the oil and gas auditors, providing them with an increase, but
not the other auditors who were also identified.
MR. IVERSEN said: "Right."
REPRESENTATIVE KERTTULA asked for clarification of what exempt
status means; surmising it means employed "at will."
MR. IVERSEN responded, "Yes, you're right."
4:56:28 PM
REPRESENTATIVE DAHLSTROM inquired as to whether there was
consideration given to hire an auditor who would be exempt, paid
well, and report to the commissioner.
COMMISSIONER GALVIN explained that the concept began when he
suggested that there needed to be a small group of highly
experienced auditors to serve as the primary managers. These
experienced auditors would direct the development of the program
as well as the audits while utilizing the existing structure as
part of the overall team. When Mr. Iversen and Ms. Davis worked
through implementing the aforementioned, they recognized that
there were management, morale, and other issues associated with
such a plan. Furthermore, empirical data highlights that
existing auditors aren't paid up to competitive standards.
Commissioner Galvin acknowledged the implications of doing this
in light of the overall recruitment and retention issue as
addressed by the governor's administrative order to perform a
study regarding the state's ability to recruit and retain
employees. The aforementioned is ongoing and separate from this
discussion. He said that he's trying to isolate this as best as
it can be without unexpected consequences. Separating the oil
and gas tax auditors as an exempt class would undermine DNR's
ability to have the exact same qualified staff doing work on the
royalty side as well. Therefore, the oil and gas royalty
auditors and the oil and gas tax auditors had to be included as
one group to move into this class.
5:00:04 PM
REPRESENTATIVE DAHLSTROM noted her agreement that this is a
crisis situation that needs to be addressed. However, she
expressed concern that a governor could use [auditor] positions
for political payback, and thus appointees may not be qualified.
COMMISSIONER GALVIN related that the fear and risk she speaks of
doesn't bear out. Although the opportunity exists, it doesn't
appear to happen because the institution remains even after
political changes. Positions that require technical expertise
to reasonably perform the job provide security [that the
position will be filled by uniquely qualified individuals]. He
acknowledged the perception that, as an exempt employee, one
serves with the threat of always being told what to do for
political purposes. However, that's not how it works in
reality, he maintained.
5:02:34 PM
CHAIR OLSON requested copies of the study referenced by Mr.
Iversen.
5:02:50 PM
REPRESENTATIVE RAMRAS mentioned that a similar situation exists
with biologists, another unique field that is experiencing a
migration of employees. He then thanked Kevin Banks, Division
of Oil & Gas, for his service with an understaffed division.
Representative Ramras inquired as to the following: how much
would it cost to outsource [the auditing function]; what is
currently being paid for the auditing function; what is the
fiscal note for changing the group of auditors to exempt status;
how much revenue is presently being managed; what would be the
outcome of a well-armed group of auditors; what would be the
private sector's equivalent of experience for a state auditor I,
II, III, and IV.
COMMISSIONER GALVIN, regarding the costs, explained that of the
five vacant positions four are at a lower level and the
intention is to reclassify those four positions such that
they're senior level auditors. Based on individual experience
and responsibilities, decisions would be made on salaries in
reference to a similar situation in the competitive market. The
aforementioned results in a fiscal note estimating about $1.1
million per year in the cost for salary and benefits associated
with making this adjustment to the entire class. Most of that
would [fund] reclassifying those four lower level positions.
5:06:17 PM
REPRESENTATIVE RAMRAS inquired as to the cost to outsource [the
entire auditing function], what amount of revenue would they
manage, and what is the incremental value of a well-armed group
[of auditors].
COMMISSIONER GALVIN answered that he doesn't have a number. As
a point of reference, there's a proposal to have contractual
auditing services for the first four years in order to get the
program off the ground. The aforementioned is estimated to cost
around $1 million a year. He estimated that having the full-
time positions become contractors would cost more than what's
specified in the fiscal note for exempt class status. From a
policy standpoint, Commissioner Galvin said he believes it's in
the state's best interest to maintain these as full-time state
positions, rather than contractual personnel and the private
sector variables involved. He said that he could provide the
committee with information of some cost comparisons with regard
to what would be needed [to contract out the auditing function].
