Legislature(2011 - 2012)BARNES 124

03/21/2012 01:00 PM RESOURCES


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Audio Topic
01:07:45 PM Start
01:08:02 PM HB360
01:09:51 PM HB365
01:39:45 PM Overview(s): Oil & Gas Taxes & Credits
03:00:05 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ HOUSE BILL -- "Production Tax on Oil & Gas" TELECONFERENCED
<Bill Hearing Withdrawn>
+ Overview: Oil & Gas Taxes & Credits by Dept. of TELECONFERENCED
Revenue
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= HB 360 INTERSTATE MINING COMPACT & COMMISSION TELECONFERENCED
Moved Out of Committee
+= HB 365 AQUATIC INVASIVE SPECIES TELECONFERENCED
Moved CSHB 365(RES) Out of Committee
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                         March 21, 2012                                                                                         
                           1:07 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Eric Feige, Co-Chair                                                                                             
Representative Paul Seaton, Co-Chair                                                                                            
Representative Peggy Wilson, Vice Chair                                                                                         
Representative Alan Dick                                                                                                        
Representative Neal Foster                                                                                                      
Representative Cathy Engstrom Munoz                                                                                             
Representative Berta Gardner                                                                                                    
Representative Scott Kawasaki                                                                                                   
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Bob Herron                                                                                                       
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
HOUSE BILL NO. 360                                                                                                              
"An Act enacting the Interstate Mining Compact and relating to                                                                  
the compact; relating to the Interstate Mining Commission; and                                                                  
providing for an effective date."                                                                                               
                                                                                                                                
     - MOVED HB 360 OUT OF COMMITTEE                                                                                            
                                                                                                                                
HOUSE BILL NO. 365                                                                                                              
"An Act relating to the rapid response to, and control of,                                                                      
aquatic invasive species."                                                                                                      
                                                                                                                                
     - MOVED CSHB 365(RES) OUT OF COMMITTEE                                                                                     
                                                                                                                                
OVERVIEW(S):  OIL & GAS TAXES & CREDITS                                                                                         
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB 360                                                                                                                  
SHORT TITLE: INTERSTATE MINING COMPACT & COMMISSION                                                                             
SPONSOR(s): STATE AFFAIRS                                                                                                       
                                                                                                                                
02/24/12       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/24/12       (H)       RES, FIN                                                                                               
03/19/12       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/19/12       (H)       Heard & Held                                                                                           
03/19/12       (H)       MINUTE(RES)                                                                                            
03/21/12       (H)       RES AT 1:00 PM BARNES 124                                                                              
                                                                                                                                
BILL: HB 365                                                                                                                  
SHORT TITLE: AQUATIC INVASIVE SPECIES                                                                                           
SPONSOR(s): RESOURCES                                                                                                           
                                                                                                                                
03/14/12       (H)       READ THE FIRST TIME - REFERRALS                                                                        
03/14/12       (H)       RES                                                                                                    
03/19/12       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/19/12       (H)       Heard & Held                                                                                           
03/19/12       (H)       MINUTE(RES)                                                                                            
03/21/12       (H)       RES AT 1:00 PM BARNES 124                                                                              
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
CHARLES SWANTON, Director                                                                                                       
Division of Sport Fish                                                                                                          
Alaska Department of Fish & Game (ADF&G)                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Answered questions related to HB 365.                                                                    
                                                                                                                                
BRUCE TANGEMAN, Deputy Commissioner                                                                                             
Office of the Commissioner                                                                                                      
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Provided a PowerPoint overview of Alaska's                                                               
oil and gas tax and credit structure.                                                                                           
                                                                                                                                
CHERYL NIENHUIS, Commercial Analyst                                                                                             
Anchorage Office                                                                                                                
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions related to the overview                                                               
of Alaska's oil and gas tax and credit structure.                                                                               
                                                                                                                                
LENNIE DEES, Audit Master                                                                                                       
Production Audit Group                                                                                                          
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions related to the overview                                                               
of Alaska's oil and gas tax and credit structure.                                                                               
                                                                                                                                
JOHN LARSEN, Audit Master                                                                                                       
Production Audit Group                                                                                                          
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:   Answered questions related  to the overview                                                             
of Alaska's oil and gas tax and credit structure.                                                                               
                                                                                                                                
JOHANNA BALES, Deputy Director                                                                                                  
Anchorage Office                                                                                                                
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:   Answered questions related  to the overview                                                             
of Alaska's oil and gas tax and credit structure.                                                                               
                                                                                                                                
DAN STICKEL, Acting Chief Economist                                                                                             
Anchorage Office                                                                                                                
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:   Answered questions related  to the overview                                                             
of Alaska's oil and gas tax and credit structure.                                                                               
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
1:07:45 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  ERIC   FEIGE  called   the  House   Resources  Standing                                                             
Committee meeting to order at  1:07 p.m.  Representatives Foster,                                                               
Gardner, P.  Wilson, Seaton, and  Feige were present at  the call                                                               
to order.   Representatives Dick, Munoz, and  Kawasaki arrived as                                                               
the meeting was in progress.                                                                                                    
                                                                                                                                
         HB 360-INTERSTATE MINING COMPACT & COMMISSION                                                                      
                                                                                                                                
1:08:02 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE announced  that the first order  of business would                                                               
be HOUSE  BILL NO.  360, "An Act  enacting the  Interstate Mining                                                               
Compact and relating  to the compact; relating  to the Interstate                                                               
Mining Commission; and providing for an effective date."                                                                        
                                                                                                                                
CO-CHAIR SEATON reported that two  constituents called him to say                                                               
they supported  HB 360.   He thanked  Co-Chair Feige  for holding                                                               
the bill  until he  could hear  from constituents.   He  moved to                                                               
report HB  360 out of  committee with  individual recommendations                                                               
and the accompanying fiscal notes.   There being no objection, HB                                                               
360 was reported from the House Resources Standing Committee.                                                                   
                                                                                                                                
                HB 365-AQUATIC INVASIVE SPECIES                                                                             
                                                                                                                                
1:09:51 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  announced that the  next order of  business would                                                               
be HOUSE  BILL NO. 365,  "An Act  relating to the  rapid response                                                               
to, and  control of, aquatic  invasive species."  In  response to                                                               
Representative Gardner,  Co-Chair Feige requested Mr.  Swanton of                                                               
the  Alaska Department  of Fish  &  Game (ADF&G)  to address  the                                                               
status of  the department's 2002 Alaska  Aquatic Nuisance Species                                                               
Management Plan.                                                                                                                
                                                                                                                                
1:11:19 PM                                                                                                                    
                                                                                                                                
CHARLES  SWANTON,  Director,  Division   of  Sport  Fish,  Alaska                                                               
Department of  Fish & Game  (ADF&G), explained that  ADF&G's 2002                                                               
Alaska  Aquatic Nuisance  Species Management  Plan was  primarily                                                               
put together because such a  plan was required under the National                                                               
Invasive Species  Act [of  1996] to  receive federal  funding for                                                               
[invasive] species.   The  plan resulted  in the  state receiving                                                               
approximately $1.7  million in  federal funds.   Noting  that the                                                               
noxious weeds  identified in  the plan are  under the  purview of                                                               
the  Department of  Natural Resources  (DNR),  he specified  that                                                               
ADF&G's primary focus  has been on northern pike  because that is                                                               
the most  pervasive issue ADF&G  has had to  deal with.   He said                                                               
the  department  has  been reasonably  successful  at  addressing                                                               
northern pike - the most  recent eradication efforts being in and                                                               
around  Yakutat, along  with a  fair amount  of work  on northern                                                               
pike in  and around the  Anchorage area and the  Kenai Peninsula.                                                               
He added that  the 2002 plan is fairly comprehensive  and in some                                                               
respects  the  authorities are  well  beyond  what ADF&G  has  to                                                               
implement;  however, as  a guiding  document it  allows ADF&G  to                                                               
focus its attentions, which the department has done.                                                                            
                                                                                                                                
1:13:37 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON  asked how  the  2002  plan was  implemented  to                                                               
address  the  Didemnum vexillum  (D.  vex)  situation in  Sitka's                                                               
Whiting Harbor.                                                                                                                 
                                                                                                                                
