Legislature(2007 - 2008)HOUSE FINANCE 519
10/24/2007 09:00 AM 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 24, 2007
9:33 a.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 LEGISLATORS PRESENT
Representative Bob Buch
Representative John Coghill
Representative Bryce Edgmon
Representative Anna Fairclough
Representative Carl Gatto
Representative Lindsey Holmes
Representative Michael "Mike" Kelly
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
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
10/19/07 (H) Heard & Held
10/19/07 (H) MINUTE(O&G)
10/20/07 (H) O&G AT 12:00 AM HOUSE FINANCE 519
10/20/07 (H) Heard & Held
10/20/07 (H) MINUTE(O&G)
10/21/07 (H) O&G AT 1:00 PM HOUSE FINANCE 519
10/21/07 (H) Heard & Held
10/21/07 (H) MINUTE(O&G)
10/22/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
10/22/07 (H) Heard & Held
10/22/07 (H) MINUTE(O&G)
10/23/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
10/23/07 (H) Heard & Held
10/23/07 (H) MINUTE(O&G)
10/24/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
WITNESS REGISTER
STEVE PORTER, Consultant
to the Legislative Budget and Audit Committee
Tehachapi, California
POSITION STATEMENT: Testified during the hearing on HB 2001.
MARK SHARP
Fairbanks, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
JERRY WALKER
Fairbanks, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
CHUCK LOGSDON, Consultant
Alaska Oil and Gas Association (AOGA)
Palmer, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
JERRY DIXON
Seward, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
DURAINEY RAWLS, Owner
Durainey's Crane Service
Nikiski, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
ERIC PEIRCE
Fairbanks, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
TOM LAKOSH
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
TOM MALONEY
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
JERRY MCCUTCHEON
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
ERIC DOMPELING, President
Alaska Support Industry Alliance (The Alliance)
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
MARY SHIELDS, General Manager
Northwest Technical Services
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
DENETTE JUSTICE ROMANO
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
MARK HYLEN
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
BOB BARNDT
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
BILL WARREN
Nikiski, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
DONALD A. BENSON
Palmer, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
JIM GILBERT, President
Udelhoven Oilfield System Services Inc.
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
TOM DORAN
Seward, Alaska
POSITION STATEMENT: Testified in support of HB 2001.
TONY TENGS
Juneau, Alaska
POSITION STATEMENT: Testified during the hearing on HB 2001.
ACTION NARRATIVE
CHAIR KURT OLSON called the House Special Committee on Oil and
Gas meeting to order at 9:33:29 AM. Representatives Doogan,
Kawasaki, Dahlstrom, Neuman, Samuels, and Olson were present at
the call to order. Representative Ramras arrived as the meeting
was in progress. Other members present were Representatives
Buch, Coghill, Edgmon, Fairclough, Gatto, Holmes, Kelly, Roses,
Seaton, and Wilson.
HB2001-OIL & GAS TAX AMENDMENTS
9:33:40 AM
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."
9:34:36 AM
STEVE PORTER, Consultant to the Legislative Budget and Audit
Committee, delineated four major issues of his presentation;
stability, Alaska's prospectivity, incentives in Alaska's Clear
and Equitable Share [HB 2001], and basic recommendations on the
impacts of this bill on the future of Alaska and the ability to
produce oil and gas in the state.
9:35:51 AM
REPRESENTATIVE HOLMES requested background information from Mr.
Porter.
9:36:13 AM
MR. PORTER stated that he worked for 21 years in the oil and gas
industry, was Deputy Commissioner for the Department of Revenue
(DOR), and has extensive experience in contract negotiations.
Most recently, he was a legislative aide to Senator Bert
Stedman.
9:37:18 AM
MR. PORTER expressed his belief that instability is created by
disproportionate sharing, or the frustration level, of either
the taxpayers or the state. A balance of tax fairness at all
levels creates stability. During the years the tax rate was
determined by the Economic Limit Factor (ELF), the industry paid
less tax, even though profits were high, and an inevitable
change in tax policy by the legislature came about. He
continued to explain that instability is also created when the
government projects a budget that will exceed revenue. The oil
industry is aware that revenue from the production of gas and
oil provides 85 percent of the state's budget, thus it will
anticipate changes in tax policy to balance the budget.
9:39:13 AM
MR. PORTER pointed out that recent testimony by the oil industry
accused the state of creating instability by changing the tax
system three times. The first tax change cited by the oil
companies was an administrative decision by the previous
administration that increased costs to the oil and gas industry
by $100 million. Mr. Porter informed the committee that this
was not a change in regulations or statute, but the
implementation of a law that was already in effect. The
implementation of this law, regarding the consolidation of
facilities, resulted in increased costs to the industry and was
regarded by the industry as a tax change. He opined that the
first real tax system change was the passage of the Petroleum
Production Profits Tax (PPT).
9:41:32 AM
MR. PORTER recalled that disproportionate unfairness was on the
horizon and the state and the oil industry realized that under
the ELF system, at some point, the industry would pay no tax
even with higher oil prices and rising industry profits. The
industry and legislature knew that changes would be coming
fairly soon. At the same time, the industry was negotiating a
contract for the gas pipeline project and wanted to keep the tax
base rate low, tax rate certainty for a term of years, and a
construction contract. Instead, there was no gas pipeline
contract, no guarantee of a certain tax rate, and the tax rate
base was raised higher than the industry had hoped. Mr. Porter
said that PPT is a tax change, and now, to consider a further
increase, raises the question of whether the oil industry is
justified in its conclusion that there is instability. Governor
Palin has stated that there is a cloud over PPT and that it must
be re-examined to determine whether the best decisions were made
during its creation. Mr. Porter noted that the administration
has reviewed PPT and is making recommendations to the
legislature for a clarification of the tax. He recommended that
the committee take the time to determine a reasonable curve, at
all prices, that is within a range of fairness and will provide
long term stability to PPT.
9:44:31 AM
REPRESENTATIVE NEUMAN asked whether the industry feels that the
passage of PPT was a fair change and how PPT will effect
decisions made by the oil companies.
9:45:14 AM
MR. PORTER encouraged the committee to consider tax changes as
sum costs. Corporate decisions are supposed to be based on risk
weights, not on emotion. The risk weights are determined for
future costs, the current economic perspective risk, and the new
tax. Mr. Porter explained that oil companies will study
production expectations, expenditure variables, the tax rate,
the possibility of delays, stress and expected price, and then
assign a risk weight to a new project. Looking at the history of
changes made to a tax system will determine the risk weight of
instability. When the risk weight of instability is determined
to be high, it will have a greater impact on the overall
economics of the project. He stressed that this is still just an
element of the overall economic evaluation and that the
biggest element of the formula is the amount of oil production
projected.
9:47:29 AM
REPRESENTATIVE NEUMAN stated that oil companies will look at
many factors; however, the risk weight for stability is based on
the fact of a change and not the size of the change.
9:47:54 AM
MR. PORTER explained that the risk weight is a percentage that
would be multiplied by the actual amount of the tax and,
therefore, results in a higher projection of the cost of taxes
on the project.
9:48:50 AM
REPRESENTATIVE DOOGAN surmised that the oil companies equate the
risk of change to the risk of an increase in taxes.
9:49:13 AM
MR. PORTER responded that a risk weight of lower taxes could be
put in the formula, as well. The result would make the project
more economic.
9:50:06 AM
REPRESENTATIVE RAMRAS interjected a comment regarding
ConocoPhillips Alaska, Inc. (ConocoPhillips)'s quarterly profits
in the last year, and pointed out that its earnings were down
this quarter by four cents from the previous year. He
encouraged the committee to consider that a publicly traded
company must search for the most robust investments to report to
its investors. An oil company is under pressure from its own
shareholders to produce increased profits and may not have the
ability to consider Alaska projects unless they are deemed most
profitable.
