Legislature(2007 - 2008)HOUSE FINANCE 519
10/26/2007 10:00 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 26, 2007
10:11 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 Andrea Doll
Representative Bryce Edgmon
Representative Anna Fairclough
Representative Les Gara
Representative David Guttenberg
Representative Lindsey Holmes
Representative Mike Kelly
Representative Bob Roses
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
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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
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10/25/07 (H) O&G AT 10:00 AM HOUSE FINANCE 519
10/25/07 (H) Heard & Held
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10/26/07 (H) O&G AT 10:00 AM HOUSE FINANCE 519
WITNESS REGISTER
MARCIA DAVIS, Deputy Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: During the hearing on HB 2001, assisted in
the slide presentation presented telephonically by Robert Mintz,
and responded to questions.
ROBERT E. MINTZ, Attorney at Law
Kirkpatrick & Lockhart Preston Gates Ellis LLP (K & L Gates)
Anchorage, Alaska
POSITION STATEMENT: During hearings on HB 2001 presented a
topical analysis of the Alaska's Clear and Equitable Share
(ACES) bill.
JERRY BURNETT, Director
Administrative Services Division
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: During the DOR presentation of Alaska's
Clear and Equitable Share (ACES), responded to questions.
ACTION NARRATIVE
CHAIR KURT OLSON called the House Special Committee on Oil and
Gas meeting to order at 10:11:16 AM. Representatives Olson,
Neuman, Samuels, Ramras, Doogan, Kawasaki, and Dahlstrom were
present at the call to order. Representatives Doll, Edgmon,
Fairclough, Gara, Guttenberg, Holmes, Kelly, Roses, and Wilson
were also present.
HB2001-OIL & GAS TAX AMENDMENTS
10:12:15 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."
10:12:17 AM
MARCIA DAVIS, Deputy Commissioner, Department of Revenue (DOR),
introduced Mr. Robert Mintz, who will present a topical analysis
of the Alaska's Clear and Equitable Share (ACES) bill.
10:12:56 AM
ROBERT E. MINTZ, Attorney at Law, Kirkpatrick & Lockhart Preston
Gates Ellis LLP (K & L Gates), began with slide 2 "A Few
Background Basics," to ascertain that "we're all on the same
page." The slide bullets that Alaska's oil and gas production
tax (PPT) resides in AS 43.55; is in addition to other taxes
imposed, which include royalty, property, and income taxes; this
tax has existed since statehood; in general it applies a
percentage tax rate to the value of oil and gas produced; and
unlike royalties, it applies to production from private and
onshore federal leases as well as state leases. On slide 3, he
presented that the PPT legislation, HB 3001 enacted in 2006,
allowed for certain core elements: AS 43.55.011(e)-(i) requires
a tax to be levied on the value of oil and gas produced in the
state; AS 43.55.160 describes the calculation of the taxable
value of oil and gas - also referred to as the net value, which
is the base to which the tax rate applies; AS 43.55.165 & .170
addresses the topic of deductible upstream costs to be
considered in calculating the taxable value of oil and gas -
exploration, development and additional lease expenditures are
included. Continuing on slide 4, AS 43.55.023 & .024 name the
2006, newly enacted tax credits; AS 43.55.020(a) addresses the
tax payment provisions for monthly estimated tax payments and
final payment on March 31 of the year following production -
enacted because it became an annual vs. monthly tax; and AS
43.55.030(a) requires the one annual return, again because it
became an annual tax. He opined that slide 5, bullets the most
fundamental part of the PPT law with AS 43.55.011(e) stipulating
the levy on the producer of 22.5 percent of the production tax
value of the taxable oil and gas as calculated under AS
43.55.160, and note, he said, that the production tax value is a
net value. There are exceptions to the general principle of
22.5 percent of the net value. Listed on slide 6, the
exceptions are the state or federal share of production;
landowner's royalty share - which is subject to a different tax
provision; Cook Inlet production subject to ceilings based on
the pre-existing Economic Limit Factor (ELF) base taxes.
Responding to a question from the committee chair, he emphasized
that Cook Inlet, other than a conforming change, was "basically
... left alone." The final exception, he continued, is the
North Slope production subject to a minimum tax depending on
price of Alaska North Slope (ANS) [products].
10:21:11 AM
REPRESENTATIVE DOOGAN asked if this means all North Slope
production.
MR. MINTZ responded, "Yes," under current law.
10:21:25 AM
MR. MINTZ directed attention to slide 7 and explained the
progressivity component. In addition to the 22.5 percent base
rate, for each month when the net value of a producer's oil and
gas exceeds $40 per barrel, the tax rate is increased by one-
quarter of a percentage point for each dollar per barrel over
the $40. Gas and oil is added together, in this equation, by
treating 6 million Btu (British thermal unit) of gas as
equivalent to one barrel of oil.
10:22:12 AM
MS. DAVIS emphasized that under both current law and ACES, the
net value of $40 a barrel represents the value at the point of
production, after netting the operating and capital expenses,
but before consideration of capital credits. This provides the
point of comparison number to ascertain if there are any dollars
that fall above $40, or, in the ACES model, above $30.