5:09:07 PM
REPRESENTATIVE RAMRAS surmised that Commissioner Galvin is
concerned that institutional knowledge would be lost if one
group migrated to another organization.
COMMISSIONER GALVIN opined, "It doesn't seem to be in the
state's interest to put ourselves subject to the knowledge of an
outside source for such a critical function."
5:09:57 PM
REPRESENTATIVE RAMRAS inquired as to the incremental value of
being fully staffed with the look back component.
COMMISSIONER GALVIN said it would be purely speculation based
upon an estimate of what the over reporting is expected to have
been under PPT. He offered to provide the committee with
information relating to other oil and gas auditing in terms of
value to the state going through the auditing process.
5:10:48 PM
REPRESENTATIVE RAMRAS inquired as to the dollar volume that the
[auditors] manage. He also inquired as to the cost of the
entire package focused on oil and gas development. He recalled
that it was an incremental increase of $1.1 million. He
inquired as to the amount of payroll and the dollar volume of
the audit for which they're responsible on an annual basis.
Representative Ramras said that he wouldn't be hesitant to
allocate another $1.5 million to safeguard a $3.8 billion
revenue stream, especially when there's perhaps an incremental
value of $100 million.
COMMISSIONER GALVIN said that he doesn't have the exact number,
but estimated that the overall salary and benefit for all 18
petroleum auditor positions is about $2 million. The $2 million
being paid to auditors is well below any margin of error for a
$2 billion total exposure. Although he said he didn't want to
speculate in terms of the opportunity costs associated with not
performing a full audit, given the scale of the numbers it's
clear that the auditors are worth it.
5:14:10 PM
REPRESENTATIVE RAMRAS characterized ACES as an $800 million tax
because he believes that is the state's objective. He then
surmised then that what's being discussed is an insignificant
sum relative to the dollars being managed.
COMMISSIONER GALVIN said he wouldn't refer to it as managing but
rather "that they may be able to recover."
REPRESENTATIVE RAMRAS clarified, "Were managing the state's
exposure to any errors in the auditing of those figures as being
reported by a pretty broad variety of oil companies that are
participating." He opined that when one refers to explorers, it
refers to more than the three oil companies. Furthermore, there
are companies with different variables in terms of size and
fields. Therefore, to go from 1 million to 2 or 3 million is of
no concern. He recalled similar concerns from the Alaska Oil
and Gas Conservation Commission (AOGCC) and the Regulatory
Commission of Alaska (RCA) [regarding exempt status]. Still,
Representative Ramras said that he is in support of exempt
auditors.
COMMISSIONER GALVIN, regarding ACES being a targeted $800
million tax, said that it's dangerous to have a tax designed to
target a certain revenue number. He assured the committee that
through the analysis, the last thing calculated was the
determination of the ultimate revenue with a package [as
proposed in ACES]. The process wasn't that the tax system will
have to produce a specified amount or revenue.
5:17:09 PM
REPRESENTATIVE RAMRAS inquired as to how much more [ACES] would
generate in taxes with the current numbers available.
COMMISSIONER GALVIN estimated that it would generate about $600
million at $60.
5:17:24 PM
REPRESENTATIVE DOOGAN recalled that the current law includes a
provision requiring a look back in 2011. He asked if that
provision is in ACES as well.
COMMISSIONER GALVIN answered that he didn't believe that
provision had been impacted. In further response to
Representative Doogan, Commissioner Galvin opined that if the
department doesn't obtain its auditors, the question will become
one of a level of confidence in the result. With the auditors
being requested, the audit would be more in keeping with a more
direct read of whether the costs deducted were appropriate.
Commissioner Galvin said that he's trying to provide the best
tools to ensure confidence that the audits are in keeping with
the intent of the statute.
REPRESENTATIVE DOOGAN surmised then that if the [auditing]
department was fully staffed, the information would be more
current than might otherwise be the case.