9:52:50 AM
MR. PORTER stated that when oil is selling at a price of $80 to
$90 per barrel, the corporate revenue stream exceeds the
portfolio expectations, and also exceeds the ability of the
company to build all of the projects that are economic. Under a
high-price environment, the decision to not proceed with a
project would be due only to a lack of manpower. Alaska must
compete at a more difficult level when the prices have dropped
to $20 to $30 per barrel and cash flow to the industry is
sufficient to support only the most economic projects. He
acknowledged that projects in Alaska are more expensive than
those in many parts of the world and drop-offs do occur
dramatically in a low-price environment. A few years ago, for
example, the value of exploration permit applications dropped
from $150 million to $10 million within two years. Alaska must
stay competitive in a low-price environment; however, when
prices are high there are few obstacles to development.
9:55:57 AM
REPRESENTATIVE DOOGAN recalled testimony regarding the Oooguruk
project that Pioneer Natural Resources Alaska (Pioneer) chose to
develop and ConocoPhillips did not. He opined that some
companies must have lower expectations for rates of return from
a project.
9:56:56 AM
MR. PORTER agreed and noted two important considerations. One
is that mature fields, like in Alaska, have an economic outlook
with a lower rate of return. This lower rate may be economic to
smaller oil companies due to lower overhead, but not for larger
companies. Occasionally, large marginal fields are held by
major oil companies for future development.
REPRESENTATIVE DOOGAN opined that Alaska may see more production
with companies who have lower rates of return expectations than
the major oil companies.
MR. PORTER said not necessarily, and to explain he will discuss
Alaska's prospectivity.
9:59:24 AM
MR. PORTER informed the committee that Alaska's prospectivity is
the second point to consider. Alaska's major reserves on state
land are located in the area from the Colville River to the
Canning River on the North Slope, and the greatest potential for
revenue from royalty oil is there. Of the 100 billion barrels
that may be on the North Slope waiting for discovery, less than
20 percent is expected to be located on state lands. Thirty
percent of future exploration is expected to be found in the
National Petroleum Reserve-Alaska (NPR-A), and over fifty
percent in the Outer Continental Shelf (OCS). Comparisons that
can be drawn to this situation would be the regions in the world
with high cost wells similar to wells drilled on state lands, in
the NORA, and in the OCS. Mr. Porter advised that within those
regions, the committee should look at high cost mature fields.
A second comparison for state lands is the heavy oils that are
not puddles and are very expensive to harvest on a per barrel
basis. He suggested that, to compare competition with the NORA,
the committee should study regions that are similar to the
Alpine Oil Field and that have higher costs and smaller
reserves. In addition, Mr. Porter stressed that revenue from
state lands between the Colville and Canning Rivers is from
royalty and taxes. In the NORA, where 30 percent of the
potential for new development is located, the royalty stream is
cut by 50 percent. The remaining 50 percent is diminished by
payments to local communities and agencies before entering the
general fund. He opined that no royalty monies from the NORA
have been deposited to the general fund. However, production
taxes are paid to the state from oil produced there.
10:04:55 AM
MR. PORTER continued to explain that future production from the
OCS will provide no tax or royalties to Alaska. He recommended
that the governor begin to work with the federal government on
arrangements to ensure that Alaska will receive a fair share of
revenue from production in the OCS, similar to arrangements with
states bordering the Gulf of Mexico.
10:05:38 AM
REPRESENTATIVE SAMUELS commented that Shell Oil Company (Shell),
ConocoPhillips, ExxonMobil Corporation (EXXON), BP, and Chevron
U.S.A. Inc., (Chevron) are the only companies large enough for
exploration in the OCS. In general, Pioneer Oil Company, Inc.
(Pioneer) or Anadarko Petroleum Corporation (Anadarko) could not
take the risk.
10:06:35 AM
MR. PORTER expressed his belief that life is unfolding as it
should right now. In a mature basin the smaller companies can
afford to work the "puddles" and the large companies can
continue to explore and do major developments elsewhere. He
said that this is beginning to happen in the area from the
Colville River to the Canning River. Mid-sized companies can
operate in the NORA as partners to the major companies. Small
and mid-size companies can not explore in the OCS, unless as
part of a large group, without the risk of bankruptcy.
10:07:47 AM
REPRESENTATIVE DOOGAN said that according to this information,
in terms of the tax policy, an increase would have an effect on
oil production on state lands. There would be less effect on
oil production in the NORA, and no effect on production in the
OCS.
10:08:32 AM
MR. PORTER clarified that the economic tax impact on projects
will have the same effect on the NORA as it has on the state
lands from the Colville River to the Canning River. The
difference will be that royalties will go to the federal
government instead of Alaska.
10:09:06 AM
REPRESENTATIVE DOOGAN asked whether all state taxes apply to the
NORA.
10:09:33 AM
MR. PORTER answered that corporate income tax and property tax
apply to the NORA.
REPRESENTATIVE DOOGAN re-stated that the effect of changing the
tax rate will be the same on the NORA as on state lands.
MR. PORTER said yes. He then spoke of the elements of each tax
that should be considered. Heavy oil is found on state land and
is a separate issue. The production of heavy oil should be
encouraged as there is the potential of producing 20 to 30
billion barrels of heavy oil on state lands. He encouraged the
committee to not place barriers on the production of heavy oil
because of the size of the reserves and the potential revenue.
10:11:27 AM
MR. PORTER recalled that previous testimony estimated that the
lifting cost of heavy oil has been established at about $41 per
barrel and that the stress cases on economics revealed costs of
$40 per barrel. In addition, the governor's proposal, with the
floor in place, made the production of heavy oil at $40 per
barrel marginally economic. He opined that if an Alaska oil and
gas corporation considered spending $100 million to enhance the
production of heavy oil and projected a stress price of $40 per
barrel, the company's management team would conclude that the
project is not competitive and would not proceed with
development.
10:12:59 AM
MR. PORTER emphasized that one thing that should be done to ACES
to ensure future revenue to the state is to remove the minimum
percentage floor. Removing the floor percentage is absolutely
vital to make sure that the future sources of revenue are not
hurt. The floor is a penalty aimed straight at the development
of heavy oil.
10:13:21 AM
REPRESENTATIVE RAMRAS asked for the rational for including a
minimum tax floor in the bill.
MR. PORTER replied that the rational for the gross floor is
that, during a low-price environment, a source of revenue is
guaranteed. However, at that point the companies will be cash
poor and they will continue to cut back on operational and
capital expenses which will hurt jobs and supporting industries
in Alaska. The only thing a gross floor will do is exacerbate
the recession that could occur. Mr. Porter recommended that
money from high oil prices be set aside and managed effectively
for the future.
10:15:35 AM
REPRESENTATIVE RAMRAS re-stated Mr. Porter's confidence in
removal of the minimum tax.
10:15:38 AM
MR. PORTER assured the committee that he is very strong on that
issue.
10:15:47 AM
CHAIR OLSON concurred with the conclusion that the state tax
rate must be lower during years of lower oil prices.
10:16:11 AM
REPRESENTATIVE NEUMAN expressed his understanding that the
production of heavy oil plays a large part in the future of
Alaska's oil industry, and in the amount of the oil coming down
Trans-Alaska Pipeline System (TAPS). He asked Mr. Porter for an
estimate of how much oil will come down the pipeline in 10 years
if there is an average decline of 6 percent. He opined that
additional money for reinvestment is necessary to try to
minimize this decline, not to just maintain the status quo.
Representative Neuman said that the projected curve indicates
that half as much oil will be flowing in ten years.
10:17:52 AM
MR. PORTER relayed that the 6 percent decline curve projected by
the Department of Revenue begins in earnest following 2012. He
observed that there is no one solution and that investment in
three basic areas should occur. There needs to be an
environment with a tax structure to encourage development in
legacy fields. Secondly, the tax environment should encourage
of development of heavy and viscous oil fields. Thirdly,
independents should be encouraged to work the puddles of
existing fields and the major oil corporations should be
encouraged to open new high cost fields. All three areas are
needed to reduce the projected decline.
10:20:01 AM
REPRESENTATIVE NEUMAN commented that the most important area is
to encourage investment in legacy fields.
10:20:18 AM
MR. PORTER opined that the highest return of value would be
investment in the legacy fields. He explained that dollars
spent in these fields will provide the largest return with the
least risk of failure.
10:21:11 AM
REPRESENTATIVE NEUMAN expressed his understanding that the state
is interested in encouraging investment in the legacy fields and
in supporting the diversification of exploration companies to
include mid-level and smaller companies.