MR. SWANTON replied he is unsure  about D. Vex in relation to the                                                               
plan.  He said the D. Vex  issue was discovered in 2010 through a                                                               
"bioblitz" conducted  by a  wide number of  agencies.   While the                                                               
2002  plan references  a wide  array  of invasives,  it does  not                                                               
identify D.  vex or tunicates.   The plan has offered  ADF&G some                                                               
guidance for addressing  D. vex, but by and large  that issue was                                                               
relatively unique  and has required  time to focus on  what needs                                                               
to be done to move forward.                                                                                                     
                                                                                                                                
1:14:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON noted it  has been two years  since the                                                               
D. Vex  was identified and voiced  her hope that a  plan has been                                                               
put in place  to ensure it does  not spread.  She  said she would                                                               
be very upset  to find ADF&G has  let it go and has  no plans for                                                               
the future.                                                                                                                     
                                                                                                                                
MR.  SWANTON responded  ADF&G  has  systematically addressed  the                                                               
issue as  best it  can with  the limited  funding available.   He                                                               
said ADF&G has requested a  capital project within the governor's                                                               
budget specifically  to Whiting Harbor  and D. vex.   That budget                                                               
will allow  ADF&G the  necessary funds  to eradicate  the species                                                               
and  do some  follow-up monitoring  for several  years after  the                                                               
eradication to ensure that all of it was eradicated.                                                                            
                                                                                                                                
1:16:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P.  WILSON  expressed  her concern  that  D.  Vex                                                               
eradication was  not been  included in  the operating  budget and                                                               
stated  that it  will take  more than  one-time funds  since this                                                               
invasive has not been eradicated  and has dispersed over quite an                                                               
area.   Regarding the capital  budget, she asked  whether someone                                                               
has informed the other body that  this is an emergency and is not                                                               
a one-time funding thing.                                                                                                       
                                                                                                                                
MR. SWANTON answered  ADF&G has identified this as  a priority on                                                               
the  capital   side  and  the  department   has  had  discussions                                                               
throughout the  course of  legislative hearings  in terms  of the                                                               
department's budget.   He presumed folks are aware  of what ADF&G                                                               
is trying to do with this capital project and the intent.                                                                       
                                                                                                                                
REPRESENTATIVE P. WILSON expressed her deep disappointment.                                                                     
                                                                                                                                
1:17:58 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON stated that this  discussion shows the importance                                                               
of HB 365.   He said D. vex is an invasive  species that could be                                                               
extremely  damaging to  the  economy of  mariculture  and to  all                                                               
Southeast Alaska  fisheries, yet  the apparent authority  was not                                                               
there to  do an emergency  response.   The right emphasis  is not                                                               
being put on  the extreme importance of failing  to give priority                                                               
to  an invasion  in a  limited geographic  area and  HB 365  will                                                               
provide this priority.   He shared in  Representative P. Wilson's                                                               
deep disappointment about the response to the D. vex issue.                                                                     
                                                                                                                                
1:20:08 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE asked  why this emergency was not  included in the                                                               
supplemental budget request.  He said  ADF&G is not jumping up to                                                               
take  care of  what  could  be a  pretty  serious  problem.   The                                                               
committee did not  know there was a capital  request, which tells                                                               
that  the issue  has  not  received much  emphasis;  HB 365  will                                                               
therefore send the department a message.                                                                                        
                                                                                                                                
CO-CHAIR  SEATON   added  that   while  the  committee   heard  a                                                               
presentation last year, that presentation  was at the committee's                                                               
request after it  learned about the issue  from Representative P.                                                               
Wilson; the  department did not  come to the committee  saying it                                                               
had an  emergency that  needed to  be addressed  right away.   He                                                               
said the purpose of HB 365 is to tell ADF&G it needs to act.                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON  pointed out that this D.  vex issue was                                                               
enough of  an emergency that it  went to a nationwide  alert with                                                               
involvement   from   the   National   Oceanic   and   Atmospheric                                                               
Administration  (NOAA),   the  Smithsonian  Institute,   and  the                                                               
University of Alaska.  Many people  knew how critical it was, yet                                                               
ADF&G said it  did not have the money and  could not do anything.                                                               
The state  cannot let this  happen because  it could lead  to the                                                               
devastating result of  quarantined harbors.  The  state must have                                                               
something  in place  to provide  direction so  that a  department                                                               
cannot say it has no money and will therefore not do anything.                                                                  
                                                                                                                                
1:23:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI noted  HB  360 was  amended  to cut  out                                                               
[freshwater aquatic  species] so  it now  deals only  with marine                                                               
aquatic  species.   He  inquired whether  ADF&G  would want  this                                                               
rapid response authority  to address all aquatic  species, if the                                                               
department believes it does not already have this ability.                                                                      
                                                                                                                                
MR. SWANTON replied he thinks  ADF&G's ability to respond rapidly                                                               
has all to  do with the circumstances  surrounding the particular                                                               
species,  the area,  and the  threat to  other resources  and the                                                               
economy.   He said  the revised fiscal  note addresses  the three                                                               
marine  species that  ADF&G  should be  paying  attention to  and                                                               
developing a plan for.                                                                                                          
                                                                                                                                
1:25:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI, noting that northern  pike is one of the                                                               
six [freshwater] species that would  be excluded from the bill as                                                               
amended,  asked whether  that means  northern pike  would not  be                                                               
identified as a priority invasive species.                                                                                      
                                                                                                                                
MR. SWANTON responded  that northern pike has been  a priority in                                                               
the  freshwater  aquatic  environment  through  the  department's                                                               
planning  exercise that  took place  in 2002  and the  subsequent                                                               
document.  The department has  had several successful eradication                                                               
efforts around the  state and will continue to  use the resources                                                               
it has sequestered for that particular instance.                                                                                
                                                                                                                                
1:26:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI pointed  out  that the  bill deals  with                                                               
rapid response  because the department  felt it did not  have the                                                               
ability to rapidly respond to  an invasive species.  For example,                                                               
flooding  of the  Salcha River  near Fairbanks  occurs regularly,                                                               
sometimes spilling water into the  Harding Lake tributary system.                                                               
Given  that ADF&G  stocks  Harding Lake  with  silver salmon  and                                                               
rainbow trout, he inquired whether  the department would have the                                                               
ability under HB 365, as amended,  to respond rapidly if pike got                                                               
into the Harding Lake area from one flooded season.                                                                             
                                                                                                                                
MR.  SWANTON   answered  he  believes  ADF&G   has  the  ability,                                                               
especially along the road system,  to address those issues fairly                                                               
rapidly, as  opposed to other areas  of the state even  in marine                                                               
waters.   Regarding the aforementioned Harding  Lake scenario, he                                                               
said he  feels comfortable that  ADF&G would have the  ability to                                                               
take care of those issues.                                                                                                      
                                                                                                                                
1:27:49 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  MUNOZ  asked what  the  current  situation is  in                                                               
Whiting  Harbor and  whether there  is  evidence that  D. Vex  is                                                               
still there or has been eradicated.                                                                                             
                                                                                                                                
MR.  SWANTON   replied  ADF&G  has  not   undertaken  eradication                                                               
efforts,  but has  removed from  the  water the  nets for  oyster                                                               
spatter that were the most contaminated  and that were not on the                                                               
sea floor.   Some of the  superstructure has been cleaned  up, he                                                               
continued, and most  of the tunicate currently exists  on the sea                                                               
floor fairly  prominently in the head  of that bay.   Mapping has                                                               
been done and the invasive  species coordinator has made in-roads                                                               
as to  what permits are going  to be necessary in  preparation of                                                               
hopefully  receiving   this  capital   project  to   conduct  the                                                               
eradication efforts, which  will start in earnest as  soon as the                                                               
funding is available.                                                                                                           
                                                                                                                                
1:29:37 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE,  regarding  the  fiscal note  mentioned  by  Mr.                                                               
Swanton, inquired what has changed  in the current fiscal note as                                                               
opposed to the original one.                                                                                                    
                                                                                                                                