10:22:58 AM
MR. MINTZ directed attention to slide 8, to indicate how [HB
2001] would change the current law. New sub sections (g) and
(h) are added to AS 43.55.011, to determine the tax rate. Bill
sections 17 and 18 raise the tax rate to 25 percent plus the
progressivity tax. The progressivity tax rate becomes one-fifth
of a percentage point for each dollar per barrel over $30 net
value and it is calculated on an annual, not monthly, basis.
Because the tax is calculated annually, rather than monthly,
it's easier to calculate, and performs differently due to the
trigger point being lowered to $30 a barrel as well as the
change to one-fifth of a percentage point.
10:24:36 AM
REPRESENTATIVE SAMUELS asked, regarding the progressivity tax,
"you're averaging the month, you're not just going to collect at
the end of the year every individual month."
MS. DAVIS responded that the average is averaged over the year,
not by individual months.
REPRESENTATIVE SAMUELS stated his disagreement with this
approach, and asked if it would be helpful to minimize the
accounting burden on the administration by establishing an
annual calculation/payment system. He stressed the importance
of calculating the months individually vs. the yearly average.
This captures monthly spikes in price fluctuations, which he
opined was the point of establishing the progressivity section.
MS. DAVIS cited ease of administration in performing a one time
calculation vs. a per month average throughout the year. This
keeps the administrative burden down. The economic effects are
different than what is proposed.
REPRESENTATIVE SAMUELS asked the deputy commissioner to provide
the committee with a comparison figure of the two different
methods of calculation. Specifically what will be lost in
administrative costs; and what is given up in the time-value of
money.
10:27:04 AM
REPRESENTATIVE HOLMES asked what was the administration's
rationale for an annual, rather than a monthly, calculation.
MS. DAVIS responded that it was an effort to strike a balance
point with the producers, as well as easing the administrative
burden.
10:27:56 AM
REPRESENTATIVE DOOGAN requested a simplistic checklist of the
takeaways and givebacks represented in the bill.
MS. DAVIS said that could be accomplished, utilizing certain
assumptions.
10:28:59 AM
REPRESENTATIVE NEUMAN inquired what was analyzed to start
progressivity at $30, what were the considerations, and what
deductions were scrutinized, to arrive at this figure.
MS. DAVIS reviewed the process and calculations considered in
changing the existing system. The involved exercise included:
testing calculations based off of a number at wellhead value;
values without impact on the fields were tested through a range
of trigger prices; curves were calibrated utilizing net present
value structure; calibrations were run on new development; and
review of existing North Slope investment structures were
compared to standings in the global environment.
REPRESENTATIVE NEUMAN inquired about the percentages that were
used, and was 25 percent the primary number.
MS. DAVIS answered that a range of calculations were used
ranging from the 22.5 percent to 30 percent. "We tried to hit
the wall, in a lot of different areas," she said, "And then once
we figured out where the numbers hit walls, we then had to step
back and ask ourselves the political salability." The goal was
to test the existing elements of the PPT, pushing them out step
wise, and thus avoid shocking the system with an extreme move in
one direction, and fine tuning in others.
REPRESENTATIVE NEUMAN surmised that the wall was reached at 25
percent.
MS. DAVIS clarified that it fell solidly in the middle of a safe
zone. To the committee member's further query, she said it is
not a percentage, but established from a number that hit the
wall and then "coming back half-way."
10:33:58 AM
REPRESENTATIVE DOOGAN asked, "If there was a political
calculation involved in this did you model it?"
MS. DAVIS said that has not come up.
10:34:24 AM
MR. MINTZ continued with slide 10 to provide section 16. The
new AS 43.55.011(f) applies a tax floor to legacy fields. The
minimum tax is 10 percent of gross value at the point of
production of oil and gas from a unit or non unitized reservoir
that (1) has produced a cumulative total of 1 billion barrels;
and (2) is producing over 100,000 barrels a day based on an
average during the most recent calendar year.
10:35:33 AM
REPRESENTATIVE SAMUELS observed that this would only apply to
Prudhoe Bay and Kuparuk.
MS. DAVIS replied, "Yes." To a follow-up question she said
Alpine falls well short of this production.
10:36:02 AM
MR. MINTZ restated that the minimum tax is 10 percent of the
gross value at the point of production, to stress that this
concept has long been in the PPT and remains unchanged. Slide
11, he said, focuses on Cook Inlet. The tax ceilings have not
changed but conforming amendments include language relating to
how lease expenditures are addressed.
10:37:29 AM
REPRESENTATIVE SAMUELS recalled that during last year's hearings
a ceiling of 50 percent for progressivity was discussed and he
asked if that ceiling has made the final version of the bill.
MR. MINTZ replied, "Yes." It is the ceiling on the total tax
rate; 50 percent. It is the same as under current law; Section
17(g).
REPRESENTATIVE SAMUELS clarified that there is not a change
pending in the current bill.
MR. MINTZ answered, "No."
REPRESENTATIVE SAMUELS pointed out that in current law the tax
cap is at 50 percent.
MS. DAVIS interjected that in the existing PPT it is worded as a
25 percent tax cap, but the calculations equivocate it to the 50
percent allowed.
MR. MINTZ called attention to current law .011(g), and said it
provides a cap on the progressivity component of 25 percent.
Add that to the base rate of 22.5 and the sum totals 47.5
percent.