COMMISSIONER GALVIN replied, "Yes."
5:20:04 PM
REPRESENTATIVE SAMUELS recalled that this exact issue surfaced
during the regular session, in separate legislation, and the
legislature failed to reach a consensus on moving forward on the
matter. The issue isn't new, he said.
5:20:41 PM
REPRESENTATIVE HOLMES asked if there are any other options to
raise the salaries of these auditors besides making them exempt.
COMMISSIONER GALVIN explained that the classification study
utilized the existing infrastructure of the state to establish
what the appropriate pay should be. Because of the systemic
nature, a salary change for the auditors would result in having
to make determinations for analogous positions as well as for
the auditors. The result is based on the current attempt to
raise [the auditors' salaries] through the existing channels.
He opined that utilizing contractors has limitations, and thus
contract employees may not be utilized without violating the
contractual provisions of an existing labor agreement. The
situation has driven [the administration] to address this issue
individually. Classifying the auditors as exempt is the easiest
and most direct way in which to address the situation.
5:23:32 PM
REPRESENTATIVE DOOGAN posed a scenario in which a gross tax was
instituted on the legacy fields and the remainder of the net tax
was left in place. In such a scenario, would the auditor
requirement decrease, he asked.
COMMISSIONER GALVIN responded, "The devil's in the details." He
explained that a so-called gross tax with a 40 percent capital
credit will still be auditable; due to the incentivizing
expenses it may even pose more significant auditing challenges.
In further response, he confirmed that unless it's a purely
gross tax, these auditors will be necessary.
The committee took an at-ease from 5:25 p.m. to 5:38 p.m.
5:38:45 PM
COMMISSIONER GALVIN turned the committee's attention to page 29,
regarding lease expenditures.
5:39:18 PM
MR. IVERSEN, referring to page 30, explained that currently the
PPT sets forth a general standard as to what expenditures are
allowed as lease expenditures with a series of exclusion. The
amendment [proposed in ACES] would specify and make express that
the department must, by regulation, set forth affirmatively what
are allowed to be included as lease expenditures by regulation.
The legislation also proposes to repeal AS 43.55.165(c) and (d),
which are provisions that allow the department to substitute
cost billings under the unit operating agreements in place of
general standards for allowable lease expenditures. Under
subsection (c) if DOR finds that an operating agreement is
substantially consistent with the general standards for allowing
lease expenditures, DOR may authorize a producer to treat as its
lease expenditures the costs that would be billable under that
agreement.
5:40:55 PM
REPRESENTATIVE SAMUELS surmised then that by repealing those
provisions, the department has taken away its ability to do so
even if it chooses to.
MR. IVERSEN said that as he reviews the issues that arise as a
regulatory matter, the problems these provisions have caused
will become clear.
5:41:32 PM
REPRESENTATIVE SAMUELS posed a scenario in which at Prudhoe Bay
British Petroleum (BP) is the operator who will bill ExxonMobil
for a portion of the costs. He surmised that the department
doesn't want the ability, even for itself, to use that billing
in the PPT calculation.
COMMISSIONER GALVIN pointed out that AS [43.55].165(a) and (b)
provide the ability of the department to look to whatever means
it feels is appropriate to establish those standards. That
general authorizing language would encompass these types of
provisions as something the department could look to as an
indication.
5:42:37 PM
REPRESENTATIVE SAMUELS surmised then the department doesn't view
it as giving up anything, but rather [repealing AS 43.55.165(c)
and (d)] would provide clarification.
COMMISSIONER GALVIN noted his agreement. If the department
believes it would be beneficial in a certain instance, then [the
cost billings] can be utilized. However, the experience has
been that the combination of AS 43.55.165(c) and (d), as it
relates the joint interest billing, results in the department
being "hamstrung" in terms of whether it has to be used or not
used. There isn't the level of flexibility that he believes is
appropriate. He pointed out that the flexibility exists in AS
43.55.165(a) and (b), and therefore (c) and (d) aren't
necessary.