MR. SWANTON responded ADF&G has  removed three of the six species                                                               
it was  going to develop rapid  response plans for.   In essence,                                                               
the original  note has  been carved in  half because  those rapid                                                               
response plans would  not be referenced.  Should HB  365 pass and                                                               
funding  become available,  ADF&G  would  develop rapid  response                                                               
plans  for  the  invasive  tunicate,  European  green  crab,  and                                                               
Spartina cordgrass.   In further  response, Mr. Swanton  said the                                                               
revised  amount  would  be  $430,000 for  fiscal  year  2013  and                                                               
$215,000 for fiscal year 2014 for finalization of those plans.                                                                  
                                                                                                                                
REPRESENTATIVE MUNOZ understood the fiscal  note is to help ADF&G                                                               
develop  the plan  and identify  information around  each of  the                                                               
species.    She  asked  what   the  capital  amount  is  for  the                                                               
eradication efforts.                                                                                                            
                                                                                                                                
MR. SWANTON answered  that this fiscal note does  not reflect any                                                               
cost with implementing any plans if  ADF&G does find any of these                                                               
species for eradication.   This fiscal note is  solely to develop                                                               
plans that  would allow for  the various agencies  and interested                                                               
parties to understand their roles in removing that threat.                                                                      
                                                                                                                                
1:31:43 PM                                                                                                                    
                                                                                                                                
MR.  SWANTON, in  response to  Co-Chair Feige,  said the  current                                                               
capital  request for  eradicating  D. vex  in  Whiting Harbor  is                                                               
$500,000.  In  response to Co-Chair Seaton, Mr.  Swanton said the                                                               
mechanism for this  eradication has yet to be  determined.  There                                                               
has been some  success within the literature,  he continued, that                                                               
suggests some  sort of matting  structure to cover  the substrate                                                               
and choke  off the invasive.   The department is planning  to put                                                               
it out for  bid as soon as possible to  a qualified contractor to                                                               
conduct the eradication.  In  response to Representative Gardner,                                                               
Mr. Swanton  said ADF&G believes  the matting will likely  be the                                                               
best approach and will take care  of most of the eradication; the                                                               
department  is suggesting  the contractor  use  other methods  to                                                               
clean up  the other spots.   The remainder  of the money  will be                                                               
used for monitoring to ensure the invasive does not resurface.                                                                  
                                                                                                                                
1:34:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI,  noting that D.  vex is not  included in                                                               
ADF&G's  2002 Alaska  Aquatic Nuisance  Species Management  Plan,                                                               
asked whether the plan will be updated.                                                                                         
                                                                                                                                
MR. SWANTON replied  the 2002 plan is not a  rapid response plan;                                                               
rather,  it  is  a  broader perspective  plan  put  together  for                                                               
purposes of  securing federal funding for  invasive species work.                                                               
He said  ADF&G has  received about  $1.4-$1.7 million  in federal                                                               
funding to implement  elements of the plan,  primarily focused on                                                               
northern  pike.   He  reiterated  that  he  cannot speak  to  the                                                               
noxious weeds elements in the  plan [because that falls under the                                                               
purview of the Department of Natural Resources].                                                                                
                                                                                                                                
REPRESENTATIVE KAWASAKI commented that page  v of the 2002 plan's                                                               
executive summary  states that protocols  shall be  developed for                                                               
early  detection, rapid  response to,  control and  management of                                                               
new invasive species.  Therefore, he  said, some of this might be                                                               
redundant and the fiscal note should reflect this.                                                                              
                                                                                                                                
1:37:06 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON moved  to  report  HB 365,  as  amended, out  of                                                               
committee  with individual  recommendations and  the accompanying                                                               
pending fiscal  notes.  There  being no objection,  CSHB 365(RES)                                                               
was reported from committee.                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  added  that  HB   365  is  being  reported  from                                                               
committee with the  understanding to ADF&G that it  has some work                                                               
to  do on  the plan  as  well as  the general  approach to  those                                                               
things that threaten Alaska's economy and environment.                                                                          
                                                                                                                              
                                                                                                                                
The committee took an at-ease from 1:37 p.m. to 1:39 p.m.                                                                       
                                                                                                                                
^OVERVIEW(S):  Oil & Gas Taxes & Credits                                                                                        
            OVERVIEW(S):  Oil & Gas Taxes & Credits                                                                         
                                                                                                                              
1:39:45 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  announced that the  next order of  business would                                                               
be an overview  of Alaska's oil and gas taxes  and credits by the                                                               
Department of Natural  Resources (DNR).  He said  the overview is                                                               
a refresher for committee members  in anticipation of receiving a                                                               
bill in this regard from the other body.                                                                                        
                                                                                                                                
1:40:38 PM                                                                                                                    
                                                                                                                                
BRUCE TANGEMAN, Deputy Commissioner,  Office of the Commissioner,                                                               
Department of  Revenue (DOR), explained his  presentation will be                                                               
separated into two  parts:  a high level overview  of the state's                                                               
system and  a review  of the  statutory language  [slide 2].   He                                                               
said reference documents  prepared by the Tax  Division include a                                                               
one-page table of tax credits  [dated 3/19/12 and entitled "Table                                                               
of  Tax  Credits  under  AS  43.55  -  The  Alaska  Oil  and  Gas                                                               
Production Tax"] and  an eight-page summary of  tax credits under                                                               
AS  43.55 [dated  1/17/12 and  entitled "Summary  of Tax  Credits                                                               
under AS 43.55 - The Alaska Oil and Gas Production Tax"].                                                                       
                                                                                                                                
MR. TANGEMAN pointed  out that investors consider two  parts of a                                                               
tax system:   simplicity and stability.  However,  he related, it                                                               
has been  stated by  both the  administration and  companies that                                                               
Alaska's  Clear  and Equitable  Share  (ACES)  is definitely  not                                                               
simple; it is  one of the more complicated tax  structures in the                                                               
world.   Additionally,  with the  changes that  have taken  place                                                               
since 2006, the stability has also come into question.                                                                          
                                                                                                                                
1:43:14 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN  explained there are four  parts to the oil  and gas                                                               
revenue  in Alaska  [slide 4].   The  production tax  rate varies                                                               
with the  value of production  after expenses are deducted.   The                                                               
royalty  rates are  generally a  straight percentage  assessed on                                                               
most oil and gas production, based  on lease terms, which are the                                                               
contracts signed by  the state and lessee.   The corporate income                                                               
tax  is  up  to  9.4  percent  of net  profits  of  oil  and  gas                                                               
production as apportioned to Alaska.   The statewide property tax                                                               
of 20 mills  [or 2 percent] is  assessed on the value  of oil and                                                               
gas  property.   He added  that  roughly 90  percent of  Alaska's                                                               
general fund revenue comes from these four sources.                                                                             
                                                                                                                                
MR.  TANGEMAN  said  slide 5  is  a  table  from  page 4  of  the                                                               
executive summary of DOR's Revenue  Sources Book and that details                                                             
for this  table can be  found starting on  page 25 of  Chapter 4.                                                               
He reported that the production tax  is by far the biggest source                                                               
of revenue.   The  total unrestricted revenue  for 2011  was just                                                               
under $7.7  billion.  The estimate  for fiscal year 2012  is just                                                               
under $9  billion, and for fiscal  year 2013, which is  not shown                                                               
on slide 5,  the estimate is about $8.2 billion.   He pointed out                                                               
that the Revenue  Sources Book is a good  document that addresses                                                             
all the revenues in the state.                                                                                                  
                                                                                                                                
1:45:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FOSTER  requested an explanation of  the price per                                                               
barrel of oil as well as the non-oil revenue shown on slide 5.                                                                  
                                                                                                                                
CHERYL  NIENHUIS,  Commercial   Analyst,  Anchorage  Office,  Tax                                                               
Division,  Department  of  Revenue  (DOR),  replied  the  average                                                               
fiscal year price for fiscal year  2011 was $94.49 per barrel and                                                               
the number  of barrels  averaged for fiscal  year 2011  was about                                                               
603,000 per  day.   Non-oil revenue  includes the  mining license                                                               
tax, tobacco  tax, charges for  services, fines  and forfeitures,                                                               
licenses and permits, and rents  and royalties.  She advised that                                                               
a detailed  explanation of non-oil  revenue sources can  be found                                                               
in Chapter 5 of the Revenue Sources Book.                                                                                     
                                                                                                                                