10:39:38 AM
MR. MINTZ continued with slide 12, stating that 43.55.160
(sections 52-55) have retained the basic principles: taxable
value equals gross value at the point of production minus lease
expenditures. The wording has been changed for clarity and
conforming purposes to (1) monthly values are no longer needed
as progressivity is now calculated annually.
10:40:52 AM
REPRESENTATIVE SAMUELS referred to the tax cap, and asked, "What
will be the current price of oil when we hit that cap ... the 50
percent?"
MS. DAVIS offered to provide that information to the committee.
10:41:51 AM
REPRESENTATIVE DOOGAN referred to the wording change that states
monthly values are no longer needed, and asked, "Do we have any
idea what the value of that giveback is?"
MS. DAVIS answered that the calculation for 2009 was $25
million.
10:42:18 AM
MR. MINTZ continued with slide 13, and said that the language
changes in section .160 are to make the law clearer and more
specific on when a producer may or may not use lease
expenditures incurred in one location as deductions for oil and
gas produced at another location. The original PPT concept
allowed a producer to tally their statewide gross value of
production, subtract the tally of their statewide lease
expenditures, and simply subtract one from the other to arrive
at the single taxable value. Eventually distinctions were made
by the legislature, which gave rise to the Cook Inlet tax
ceilings, the North Slope tax floor, and special credits for
small producers outside of Cook Inlet and the North Slope.
10:43:43 AM
REPRESENTATIVE NEUMAN observed that the bill sections are being
taken in groups and not necessarily in order.
MS. DAVIS explained that the sections are being presented based
on the topic as opposed to moving directly through the bill
sections.
10:45:37 AM
MR. MINTZ continued to describe how the segregation of tax
treatments, and values, evolved for the different areas of the
state. Over time, some of the values have been addressed via
departmental regulation, but it is recommended that the basic
tax structure be addressed in statute. Therefore it is
necessary to embed the various aspects into the different
sections of the bill. The examples on slide 14 give "for
instance" possibilities of how the tax floor deductions and the
tax ceiling deductions, of sections 54 and 55, could be
manipulated and cause "double-dipping. The rules set out in the
bill help to prevent these scenarios. Further, the new text in
.160, which addresses Cook Inlet as previously mentioned on
slide 11, ensures consistent operation and prevents double-
dipping.
MS. DAVIS relayed that this language has been introduced to
provide clarity and uphold the original intent of the law. She
emphasized that the law is not being changed, the ELF ceiling
continues to be the ceiling.
10:50:51 AM
REPRESENTATIVE HOLMES translated that this means other fields
can interchange credits back and forth from one field to
another, Prudhoe and Kuparuk have a ring around them, and Cook
Inlet is mostly excluded..
MS. DAVIS said, "Correct."
10:51:33 AM
REPRESENTATIVE SAMUELS inquired about the possible double-
dipping in Cook Inlet, and whether regulatory policies have
prevented this.
MS. DAVIS assured that it is not occurring.
10:52:12 AM
MR. MINTZ recapped what has been reviewed: the percentage
changes in the basic tax levy; and the minor changes in the tax
base and how to arrive at the taxable value of oil and gas. The
next area for review, he said, is the lease expenditures; the
types of costs that a producer is allowed to deduct to arrive at
the taxable value. He directed attention to slide 15, and said
these expenditures are contained in AS 43.55.165, bill sections
56-59, and 64. New text was written, (a) and (b), to add
clarity and to limit lease expenditures to only what the
Department of Revenue (DOR) allows by regulation. Currently the
department may, but is not required to, interpret and define
deductible lease expenditures by regulation.
[Chair Olson turned the gavel over to Representative Samuels.]
10:54:26 AM
REPRESENTATIVE NEUMAN referred to sections 56 and 57 and read
the language dealing with deductions. He stated his interest in
having a discussion on what constitutes "reasonable" overhead
expenses; "what's there now, and what's going to be, with ACES."
MS. DAVIS said that the language relating to overhead now
appears on page 41, section 56, subsection (a)(2).
10:55:49 AM
MR. MINTZ turned to slide 16 to explain the next change in the
treatment of lease expenditures; subsections (c) and (d), of AS
43.55.165 are repealed. Under current law these sections allow
a "separate alternative" track for determining what constitutes
an allowable lease expenditures. The department proposes the
repeal of this language because the utilization of a "single"
track for these determinations, is more feasible for the
administration to manage.
10:58:03 AM
REPRESENTATIVE SAMUELS provided a private business scenario for
complying with changing regulations based on regulatory regime
changes. He asked the deputy commissioner to comment on the
concepts of statute vs. regulation.
MS. DAVIS said:
The idea of putting enough detail into a statute
that's fixed for a very, very long, and fairly
inflexible period of time is unusual, because it
really isn't as workable long term as far as industry
[is concerned]. ... Unless it's something that is ...
[a] high, intense public concern, and scrutiny needs
to be at that level, that the legislators can't
delegate it out; you need to keep that type of
control. Under ACES what we're proposing, is it has
to be spelled out now. Instead of PPT which said,
'it's got to be direct, it's got to be reasonably
related, and here's some general rules, ... go forth
and deduct.' And then it was up to the department to
figure out ... does this deduction fit that generic
rule. ... The judgment call to put the detail in the
regulation, we think is a sound one, and a good one.