5:43:19 PM
REPRESENTATIVE SAMUELS recalled the debate last year in which
the intent was to provide the flexibility to DOR. Therefore, if
[repealing AS 43.55.165(c) and (d)] achieves that, it's fine.
5:43:47 PM
REPRESENTATIVE NEUMAN recalled that Dr. van Meurs has said that
having someone in place to determine what could be allowed for
repairs and maintenance would be an auditing nightmare.
However, this provision seems to allow that. Therefore, he
requested comment. He then related that a constituent had
requested that he ensure that lobbyists not be allowed to deduct
their costs.
COMMISSIONER GALVIN said that's not allowed. With regard to the
standards determining what is proper maintenance versus improper
maintenance, Commissioner Galvin acknowledged that challenge and
ACES attempts to ensure that the state doesn't pay for the
replacement of improperly maintained equipment.
MR. IVERSEN specified that ACES utilizes the same policy tack as
SB 80 did with regard to improper maintenance. However, the
provision within ACES intends to have a much more objective
trigger point of an unscheduled interruption in production or a
release or spill of oil or gas. Costs incurred for repair,
replacement, or deferred maintenance of facilities and
equipment, other than a well, would be excluded. The
aforementioned provides a brighter line and encourages proactive
maintenance, he opined. He noted that the legislation includes
an exclusion for "Acts of God," inevitable catastrophe, or third
party acts that couldn't have been reasonably prevented through
the diligent operation of the taxpayer.
5:46:49 PM
CHAIR OLSON asked whether pigging a feeder line in the Prudhoe
Bay unit for eight years would be covered by the aforementioned
provision.
MR. IVERSEN responded that any repair, replacement, or deferred
maintenance costs associated with an unscheduled interruption in
production or a shut down would be excluded.
COMMISSIONER GALVIN acknowledged that determining an industry
standard, such as maintenance via interval line pigging, could
result in a fairly subjective discussion. When dealing with the
question of negligence versus non-negligence, it could become a
long-term issue. The proposed standard attempts to move away
from a subjective analysis of the behavior that led to the
incident and have more of a strict liability issue, such that
the costs incurred when there's an unplanned incident won't be
covered. He mentioned that there may be some exclusions.
Basically, it's the best call that can be made without entering
an endless factual dispute, and encumbering the tax program in
incident management and retroactive evaluation. He indicated,
"And trying to make it something that can be done on more of an
accounting basis."
5:48:48 PM
REPRESENTATIVE DOOGAN asked why wells were excluded.
MR. IVERSEN explained that it's a policy call for the
legislature to consider. He characterized the wells as the
"cash register that drives the whole machine," which is the
reason [they were excluded].
COMMISSIONER GALVIN interjected that, from an operational
standpoint, interruption of production at a well is not directly
equated to a lack of maintenance, as there could be many other
driving factors. Being able to separate the system integrity
portion from the other factors causing a well interruption,
becomes the policy call. The administration's focus has been
primarily on facilities/pipelines and ensuring they are properly
maintained.
5:50:25 PM
REPRESENTATIVE DOOGAN said that he could think of a scenario in
which a company doesn't act prudently, and thus a well explodes
and cuts production on the North Slope. Therefore, he
questioned why such negligence is different than what results
when a company neglects to pig a feeder line.
5:50:59 PM
COMMISSIONER GALVIN pointed out that under a bright line strict
liability standard, more events are potentially included than
with the standard of determining properly or improper
maintenance. He further pointed out that most of the things
that one would consider to be improperly maintained are likely
to be included in [this strict liability standard], although
some incidents that occurred as a result of fully responsible
decisions may also be included. At the well level, the impact
associated with the aforementioned is on an individual well and
doesn't impact a gathering line that will have a major impact.
He opined that being able to identify whether a well is shut
down due to planned or unplanned reasons is a management
responsibility that will "dwarf anything associated with the
potential shutdowns of other aspects of the system." On
balance, less bang for the buck is achieved by placing emphasis
on the well.
5:52:39 PM
REPRESENTATIVE DOOGAN inquired as to where a situation in which
an employee driving a forklift into the pipeline would fall.