10:21:54 AM
MR. PORTER stated that, although he did not participate in the
development of PPT, he agrees with its structure. The PPT
creates a capital investment structure, whereby, all three
elements previously discussed are being supported. The oil and
gas industry will be able to benefit in each division, based on
capital deductions or investment credits. He opined that the
state currently has a healthy environment and is seeing strong
investment in legacy fields and heavy oil production. There is
also a fair rate of new exploration. Mr. Porter turned to the
subject of the impacts of the progressivity factor in a high-
price environment and the 22.5 percent to 25 percent tax base
rate in a mid-price environment. The governor's progressivity
factor captures some, but not substantial, additional revenue.
When oil prices per barrel are between $80 and $90 progressivity
makes more sense. Taxes on the oil industry should not be
increased during times of low prices, but in a progressive
market it is appropriate to share the wealth. Mr. Porter
emphasized that the share of government take needs to be fair at
all price ranges.
10:25:54 AM
REPRESENTATIVE NEUMAN expressed his appreciation for Mr.
Porter's praise of PPT as a good operating model. Comparing PPT
with ACES, he opined that they are basically the same.
10:27:12 AM
MR. PORTER agreed and said that ACES is the same model with
small changes in tax base rate percentages that increase the
state revenue at certain oil prices over time.
10:28:08 AM
CHAIR OLSON requested copies of Mr. Porter's testimony from the
Senate presentation on October 23, 2007.
10:28:24 AM
REPRESENTATIVE DOOGAN asked for Mr. Porter's definition of
"fair".
10:28:48 AM
MR. PORTER responded that the committee must determine how to
create an economic balance through the tax structure in all
three regions of economics; low-price, mid-price, and high-
price. The resulting "fair" tax environment will create
stability over the broad range of oil prices. The exact tax
will not be apparent; however, extreme figures such as a 95
percent tax rate, will obviously not create a healthy
environment that encourages investment. He concluded that the
current middle range is a healthy environment for all three
regions of economics.
10:30:33 AM
REPRESENTATIVE DOOGAN observed that there is no difference
between 22.5 percent or 25 percent or whether a percentage of
operating costs can be deducted or credits given, as long as
they have yields in a similar range.
10:30:58 AM
MR. PORTER re-stated his belief that if the tax rate is adjusted
at 21 percent or 22 percent it will have the effect of being
less friendly to the industry and will change an oil company's
projections in the margins, but not necessarily in the final
economic decision. The tax is a piece of the model and the base
economic decision making should not be strongly affected, in
most cases, by a one percent change. Regarding the
deductibility of operating and capital expenses, Mr. Porter said
that capital credits help the models support investment, are
beneficial to the state, and are an increment that supports
proposed projects.
10:32:35 AM
REPRESENTATIVE DOOGAN conceded that PPT looks good on paper,
however, it may not perform as well as was expected in the real
world. He concluded that if PPT had performed as well as
expected, we would not be here today.
10:33:23 AM
MR. PORTER said that Representative Doogan is referring to the
$800 million shortfall. He stated that he is unsure of the
origin of that figure, beyond the fact that DOR projected the
price of oil incorrectly. Other revenue forecasts by DOR have
been significantly off, especially regarding production. Mr.
Porter explained that DOR projections are historically
conservative and do not over-project in a downward market.
Expected case production figures supplied by the industry do not
include unexpected shut-downs, upgrades, permitting, and other
losses. The DOR estimates for production, pricing, and costs
were all incorrect with the exception of the amount of the first
payment. Mr. Porter questioned the basis of the $800 million
loss and how the incorrect projection influenced the debate on
PPT last year. He opined that the debate over the loss is
immaterial since the legislature is now in the process of
reviewing the tax base rate and will decide what rate will
benefit the state in the future.
10:36:54 AM
REPRESENTATIVE DOOGAN said that at some point the question of
where the $800 million is will be resolved.
10:37:17 AM
MR. PORTER explained that DOR has itemized the loss by
calculating the four or five variables of price, production, and
operating and capital expenses. He said that he does not know
which variable accounts for the $800 million.
10:37:42 AM
REPRESENTATIVE DOOGAN remarked:
I think that, had I been here [last year] I would have
been a lot more likely to vote for a tax that brought
in $800 million more than this one appears to have, no
matter how that worked. So, thank you.
10:38:09 AM
MR. PORTER said that he is not a political junky and has a hard
time understanding how there would be enough energy in the
legislature to vote for a bill that captures $2 billion out of
somebody's pocket. He then directed the committee's attention
to the exploration of gas and noted that gas, except as a by-
product to the production of oil, is not a mature resource in
the state. There are areas that are gas prone; however, the
market has been flat, thus there has been no exploration and
development of this industry.
10:40:01 AM
MR. PORTER advised the committee that his current testimony can
be found on page 4, Senate Resources, Comments on Governor's
ACES Proposal, by Steve B. Porter, dated October 22, 2007. He
continued to say that, although Dr. Pedro van Meurs determined
that the gas pipeline was uneconomic, his feeling is that the
project is indeterminate due to the following four variables:
Costs of the pipeline; the future price of gas; stability of the
taxes and what they are; the internal rate of return and project
evaluation criteria. Mr. Porter stated that Dr. van Meurs
projected the cost of the project to be $40 billion. In
addition, his estimate for the future price of gas was based on
present prices. Mr. Porter expressed his belief that these
factors are indeterminate. Regarding the stability of taxes, he
said that if the owners of the resource decide to build the
pipeline, or commit to shipping gas, then, after spending a huge
amount of capital, the indeterminate risk of the state
substantially raising the tax rate on gas is a high risk factor.
How the companies will weight that risk and complete an internal
rate of return analysis on the pipeline project is unknown. He
concluded that even if the project is never economic, the gas is
still an asset that a corporation might want to hold onto and
try to monetize.
10:44:29 AM
MR. PORTER disclosed that, during his job for the state
negotiating with the major oil producers on the gas pipeline
project, he strove to enhance the overall potential for the
project to occur. The project was to monetize the gas resource
and to explore all ideas to that end. All of the alternatives,
such as gas to liquids, need to be addressed and pursued. In
addition, when the applications are reviewed, the state should
be prepared to understand the risks and whether they are taken
by the applicant, or delayed, or shifted to the federal
government and elsewhere. Mr. Porter stressed that the
legislature will be the leaders of the state and will decide to
modify AGIA or implement it. Regarding the timing for the
development of gas, the length of time for the project to come
on line, from the time of gas discovery to market, could
minimally be one year, depending on its proximity to the
existing infrastructure. Six to eight years is a fair estimate
for projects within twenty-five miles of existing facilities.
Large projects in remote areas could easily take ten years or
more. Successful development of the gas pipeline will also need
time to address environmental and subsistence concerns. He
opined that a proposal with an estimated completion date of less
than nine years could bring additional risks to the project.
10:50:14 AM
MR. PORTER restated his strong recommendation to remove the
floor minimum tax rate in ACES. He said that he would not
recommend a specific tax base rate except to keep the rate in
the 20 percent to 25 percent range. Regarding progressivity, he
encouraged legislators to invoke a fair share of the profits
during periods of high oil prices.
10:51:22 AM
REPRESENTATIVE DOOGAN asked whether Mr. Porter could specify the
highest tax rate range that is reasonable.
MR. PORTER cautioned against making a leap of five to ten
percent and suggested that an increase of one to two percent
would be an acceptable risk. He said that he felt a model of a
five percent increase would demonstrate an unacceptable risk to
the oil industry and would not be beneficial to the state.
10:52:36 AM
REPRESENTATIVE SAMUELS stated that he considers the possible
changes a continuum and the increase in the base rate that will
stop a project is unknown.
10:53:35 AM
MR. PORTER suggested that the committee look at the bell curve
analysis; the highest point of the curve is near the center.
When the tax rate falls off of the center, either less tax
creates instability and a more volatile environment, or, moving
down the other side, with more money out of the industry's
pocket, potential projects are lost. He said that he was unsure
where the continuum lies. Mr. Porter continued to say that the
committee must guess, with a broad brush, what the future will
be like. Then, in ten or fifteen years, the decision can be
evaluated for accuracy. He cautioned against using models with
rates broken down into decimal points.