1:47:37 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN,  resuming his presentation, said  production tax is                                                               
a tax on the producing or  severing of a non-renewable resource -                                                               
oil  or gas  - from  the state  (slide 6).   Authorized  under AS                                                               
43.55,  it  is  administered  by   DOR  and  is  applied  to  all                                                               
production  in the  state, including  three  miles off-shore  and                                                               
federal on-shore acreage; however,  production tax is not payable                                                               
on state or federal royalty  production.  He explained that under                                                               
the ACES  tax system, the  production tax value  (PTV), otherwise                                                               
known as the net amount,  is the market price less transportation                                                               
costs and  allowable lease expenditures  [slide 7].   While there                                                               
are other  net tax systems  in the world,  he noted, most  of the                                                               
Lower 48 states are  based on a gross tax system.   The base rate                                                               
for ACES is 25 percent and  there is a progressive surcharge rate                                                               
of 0.4  percent for every dollar  up to $92.50 PTV.   In response                                                               
to Representative P. Wilson, he  elaborated that the base rate of                                                               
25 percent  is the kick-off point  at $30 PTV -  for every dollar                                                               
increase in  oil price, the  progressive surcharge rate  kicks in                                                               
at 0.4  percent per dollar  and is  continuous up to  $92.50 PTV.                                                               
Unique with the ACES  system is that as the price  of oil goes up                                                               
$1, that  new percentage  is then applied  to the  entire amount,                                                               
which  is  different  from  the   governor's  bill  which  had  a                                                               
bracketed system.                                                                                                               
                                                                                                                                
1:50:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   P.   WILSON   surmised   the   surcharge   would                                                               
incentivize oil companies  to keep their production  lower so the                                                               
tax rate would not be as high.                                                                                                  
                                                                                                                                
MR. TANGEMAN responded  he does not think  keeping oil production                                                               
low is an incentive for anyone; this is price driven.                                                                           
                                                                                                                                
REPRESENTATIVE P.  WILSON further  surmised that a  company could                                                               
keep production  low [in Alaska]  and increase its  production in                                                               
other areas of the world.                                                                                                       
                                                                                                                                
MR.  TANGEMAN  answered that  at  these  high  oil prices,  if  a                                                               
company reduced its  production by a barrel it would  still pay a                                                               
lot of money on a lot  of barrels given Alaska is flowing between                                                               
550,000-600,000  barrels a  day.   Therefore,  he  did not  think                                                               
reducing production  is an incentive  to either the  producers or                                                               
the  state.   The  main  goal  for  any  private business  is  to                                                               
generate  revenue for  its  shareholders and  at  these high  oil                                                               
prices a  company is incentivized  to take advantage of  the high                                                               
prices.  Because  prices can go up and down  drastically, he said                                                               
he did  not think a  company's business plan  would be to  try to                                                               
game the market such that  it would reduce production when prices                                                               
are high and increase production when prices are low.                                                                           
                                                                                                                                
CO-CHAIR SEATON  interjected that built  into the ACES  system is                                                               
the incentive  to reduce a  barrel of oil's production  tax value                                                               
by investment in  Alaska.  The investment cost lowers  the tax on                                                               
the entire  value of the  oil because  the company can  write the                                                               
investment off as  a cost in the initial year  of the investment;                                                               
thus, the investment is considered just like an expense.                                                                        
                                                                                                                                
MR. TANGEMAN concurred with Co-Chair Seaton.                                                                                    
                                                                                                                                
1:53:20 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN returned  to his overview of ACES  [slide 7], noting                                                               
that there is also a tax credit  system in place.  He pointed out                                                               
that ACES  is a company  specific tax - so  the price is  what it                                                               
is,  but  the tax  depends  on  a  company's production  and  its                                                               
investment capital  expenses and  operating expenses.   Reviewing                                                               
the basic calculation  for the production tax owed  [slide 8], he                                                               
said the  production tax  value (PTV) is  multiplied by  the base                                                               
tax rate  of 25 percent to  get the base  tax.  Added to  this is                                                               
the progressive surcharge rate of  anything above that 25 percent                                                               
$30 kickoff.   This arrives at the pre-credit tax  bill.  The tax                                                               
credits are then deducted against  the tax liability to arrive at                                                               
the final tax  bill of the total production taxes  owed.  He then                                                               
moved  to  a brief  explanation  of  each of  the  aforementioned                                                               
sections of the production tax.                                                                                                 
                                                                                                                                
1:55:00 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN said the four  main components of the production tax                                                               
calculation are  production, price,  lease expenditures,  and tax                                                               
credits [slide 9].   Moving to slide 10 he  noted that the fiscal                                                               
year 2011 production  tax calculation shown on this  slide can be                                                               
found on pages 102-104 of DOR's  Revenue Sources Book.  The first                                                             
calculation  is  determining  the   value  of  the  total  annual                                                               
production:  at the fiscal year  2011 average price of $94.49 per                                                               
barrel and  an approximate production  of 602,000 barrels  a day,                                                               
the total  value per  day comes  to $56.9  million and  the total                                                               
annual production is just under  220 million barrels; royalty and                                                               
federal  barrels are  not  included in  the  tax calculation,  so                                                               
these are subtracted to arrive at  a total of about 190.5 million                                                               
taxable  barrels for  a  total  annual value  of  just under  $18                                                               
billion.   The net value  at the point of  production [production                                                               
tax   value  (PTV)]   is  then   calculated   by  deducting   the                                                               
expenditures  from the  gross value:   per  barrel transportation                                                               
costs  include   $2.45  for  Alaska  North   Slope  (ANS)  marine                                                               
transportation,  $4.02  for   the  Trans-Alaska  Pipeline  System                                                               
(TAPS)  tariff, and  $0.70 for  other costs,  for a  total fiscal                                                               
year transportation  cost of $7.17  per barrel; per  barrel lease                                                               
expenditures  include   an  average   of  $13.22   for  operating                                                               
expenditures and  an average of  $8.52 for  capital expenditures.                                                               
The tax  liability is  then calculated from  this PTV  [of $65.58                                                               
per barrel].                                                                                                                    
                                                                                                                                
1:57:53 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  inquired whether  the [total  lease expenditure]                                                               
of  $21.74  [$13.22  operating expenditures  plus  $8.52  capital                                                               
expenditures]  is   the  actual  average  of   Alaska's  combined                                                               
taxpayers.                                                                                                                      
                                                                                                                                
MR. TANGEMAN  replied this number is  a snapshot for one  look at                                                               
the state  so does not quite  tell the whole story.   He deferred                                                               
to Ms. Nienhuis for further explanation.                                                                                        
                                                                                                                                
CO-CHAIR   SEATON  related   that  ConocoPhillips   Alaska,  Inc.                                                               
recently  stated  in a  publication  that  its average  cost  for                                                               
producing a  barrel of oil  in Alaska is $15.48.   He said  he is                                                               
therefore trying  to see  how the  state's estimate  squares with                                                               
that of ConocoPhillips.                                                                                                         
                                                                                                                                
MS.  NIENHUIS  explained  the  deductions  shown  in  the  income                                                               
statement are primarily the expenditures  that would be allocated                                                               
to  companies  that  have  a  tax  liability  in  the  state;  so                                                               
expenditures that companies are  making on currently nonproducing                                                               
properties are  excluded from  this income  statement.   This was                                                               
done because  DOR was asked  to prepare this income  statement to                                                               
mirror as closely  as possible the actual  tax calculation; since                                                               
those expenditures are not actually  part of the tax calculation,                                                               
the  department  excludes those.    In  regard to  ConocoPhillips                                                               
Alaska, Inc., Ms. Nienhuis said  she was at that presentation and                                                               
offered  her  belief  that  the  company's  chief  economist  was                                                               
speaking about operating and transportation costs.                                                                              
                                                                                                                                
2:00:35 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON inquired  whether the independents/explorers were                                                               
separated from the  producers since Alaska's tax  system is based                                                               
on  company-wide.   He surmised  that expenditures  for currently                                                               
nonproducing areas, such as Point  Thomson, are excluded from the                                                               
aforementioned calculations.                                                                                                    
                                                                                                                                
MS.  NIENHUIS replied  correct; expenditures  for properties  not                                                               
currently producing  are not  included in  this because  there is                                                               
not a tax liability calculated from that.                                                                                       
                                                                                                                                