COMMISSIONER GALVIN answered that it would be an unscheduled
shutdown that wouldn't be deductible.
5:53:22 PM
REPRESENTATIVE SAMUELS recalled that when SB 80 was moving
through the process, DOR testified in favor of it. However, he
recalled reading that SB 80 couldn't be administered under its
language and thus the language proposed in HB 2001 was
suggested. He inquired why the change.
COMMISSIONER GALVIN specified that his testimony [on SB 80]
indicated that the administration was always working to improve
the language with regard to the standard that would be used.
[The language] changed numerous times as the best standard was
sought. He confirmed that the overall policy was one that was
very much supported by the administration, and therefore the
objective was to develop the best standard possible. With the
time to do so, a better standard was developed [in HB 2001].
REPRESENTATIVE SAMUELS said that he doesn't want to pass
legislation only to have [the administration] return in two
years because it didn't work. The aforementioned would've been
the case if SB 80 had passed. He said that he understood that
Commissioner Galvin supported the policy goal, but the language
didn't work. He then turned to the term "unscheduled
interruption" and asked if it's a term in law.
COMMISSIONER GALVIN said that clearly there needs to be a
regulatory process, in terms of how to provide a more refined
picture in terms of the taxpayers' standpoint.
REPRESENTATIVE SAMUELS related his assumption that maintenance
on any facility or business in which there would be the need to
shutdown for specific repairs would be considered a part of the
normal course of business.
COMMISSIONER GALVIN said that the deductions for [those type of
things] would be allowed.
5:56:32 PM
REPRESENTATIVE NEUMAN suggested that unless all the situations
are specifically stated, enforcing this type of policy could
prove to be difficult.
COMMISSIONER GALVIN opined that having the state reimburse a
company a portion of their costs for replacing and properly
maintaining equipment wasn't in the state's best interest.
Therefore, the attempt has been to develop a clear policy that
identifies those things that would fall under that
[reimbursable] category. There's likely to be conflict,
litigation, and disputes about the implementation of the
standard, for which the state will pay. The question is whether
that cost is worth the value of not having paid for the
replacement of equipment that unexpectedly breaks.
5:58:56 PM
REPRESENTATIVE NEUMAN opined that the legislature, through the
PPT, tried to provide the administration the authority to have
some leeway in those decisions. However, he recalled that
Commissioner Galvin presented to the House that [the department]
didn't have the statutory authority to do so. Therefore, he
asked if any provision in ACES provides that authority.
COMMISSIONER GALVIN specified that this language in ACES is
necessary in order for the [department] to have the statutory
authority to exclude those deductions in regulations. In
further response to Representative Neuman, Commissioner Galvin
confirmed that inclusion of this exclusion in ACES will provide
the statutory authority.
6:00:11 PM
REPRESENTATIVE KERTTULA said that she wanted to be certain that
this wouldn't pre-empt the prudent management standard and that
it would still be available for use in relation to wells.
COMMISSIONER GALVIN specified that nothing in the provision
under discussion or within this tax standard would preclude the
state from pursuing damages for lost revenue associated with a
shutdown that resulted from negligence or some lease violation.
This provision simply addresses whether the tax code will allow
it or not.
6:01:08 PM
MR. IVERSEN continued with page 33. He explained that ACES
proposes to exclude from lease expenditures the costs to
construct, acquire, or operate a refinery or crude oil topping
plant. Under the language of HB 2001, the company could deduct,
as an operating expense, the incremental value that would be
attributable to the refined product. Therefore, the difference
between the value of the diesel when it comes out of the plant
and the prevailing value of the crude would remain as a
deduction. However, this would exclude from costs, the actual
capital costs to construct, acquire, or operate a refinery and
the associated operating expenses. He pointed out that the
legislature needs to decide whether a deduction in credit for a
refining operation is too great a tax break for a product that
would otherwise be purchased. He noted that a purchase of
diesel would be allowable as a lease expenditure.