10:55:05 AM
REPRESENTATIVE DOOGAN expressed his disappointment that the
committee decision will not be based on a mathematical,
rational, and structured formula.
10:55:23 AM
MR. PORTER informed the committee that he is not an economist,
but a lawyer by trade.
10:55:50 AM
REPRESENTATIVE SAMUELS said that, at one point last year, he and
Representative Kelly sat on a conference committee where there
was contention over two-tenths of a percentage point in the tax
rate.
10:56:36 AM
MR. PORTER summarized his recommendations to the committee:
encourage heavy oil development without penalties; encourage the
governor to work with the Congressional delegation to get
Alaska's fair share of OCS revenue before Shell, or any other
oil company, drills in the OCS; work with local communities to
make sure their concerns are addressed before development begins
so that responsible development can proceed without legal
challenges.
10:58:19 AM
REPRESENTATIVE HOLMES asked for Mr. Porter's opinion on the
difference between a gross tax with credits and PPT.
10:58:59 AM
MR. PORTER answered that a gross tax provides models with
straight lines verses a curve that would be low in a low-price
economic environment and rises to follow the high-price economic
trends. A gross tax alone will not benefit the state because
there is only one point at which the tax rate is fair.
Otherwise, the state is collecting too little at the bottom and
too much at the top. A gross tax can be altered; however, the
result is very complex. He opined that the PPT creates a lot of
debate over costs and operational expenses; however, this debate
will encourage the industry and DOR to come to terms and avoid
future conflicts. Mr. Porter opined that the PPT formula and
model are very clean and simple. The argument is about how much
oil companies will be allowed to take in operational and capital
expenses, especially in a high-price environment. In a stable
price environment, operational expenses increase only with
inflation and thus will garner less debate. He pointed out that
the creation of any new tax will cause debate over margins and
that the true battle is clarification of operational and capital
expenses, not whether a tax is based on gross or net profit.
11:03:15 AM
REPRESENTATIVE HOLMES asked whether, once a good model is
established, it can be administered and implemented correctly.
11:04:07 AM
MR. PORTER said absolutely. He assured the committee that when
a tax is changed a margin is created. The oil companies will
work to establish their maximum value of the margin. He
explained that there will be more litigation settled immediately
after the change than during later years and then, after a few
years of litigation, the administration of the tax change will
become clear to all parties. He advised the committee that
litigation often results in the assessment of penalties and
interest and may increase a taxpayer's debt, even when settled
at a discount. Eventually, the principles of the law will be
established and payments will be made. Mr. Porter encouraged
reduction of the differential on settlements and thus the
industry and the state will benefit from less litigation. He
stressed that the auditors will address the fluctuation of
operational and capital expenses; there is no avoiding these
issues. He also commented that he does not feel that the state
auditors are overwhelmed by those representing the industry.
11:08:11 AM
CHAIR OLSON announced that the committee will allow time on
October 25, 2007, for the House Special Committee on Economic
Development, International Trade and Tourism to hold a hearing
on Alaska's economy.
11:08:44 AM
REPRESENTATIVE NEUMAN inquired as to the penalty for heavy oil
development that Mr. Porter referred to in his recommendations.
MR. PORTER answered that the penalty is the 10 percent gross tax
on the bottom. He recommended that it be removed from ACES.
11:09:22 AM
REPRESENTATIVE NEUMAN informed the committee that the House
Special Committee on Economic Development, International Trade
and Tourism will be addressing Alaska's economy; past, present,
and future. Governor Sheffield will testify along with other
speakers from every region. He said that the topics discussed
will play a large part in the decisions to be made during this
special session.
11:10:29 AM
REPRESENTATIVE RAMRAS asked for clarification on what are
operational expenses.
11:11:04 AM
MR. PORTER responded that operational costs are the employees
and the equipment that keeps the oil flowing. Operational
expenses should remain fairly stable in a stable environment;
the deductions just need to be verified. He expressed his
belief that operating expenses can be projected incorrectly
without causing major problems. Furthermore, oil and gas
production companies like to keep their operating expenses on
facilities low so they can divert funds to capital expenses and
bring new oil out of the ground.
11:12:44 AM
REPRESENTATIVE RAMRAS restated Mr. Porter's opinion that the 10
percent floor tax creates a penalty against heavy oil
investment, thus, in a low-price environment, may lead to
industry cuts in jobs for Alaskans. He also pointed out that
ACES allows the industry to take deductions over a two-year
period, rather than the present one-year period, and asked Mr.
Porter to explain the reasons for this change.
11:14:26 AM
MR. PORTER explained that the revenue impact between a one year
period and a two year period remains the same. The
administration extended the time period in order to project
future revenue resources more effectively; however, he voiced
his belief that this benefit is insufficient to justify a change
in economic decision-making.
11:15:08 AM
REPRESENTATIVE RAMRAS suggested that, similar to an accounts
payable system that provides 30 days to use a vendor's money,
this extension provides the state one year's worth of credits
for its use.
11:15:39 AM
MR. PORTER remarked:
And in a, in a broad laymen's world, if you were
discounting things at ten percent, you just cost them
five. You know, so I mean, it's, because you just
rolled half of it back. So it's, interestingly, it's
that particular negative impact if you balance that
against the payment that the state wants to make. ...
The state wants to buy back the credits for the small
producers, because they're getting ninety, somewhere
plus ... 95 cents on the dollar, but not getting the
full dollar. ... That delay for a year of half your
credits, is actually a more negatively impacting than
this is positively impacting. This is five percent
and this is three percent. They lose ... from a net
standpoint. ... On this delay of half your credits for
a year, all things being equal, ... I probably
wouldn't do it.
11:17:01 AM
REPRESENTATIVE RAMRAS spoke of his worry about things that are
perceived as dampening agents.
11:17:29 AM
The committee took an at-ease from 11:17 a. m. to 11:20 a. m.
11:20:24 AM
REPRESENTATIVE RAMRAS asked whether a 22.5 tax, as an entry
point to attract the retention of capital and new explorers, is
a more welcoming figure than a 25 percent tax rate.
11:21:14 AM
MR. PORTER answered that no change is always a more welcoming
environment than an increase in the tax. He opined that the
industry will decide what it can live with and where it will
spend its money. Therefore, keeping the existing tax holds
psychological and economic benefits that can not be overlooked.
By making no changes during this hearing process, the
legislature will send a signal to the industry that Alaska's tax
system is stable. Mr. Porter said that no change enhances the
stability factor slightly.
11:22:51 AM
REPRESENTATIVE RAMRAS reviewed Mr. Porter's support of a sound
tax policy to enhance oil and gas development and to maximize
revenue, not at the beginning or at the end, but somewhere in
the middle when the most premium is available. He said that Mr.
Porter recommended the imposition of the highest tax at the time
of highest oil prices, and that a savings component, on behalf
of the state, should be implemented. Representative Ramras said
that another factor of Mr. Porter's testimony is that the state
should not be punitive toward the industry when the times of low
oil prices return. Mr. Porter's prescription is to hold down
taxes to present stability and lower barriers to new
exploration; take the most in taxes at peak prices; and to save
the revenues for future use. In addition, operating
expenditures should be held in a positive light, and we should
not have an element of punishment against the industry when oil
prices are low. Furthermore, taxing too heavily during times of
low oil prices may be at the expense of jobs for Alaskans.
Representative Ramras concluded by saying that if heavy oil is
the last untapped legacy asset that the state has, those
barriers to entry should be as low as possible and a gross tax
is the single greatest dampening agent to continued production
from these legacy fields. He asked whether his summary of Mr.
Porter's testimony was correct.
11:27:50 AM
MR. PORTER concurred.
11:27:54 AM
CHAIR OLSON remarked:
Steve, one of our comrades down the hall has indicated
that he felt that the testimony from the ... two LB&A
consultants was going to be biased and should be
discounted ... because they were given direction by
LB&A on ... their conclusions. I wonder if you can
comment on that?