... Our goal is, as we implement these regulations,
it's going to be bringing industry in, it's going to
be trying to make sure our [regulations] fit their
realities.
11:05:31 AM
REPRESENTATIVE SAMUELS agreed with the DOR proposals for leaving
these provisions under regulatory authority. However, he opined
further on the effects of fluctuating regulatory changes that
create difficulty in an industry.
11:06:53 AM
REPRESENTATIVE NEUMAN stated, "Regulations ... allows ... for
more adaptation as industry changes; statutes you're locked in."
MS. DAVIS agreed.
11:07:57 AM
MR. MINTZ related his observation that there has been progress
in production tax regulations by the incorporation of many
resolutions that will minimize future disputes. He stated that
slide 17 continues the lease expenditure provision changes. AS
43.55.165(e) is a list of excluded costs that will never qualify
as a deduction. Section 58 of the bill expands this existing
list. Paragraph (6) is modified to include costs arising from
violation of law or noncompliance with lease or permit
obligations. Paragraph (15) now includes all dismantlement,
removal, and restoration (DR&R) costs. Continuing with the
exclusions on page 18, paragraph (19) includes repair or
replacement of facilities or equipment associated with an
unscheduled drop in production or an oil spill or release. If
there is a problem with the pipeline or other facility, the
state will not share in the repair costs.
11:12:02 AM
REPRESENTATIVE SAMUELS inquired how soon after the effective
date of the legislation would the language on this regulation be
available.
MS. DAVIS responded that the drafts are still being worked on
and industry will be consulted as the language is established.
The range and magnitude of disruptions in production will be a
major consideration. Once passed, she anticipates regulation to
be enacted "as soon as possible."
REPRESENTATIVE SAMUELS asked if regulation could be enacted with
the effective date of the bill.
MS. DAVIS offered that emergency regulations can be issued to
provide guidance in the near term, if necessary.
11:15:07 AM
REPRESENTATIVE DOOGAN asked how paragraph (19) addresses the
issue of the pipeline suffering a shooting incident.
MS. DAVIS responded that the provisionary language was imported
to address acts of God and third party acts, as exclusions;
unless reasonable measures were not taken to avoid such
incidents.
11:16:27 AM
REPRESENTATIVE DAHLSTROM continued to discuss the liability
issues pursuant to providing security for the pipeline.
[Representative Samuels returned the gavel to Chair Olson]
MS. DAVIS suggested that perhaps a first time, unforeseen
incident occurs, the company would not be penalized but put on
notice.
REPRESENTATIVE DAHLSTROM reminded the committee that many first
time incidents would totally shut the pipeline down. She
recommended scrutiny of the definition for this aspect of the
bill.
MS. DAVIS underscored that this language is about the cost to
repair or replace, and does not address the economic impact of
production loss.
11:19:43 AM
REPRESENTATIVE NEUMAN presented the issue of being able to
establish whether approved maintenance was scheduled or
unscheduled. He elaborated on how "things happen," and the
reason may not be clear.
MS. DAVIS agreed that this is the major point of concern for
administration. She described the process and considerations
that the department undertook to address this topic. The
result/effect of the producer's acts became the bottom line for
the department to scrutinize. It is important to note, she
said, that this provision does not replace or take away the
other exception that remains in the law, which stipulates gross
negligence. "This," she said, "is what I call ... a strict,
liability, event based exclusion."
REPRESENTATIVE NEUMAN maintained, "This is going to come down to
a regulator, in an office somewhere, who just makes his
decision."
MS. DAVIS stated agreement and stressed that the regulations
need to be "ground based, and the way operations actually happen
on the slope."
11:24:46 AM
MR. MINTZ pointed out that the scenarios described would have to
do with activity downstream from the point of production, and
the language for this legislation only addresses upstream costs.
He returned to slide 18, paragraph (20) to explain the final
change in cost exclusions, which pertain to crude oil topping
plants or refineries. One of the inputs to the production costs
is diesel fuel used in the oil and gas operations. Assuming it
is a direct cost of production, the cost of the diesel fuel
would be an allowed deduction. Paragraph (20) clarifies that,
although the cost of fuel may be deducted, the deduction may not
be expanded to cover the cost of building, acquiring, or
operating a refinery or topping plant that generates the diesel
product.
MR. MINTZ recapped how the amount of tax is levied on a
producer: beginning with the gross value of the oil and gas,
subtract the lease expenditures, and multiply the remainder by
the tax rate. However, he said, the final element in the
process is the application of tax credits. Slide 19 addresses
the application of these tax credits. The current law, enacted
under HB 3001, provides for several new tax credit provisions,
aimed at public policy to create economic
incentives/improvements benefiting both the producers and the
state. He described the amendments as improvements,
clarifications, and conforming changes. The first set of tax
credits appear in AS 43.55.023, and found in bill sections 26-31
and 65. Subsection (a) addresses qualified capital investment
expenditure credits, which are capital investments for oil and
gas exploration/development, which earn a 20 percent credit
against the production tax. Several changes were made to this
subsection beginning with a provision that "requires spreading
out of the credit." No more than 50 percent of the credit may
be taken in the first year. The second sets of changes are
associated with exploration expenditures that qualify for
capital credit. Long before the PPT bill was enacted, he
reminded the committee, the legislature enacted some exploration
incentive credits; appearing in section 025 of the production
tax statutes.