6:03:03 PM
COMMISSIONER GALVIN explained that in the production of oil
there is a need for diesel fuel. That diesel fuel is used in a
number of ways so a large amount is utilized. Operationally,
the company could build a local refinery and create this diesel
on the North Slope. The alternative is to get it elsewhere and
bring it to [the North Slope]. The question [within ACES] is
whether the cost of building the refinery would be considered a
production cost in the nature of a capital expenditure that
would receive the deduction as well as the state capital credit
addition, or whether the diesel and the value of its use would
be considered an "expansible" cost. This is particularly
relevant because ConocoPhillips Alaska, Inc., has an obligation
under Alaska's environmental requirements to use low sulfur
diesel, and have penciled out the opportunity of building a
refinery on the North Slope at a cost of $300 million. As long
as Conoco can receive the PPT-related credits and deductions,
this will be considered an economic project, otherwise they will
continue to truck in the diesel. In question is whether the
state should provide an approximate $135-$150 million subsidy
for the building of this refinery.
6:05:38 PM
REPRESENTATIVE SAMUELS opined that if he were the Conoco
refining company and built the refinery, he would simply charge
the Conoco exploration company a per gallon cost in order to
obtain what is desired from the tax break.
COMMISSIONER GALVIN provided a calculation for formulating the
fair market value of the diesel; as a transported product vs.
produced and refined on the North Slope.
REPRESENTATIVE SAMUELS surmised then that the policy call is to
specifically preclude a $300 million project from being
developed on the North Slope.
COMMISSIONER GALVIN interjected that it would be specifically
excluded from being deductible, and therefore not qualified for
a state credit on the production.
6:06:48 PM
REPRESENTATIVE SAMUELS reminded that if [the company] doesn't
have the deductions, the diesel will continue to be transported.
He said, "[It's] a project on the bubble ..., and with the
deductions they build it; without the deductions they truck it."
COMMISSIONER GALVIN concurred that's the way it has been
presented.
6:07:04 PM
REPRESENTATIVE SAMUELS opined that he will have to think about
that because it represents projects pushed on and off the
bubble; between the private sector and the government. He
questioned whether this diesel is available [within the state].
If it isn't, are the daily costs of exploration and operation
being driven up.
COMMISSIONER GALVIN suggested that the industry be asked those
questions. He offered his view that if the refinery were going
to be located in Fairbanks, would the same amount of the subsidy
be included. He said:
Or if it was another operation that was going to be
built, would the state be looking at providing an
upwards of 40, 45, 50 percent subsidy for any
development project that would generate jobs and
generate all the spin-off opportunity; that's a policy
call to make for the state.
6:08:40 PM
REPRESENTATIVE HOLMES asked how the department came to the
conclusion to exclude this tax deduction.
COMMISSIONER GALVIN opined that if it were any other development
project of a similar nature, the department would review the
overarching policy of whether the state is going to provide that
large of a subsidy to make the project economic. Furthermore,
when one reviews whether it should be included in the PPT issue,
there are many incremental costs associated with production. He
said:
If they decide to ... take the work from somebody else
and build something that we're going to end up
subsidizing every effort to move from a purchase
product to a manufactured product, that's a slippery
slope I don't want to start moving down.
COMMISSIONER GALVIN acknowledged that it's a cost of production,
and said that it's merely a matter of how it should be
represented. He stated his belief that it should rise and fall
on its own merit, in terms of a project to manufacture a
product.
6:10:36 PM
REPRESENTATIVE NEUMAN expressed concern with regard to what
changes will stop development or investment in Alaska. He asked
if low sulfur diesel is even available in Alaska.
COMMISSIONER GALVIN related his understanding that low sulfur
diesel would need to be trucked up.
CHAIR OLSON interjected that a new clean diesel facility just
opened up in Nikiski.
6:11:35 PM
KEVIN BANKS, Acting Director, Division of Oil and Gas,
Department of Natural Resources, noted that the facility in
Nikiski is the only source of low sulfur diesel in the state.
He noted that Flint Hills was going to build a low sulfur diesel
refinery in North Pole, but due to the economics chose to
instead contract with Tesoro to have it manufactured. In a
sense, these topping plants might be thought of as competing
with the North Pole refineries.