11:28:19 AM
MR. PORTER responded that he is very pleased by the terms under
which he was hired. The Legislative Budget & Audit committee
hired him to share his expertise with members of the
legislature; he was not given a mission or directed to lean his
testimony in a certain direction. He said that he felt his
responsibility as an advisor is to state what he knows to be
true. He stressed that LB&A did not have prior knowledge of
what his testimony would be and encouraged the committee to look
closely at his testimony and to test his figures for accuracy.
Mr. Porter said that this testimony is his personal opinion.
CHAIR OLSON expressed his appreciation for Mr. Porter's
testimony.
11:30:16 AM
REPRESENTATIVE SAMUELS confirmed that this was the first time he
has heard Mr. Porter's testimony. He spoke of a previous
situation and said that he wished to clear the air. He agreed
that as a member of the LB&A committee he is in a difficult
position; he must provide enough information, but not too much.
The LB&A Committee and Wood Mackenzie are in negotiations
regarding the public disclosure of its report, and he encouraged
his fellow members on the House Oil and Gas Special Committee to
sign the confidentiality statement and read the Wood Mackenzie
report.
11:33:01 AM
REPRESENTATIVE DOOGAN expressed his feeling that the review
process is based on variables and that there are no true
constants to consider. He observed that the oil industry
environment in Alaska began at zero barrels of oil produced per
day, passed through the production peak of about 2 billion
barrels per day, and continues today at about 720 million
barrels per day. During this time the price of oil has
fluctuated from the lowest price of about $8 per barrel to
today's cost of over $80 per barrel. In addition, during this
same span of time; a tanker hit a reef, a person shot a hole in
the pipeline; there was an emergency closure for unscheduled
maintenance on feeder lines; there was a change in the tax
system. He opined that the events taking place in the real
world create a pretty unstable environment. He questioned Mr.
Porter's advice that the committee will be able to draw a tax
law that works in a stable environment.
11:36:23 AM
MR. PORTER expressed his belief that Alaska is a very stable
environment. He opined that changes in the tax code are not a
major impact on the oil industry, with the exception of the
gross tax floor.
REPRESENTATIVE HOLMES asked whether the progressivity factor
should be based on a gross or a net profit system.
11:36:46 AM
MR. PORTER advised the committee that his preference is for the
net system in PPT. A gross system is designed and modeled with
straight lines that must be manipulated into a curve. For
progressivity, he and most other consultants prefer a net
system, although a gross component in the top range, as
suggested by Dr. Pedro van Meurs, would not be a cause for
concern.
11:37:58 AM
REPRESENTATIVE HOLMES asked about the preference for a
progressivity factor of $30 versus $40.
MR. PORTER pointed out that the only difference between starting
at $30 versus $40 is that the tax will be especially hard on the
production of oil that is more expensive to produce. The impact
will be felt more on operations that have lifting costs of
around $40. He stated that some of the heavy oil being produced
now has lifting costs greater than $40. His recommendation was
that the progressivity factor should stay at $40.
11:39:05 AM
REPRESENTATIVE DAHLSTROM praised Mr. Porter's testimony before
the committee and asked about his availability for the next few
days.
MR. PORTER said that he is available.
11:40:20 AM
REPRESENTATIVE SAMUELS asked about the ramifications of a tax
system with an earlier progressivity factor and a lower base tax
rate. He provided a scenario that could provide more of a share
for the state throughout price swings, although the cost to the
industry during periods of low oil prices would be higher.
MR. PORTER said:
... the question would be, if you cross ... the line
and went lower, on the, when prices were low, and
picked up more when prices were high, is that more ...
making the curve, I say, more extreme and giving them
more in the low-price environment. Is that a good
thing?
11:42:37 AM
REPRESENTATIVE SAMUELS clarified by saying that everything is
bad for all parties when oil is at a price of $25 per barrel.
MR. PORTER remarked:
I would have to model it, but my initial thought was,
because you are, it depends on your view of the world,
especially depends on your crossover point ... if the
crossover point is 60 and you are getting more from 60
to and 80 to 100, and their, their expected case is
65, then they don't care that they, you gave them a
lot of benefit at 22. ... I think what you should look
for is at each point or dot along the scale, trying to
find a fairness spot that makes sense. ... Tilting the
curve may not be as beneficial. ... The problem is how
you see the future.
11:43:37 AM
REPRESENTATIVE SAMUELS suggested that one proposal was that a
company could spend money, receive credits, and buy down its tax
rate to 20 percent; or a company that did not spend money on
investment in Alaska may see its tax rate go up to 25 percent.
He added that Dr. van Meurs advised that this concept put too
much emphasis on the credits and that could lead to huge
liabilities to the state. Representative Samuels asked for Mr.
Porter's opinion on this concept.
11:45:05 AM
MR. PORTER clarified how this concept would work and said that,
from an investment climate and exploration incentive standpoint,
this concept would result in more reserves. However, the
question remains about the balance between how much money the
oil industry spends against how much the state spends to get
those reserves. He said that he thinks the movement of state
revenue from the front end of production to the back end,
similar to what is happening in Alberta, Canada, is always an
economic benefit to the industry. Additionally, this is a more
complex system. His final comment on the bottom curve issue is
that a change on the bottom half of the curve, but not on the
top half, would provide a benefit to the oil and gas companies.
11:47:19 AM
CHAIR OLSON announced that the House Special Committee on Oil
and Gas meeting is recessed at 11:47 a. m. to be continued at
5:30 p. m.
11:47:40 AM
5:36:24 PM
CHAIR OLSON called the meeting back to order at 5:35 p.m.
Representatives Ramras, Doogan, Kawasaki, Dahlstrom, Neuman,
Samuels, and Olson were present at the call back to order.
Chair Olson announced that HB 2001 is on the agenda and that
public testimony is limited to five minutes per speaker.
MARK SHARP stated that he is speaking as a citizen of Alaska and
appreciates the time given to him to testify. He expressed his
anger at the development of the PPT and the fact that the
legislature ignored the testimony of citizens. He referred to
his previous testimony 18 months ago regarding the flaws in the
PPT, and pointed out the fact that it was written by the oil
industry. The net profits element of the PPT will lead to the
gross overstatement of expenses and understatement of profits by
the oil and gas industry. He said that previous testimony also
pointed out that the state has been outsmarted by the oil
industry. He added that the former attorney general was not
consulted before the passage of PPT. Mr. Sharp said that his
advice 18 months ago was to keep the [tax law] simple and to do
what is best for the state, not the industry. He said that
today we are dealing with the greediest industry of all and they
are not our buddies or teammates. He urged the committee not to
ask the industry what it thinks the tax rate should be. Mr.
Sharp stated that the 24th legislature was corrupt, and did not
set fiscal policy that would allow the state to get fair value
for its resources. He warned that the big three [oil companies]
will continue to manipulate and corrupt the process, and should
not set the ground rules for negotiation. He urged the
legislature to set the tax terms and force the industry to
adhere. Mr. Sharp said that the industry only wants to extract
the resources and get away as cheaply as possible, as evidenced
by ExxonMobil Corporation's refusal to pay damages from 20 years
ago. Regarding ACES, he said that he likes the sharing of
information; however, the gross tax starts at four. He noted
that there is no wealth "trickling down" on him and suggested
that the oil industry testimony, rather than public testimony,
should be scheduled at an inconvenient time.
5:43:57 PM
REPRESENTATIVE RAMRAS clarified his statement regarding the
permanent fund. He explained that all Alaskans who receive a
Permanent Fund Dividend (PFD) are ExxonMobil Corporation
shareholders.
5:45:13 PM
JERRY WALKER informed the committee that he is representing
himself. Mr. Walker has been in Fairbanks for 18 years. His
perspective is based on his experience in nonprofit community
service organizations, education, retail business, and the oil
and gas industry. He expressed his concern about Alaska's
ability to maintain and grow positive communities in which to
live, work, and compete in a global marketplace. He said that
he is a board member of the Alliance Support Industry [sic] and
everyone he knows is dependant upon an environment that invites
and supports business and the nonprofit sector. Mr. Walker
urged the committee to remember its role to recognize the value
of fiscal stability and encouraged members to not change the
rules. He stressed the importance of a consistent effort to
maintain an investment climate that promotes jobs and paychecks.