MR. TANGEMAN clarified  that this is for  taxpayers, so companies                                                               
not having a tax liability would not be included.                                                                               
                                                                                                                                
2:01:56 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  said he is  confused because one  very important                                                               
aspect of  Alaska's tax system  as it  was developed was  that it                                                               
would be on a company-wide  basis so expenditures in nonproducing                                                               
areas  would  be  written  off   against  a  company's  corporate                                                               
production so  as not  to ring  fence those.   However,  it seems                                                               
that this calculation has ring  fenced producing and nonproducing                                                               
areas, an  absolute juxtaposition of  what was trying to  be done                                                               
in an effort to stimulate those investments.                                                                                    
                                                                                                                                
MS. NIENHUIS  responded that the  basis for leaving those  off is                                                               
DOR was  trying to make  this calculate  as close as  possible to                                                               
what  the state  actually receives  in  production tax.   When  a                                                               
company  has  production  on  the  North  Slope  and  exploration                                                               
expenditures, there is  no ring fencing of  those expenditures in                                                               
this system.   There  are occasions where  there is  ring fencing                                                               
that has to  do with segments of the state;  however, North Slope                                                               
operations  that are  not contributing  at  all to  the basis  of                                                               
calculating a  company's tax  are not  included here  unless they                                                               
are somehow  deducted from  the company's tax  liability.   It is                                                               
not  necessarily  just  the  explorers.     There  are  companies                                                               
developing fields that  are still in the early  initial phases of                                                               
development   and  many   of  those   companies  are   still  not                                                               
experiencing a  tax liability.   So  that is  the reason  DOR put                                                               
this  together  in that  way.    The  department has  on  request                                                               
prepared  tables  showing  all  expenditures,  she  added.    She                                                               
further advised that the basic data  table on page 31 of the fall                                                               
2011 Revenue Sources  Book includes all of the  expenditures.  In                                                             
further response to Co-Chair Seaton,  Ms. Nienhuis confirmed that                                                               
if the expenditures were experienced by  a company that has a tax                                                               
liability,  then those  expenditures  would be  included [in  the                                                               
calculations on slide 10].                                                                                                      
                                                                                                                                
2:05:47 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN,  resuming his overview, explained  that the taxable                                                               
value is  derived via  a netback  calculation under  AS 43.55.150                                                               
(slide 11).  The destination value  - ANS West Coast value - less                                                               
marine  transportation,  less  TAPS  transportation,  equals  the                                                               
gross value  at the  point of production  (GVPP).   Operating and                                                               
capital  lease expenditures  [AS  43.55.165 -  AS 43.55.170]  are                                                               
subtracted from  the GVPP to  arrive at the production  tax value                                                               
(PTV) [AS 43.55.160].   He noted that this is  a different way of                                                               
getting to the PTV line depicted on the chart on slide 10.                                                                      
                                                                                                                                
2:06:31 PM                                                                                                                    
                                                                                                                                
MR.  TANGEMAN  next  discussed  Alaska's  suite  of  tax  credits                                                               
available  to  both  explorers   and  producers  and  which  have                                                               
generated quite  a buzz from the  new companies that are  not yet                                                               
producing but are hoping to be some  day [slide 12].  He said the                                                               
qualified  capital  expenditure  credit  provides  a  20  percent                                                               
credit  for  qualified  capital   expenditures;  for  well  lease                                                               
expenditures outside  the North  Slope it  provides a  40 percent                                                               
credit.  The  carried-forward annual loss credit is  a 25 percent                                                               
credit for  carried-forward annual loss.   The small producer/new                                                               
area development credit  provides up to $12 million  per year for                                                               
small  producers and  up to  $6 million  per year  for production                                                               
outside the North  Slope and Cook Inlet.   The alternative credit                                                               
for  exploration  is  30  percent   or  40  percent  of  eligible                                                               
exploration  expenditures if  certain  criteria  are met,  mainly                                                               
having to  do with new  targets or distance from  existing wells.                                                               
The Cook  Inlet jack-up  rig credit is  an 80-100  percent credit                                                               
for the  first three  exploration wells  drilled using  a jack-up                                                               
rig in Cook Inlet.                                                                                                              
                                                                                                                                
2:08:20 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN  explained that for  the aforementioned  credits the                                                               
state  can  either  purchase  the  tax  credit  certificate  from                                                               
somebody  without a  tax liability  or reduce  tax revenue  for a                                                               
taxpayer with  a tax liability  [slide 13].   He noted  that some                                                               
people say  ACES is working and  some say not and  said he thinks                                                               
this  has to  do  with where  someone  is at  in  the process  of                                                               
becoming a developer,  explorer, or producer.  As  a new explorer                                                               
incurs these costs it can turn  in its tax credit certificate for                                                               
cash;  companies  with  a  tax   liability  generally  apply  the                                                               
certificate to their  tax liability rather than taking  cash.  In                                                               
both cases the state is an  investor and shares the risk borne by                                                               
the active investor.  The  ACES credit system aims to incentivize                                                               
investment  because the  state bears  some risk  and reduces  the                                                               
cost  to  explorers and  producers.    Along with  the  net-based                                                               
structure, tax credits make the  state an investor in exploration                                                               
and new development activities in the state.                                                                                    
                                                                                                                                
2:10:09 PM                                                                                                                    
                                                                                                                                
MR.  TANGEMAN  pointed out  that  DOR  regulation 15  AAC  55.375                                                               
prescribes  the order  in  which tax  credits  should be  applied                                                               
against a producer's tax liability,  saying the order was derived                                                               
to provide  the maximum benefit of  the credits.  A  taxpayer can                                                               
choose to  apply credits in a  different order than under  15 AAC                                                               
55.375, he noted,  in which case a separate  schedule setting out                                                               
the order of the credits must be submitted.                                                                                     
                                                                                                                                
REPRESENTATIVE GARDNER asked under  what circumstances a taxpayer                                                               
would choose a different order.                                                                                                 
                                                                                                                                
LENNIE DEES, Audit Master, Production  Audit Group, Tax Division,                                                               
Department of  Revenue (DOR), replied the  reason for prescribing                                                               
a particular order  is to ensure that a taxpayer  is able to take                                                               
advantage of those  credits that are not allowed  to be converted                                                               
to cash or that  can only be used against the  tax liability.  If                                                               
a taxpayer qualifies for a small  producer credit or the new area                                                               
development credit  there is  no benefit  to applying  credits in                                                               
any  other order  because then  the  taxpayer would  not get  the                                                               
benefit  of those  credits.    The credits  that  are subject  to                                                               
refund or cash from  the state could be used in  that manner.  He                                                               
said  he could  think of  no  discernible reason  for a  taxpayer                                                               
doing it in any other order  than what is prescribed.  In further                                                               
response, Mr. Dees  said that to his knowledge no  one has chosen                                                               
a different order.                                                                                                              
                                                                                                                                
2:14:30 PM                                                                                                                    
                                                                                                                                
MR.  TANGEMAN continued  addressing tax  credits, explaining  the                                                               
limits for  which the application  of certain tax  credits cannot                                                               
exceed [slide 15].   Only 50 percent of a tax  credit for which a                                                               
transferable  tax credit  certificate  has been  received may  be                                                               
applied in a single year;  this limitation includes the qualified                                                               
capital expenditure  credits under  AS 43.55.023(a) but  does not                                                               
include  AS 43.55.023(l),  which  is the  40  percent well  lease                                                               
expenditure  credit.    Another  limit  is that  a  holder  of  a                                                               
transferable tax  credit certificate  may not  use the  credit to                                                               
reduce the transferee's tax liability  to less than 80 percent of                                                               
the tax that  would otherwise be due without  applying the credit                                                               
[AS 43.55.011(e)].  He related  that the other body has discussed                                                               
how the tax  liability is calculated and then  how additional tax                                                               
credits might also  affect a taxpayer.  However,  he pointed out,                                                               
existing statutes provide that a  credit cannot be used to create                                                               
a negative PTV.                                                                                                                 
                                                                                                                                
2:16:16 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON  inquired  whether  someone  who  has  zero  tax                                                               
liability but  who has  expenses could fall  into the  loss carry                                                               
forward that  can be converted to  credit at the 25  percent base                                                               
rate.  Rephrasing  his question, he surmised  someone could apply                                                               
tax  credits to  get to  a zero  production tax  value (PTV)  and                                                               
still have  expenses, thereby creating  a net loss  carry forward                                                               
situation that  would then convert  to credits at the  25 percent                                                               
base tax level.                                                                                                                 
                                                                                                                                
