Legislature(2005 - 2006)HOUSE FINANCE 519
03/04/2006 02:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB488 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 488 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
March 4, 2006
2:02 p.m.
MEMBERS PRESENT
Representative Jay Ramras, Co-Chair
Representative Ralph Samuels, Co-Chair
Representative Jim Elkins
Representative Carl Gatto
Representative Gabrielle LeDoux
Representative Kurt Olson
Representative Paul Seaton
Representative Harry Crawford
Representative Mary Kapsner
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative John Coghill
Representative Peggy Wilson
Representative David Guttenberg
Representative Les Gara
Representative Beth Kerttula
Representative Bill Stoltze
Representative Reggie Joule
Senator Thomas Wagoner
COMMITTEE CALENDAR
HOUSE BILL NO. 488
"An Act repealing the oil production tax and gas production tax
and providing for a production tax on the net value of oil and
gas; relating to the relationship of the production tax to other
taxes; relating to the dates tax payments and surcharges are due
under AS 43.55; relating to interest on overpayments under AS
43.55; relating to the treatment of oil and gas production tax
in a producer's settlement with the royalty owner; relating to
flared gas, and to oil and gas used in the operation of a lease
or property, under AS 43.55; relating to the prevailing value of
oil or gas under AS 43.55; providing for tax credits against the
tax due under AS 43.55 for certain expenditures, losses, and
surcharges; relating to statements or other information required
to be filed with or furnished to the Department of Revenue, and
relating to the penalty for failure to file certain reports,
under AS 43.55; relating to the powers of the Department of
Revenue, and to the disclosure of certain information required
to be furnished to the Department of Revenue, under AS 43.55;
relating to criminal penalties for violating conditions
governing access to and use of confidential information relating
to the oil and gas production tax; relating to the deposit of
money collected by the Department of Revenue under AS 43.55;
relating to the calculation of the gross value at the point of
production of oil or gas; relating to the determination of the
net value of taxable oil and gas for purposes of a production
tax on the net value of oil and gas; relating to the definitions
of 'gas,' 'oil,' and certain other terms for purposes of AS
43.55; making conforming amendments; and providing for an
effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 488
SHORT TITLE: OIL AND GAS PRODUCTION TAX
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
02/21/06 (H) READ THE FIRST TIME - REFERRALS
02/21/06 (H) RES, FIN
02/22/06 (H) RES AT 12:30 AM HOUSE FINANCE 519
02/22/06 (H) Heard & Held
02/22/06 (H) MINUTE(RES)
02/23/06 (H) RES AT 12:30 AM HOUSE FINANCE 519
02/23/06 (H) Heard & Held
02/23/06 (H) MINUTE(RES)
02/24/06 (H) RES AT 12:30 AM HOUSE FINANCE 519
02/24/06 (H) Heard & Held
02/24/06 (H) MINUTE(RES)
02/25/06 (H) RES AT 10:00 AM SENATE FINANCE 532
02/25/06 (H) Joint with Senate Resources
02/27/06 (H) RES AT 12:30 AM CAPITOL 124
02/27/06 (H) Heard & Held
02/27/06 (H) MINUTE(RES)
02/28/06 (H) RES AT 12:30 AM CAPITOL 124
02/28/06 (H) Heard & Held
02/28/06 (H) MINUTE(RES)
03/01/06 (H) RES AT 12:30 AM CAPITOL 124
03/01/06 (H) Heard & Held
03/01/06 (H) MINUTE(RES)
03/02/06 (H) RES AT 12:00 AM CAPITOL 124
03/02/06 (H) Heard & Held
03/02/06 (H) MINUTE(RES)
03/03/06 (H) RES AT 12:30 AM CAPITOL 124
03/03/06 (H) Heard & Held
03/03/06 (H) MINUTE(RES)
03/04/06 (H) RES AT 2:00 PM HOUSE FINANCE 519
WITNESS REGISTER
JIM EASON, Consultant
to the Legislative Budget and Audit Committee
POSITION STATEMENT: Provided an analysis of HB 488.
ACTION NARRATIVE
CO-CHAIR RALPH SAMUELS called the House Resources Standing
Committee meeting to order at 2:02:26 PM. Present at the call
to order were Representatives Elkins, Seaton, LeDoux, Ramras,
and Samuels. Representatives Olson, Gatto, Crawford, and
Kapsner arrived as the meeting was in progress.