He also encouraged members to make no changes in the PPT and to
allow it to work.
5:46:51 PM
REPRESENTATIVE RAMRAS disclosed his conflict of interest with
Mr. Walker.
5:47:17 PM
CHUCK LOGSDON, Consultant, Alaska Oil and Gas Association
(AOGA), [Testimony garbled.]
The committee took an at-ease from 5:48 p. m. to 5:50 p. m. due
to technical problems.
5:51:33 PM
REPRESENTATIVE SAMUELS suggested that Mr. Logsdon call in on an
outside line.
5:51:40 PM
CHAIR OLSON asked whether Mr. Logsdon could hear.
5:52:55 PM
The committee took brief at-ease from 5:52 p.m. to 5:53 p.m. due
to technical problems.
5:53:58 PM
CHAIR OLSON called the meeting back to order at 5:53 p. m.
JERRY DIXON informed the committee that he is representing
himself. Mr. Dixon said that he has been an Alaska resident for
40 years, working as a smokejumper and a teacher. He spoke of
the losses of the gifted program and 70 percent of the staff at
the high school in Seward. He said that he wants to see an
increase in the oil tax. He expressed his concern about his
colleagues leaving the area due to cuts in education. He stated
that there are 44 schools for over 26,000 square miles and
schools are funded as if everyone lived in Soldotna. Mr. Dixon
said that he appreciated the good work of the legislators and
re-stated his desire to see the oil tax increased.
5:56:12 PM
REPRESENTATIVE NEUMAN asked whether Mr. Dixon wanted the tax
rate increased to provide funds for education in the Kenai
Peninsula.
5:56:38 PM
MR. DIXON explained that, firstly, he would like to see a tax
rate increase in general. The second issue is that his school
district includes four schools that are not on the road system,
yet, it is funded as if everyone lived in the same city.
5:57:10 PM
REPRESENTATIVE NEWMAN suggested that Mr. Dixon talk with his
legislators about more funding for schools.
5:57:34 PM
MR. DIXON restated his concern that, in his community, schools
are hurting and professionals are leaving their jobs and moving
away.
5:57:59 PM
DURAINEY RAWLS, Owner, Durainey's Crane Service, informed the
committee that her company is a support service for the oil and
gas industry. Ms. Rawls stated that sales have been steadily
declining and, with the indefinite closure of the Agrium Inc.
plant and the winter closure of the BP gas to liquids plant, her
business is further negatively affected. She said that her
staff has been reduced by half and that if she had to face
constant tax increases, similar to those that are faced by the
oil and gas industry, she would have to reconsider staying in
business in Alaska. Additionally, her cost of business is going
up due to inflation. Ms. Rawls questioned the amount of money
that is needed in the general fund to be thrown away. She
emphasized that her business is totally dependent on the oil and
gas industry, and thanked the committee for the opportunity to
speak.
6:00:28 PM
CHAIR OLSON announced that Representative Mike Chenault is
listening to this testimony.
6:00:50 PM
ERIC PEIRCE stated that he is representing himself and asked the
chair to identify the committee members that are present.
6:01:22 PM
CHAIR OLSON said Representatives Doogan, Dahlstrom, Samuels,
Neuman, Ramras, Kawasaki, and Olson are present.
6:01:25 PM
MR. PEIRCE said that he is pleased the governor has called a
special session to address the oil tax. He noted that the
Alaska constitution requires that oil and gas must be sold for
the maximum benefit to the people of Alaska. He expressed his
frustration that his testimony against the PPT last year was
lost due to the corruption of legislators who had already sold
their votes. In addition, he said that it was hard to observe
legislators voting against HB 485, the bill introduced last
session that would have allowed DOR to hire tax auditors that
are needed to administer a very complicated tax scheme. For
perspective, Mr. Peirce asked the committee to consider that, at
current oil prices, oil production represents $23.5 billion
worth of finite resources that are leaving Alaska annually. On
a per capita ownership basis, that represents $35,670 for each
Alaskan. He wondered what Alaskans are getting for that money,
and observed that, in Fairbanks, he is paying high property
taxes due to inadequate municipal revenue sharing, paying
exorbitant prices for heating oil, and driving on a
deteriorating infrastructure. Mr. Peirce stated that it is
very clear that the state is not receiving a reasonable return
from the sale of oil. He urged that the committee produce data
to support the argument that a net tax scheme is more beneficial
to the state and future development than a gross system with
simple price indicators and capital credit. He questioned
whether the data from the industry is solid enough for an
accurate comparison. He recalled that Trans-Alaska Pipeline
System (TAPS) tariffs increased after the passage of PPT. Mr.
Peirce also questioned the sense of giving away production taxes
before correcting the disincentive for independent oil companies
to develop fields on the North Slope. Mr. Peirce asked to hear
the debate on how Alaska will diversify its economy and develop
new jobs when it stops giving away billions of dollars by under-
taxing oil. He concluded by saying that no one stands up for
Alaska against oil companies that falsely claim that allowing
billions of dollars to leave Alaska is somehow good for Alaska's
economy. Mr. Peirce thanked the members for their time.
6:05:10 PM
CHAIR OLSON requested that witnesses submit written testimony if
available.
6:05:20 PM
REPRESENTATIVE RAMRAS said that he appreciated Mr. Peirce's
point of view; however, he said that he voted against HB 45 and
the speaker call his office to talk about a net profits tax with
credits versus a gross profits tax.
6:06:35 PM
REPRESENTATIVE NEUMAN added that a majority of legislators
present voted for an increase in benefits and salary for state
employees. He recalled testimony from DOR about a gross tax
versus a net tax policy and the administration's conclusion that
a net tax profits tax works better in Alaska. Representative
Neuman agreed with the speaker about the importance of the
diversification of the state's economy.
6:07:55 PM
MR. LOGSDON informed the committee that PPT is performing as it
was intended in two ways; Alaska is capturing more revenue than
it would have under ELF, and capital investment remains strong.
In fact, the eighteen exploratory wells drilled on the North
Slope recently were the most new wells drilled in this decade.
He said that the changes contemplated in PPT are designed to
increase revenue by increasing the size of the tax base and by
lowering the threshold that triggers the tax on gross. The base
tax and progressive charge are also increased. He opined that
these changes will not do anything to encourage exploration. In
addition, the ring fencing of the legacy fields will increase
the administrative complexity of PPT, especially the separate
treatment of leases and properties. Mr. Logsdon described the
raising of the minimum tax on heavy oil to ten percent on gross
as bizarre. These large reserves will be significantly more
expensive to produce and economists have recommended that a
floor tax must remain very low. Finally, ring fencing of legacy
fields also results in a reduction in incentives to the
reinvestment of profits. Mr. Logsdon said that one out of three
jobs in Alaska are directly or indirectly tied to oil production
and a fiscal system must always recognize the trade-off between
money for state spending and the profits the oil and gas
industry needs to continue the production of oil. He opined
that changes in the PPT are premature, especially changes that
limit incentives to exploration.
6:12:24 PM
REPRESENTATIVE DOOGAN asked Mr. Logsdon what organization
employs him as a consultant.
6:12:50 PM
MR. LOGSDON answered that he works for the Alaska Oil and Gas
Association (AOGA).
6:13:02 PM
REPRESENTATIVE DAHLSTROM asked Mr. Logsdon whether he was
testifying as a private citizen or representing AOGA.
6:13:14 PM
MR. LOGSDON replied that he was testifying on behalf of both.
6:13:26 PM
TOM LAKOSH stated that he is affiliated with all of the citizens
of Alaska and asked the committee to refer to his written
testimony.
6:14:25 PM
CHAIR OLSON informed Mr. Lakosh that the committee did not have
his written testimony, but that it would be distributed upon
receipt.