JOHN LARSEN,  Audit Master, Tax Division-Production  Audit Group,                                                               
Department of  Revenue (DOR), responded  that if a company  is at                                                               
the point where its production  tax liability has been determined                                                               
and is  applying the tax credits,  then that would mean  that all                                                               
of  the  lease  expenditures  have already  been  accounted  for.                                                               
Therefore,  in   the  situation   described,  no   additional  AS                                                               
43.55.023(b) carry forward loss credits would be available.                                                                     
                                                                                                                                
2:17:51 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON asked  whether expenses could, in  a situation of                                                               
zero tax  liability, be  carried forward into  the next  year for                                                               
use against the tax liability in that next year.                                                                                
                                                                                                                                
MR.  LARSEN  answered  that  if  lease  expenditures  exceed  the                                                               
production tax  value, the lease  expenditures cannot  be carried                                                               
forward into  the next year.   If a company's  lease expenditures                                                               
exceed its  revenues, it can  get an AS 43.55.023(b)  credit from                                                               
that.   But at the point  where a company's production  tax value                                                               
has   been  determined,   then   all  of   the  company's   lease                                                               
expenditures have  been accounted for.   A company can  apply the                                                               
credits  that  it  has  available   against  its  production  tax                                                               
liability  down  to  zero  liability,   but  the  production  tax                                                               
liability cannot be taken below zero.                                                                                           
                                                                                                                                
2:20:55 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN,  returning to his  presentation, stated  that slide                                                               
16 depicts the order of applying  credits.  [The order from first                                                               
to eleventh  is:   any credit under  AS 43.55.024(a),  any credit                                                               
under AS 43.55.024(c), any credit  under AS 43.55.019, any credit                                                               
under AS 43.55.025, any credit  under AS 43.55.023(i), any credit                                                               
under  AS 43.55.023(a),  any credit  under  AS 43.55.023(l),  any                                                               
credit under AS 43.55.023(b), any  credit under AS 41.09.010, any                                                               
credit under AS 38.05.180(i), any credit under AS 43.55.023(e).]                                                                
                                                                                                                                
2:21:14 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN  said another source  of state revenue  is royalties                                                               
[slide 17].   He  specified that, currently,  almost all  oil and                                                               
gas  production  in Alaska  comes  from  state lands  leased  for                                                               
exploration and development.  Leases  issued by the Department of                                                               
Natural  Resources  (DNR)  are  legal  contracts  and  cannot  be                                                               
altered  or amended  without the  consent of  all parties  to the                                                               
contract.  As  an aside he noted  that in the recent  past it has                                                               
been suggested  that royalty rates  be reduced to  make something                                                               
economic instead  of the production  tax.   He allowed that  is a                                                               
knob that can be turned, but  pointed out that royalties are what                                                               
feed  the permanent  fund.    If royalty  rates  are reduced  the                                                               
amount coming into  the state may increase, but  the amount going                                                               
into the permanent  fund is decreased.   Continuing his overview,                                                               
he  said that  as  the  landowner the  state  earns revenue  from                                                               
leases as upfront  bonuses, annual rent, and  royalty interest in                                                               
oil and gas production.                                                                                                         
                                                                                                                                
2:22:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER, in regard to  the option for applying for                                                               
a waiver  or reduction on  [royalty] by a company,  asked whether                                                               
the state compares  other tax regimes or looks just  at Alaska to                                                               
determine whether something is or is not economic.                                                                              
                                                                                                                                
MR. TANGEMAN  replied that royalty  rates and royalty  relief are                                                               
issues for the Department of Natural Resources to address.                                                                      
                                                                                                                                
2:24:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P.   WILSON  inquired  what  percentage   of  the                                                               
royalties goes into the permanent fund.                                                                                         
                                                                                                                                
MS.  NIENHUIS responded  it is  currently 25  percent on  certain                                                               
leases, although  some leases were  written during a  time period                                                               
when the rate was at  50 percent; therefore, the current combined                                                               
rate is about 35 percent.   In further response, she said she did                                                               
not know  how many leases are  still at the 50  percent rate, but                                                               
that there  are leases  let in  the early 1970s  to which  the 50                                                               
percent  still applies.    She  said she  will  get  back to  the                                                               
committee on the number of leases at 50 percent.                                                                                
                                                                                                                                
2:26:18 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN  resumed his overview,  noting that  typically state                                                               
leases are issued based on  a competitive bonus bid system [slide                                                               
18].  He  said the state generally retains a  royalty interest of                                                               
12.5  percent, although  some leases  carry rates  as high  as 27                                                               
percent and some  leases also have a  net profit-share production                                                               
agreement.  Currently the vast  majority of production comes from                                                               
leases where the state retains a 12.5 percent royalty interest.                                                                 
                                                                                                                                
REPRESENTATIVE  P.  WILSON inquired  where,  in  addition to  the                                                               
permanent fund, the royalty interest goes within the state.                                                                     
                                                                                                                                
MS.  NIENHUIS replied  the 12.5  percent is  the amount  of total                                                               
royalty collected from  those leases that have a  royalty at that                                                               
rate.  The  state takes a percentage of that  12.5 percent and it                                                               
is a  combined percentage  of around 30-31  percent of  that 12.5                                                               
percent that goes to the permanent fund.                                                                                        
                                                                                                                                
MR.  TANGEMAN clarified  that the  12.5 percent  is the  oil that                                                               
Alaska can take in-kind or in cash,  and that is the part that is                                                               
divvied up between the different funds.                                                                                         
                                                                                                                                
2:28:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  MUNOZ  asked  why  some  leases  carry  a  higher                                                               
royalty rate than 12.5 percent.                                                                                                 
                                                                                                                                
MR. TANGEMAN responded this is a question for DNR.                                                                              
                                                                                                                                
CO-CHAIR FEIGE said  that was the royalty rate  negotiated at the                                                               
time the  lease agreements  were established.   For  example, the                                                               
rate is about  16 percent for a recent discovery  by Brooks Range                                                               
Petroleum Corporation.  The state  was able to negotiate a higher                                                               
royalty for  this area because  the ground was  more prospective.                                                               
In  further  response, he  confirmed  that  the royalty  rate  is                                                               
negotiable and the 12.5 percent is not set in statute.                                                                          
                                                                                                                                
CO-CHAIR  SEATON  believed  some  of  the  aforementioned  was  a                                                               
component of bonus bids.                                                                                                        
                                                                                                                                
2:29:36 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN,  continuing his  overview, addressed  the petroleum                                                               
corporate  income tax  (slide  19).   He  said  "an  oil and  gas                                                               
company's  corporate income  tax liability  in Alaska  depends on                                                               
the relative size of its  Alaska and worldwide activities and the                                                               
corporation's  total  worldwide  net  earnings.    The  company's                                                               
taxable  income   in  Alaska  is  derived   by  apportioning  its                                                               
worldwide taxable income  to the state based on  three factors as                                                               
they pertain to the corporation's  Alaska operations:  1) tariffs                                                               
and  sales;  2) oil  and  gas  production;  and  3) oil  and  gas                                                               
property."                                                                                                                      
                                                                                                                                
MR. TANGEMAN moved  to slide 20, specifying that  "similar to the                                                               
production  tax, corporate  income tax  collections vary  greatly                                                               
along with oil  prices and oil industry profits.   In fiscal year                                                               
1994,   the  oil   and  gas   corporate   income  tax   generated                                                               
approximately  $17.8  million.    For  the  past  several  years,                                                               
revenues  from  the  oil  and   gas  corporate  income  tax  have                                                               
benefitted from  high oil prices  and high oil  industry profits.                                                               
In fiscal  year 2010, revenue  collections from this  tax totaled                                                               
$446 million;  in [fiscal year  2011] it  was $542 million."   He                                                               
added that according  to DOR's Revenue Sources  Book, fiscal year                                                             
2012 revenue  is estimated at  $662 million and fiscal  year 2013                                                               
revenue is estimated at $728 million.                                                                                           
                                                                                                                                