11:29:25 AM
REPRESENTATIVE NEUMAN pointed out that this "doesn't affect the
big operators, but it affects the little guys who ... Alaska is
trying to attract."
MS. DAVIS said that, from the state's perspective, this does not
represent a monetary issue. The goal, she explained, was to
modulate impacts to the state's revenue and minimize spikes
created by capital credits; "we dampen that effect and spread it
over two years." By creating the way in which information is
reported to the state, future forecasts will allow the
administration to prepare this legislature for those "spikes."
REPRESENTATIVE NEUMAN said that this does not represent a
significant revenue issue.
MS. DAVIS agreed.
11:31:56 AM
REPRESENTATIVE DOOGAN pursued further discussion on how this
credit would work, creating a liability displacement to the
state, not eliminating it. He said that it seems "foolhardy ...
to be proposing a change of this nature without ... knowing what
the real world effects are going to be."
MS. DAVIS suggested that this has been considered by the DOR,
and offered how this has been looked at in creating this model.
11:35:57 AM
REPRESENTATIVE SAMUELS asked how the diesel fuel credits are
considered by the auditors in the event that ConocoPhillips
Alaska, Inc., chooses to build the refinery on the North Slope.
MS. DAVIS explained how the fair market value of the product was
assessed for the model. Further, she clarified the 50 percent
credit approach, in response to a further question from the
committee.
The committee took an at-ease from 11:37:52 AM to 12:02:47 PM.
12:03:07 PM
MR. MINTZ finished explaining the second point of the
conformation language on slide 19. The final change made to the
capital credit position, slide 20, prevents undercutting the
purpose of the tax floor by disallowing capital credits from
being applied, or exported, outside of the legacy field from
which they were incurred. The language reads: credits for
capital expenditures in a unit subject to the tax floor may be
applied only against tax on oil and gas production from that or
another unit subject to the tax floor. Beginning on slide 21, a
set of changes is addressed, which deals with the type of tax
credits associated with "loss carried-forward;" AS 43.55.023(b),
bill section 27. This section conforms the percentage allowed,
from 20 percent to the percentage tax rate of 25 percent. He
explained how a carried forward credit might be incurred by an
exploration company; however, there is no carry forward allowed
in a legacy field.
12:07:15 PM
MS. DAVIS pointed out that in making this change from 20 to 25
percent, the new entrants and incumbent exploration companies
maintain a parity; without this, new entrants were placed at a
tax credit disadvantage. In response to a question from the
committee, she explained how this disparity could arise out of
the current structure, and how this change creates equality
between the taxpayers.
12:10:19 PM
MR. MINTZ presented slide 22, AS 43.55.023(d), bill section 28,
which clarifies the use of transferable tax credit certificates.
The new language specifies that two certificates will be issued,
each for half of the credit; and one certificate cannot be used
until the following year. Additionally, the language of
subsection .023(l) makes it clear that a tax-exempt entity may
not obtain a transferable tax credit certificate.
12:13:16 PM
REPRESENTATIVE DOOGAN clarified that the credits are being
provided for exploration purposes, and pointed out that
exploration may not lead to production. He suggested that this
may cause a disparity if the tax credits are not offered to tax
exempt entities, which may undertake exploration/production
activities.
MS. DAVIS answered that this is addressed in bill section 40,
slide 29, which also excludes the ability of a tax exempt entity
to purchase a tax credit certificate under the exploration
incentive program. The intent of this language is to direct tax
credits to companies that would pay production tax. Using a
municipality and utility as an example, she pointed out that
these land owners would not be eligible to pay a production tax,
should oil be discovered on their land.
REPRESENTATIVE DOOGAN stated his understanding that this is
aimed at companies that are in the business of exploring and
producing oil.
MS. DAVIS said, "Correct."
12:15:43 PM
MR. MINTZ directed attention to slide 24, bill section 65, which
repeals AS 43.55.023(i); the transitional investment expenditure
credits for investments that were made during the five years
before April 1, 2006. The department believes this is no longer
good public policy. The language for this amendment is still
being drafted to avoid unintentional effects that were
identified after submission.
12:18:02 PM
MR. MINTZ introduced slide 25, dealing with the exploration
incentive credit provisions; AS 43.55.025, bill sections 36-44.
As previously mentioned, the exploration well credit program
existed prior to enactment of the PPT, and was rewritten to
conform to the PPT. In ACES, additional minor adjustments are
proposed. He explained the changes in each of the sections
beginning with section 36. This section stipulates four
categories of exploration expenditures that qualify for credits.
It is recommended that a uniform sunset date, of 2016, be
applied to all four of these categories. As currently written
this date applies only to wells drilled 25 miles from an
existing unit, or in Cook Inlet 10 miles away, not otherwise
meeting qualifications for the strict criteria for exploring a
previously untested prospect. In the bill, sections 37 and 43,
change language to allow for delineation wells within two
drilling seasons. This is accomplished in the bill by
redefining the term pre-existing well.
12:20:56 PM
CHAIR OLSON inquired whether this will have an impact on
specific platform wells in Cook Inlet.