HB 488-OIL AND GAS PRODUCTION TAX
2:03:07 PM
CO-CHAIR SAMUELS announced that the first order of business
would be HOUSE BILL NO. 488, "An Act repealing the oil
production tax and gas production tax and providing for a
production tax on the net value of oil and gas; relating to the
relationship of the production tax to other taxes; relating to
the dates tax payments and surcharges are due under AS 43.55;
relating to interest on overpayments under AS 43.55; relating to
the treatment of oil and gas production tax in a producer's
settlement with the royalty owner; relating to flared gas, and
to oil and gas used in the operation of a lease or property,
under AS 43.55; relating to the prevailing value of oil or gas
under AS 43.55; providing for tax credits against the tax due
under AS 43.55 for certain expenditures, losses, and surcharges;
relating to statements or other information required to be filed
with or furnished to the Department of Revenue, and relating to
the penalty for failure to file certain reports, under AS 43.55;
relating to the powers of the Department of Revenue, and to the
disclosure of certain information required to be furnished to
the Department of Revenue, under AS 43.55; relating to criminal
penalties for violating conditions governing access to and use
of confidential information relating to the oil and gas
production tax; relating to the deposit of money collected by
the Department of Revenue under AS 43.55; relating to the
calculation of the gross value at the point of production of oil
or gas; relating to the determination of the net value of
taxable oil and gas for purposes of a production tax on the net
value of oil and gas; relating to the definitions of 'gas,'
'oil,' and certain other terms for purposes of AS 43.55; making
conforming amendments; and providing for an effective date."
2:04:14 PM
JIM EASON, Consultant, Legislative Budget and Audit Committee,
said he came to Alaska as a petroleum geologist and has worked
for Conoco and Arco, as well as the United States Geological
Survey evaluating off-shore acreage in Alaska. He then worked
for the state as the director for the predecessor of the
Division of Oil and Gas. He has since been a consultant for
industry, governments, and law firms. He said there have been
all sorts of mathematical issues, but he wants to talk about his
perspective. He has seen the "quasi-legal side" of states
protecting their interests.
2:09:12 PM
MR. EASON said there are geological connections that aren't
obvious "if you are just going to focus on the economics." He
said "the numbers you've been looking at are wrong, but it's not
necessarily bad." He noted the geological risk of reduced large
discoveries, but there are new ideas and new technology.
MR. EASON said Pedro van Meurs' report helps evaluate "what the
numbers mean." The report notes that smaller fields are the
main target on the North Slope, and the proposed profit-based
petroleum production tax (PPT) is primarily a tax on existing
production. The 50 million-barrel high-cost, low-productivity
case "is a very important benchmark for large producers because
this is a fairly representative case of most of the incremental
developments that may take place on the North Slope. This case
will therefore see a significant improvement over all economics
while on average there's no increase in tax, assuming that large
companies maintain a long-term price forecast in the $25 to $30
range." Mr. Van Meurs is saying there is geological and
forecasting risks, which is relatively minimal because there is
history there. Undiscovered resources are "totally
hypothetical." Price forecasts are notoriously unreliable.
MR. EASON said some wells penetrate many different reservoirs,
and a company in Cook Inlet defined "well" to take advantage of
the ELF. He said most people assumed that the accumulations in
Prudhoe Bay were part of the Prudhoe Bay field, and it was
disaggregated. He reflected on mistakes the state made when
beginning competitive oil and gas lease sales. An attorney, who
was provided by the Western Oil and Gas Association, influenced
these decisions, causing years of litigation. In 1977, "the
words of the lease finally began to take on real significance.
The state's first royalty receipts indicated that everybody
seemed to be paying royalties on a very different basis."
2:22:16 PM
MR. EASON spoke of the issues around the leases, including how
the state determines the fair and reasonable allowance for
transportation. He said litigation lasted 17 years. For
Prudhoe Bay it was agreed that "the state would pay a field cost
no matter what, if it was in kind or in value, on a negotiated
amount." The settlement did not provide a mechanism to look
back. He said that agreement is still alive and governs what
the state's obligations are at Prudhoe Bay, and the state pays
"just about a dollar a barrel." There are some [indecipherable]
leases still there and are associated mostly with production.
MR. EASON said that while the case was pending, the producers
settled and produced the Trans-Alaska Pipeline System Settlement
Methodology, and "for years and years, everyone that I've talked
with who does not own a piece of the pipeline feels that the
actual settlement values on that pipeline are prohibitively
expensive for some companies to produce on the North Slope and
at a minimum, very costly."
MR. EASON said the effects [of the methodology] have grown over
time, and it is a big impediment for some. It is the same with
facilities-access, he noted. He said, "By the time the early
90s was rolling around, litigation was still going on, the
administration made a decision to try to settle the case on the
remaining issues before the trial date because the climate had
really gotten ripe." The litigation was expensive, he said.
Three people were selected to meet with the big producers to
settle the "simple question" of how to value the oil. The
agreement resulted in three different settlement agreements with
Phillips Alaska, Inc., BP, and ExxonMobil Corporation.
"Basically they looked to a proxy for the lease terms that they
had before [indecipherable] value. Those are just set aside,
and the deal was that we created a new way of valuing North
Slope oil." He said the basic agreement looked to the relative
movement of the average prices of the spot reported prices for
[indecipherable]. "It was designed so they would try to
replicate the value...of ANS in the market and hopefully, with
the provisions that were designed into it, continue to do that,
continue to produce the same economic result." He said the
agreements have been in effect since about 1992. There have
been "a number of re-openers" and negotiations, he said. Both
sides are happy, he opined.