2:31:14 PM                                                                                                                    
                                                                                                                                
MR.  TANGEMAN next  reviewed the  petroleum property  tax, noting                                                               
that it is  the only statewide property tax (slide  21).  He said                                                               
this  tax is  annually  levied  on the  full  and  true value  of                                                               
property taxable under  AS 43.56.  Three classes  of property are                                                               
valued  and  taxed  for  property   tax  purposes:    exploration                                                               
property,  production   property,  and   pipeline  transportation                                                               
property.   He  said  pages  41-42 of  the  Revenue Sources  Book                                                             
provide more detail on this tax.                                                                                                
                                                                                                                                
REPRESENTATIVE MUNOZ  inquired whether  lands in the  North Slope                                                               
region are also taxable at the borough level.                                                                                   
                                                                                                                                
JOHANNA BALES,  Deputy Director, Anchorage Office,  Tax Division,                                                               
Department  of Revenue  (DOR),  replied  that the  municipalities                                                               
where the property is  located can levy a tax.   This tax is then                                                               
credited against the state tax so  the companies only pay tax one                                                               
time on that property.                                                                                                          
                                                                                                                                
CO-CHAIR FEIGE  noted the  municipality that  levies its  own tax                                                               
cannot levy that  tax rate just on  those oil-related properties;                                                               
the  municipality must  levy that  tax rate  on all  the property                                                               
owners within  the municipality.   In response  to Representative                                                               
P. Wilson,  he confirmed that  a company would deduct  the amount                                                               
of  property  tax paid  to  a  municipality  from the  amount  of                                                               
property tax that it owed to the state.                                                                                         
                                                                                                                                
2:33:26 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN,  resuming his overview,  directed attention  to the                                                               
graph  on slide  22  depicting the  absolute  profit split  under                                                               
Alaska's Clear and  Equitable Share (ACES).  He  pointed out that                                                               
at  higher oil  prices the  state's take  increases significantly                                                               
more than  does the  take by  the producer;  in other  words, the                                                               
upper end is taken  away by the state.  He  said slide 23 depicts                                                               
the share of profit under the current ACES tax system.                                                                          
                                                                                                                                
2:34:52 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN next reviewed the  statutes for Alaska's oil and gas                                                               
tax structure  in an effort  to provide  members with an  idea of                                                               
the enormity of  what is considered under the  state's tax system                                                               
(slides 25-56).   He said that under AS  43.55.011(e), all state,                                                               
federal, and  private lands within  the state are subject  to oil                                                               
and gas production  tax [slide 25].  Regarding  tax on royalties,                                                               
he explained  that royalties from  private land within  the state                                                               
are taxed  at a reduced  rate under  AS 43.55.011(i) and  that no                                                               
tax  is levied  on  royalties from  state  or federal  production                                                               
[slide  27].   He reminded  members that  for a  company's income                                                               
statement the total barrels minus  the royalty barrels equals the                                                               
gross value  at the  point of production,  which is  the starting                                                               
point for deductions.                                                                                                           
                                                                                                                                
2:36:37 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  noted that Alaska's congressional  delegation is                                                               
seeking a split with the  federal government on outer continental                                                               
shelf  (OCS)  lands.   He  inquired  whether  the  aforementioned                                                               
calculation would be  made on OCS lands should  the delegation be                                                               
successful.                                                                                                                     
                                                                                                                                
MR. LARSEN  responded the  state would not  receive any  share of                                                               
OCS production.   Regarding production from  other federal lands,                                                               
he asked whether Co-Chair Seaton  is referring to revenue sharing                                                               
as it is done for some offshore locations in the Gulf of Mexico.                                                                
                                                                                                                                
MR. TANGEMAN  interjected that the  revenue sharing to  Alaska is                                                               
currently  next  to   nothing,  if  anything  at   all,  and  the                                                               
congressional delegation  is working on  that.  He  believed that                                                               
the revenue  sharing in the  Gulf of  Mexico was increased  to 37                                                               
percent.  He asked Mr.  Larsen whether that revenue sharing would                                                               
be applied  to the OCS  should Alaska's  congressional delegation                                                               
be successful.                                                                                                                  
                                                                                                                                
MR.  LARSEN   answered  that  if  the   delegation  succeeded  in                                                               
increasing the royalty share going  to the state, the state would                                                               
get  that  revenue; however,  he  did  not  think that  would  be                                                               
taxable because  that is not land  within the state.   In further                                                               
response  to  Mr.  Tangeman,  he  understood  it  would  just  be                                                               
addressed through the royalties, not the production.                                                                            
                                                                                                                                
2:39:04 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  inquired as  to what  properties the  royalty tax                                                               
under AS 43.55.011(i) would apply to.                                                                                           
                                                                                                                                
MR.  LARSEN replied  private lands  would  be lands  held by  any                                                               
individual  or  corporation that  is  not  the state  or  federal                                                               
government.    In  further response,  he  confirmed  that  Native                                                               
regional corporation land  would be private land.   By and large,                                                               
he  continued,  the  State  of  Alaska owns  almost  all  of  the                                                               
subsurface rights  in Alaska  except for  certain lands  that are                                                               
held by either private individuals  or companies.  For example, a                                                               
private landowner  putting a  well in his  or her  backyard would                                                               
not have the  subsurface rights to any production  from that well                                                               
if the  state owned the  minerals under  that land.   He allowed,                                                               
however,  that  under  the  Homestead   Act  there  may  be  some                                                               
homesteaders who own the subsurface rights.                                                                                     
                                                                                                                                
MR.  LARSEN, in  response to  Co-Chair Seaton,  said he  will get                                                               
back to the  committee regarding whether mental  health lands are                                                               
categorized as private or state land.                                                                                           
                                                                                                                                
2:41:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON asked why  Alaska does not have the same                                                               
opportunity as in the Gulf of Mexico.                                                                                           
                                                                                                                                
MR.  LARSEN understood  that originally  the Gulf  of Mexico  was                                                               
considered outside  of state lands  for Louisiana and  other gulf                                                               
states; however,  the delegations  for those  states successfully                                                               
argued that  those states should  receive a greater share  of the                                                               
offshore  revenues.   He  offered his  belief  that this  greater                                                               
share  of royalties  is for  dealing with  the impact  of staging                                                               
operations, which  is what  the Alaska  delegation is  working on                                                               
right now as well.                                                                                                              
                                                                                                                                
2:43:04 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN,  returning to  his overview,  said the  minimum tax                                                               
applies only to oil and gas  production north of 68 degrees north                                                               
latitude,  which   is  the  North   Slope,  except   for  royalty                                                               
production  and  gas used  in-state  (slide  29).   He  said  the                                                               
minimum tax is based on the  average price for Alaska North Slope                                                               
(ANS) crude on  the U.S. West Coast, which  uses several reported                                                               
prices [Platt's,  Reuters, and  Dow Jones  monthly average].   He                                                               
added that this is a "soft"  floor, meaning a company can use tax                                                               
credits to  get below the minimum  tax.  In response  to Co-Chair                                                               
Feige, he  confirmed that  going below the  minimum tax  floor is                                                               
not currently a concern given today's [high] oil prices.                                                                        
                                                                                                                                
MR.  TANGEMAN explained  that AS  43.55.160 is  the progressivity                                                               
statute, which is what he  has been talking about throughout this                                                               
presentation (slide 31).   He said the 25 percent  rate kicks off                                                               
at  $30 per  barrel production  tax  value (PTV),  climbs at  0.4                                                               
percent for every $1 increase in  PTV up to $92.50, at which time                                                               
it decreases to  0.1 percent for each $1 [increase]  in PTV.  The                                                               
maximum progressivity  tax is up  to 50 percent of  PTV; combined                                                               
with the  25 percent  base tax,  this means tax  is capped  at 75                                                               
percent [before application of credits].   Progressivity is based                                                               
on  the British  Thermal  Unit (BTU)  per barrel  -  for oil  one                                                               
barrel equals  one barrel  and for  gas it is  the amount  of gas                                                               
that has a heating value of 6 million BTUs (side 32).                                                                           
                                                                                                                                
2:45:15 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  requested  an explanation  of  the  relationship                                                               
between 6 million BTUs  of gas and a barrel of  oil and asked why                                                               
this was done.                                                                                                                  
                                                                                                                                