6:15:12 PM
MR. LAKOSH told the committee that the net tax system being
proposed is all wrong. He informed the committee that an
example of how hydrocarbons get developed in Alaska is the
revocation of the Point Thompson leases. The Department of
Natural Resources (DNR) and the Alaska Oil and Gas Conservation
Commission (AOGCC) have the power to tell the lessees which
hydrocarbons to produce, and in what quantities, in order to
meet the terms of the leases. Mr. Lakosh said that he thought
that, if the committee is trying to provide incentives, maximize
production, and collect windfall profits, the best way is not
through taxes but to give DNR and AOGCC the authority and tools
to manage leases and to get optimal production rates. His
proposal, instead of multiple tax schemes, is to have adjustable
royalty rates and that the agencies set rates appropriately for
each type of hydrocarbon. Mr. Lakosh suggested a variable lease
rate that gets periodically updated every five years. The lease
rate may be set at a floor of between one and nineteen percent
and DNR would be allowed, by statute, to set appropriate lease
rates for each type of hydrocarbon and for its accessibility to
the infrastructure. In that way, incentives would be provided
for specific fields using a laser-like approach instead of the
shotgun approach of net taxes. The biggest complaint from the
oil industry is about the difficulty of getting to the lease
areas. He encouraged the state to take money from the royalties
and taxes to develop the infrastructure by providing heavy-lift
helicopters and improvements to ports and rail connections. Mr.
Lakosh urged the committee to increase taxes first through
corporation income taxes and to create a distinct class of
corporation taxes for companies that include operations to
handle substantial quantities of hydrocarbons and hazardous
materials. He concluded by suggesting that the committee should
look to Norway and other comparable nations and determine a tax
rate relative to a specific price for oil.
6:20:39 PM
TOM MALONEY informed the committee that he was representing
himself and appreciated the time given to speak. He said that
his background is in accounting and finance and that he is a
Certified Public Accountant, a Certified Management Accountant,
and a Certified Financial Planner with 30 years of experience in
Alaska. He referred to discussion about the taxation levels of
the legacy oil fields, and he pointed out that funding of
capital costs for the North Slope infrastructure and the Trans-
Alaska Pipeline System was 100 percent by private companies.
The risks were also borne by the private investor. Mr. Maloney
recalled that there have been fields developed that were
uneconomical, such as, Badami Oil Field, and the Northstar Unit,
which was developed when oil prices were at less than ten
dollars per barrel. Owners took on the full cost and risk of
these developments, even when risks were high. He noted that,
currently in the legacy fields, production has begun a dramatic
decrease that will only be stemmed by new wells producing both
light and heavy oil. Mr. Maloney expressed his belief that
additional investment tax incentives related to heavy oil are
required. The initial development of heavy oil will cost much
more in capital and operating expenses and production volumes
per well will be less. Everything possible must be done to
encourage investment and production volumes as the state can not
control the price of oil or natural gas. He asked members to
pass a reasonable and understandable tax system to encourage
billions of dollars in investment over the next ten years. He
reminded the committee that producers have not been getting a
free ride. In fact, producers have paid over $50 billion in
investments in Alaska and about $80 billion in state income tax.
He opined that PPT encourages new investment in existing and new
fields, but heavy oil tax credits are needed to offset the high
costs of research and development. He concluded by saying that
his son is interested in working in the technical trades in the
near future.
6:25:30 PM
REPRESENTATIVE DOOGAN thanked Mr. Maloney for his testimony and
asked for an estimate of industry profits during the period that
the producer companies paid $80 billion in state income taxes.
6:26:04 PM
MR. MALONEY answered that recent public disclosures indicated
that state take and industry profits were in a similar range of
numbers. He added that some companies did not release financial
figures for Alaska.
6:26:22 PM
REPRESENTATIVE DOOGAN agreed that some companies will not reveal
what their profits are.
6:26:43 PM
JERRY MCCUTCHEON informed the committee that 30 years ago he
initiated a Congressional hearing before the Senate Energy
Committee. ExxonMobil Corporation represented the oil industry
and stated that Prudhoe Bay would produce nine billion barrels
of oil with or without a gas line. Mr. McCutcheon said that he
predicted that production would be 15 billion barrels of oil
without a gas line. The situation has not changed as oil and
gas producers continue oil production in Prudhoe Bay and will
for 30 more years. Mr. McCutcheon reviewed his previous
testimony and said that the proposed taxes are far too low. He
referred to a memo to [former] Governor Murkowski from Dr. Pedro
van Meurs that said state take should be higher. He stated that
this memo was held from legislature. In addition, Mr.
McCutcheon said that Dr. van Meurs testified that, under PPT and
ACES, the percentage of state take will decline with the price
of oil. He expressed his belief that the state's take should
increase with the increasing price of oil. Mr. McCutcheon
relayed that Dr. van Meurs testified that government take from
75 percent to 85 percent is usual and customary. Mr. McCutcheon
advised the committee that the gross take on Alaska's oil should
approach 90 percent and encouraged the committee to look at
willing bids made when the price of oil was $18 per barrel. He
opined that it may be in Alaska's best interest for the long
term for some oil companies to leave. However, Mr. McCutcheon
stated that the grand jury and the FBI may address the mechanics
of past legislation and this legislature should adopt a clean
tax on the gross pending investigations, then add tax credits if
it is necessary.
6:31:19 PM
ERIC DOMPELING, President, Alaska Support Industry Alliance
(Alliance), told the committee that he is employed as a
technical representative and is testifying as president of the
Alliance, a trade organization representing companies and
individuals who provide goods and services to Alaska's oil, gas
and mining industries. Mr. Dompeling said the Alliance's 400
member companies and their 35,000 employees keep the oil
industry working. These companies and workers, who's jobs
depend on oil industry investment, are deeply concerned about
costs and changes in fiscal policy that put these investments at
risk. He advised the committee that PPT has not had time to
work, and there is no compelling evidence that it is broken.
Regulations for implementation of PPT, or subsequent audits,
have not been completed. Mr. Dompeling said that it is unknown
whether the tax rate should be 22.5 percent, 20 percent, 15
percent, or 25 percent to find the right balance for state
share. However, tax dollars are dollars that will not be
reinvested in Alaska to generate business opportunities for
Alliance members and good paying jobs in the private sector for
Alaska. Another debate about the tax rate will not encourage
new oil production or the construction of a gas pipeline unless
all parties begin to work together. He encouraged the committee
to discuss how to work together to promote investments and
ensure the state's fair share of long term jobs and business
opportunities. Mr. Dompeling pointed out that the PPT was
passed with provisions for a complete review in five years,
primarily so all parties could come to understand the system.
He urged the committee to make the PPT work by hiring more
auditors, but to reject fundamental changes that will increase
taxes and costs, jeopardize the economics of critical long-term
investments, and put production, Alaska jobs, and business
opportunities at risk.
6:35:02 PM
MARY SHIELDS, General Manager, Northwest Technical Services,
informed the committee that her company provides technical
support to a variety of businesses including the oil industry.
She expressed her concern about the bill's impacts on the future
employment of her company's 100 employees and other Alaskan
workers. She recalled that the legislative body spent
considerable time in debate prior to passage of PPT. Although
passage was not unanimous, a decision was reached with the
provision that the tax system will be reviewed in 2011. Ms.
Shields asked the committee to make no changes prior to
promulgation of the regulations and audits of the first returns.
She said that she is in favor of the state hiring additional
auditors to review the returns. Ms. Shields concluded by saying
that oil industry investment dollars create jobs for not just
Northwest Tech employees, but for all. She asked the committee
to please deliberate on jobs, community development, and the
quality of life for all Alaskans.
6:38:09 PM
DENETTE JUSTICE ROMANO informed the committee that she is
representing herself as an Alaska resident since 1986. She said
that she is a financial advisor with Wachovia Securities and
understands the meaning of investment and taxes. Ms. Romano
told the committee that there is a simple fact that higher taxes
on corporations and individuals means a decrease in spending and
investment. She asked how many times the PPT tax rate will be
raised to cover increases in government spending. Higher
spending by government is a cycle that affects the local economy
and each household. She asked members to consider how a large
tax increase would affect them personally. Ms. Romano expressed
her belief that the PPT tax rate should be left unchanged for
five years until there is sufficient data for analysis.
6:41:01 PM
MARK HYLEN stated that he is representing himself. Mr. Hylen
said that he is a lifelong Alaskan and that his wife and he own
and operate a business called Beacon Occupational Health and
Safety Services. His business provides medical safety and
training services to companies that service remote industries,
as well as federal, state, and municipal governments. His
clientele includes support services to the oil industry. Mr.