MR. MINTZ explained that it comes down to a question of geology
and location; in Cook Inlet a presumptive three mile limit has
been removed.
12:22:11 PM
REPRESENTATIVE HOLMES asked if unintentional consequences have
been considered in proposing this action, and whether it is
expected to encourage developers.
MR. MINTZ responded by describing the categories of development
addressed in section 37. Concern arose for the overuse of the
suspension category, and DNR proposed this language to minimize
that concern. To receive the credit the well must be completed
or abandoned, but a suspended well could still qualify for a
credit, under specified terms.
MS. DAVIS offered to have DNR generate a response to the
committee.
12:25:05 PM
MR. MINTZ continued with slide 26, addressing the proposal to
exclude costs arising from gross negligence or violation of
health, safety, or environmental statutes/regulations. Section
38, considered by the department to be a core improvement,
requires a clear, geologically based definition, to indicate
that a new exploration target is being explored; the target must
be pre-approved through the Department of Natural Resources
(DNR).
12:27:28 PM
REPRESENTATIVE RAMRAS pointed out that DNR is currently
understaffed, with 139 vacant positions, and asked if this might
create a "bureaucratic lag in the process."
MR. MINTZ responded that a determination deadline of 60 days is
included in the language.
MS. DAVIS clarified that section 38 (c) imbeds a 60 day
timeframe in which DNR must respond.
MR. MINTZ said that no automatic legal consequence would be
imposed, however, the departments take these deadlines very
seriously. Neither, he said, should this create an
administrative burden to be carried out.
REPRESENTATIVE RAMRAS reviewed counsel from Commissioner Irwin's
statement with regard to lack of staff; this is an endemic
problem within state departments.
MS. DAVIS noted her agreement that with the imposition of this
type of hurdle, a realistic stance must be taken. She offered
to have DNR respond to the committee on how this directive will
be accomplished within the department. To her knowledge, this
function will be performed by the scientific geology group,
which is fully staffed.
12:31:46 PM
REPRESENTATIVE HOLMES referred to section 37 and asked if
additional administrative concerns are being added by including
a gross negligence standard; does this invite arguments for
litigation.
MS. DAVIS assured that this language is not unlike the
generalized statute that exists. The premise of the underlying
legislation has not been changed.
12:33:08 PM
REPRESENTATIVE NEUMAN observed that if DNR does not meet the 60
day deadline, the consequences are minimal. However, if
industry is required to provide documents, daily fines may be
incurred.
12:33:56 PM
MR. MINTZ continued to slide 27, bill section 39, that sets out
specific data requirements for exploration credit eligibility.
Additionally, existing law provides for 10 years of
confidentiality for well data, and represents an inconsistency
with existing law.
12:35:37 PM
REPRESENTATIVE HOLMES referred back to slide 26, regarding gross
negligence and observed that gross negligence issues appear in
different aspects of the bill. Criminal negligence also occurs,
and she asked if this would be considered automatic admission
prima facie for gross negligence.
MS. DAVIS suggested that the attorney general could provide a
response on this type of torte question.
12:37:42 PM
MR. MINTZ returned to the tax credit requirements on slide 27,
and continued to explain the confidentiality period. Section 39
requires well data confidentiality to be limited to 24 months.
Also, a 50 percent rule for tax credits will be imposed in this
section. Proceeding to slide 28, continuing with bill section
39, and the basic information about the tax credits for
exploration will be made public. Section 40 is a companion
provision to .023 credits, and specifies that a tax-exempt
entity may not transfer a tax credit certificate. A new five
percent tax credit is made available in Section 44, for old
seismic data if DNR determines that acquiring the data for
public distribution is in the state's interest. This is a means
for the state to acquire valuable data for DNR that otherwise
would not be available.
MS. DAVIS pointed out that the 5 percent credit in section 44
purchases historical information for the state.
12:41:32 PM
REPRESENTATIVE DOOGAN questioned if a company with old seismic
data could receive 5 percent of their current tax liability by
providing the information to DNR.
MR. MINTZ answered that 5 percent of the original expenditure
incurred to obtain the data would be considered. In further
response to committee discussion, he stepped through the means
by which the state would purchase seismic data from an entity.
[A brief discussion on the viability of obtaining seismic data
ensued.]
12:45:02 PM
MR. MINTZ continued with the final subject of tax credits, as
indicated on slide 29; how an explorer can turn credits into
cash if no tax liability exists to which to apply it against.
This bill repeals AS 43.55.023(f), which authorized the
department to provide cash refunds for particular tax credit
circumstances up to a limit of $25 million per year, per
explorer. The bill replaces that with a new program, AS
43.55.028, establishing an oil and gas tax credit fund to
purchase credit certificates from explorers or small producers
that have no tax liability to apply credits against. The fund
is an appropriation of a percentage of PPT revenues. With the
exception of the $25 million cap, the remainder of the criteria
for qualifying provisions remains intact. He reviewed the
existing policies.
12:47:25 PM
REPRESENTATIVE HOLMES asked if this is a dedicated fund.
MS. DAVIS responded, no.
12:47:45 PM
JERRY BURNETT, Director, Administrative Services Division,
Department of Revenue (DOR), responded that this fund is subject
to appropriation each year by the legislature. He explained the
process for making it a dedicated fund.