MR. LARSEN responded  that the definition for the  6 million BTUs                                                               
is under AS 43.55.903.  He offered  his belief that it is a rough                                                               
approximation of the  number of million cubic feet  (MCF) that it                                                               
takes to equate to  a barrel of oil for the  heating value of the                                                               
gas.   In further response, he  said 6 million BTUs  is the rough                                                               
equivalent of  one barrel [of  oil] and confirmed that  1 million                                                               
BTUs is about 1 MCF of gas.                                                                                                     
                                                                                                                                
CO-CHAIR FEIGE  noted the current  Henry Hub  price for gas  is a                                                               
little over $2  per MCF and calculated that 6  million BTUs would                                                               
go for roughly $13 if it is gas and about $120 if it is oil.                                                                    
                                                                                                                                
MR. TANGEMAN concurred.                                                                                                         
                                                                                                                                
MR. LARSEN also concurred.                                                                                                      
                                                                                                                                
REPRESENTATIVE GARDNER inquired whether wet  gas and dry gas have                                                               
different BTUs and if so whether they sell for different prices.                                                                
                                                                                                                                
MR. TANGEMAN deferred to the  Department of Natural Resources for                                                               
an answer.                                                                                                                      
                                                                                                                                
2:47:41 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  said his point  is that the  $13 is for  the same                                                               
amount of  energy that  is $120.   Given  Alaska's tax  system is                                                               
based on  the BTU equivalent, he  asked what would happen  if the                                                               
state started to export a considerable amount of gas.                                                                           
                                                                                                                                
DAN  STICKEL,  Acting  Chief  Economist,  Anchorage  Office,  Tax                                                               
Division, Department  of Revenue  (DOR), answered that  this gets                                                               
to  the  dilution  effect  in   regard  to  progressivity.    The                                                               
progressive surcharge  applied to the  oil produced on  the North                                                               
Slope  is  based  on  a  statewide  progressivity  rate  that  is                                                               
calculated using  all oil and  gas produced in  the state.   In a                                                               
situation where gas  is relatively low valued  and oil relatively                                                               
high valued,  a major gas  sale would decrease  the progressivity                                                               
surcharge on the  oil, which, under today's  prices, could result                                                               
in the state taking in less  revenue with a gas sale than without                                                               
it.                                                                                                                             
                                                                                                                                
2:49:10 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  inquired  what  would happen  to  the  State  of                                                               
Alaska's revenue  with a [gas]  pipeline like the one  planned to                                                               
go to Valdez of roughly three billion cubic feet per day.                                                                       
                                                                                                                                
MR. STICKEL replied the revenue  impact would be highly dependent                                                               
on the  price of  oil and  the price  of gas  when the  sale took                                                               
place.    He said  DOR  has  run  a  range of  scenarios  showing                                                               
different  possible  prices  and  the  revenue  impact  could  be                                                               
positive or negative to the state  depending on the prices of the                                                               
oil and gas.                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  asked what the  impact to  the state would  be at                                                               
today's prices.                                                                                                                 
                                                                                                                                
MR. STICKEL  responded that  no modeling  has been  done specific                                                               
for a  pipeline to  Valdez; the modeling  done to  date typically                                                               
assumes an  export pipeline through  Alberta.  He offered  to run                                                               
some scenarios  for a pipeline  to Valdez.  In  further response,                                                               
he said that at today's prices  and a 4.5 billion [cubic foot per                                                               
day]  pipeline to  Alberta, the  state would  take in  about $1.8                                                               
billion less with  a coupled tax system versus  a non-coupled tax                                                               
system.                                                                                                                         
                                                                                                                                
2:51:31 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE, in response to  Representative Foster, said 1 MCF                                                               
of gas is equal  to 1 million BTUs and confirmed that  6 MCF is 6                                                               
million BTUs; so at just over $2  per MCF, multiplying 1 MCF by 6                                                               
equals $13.                                                                                                                     
                                                                                                                                
2:52:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE MUNOZ  returned to slide  22, observing that  at a                                                               
price of $115 [per barrel]  (roughly today's price), the State of                                                               
Alaska's share  is $9.93 billion, which  includes the production,                                                               
royalty,  property, and  corporate  taxes; the  federal share  is                                                               
$2.69  billion,  and the  company  share  is  $4.99.   She  asked                                                               
whether this same graph has been run for HB 110 and [SB 192].                                                                   
                                                                                                                                
MR. TANGEMAN confirmed DOR has done  so.  In further response, he                                                               
agreed to provide the graphs for HB 110 and [SB 192].                                                                           
                                                                                                                                
2:54:09 PM                                                                                                                    
                                                                                                                                
MR.  TANGEMAN  returned  to  his   review  of  the  progressivity                                                               
calculation,  noting it  is a  several-step process  to calculate                                                               
the monthly payment  for all leases or  property segments (slides                                                               
33-35).    Step  1  enters  the  gross  value  at  the  point  of                                                               
production  (GVPP).   Step  2 enters  one-twelfth  of the  annual                                                               
lease  expenditures for  the year.   Step  3 subtracts  the lease                                                               
expenditures from the  GVPP to determine if  the gross production                                                               
tax value (PTV)  is greater than zero.  Step  4 enters the amount                                                               
of BTU equivalent barrels for  taxable production of oil and gas.                                                               
In Step 5, if the production tax  value in Step 3 is greater than                                                               
0, the  gross PTV is divided  by the total amount  of taxable BTU                                                               
equivalent barrels  [Step 4]  to derive  a per  barrel production                                                               
tax value.   Step 6 determines  the percent of taxable  volume on                                                               
BTU equivalent barrels  by dividing the amount  of BTU equivalent                                                               
barrels in Step  4 for each lease or property  by total amount of                                                               
BTU equivalent  barrels for  a producer  for all  taxable barrels                                                               
produced in  all areas of  the state.   He pointed out  that both                                                               
the state and  each taxpayer has an army  of auditors responsible                                                               
for  making sure  these  calculations are  correct.   He  further                                                               
pointed  out  under North  Dakota's  gross  tax  system it  is  a                                                               
certain percentage above $60 per  barrel and below $60 per barrel                                                               
it  is  a different  percentage  and  only  one person  does  the                                                               
calculations for North Dakota's taxes  as compared to Alaska's 30                                                               
or 40 people.                                                                                                                   
                                                                                                                                
2:57:22 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  announced that Mr.  Tangeman's overview  would be                                                               
continued  at  the  committee's  next  meeting.    He  encouraged                                                               
members to review the rest of the presentation in the meantime.                                                                 
                                                                                                                                
REPRESENTATIVE  P. WILSON,  regarding  the 3/19/12  Table of  Tax                                                               
Credits under  AS 43.55  in the  committee packet,  observed that                                                               
three  sets of  credits  still have  no  regulations written  and                                                               
asked why.                                                                                                                      
                                                                                                                                
MR.  TANGEMAN answered  it  is  an ongoing  process  and said  he                                                               
believes DOR has  implemented over 80 regulations  since ACES was                                                               
put into  effect.  The  department has  had to staff-up  over the                                                               
last four or  five years; additionally, the  department must hold                                                               
workshops to implement  each regulation.  He assured  that if any                                                               
credits have not been addressed, they will be.                                                                                  
                                                                                                                                
REPRESENTATIVE P.  WILSON inquired whether DOR  needs more people                                                               
to get this done.                                                                                                               
                                                                                                                                
MR. TANGEMAN  said he believes  DOR has a  handle on this  and no                                                               
new staff is needed.  As  new changes are made, he continued, new                                                               
regulations are required,  but the biggest lift  was getting from                                                               
gross to  net under  the petroleum  production profits  tax (PPT)                                                               
and then  the additional changes  under ACES, which is  where the                                                               
bulk of those 80 regulations are.                                                                                               
                                                                                                                                
3:00:05 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no further business before the committee, the House                                                                 
Resources Standing Committee meeting was adjourned at 3:00 p.m.                                                                 

Document Name Date/Time Subjects
DOR.H.RES.Presentation.3.21.12.pdf HRES 3/21/2012 1:00:00 PM
HRES 3.21.12 Credits Table.pdf HRES 3/21/2012 1:00:00 PM
HRES 3.21.12Credits Summary.pdf HRES 3/21/2012 1:00:00 PM