COMMISSIONER GALVIN commented that it's a question of who will
receive the benefit of that state subsidy.
6:12:47 PM
REPRESENTATIVE NEUMAN opined that competition is a good thing.
He pointed out that this $350 million project is on hold. He
then said that he would consider it an operating expense as
industry has to change to make itself more efficient.
6:13:16 PM
REPRESENTATIVE DOOGAN surmised that whatever it takes to build
this plant will be imported so there wouldn't be much in the way
of transportation money. It is fair to assume that there would
be a number of North Slope construction and operational jobs
associated with this project. Agreeing with the commissioner,
he said that he will want to see substantial numbers in the way
of return on the $150 million [subsidy].
6:15:16 PM
MR. IVERSEN directed attention to page 34, which focuses on the
exclusion of dismantlement, removal, and restoration (DR&R)
expenses. He explained that DR&R are the expenses to dismantle
and remove the equipment that has been used on the North Slope,
and restoring the area afterwards. Under existing state law,
DR&R is required, and performed to the satisfaction of the DNR
commissioner. Therefore, a subsidy of DR&R costs creates a
potential conflict of state goals. The PPT only excluded the
portion of DR&R expenses attributable to production prior to
April 1, 2006. Page 35 addresses the exclusion of disallowing
tax-exempt entities from obtaining transferable credit
certificates under AS 43.55.023, which are the qualified capital
expenditure certificates, and from transferring production tax
credit certificates under AS 43.55.025, which is the exploration
incentive credits. The notion is that an entity that isn't
paying any tax shouldn't receive any credits.
6:17:09 PM
REPRESENTATIVE RAMRAS inquired as to why.
MR. IVERSEN responded that the assumption is that the entity
isn't paying a tax.
COMMISSIONER GALVIN pointed out that these are companies that
are actively producing oil and gas, incurring expenses, and
applying for credits when they're not subject to ultimately
paying the tax under that system.
6:18:49 PM
REPRESENTATIVE SAMUELS requested an example of what is trying to
be stopped.
COMMISSIONER GALVIN reminded the committee that the department
has an obligation to not disclose any taxpayer information. He
then clarified he's referring to a tax exempt entity. For
example, if the port authority was able to obtain leases, or buy
into a situation, and it produced oil and gas, under
interpretation of the law they're not subject to paying
production tax. This [exclusion] is merely a clarification
specifying that such an entity doesn't qualify to receive a
credit under the tax as well.
6:20:08 PM
REPRESENTATIVE SAMUELS related his understanding that whether
the tax is paid or it's sold, the end result is the desire for
the investment made to obtain more oil.
COMMISSIONER GALVIN opined that the desire is for the investment
to get more oil, because ultimately we'll get tax on the oil.
6:20:42 PM
REPRESENTATIVE DOOGAN asked whether there is a category of
company to which this would apply. For instance, would it apply
to the so-called "state-owned oil companies."
COMMISSIONER GALVIN replied no, and added that the port
authority is the best example.
REPRESENTATIVE SAMUELS highlighted that the port authority is
owned by the municipality.
6:21:38 PM
MR. IVERSEN continued with page 37 regarding transitional
investment expenditure (TIE) credits, which are based on a pool
of expenditures from as far back as 2001. These TIE credits
aren't transferable and essentially are only available to
incumbents who have incurred lease expenditures prior to the
passage of PPT. Therefore, it won't be available to new
entrants because allowing these credits would incentivize
behavior that has already taken place.
6:22:18 PM
REPRESENTATIVE RAMRAS questioned, "Why wouldn't it also just be
a deal, is a deal, is a deal?" He recalled this being an issue
with regard to retroactive taxes.
COMMISSIONER GALVIN opined that's one of the reasons why the
administration isn't suggesting that the move to ACES be
retroactive. He reminded the committee that the provision
addresses expenditures made prior to the passage of the PPT.
The benefit was received from April 2 to December 31, 2007, and
from that point forward any credits incurred won't receive the
uplift associated with the TIE credit.