REPRESENTATIVE HOLMES said, "So this is another one of these
funds that we like to create and ... put money over here but the
legislature still has the authority to pull it out and put it
somewhere else."
MR. BURNETT replied, "That is exactly correct." Refundable
credits are unique. That is, the state is paying a tax payer
for a tax refund, when in actuality no tax liability exists.
The current PPT law stipulates that these credits are a general
fund appropriation. During the past year, the department
requested a supplemental appropriation to pay the tax credit
liability. He reviewed the recent authorization figures that
have come before the legislature for funding tax credits: FY 07
totaled $59 million; FY 08 will be $25 million, and a
supplemental request will be made to pay the actual $100 million
plus that will be due. Forecasting the tax credits is
difficult, he explained, and the department believes that it
would be prudent to set aside the total PPT liability to ensure
that money will be available at the end of the year.
12:50:27 PM
REPRESENTATIVE DOOGAN speculated that if the department has the
ability to compute the percentage of the total tax liability for
creating the fund, why not apply that to the appropriation.
MR. BURNETT clarified that DOR computes an estimate for the fund
and the money remaining, after payment, will carry forward or
not, based on legislative action. He explained how the
estimated revenues work in the bill's fiscal note, and when
reported in the general fund. He maintained that the proposed
change will create a more transparent process.
REPRESENTATIVE DOOGAN stated that he could see no reason for
this to not come under the appropriation request system
currently in place.
MS. DAVIS agreed that status quo would be an alternative
mechanism. However, the department attempted to take an
industry perspective on this issue. It is difficult to package
this in a "way that gives confidence to industry that we are
taking seriously this funding requirement."
REPRESENTATIVE DOOGAN underscored that arguments continually
come before the legislature regarding funds that are not
dedicated. He opined that "all you're really trying to avoid
here is the appropriations process." Unless a better argument
can be brought, he said, he cannot support this proposal.
MR. BURNETT pointed out that this proposal still requires an
appropriation decision from, and to, the fund each year by the
legislature. The intent is to place parameters around how much
money, looking forward, would be available for that purpose. In
a time of falling revenues there would potentially be carry
forward money from a previous year, that could be used for
paying credits vs. using current year general funds.
12:54:15 PM
REPRESENTATIVE SAMUELS provided a scenario of a company without
a tax liability, that incurs a credit but the legislature
doesn't appropriate funds to purchase it; what happens legally
to the credit.
MS. DAVIS responded that the credit will remain viable and
transferable. Thus, it could be commuted to another company
that owes a tax to the state, and that company would subtract it
from its tax liability.
12:55:46 PM
REPRESENTATIVE SAMUELS ascertained that the fund couldn't be
used for anything else.
MR. BURNETT said that the legislature is able to appropriate
money from this fund for any legal purpose.
REPRESENTATIVE SAMUELS continued to pursue the question of the
fund availability for other than the legislature's intent.
MR. BURNETT assured that the executive branch and DOR do not
spend money in ways for which it isn't appropriated.
REPRESENTATIVE SAMUELS asked if there would be administrative
costs to operate the fund.
MR. BURNETT responded that there would be no incremental costs.
Furthermore, the fund would earn interest at the same rate as
other state funds.
REPRESENTATIVE SAMUELS referred to slide 30, and questioned how
and who would establish the specified "criteria" for this fund.
He recalled advice from former Commissioner Bill Corbus who
cautioned that, when dealing with numbers this large, an
individual should not be making the decision.
MS. DAVIS responded that the criteria embodied in the law now,
are verifications that expenditures occurred, are accurate, and
complete; there is no discretionary call. Also, she pointed
out, under ACES it is split into two years, and the cap is
removed.
12:58:56 PM
MR. MINTZ interjected that the criteria for issuing the
certificate is different than the criteria for cashing the
certificate. On page 31 of the bill, the objective criteria are
set forth, and do not involve discretion.
12:59:55 PM
REPRESENTATIVE HOLMES inquired how the fund would be managed.
MR. BURNETT explained that a fund of this type would be managed
in the Treasury Division of DOR, and accounted for by the
Department of Administration (DOA). It would be invested with
the general fund and other similar type of investments.
Treasury would have the control of the actual investment.
REPRESENTATIVE HOLMES referred to the investment formula in the
committee packet, and the provision in section (f) indicating
the carry over from year to year. She asked, "How big is big
enough."
MR. BURNETT stated that the department would come before the
legislature to report and receive advice on the size of fund.
He used FY 08 projections as an example of what could be
expected if this fund were in place right now.
REPRESENTATIVE HOLMES suggested that this creates a presumption
in law, and predicted that it could be growing "out of control
for awhile until somebody noticed."
MR. BURNETT agreed that oversight would need to be exercised.
1:04:52 PM
MR. MINTZ continued with slide 31, to understand how the payment
of tax occurs. The exact rules of calculating monthly
installment payments have been conformed to the changes in the
tax. That is, the different tax floor, and accounting for the
Cook Inlet tax ceiling. The progressivity aspect is not
included in the monthly installment payments, but will be
considered in the total amount of tax due on March 31. Slide 32
clarifies that the department can be particular about the form
of electronic payments made, for uniformity purposes.