Hylen recalled the time when the price of oil was $8 per barrel,
and stated that the slope seems to be busier today than ever.
Whether this additional business is due to incentives within PPT
or due to high oil prices, Alaskans are working and the economy
has benefited. He urged the committee to be cautious when
considering increasing taxes on the industry as the economy is
sensitive to reductions in federal projects, the slowdown of
development by court decisions, and less development on the
North Slope. He observed that, although the general public is
questioning the 22.5 percent tax, since the passage of PPT, the
industry has thrived. He warned the committee that increasing
taxes is playing with fire. Mr. Hylen encouraged the committee
to not raise a tax that has only been in effect for one year.
6:43:27 PM
BOB BARNDT informed the committee that he is representing
himself. He recalled that in 1983, when he held is first job on
the North Slope, there was a lot of new production, exploration,
and excitement. In the last two to three years new companies
have come to Alaska that want to explore for new development.
He warned that they may look elsewhere if tax rates change every
year and business in Alaska becomes risky. Mr. Barndt urged the
committee not to change PPT. He said that other industries,
like mining and logging, will be looking at the risk of doing
business in Alaska.
6:45:46 PM
BILL WARREN informed the committee that he is representing
himself, is a retired member of Local 367 and a 55 year resident
of Alaska. He expressed his concern for the state's prosperity.
Mr. Warren said that the legislators need to raise taxes by a
gross tax on the legacy fields to incentivize the heavy oils
with the profit tax. He reported that Agrium, Inc., closed its
plant due to the lack of exploration and the shortage of gas.
He stressed that a gas infrastructure is needed in order to
preserve Alaska's industrial base and fill the pipeline. A
diversification of the energy grid away from gas and oil is the
way to look ahead. In addition, he told the committee that he
was disappointed to see the parade of oil producers and advisors
repeating their previous testimony. Mr. Warren opined that gas
will continue to support the state; however, the monopoly of the
big three producers will not build the gas pipeline. He spoke
of the recent attempts to encourage exploration and development
in Cook Inlet. He then advised that the legislators were
elected to find a solution and that the state should act like a
sovereign and take charge of the future development of the
billions of dollars of the state's resources. Mr. Warren
concluded by expressing his appreciation for the committee's
work.
6:49:27 PM
CHAIR OLSON relayed that business may be picking up.
6:49:40 PM
MR. WARREN added that the state has had years to work on this
problem, yet people are still losing jobs. He said that
ConocoPhillips Alaska, Inc. has the ability to come to Cook
Inlet and action is needed.
6:50:28 PM
DONALD A. BENSON informed the committee that he is representing
himself. Mr. Benson expressed his agreement with the testimony
of Bill Warren. He said that he is a 55 year life-long resident
of Palmer, and that he wants the tax re-examined for two
reasons; to restore public trust and to bring Alaska its fair
share for the future. He relayed that a public opinion poll
indicated that 72 percent of the respondents in Anchorage
believe that the state does not get its fair share of the oil
profits. Mr. Benson opined that there is a mistrust of the
current tax system and all parties need to work together to
remove the cloud over the legislature's good name. He
encouraged the committee to revisit the PPT and listen to the
public testimony to determine what is best for Alaska, not for
private interest and concerns. Mr. Benson concluded by saying
that ACES will ensure tax write-offs for investments and
additional taxes if investments are not made. He encouraged the
committee to follow the will of the Alaskan people and support a
tax that is fair for everyone and that uses the same
mathematical numbers.
6:53:34 PM
CHAIR OLSON asked for testimony from visitors in the gallery.
6:54:10 PM
JIM GILBERT, President, Udelhoven Oilfield System Services Inc.,
informed the committee that his company is an oil field service
contractor working with the oil producers and with the operators
of TAPS. He stated that higher taxes result in less work for
his 508 employees. Mr. Gilbert recalled that a major oil
company representative testified that the tax is already too
high and he agrees with that testimony. He opined that bigger
government is not needed, but good jobs are. Mr. Gilbert
recalled receiving a recent order for six highly paid workers
needed for a project lasting two to two and one-half years.
That project is now cancelled and he noted that businesses in
the state are already feeling the effects of higher taxes. He
asked the committee to consider the jobs that are needed today.
6:56:08 PM
REPRESENTATIVE NEUMAN asked Mr. Gilbert to explain the changes
in expenditures at Prudhoe Bay during the last year.
6:56:57 PM
MR. GILBERT answered that the oil fields there are mature. He
opined that the recent increase in capital costs is due to the
repair and inspection of the neglected and aging infrastructure.
In response to a question, he added that the PPT is paying more
than ELF and it has only been in effect for 14 months.
6:58:01 PM
REPRESENTATIVE RAMRAS asked Mr. Gilbert to explain the
competitive bid procedure. He observed that winning bidders
want to know details about the second place bid in order to
determine "what was left on the table". Representative Ramras
said that this insight will be helpful when the committee
considers modifications to PPT.
6:59:44 PM
MR. GILBERT recalled that, last year, the producer companies
expressed their preference for a tax in the 15 percent to 18
percent range; nevertheless, the present work continues at the
22.5 percent level. However, convening the special session to
reconsider the tax rate has created an image of instability. He
opined that the companies are probably willing to continue to
produce oil, but they will not reinvest as the tax rate climbs.
Mr. Gilbert said that Alaska businesses will realize that the
oil companies are not investing two years before the legislature
and administration does.
7:02:24 PM
REPRESENTATIVE NEWMAN repeated earlier testimony from an
industry spokesman about stability. He said that the industry
accepts the tax change from ELF and the review of the PPT, but
not an increase in the tax rate now. He asked whether an
increase will be seen as a positive or a negative signal to the
industry.
7:04:18 PM
MR. GILBERT answered that it will be a negative signal. The
producer companies view a change in PPT, after only 14 months,
as something that happens in third world countries. He added
that the corruption of the legislators involved few people and a
small amount of money.
7:06:00 PM
TOM DORAN said that he is representing himself. He testified
that he is in favor of ACES and described the bill as not a tax,
but a price for the sale of Alaska's product for development.
Mr. Doran recommended that the tax rate be 24 percent,
especially as Alaska is a stable political environment. For the
first time, there are independent explorers interested in Alaska
and who support the PPT. In addition, they have a vertical
integrated interest and own, develop, transport, and market the
resource. He opined that the state should have a higher tax
rate, not because there were corrupt politicians, but because
oil is a nonrenewable resource. Mr. Doran told the committee
that Alaska's constitution mandates that the resource must be
sold for the maximum benefit to Alaskans, in addition to
supporting the creation of jobs and the economy. He pointed out
that Barron's magazine expects the price of oil to go to $100
per barrel. Mr. Doran informed the committee that he has heard
a lot of testimony about the PPT and he also knows that the
Seward and Kenai schools need more money in their budgets.
7:11:13 PM
TONY TENGS stated that he is representing himself, that he is
also a small businessman, and that he works for the Alaska
Marine Highway System. He opined that personal testimony from
some citizens may really be representing the oil industry. In
addition, advertising on radio and television by the oil
companies is similar to a political campaign, without equal
representation from the other side. He asked the committee to
consider that the public is being influenced from this
advertising. Mr. Tengs disagreed with previous testimony that
money paid for taxes is diverted from exploration. He informed
the committee that the Chief Executive Officer of ConocoPhillips
Alaska, Inc., was paid $31 million in 2005. He urged the
committee to remember that this money is untaxed and was not
spent on exploration. Mr. Tengs observed that other industries,
for example, commercial airlines, survive on a two percent
profit margin. He stressed that taxes assessed to the oil
industry are really a fee paid for materials received and serve
to lower local taxes and fund projects like roads, harbors, and
bridges. He encouraged the committee to consider the amount of
Norway's permanent fund, which is larger than Alaska's even
though Norway is a smaller resource area. He urged the
committee to keep the tax simple by adopting a gross tax with a
credit for development costs. Mr. Tengs expressed his support
of the legislative review of the PPT.
7:18:35 PM
[HB 2001 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 7:18
p. m.
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