6:23:58 PM
REPRESENTATIVE DOOGAN inquired as to the reasoning for including
the TIE credits.
REPRESENTATIVE SAMUELS explained that the original [PPT]
legislation had a five-year look back. The philosophical reason
was that if the money was expended with the expectation of a
rate of return on the investment, but the rate of return was
diminished because the tax was increased, then the entity should
be able to take a deduction. The oil produced by investment
made two years ago is oil that's being produced today. He
continued:
In House Resources we eliminated that and we said,
'Five years ago you've made your money back, four
years ago you've made your money back.' Last year, in
one year we had 100 percent, two years ago it was 50
percent, and one it was 25 [percent]. So, we
eliminated probably three-quarters of it. An
amendment in House Resources, Representative Kapsner,
eliminated the entire thing. And philosophically, the
argument was we're looking back on the taxes, there
was an amendment to go back to January 1st. At that
time ... it was only February .... The amendment was
to go back to the 1st of January. There wasn't the
will of the committee to have retroactive taxes, which
the will of the legislature drastically changed later
that August. So, the argument was made to eliminate
that too. If you're not going to look back on the
taxes, don't look back on the expenditures. It was
eliminated completely, passed out of the first
committee. And at the same time in the Senate, they
came up with a different way of looking at it that
said for every $2 that you spend today, then you can
recoup one of your last five years of expenditures.
REPRESENTATIVE SAMUELS noted that once the aforementioned was
adopted in the Senate, it carried through every version of the
legislation from that point forward. This action was considered
to be the middle ground.
COMMISSIONER GALVIN commented that having it in effect for a
year-and-a-half may have resulted in the same value.
6:27:10 PM
MR. IVERSEN, referring to page 38, explained that deductions
arising from Cook Inlet operations must first be used in Cook
Inlet and may not be shielded by the tax ceilings. He explained
that Cook Inlet has a tax ceiling, which is the amount it was
taxed before the passage of PPT. This provision would consider
the ELF and the PPT calculation for each lease or property in
Cook Inlet. To the extent that there are lease expenditures
that are in excess of what would be below the ceiling, and in
order to avoid double dipping as per regulation, the portion
attributable to the ceiling and what would be taxable under PPT
can't be converted into a carry-forward credit.
6:28:54 PM
REPRESENTATIVE RAMRAS asked if Commissioner Galvin believes that
tax policy impacts the behavior of the taxpayer.
COMMISSIONER GALVIN replied yes. "We believe that we can have a
tax policy that will direct behavior and result in more
investment," he said.
REPRESENTATIVE RAMRAS asked whether a policy change will change
taxpayer behavior.
COMMISSIONER GALVIN answered, "That's the nature of our question
for this entire session."
6:29:45 PM
REPRESENTATIVE SAMUELS suggested a situation in which a company
such as ConocoPhillips Alaska, Inc., would use the credits as
double dipping.
MR. IVERSEN said that the company has already received the
benefit of the ceiling amount. Therefore, to the extent that
the benefit has already been obtained, the lease expenditures
would serve to drive it down to the normal production tax value.
6:31:26 PM
REPRESENTATIVE NEUMAN expressed the need for the public to
understand why a gross tax system won't work. He then related
that he was told that the governor instructed [the commissioner]
to develop a gross system of taxation of the oil industry.
COMMISSIONER GALVIN clarified that [the department] was told to
develop a transparent system to provide a balance between
revenue and investment.
6:33:23 PM
REPRESENTATIVE NEUMAN commented that in reviewing ACES, he sees
a model that is the same as the PPT. He asked if that statement
is accurate.
COMMISSIONER GALVIN confirmed that the net tax component of ACES
is built upon the PPT, and that ACES and PPT are close to the
same model.
REPRESENTATIVE NEUMAN questioned why a gross system won't work
in Alaska.
COMMISSIONER GALVIN said the details in response to that
question will be provided in the presentation on Sunday.
[HB 2001 was held over.]
6:34:46 PM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 6:34
p.m.
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