1:07:12 PM
MS. DAVIS interjected that also included in bill section 51 is
language to provide DOR the authority to issue advisory
bulletins to industry.
1:08:03 PM
MR. MINTZ continued, stating that the tools for the department
to improve the administration and transparency of the PPT begin
on slide 33. Bill section 46 makes clear that every oil or gas
producer must file an annual return, whether or not the taxpayer
believes that a tax is due. Additionally, the existing list of
information examples required in the return is expanded in this
section, and the department retains the right to require more
information if deemed necessary. Reporting requirements
continue on slide 34, where bill sections 47 and 49 require
additional penalties, of up to $1,000 per day, for late or non
filing of returns or reports. There are existing general
penalty provisions that apply to the revenue statutes, including
penalties for late filing; however, they are based on the amount
of tax deficiency without a penalty for failing to file a
report. Explorers or producers are required, under bill section
48, to file an annual statement on expenditures or adjustments,
even if no oil or gas is produced during the year. Bill section
48 provides DOR clear authority to require monthly reporting.
This will keep the department better informed of activity
throughout the year. Additional authority is included in bill
section 49. Although the department has general authority to
require reporting, this would allow it the express authority to
require reporting of forward-looking information for revenue
forecasting purposes. The final reporting requirement, slide
36, bill section 51, clarifies that the department can require
returns and reports to be filed in a specific electronic format.
1:12:17 PM
MR. MINTZ moved on to the confidential and public information on
slide 37. Beginning with AS 38.05.035, bill section 2
recognizes the overlap of information required by DOR and DNR.
This clarifies to what extent these agencies may share
information while respecting the necessity for maintaining
information confidentiality. Under the heading of additional
transparency, slide 38 clarifies how PPT information may be
published; in an aggregated form based on information from at
least three producers or explorers, to minimize the
identification of individual taxpayers. Additional
administrative improvements in the law, slide 39, bill section
10 places oil and gas auditors into exempt service. He provided
that this is necessary in the recruitment/retention of highly
qualified auditors who can perform the sophisticated audits.
The transition provision, bill section 67, allows current
employees to opt to remain in classified service. The
administrative improvement in bill sections 14 and 50, extend
the statute of limitations for PPT from the current three years
to six years. This is in recognition of the expanded audit
requirements. Slide 40, he said, deals with section 1 of the
bill and could be considered to be arcane. He explained the
current understanding of how the statute of limitations has been
handled, and said that this provides a clear interpretation of
how these statutes are to be applied. There are no outstanding
disputes around this issue, but this provision is timely for
clarification purposes.
MS. DAVIS said that AOGA commented on this provision and
expressed concerns that interest rates may be impacted.
MR. MINTZ addressed the AOGA interpretation and when interest
rates begin to run, regarding retroactive statute of
limitations. That is not the intent of this provision, he
assured the committee. He said:
We are just trying to make clear that when there's an
event that occurs years after the original tax was
due, and that event actually involves new money
changing hands, that retroactively relates back to the
amount of the tax, that the statute of limitations
starts to run again with that event, and we're not
foreclosed from recognizing the tax consequences.
1:19:47 PM
MR. MINTZ referred to slide 41, stating that, as previously
mentioned, it provides language in bill section 51 to allow DOR
the ability to issue advisory bulletins on the interpretation of
the PPT statute and regulations for the benefit of the taxpayers
and others, without running afoul of the administrative
procedures act. The final slides address the issue of
transition, applicability, and effective dates. Slide 42,
sections 66 and 72 set out that the changes in the PPT are
prospective and would begin on January 1, 2008. The changes to
lease expenditure exclusions and the use of unit operating
agreements for lease expenditures are established in bill
sections 66 and 71 as retroactive to April 1, 2006. Also, this
is where 165(c) and (d) are repealed, as previously discussed.
Slide 43, bill sections 66 and 71 extend the statute of
limitations to still-open periods and sets a retroactive date of
April 1, 2006. Bill section 71 makes clear that the tax exempt
entities may not transfer tax credits back to the beginning of
the respective tax credit provisions. The final slide, 44, bill
section 73, aside from specified provisions mentioned, all other
aspects of the bill are effective date immediately. Bill
sections 68 and 70 address the time line for DOR and DNR to
develop and implement regulations; providing a retroactive date
for applicable statutory provisions being implemented.
1:23:56 PM
REPRESENTATIVE SAMUELS referred to the "switching of
information" between the departments, and asked how criminal
penalties would be applied.
MS. DAVIS stated that the intent would be to have the
confidentiality penalties carry over to both departments. She
deferred to Mr. Mintz for further clarification.
MR. MINTZ stated that he is not familiar with DNR's penalties
regarding confidentiality protection, and offered to provide
further information to the committee.
1:25:54 PM
REPRESENTATIVE DOOGAN referred to the reported vacant auditor
positions, stated that conflicting information has been
received, and asked to how many oil and gas auditor positions
are not filled; what is the requirement history for these
positions; and what alternatives to exemption classification
could be considered.
MS. DAVIS agreed to provide this information to the committee.
1:27:22 PM
CHAIR OLSON closed public testimony.
[HB 2001 was held over.]
1:28:14 PM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at
1:28:18 PM.
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