MR. EASON added, "The key is, without the ability to compensate
if your decision is wrong, you run the risk of a really
disproportionate result." He said the question of the point of
production that was "so important in the royalty litigation...is
an issue that needs to be clear in both parties' minds...how it
may affect existing production practices but also how it may
translate to the major gas sale."
MR. EASON said the state anticipated major gas sales in 1980
during the settlement agreement, and there are some provisions
that will materialize over time as the project moves forward.
The changes made in tax statutes "change some of the things that
will have, or be impacted by, the decisions incorporated in any
agreements that affect those in the future. And we can't really
say much about that other than that right now." Looking at HB
488, there is a new definition for both gas processing
facilities and gas treatment facilities, "and we have asked...to
get some greater certainty about what the intent and the
interpretation of some of these features might be and how that
may change over time." He stated that it is very important that
those questions be answered because they provide some
uncertainty with potentially great significance.
MR. EASON said another issue is the breadth of credit and
deductions in HB 488. The bill speaks to qualified expenditures
for exploration, production, and development, but no one knows
what that is. As it is written, it could be argued that it is
"everything and anything that you can imagine." He said he is
not alone in that thought. He said smaller companies would like
those terms better defined, and the state should know its future
exposure to that. He said it will be time consuming but worth
it, and the hard calls would be "your calls, obviously." It
will help avoid ambiguity and give an understanding to the
implications of this decision. He said one issue is the
question of abandonment costs, and the state should have some
sense of what that might be. The state will be underwriting
these costs, which is a major change from today.
2:37:17 PM
MR. EASON said the Department of Revenue told the legislature it
has not included abandonment costs in all its estimates. He has
not seen any estimate of the costs of abandoning the Cook Inlet
platforms. As an example of a way Alaska could begin to examine
this potential cost to the state, he looked at the costs of
abandoning platforms on the California coast.
REPRESENTATIVE GUTTENBERG asked Mr. Eason about abandonment
costs in Prudhoe Bay. He asked if he is talking about the "r
and r' and what's been in place since the original leases. He
asked if the past can be set aside as no longer valid.
MR. EASON asked if he is referring to the Trans-Alaska Pipeline
System. He said that "would stay just as they are because it's
a transportation. Arguably you can't guarantee nobody would
claim that, but I'm looking upstream of the transportation. But
including the transportation-the pipelines, the flow stations,
all the things upstream of that-I believe under this bill would
be subject to your support in abandoning."
REPRESENTATIVE GUTTENBERG said, "So it has to be in the bill,
otherwise it doesn't happen?"
MR. EASON said that is correct.
2:39:58 PM
REPRESENTATIVE GATTO said, "I think he's referring to what we
call demobilization, removal, and rehabilitation." That money
is supposed to be set aside for that eventual day in an amount
sufficient to make it all happen. He asked if new legislation
could eliminate that.
MR. EASON said he is talking about field abandonment. "I do not
believe anybody has physically put money aside for that. They
are contemplating it. They are in some fashion accounting for
it." He doubts anybody has put money aside for it, but it is a
known, and substantial, obligation.
CO-CHAIR SAMUELS said it is just a future liability.
REPRESENTATIVE GATTO said, "I thought it was a nickel, and I
think the only thing we're talking about was removing the
pipeline." He still wants to know if it is a promise to pay or
is it money in the bank.
2:41:40 PM
MR. EASON said there is no bank for the money. He said it is
completely separate from the TAPS and upstream from it. It
would be all the wells that have been drilled, the pads, and
whatever the state requires. Other agencies will play a role,
including the Fish and Wildlife Service and the Environmental
Protection Agency. "The question is: who pays for it?" Under
existing law and existing leases, the companies can deduct those
costs from their federal and state corporate income taxes. They
can't deduct from the petroleum tax, but will under this bill.
He warned that there is an exposure to allowing credit on top of
the deduction, even thought DOR has said that is not the intent.
MR. EASON said most of those costs are unknown. The 23
platforms that will be abandoned in California will cost
anywhere from $10.29 million to $129 million. It will cost more
in Alaska, but not as high as the high estimate, he surmised.
Under the net profit share leases, the lessee pays a royalty and
is forced to pay a share the net profits above that, he said.
So there are running accounts for those leases in certain
fields. Every month and year the costs are accumulated and
carried forward, "so at any point in time you can look and see
what the development account balance is that's growing with
interest." That gives an indication for two fields, and the
estimated cost for the Endicott field is about $110 million, he
said. The Northstar field has a $75 million exposure for
abandonment. He looked at the applications for royalty
reductions, which are confidential. But the range for royalty
applications range from 7-20 percent of the total combined
facility and well costs. "Those are very large numbers, and I
think they are large enough that you should be concerned about
trying to find out as much as you can...[of] an estimate of what
those costs might be spread across all the known facilities
today." It is significant, he opined.
2:48:11 PM
CO-CHAIR SAMUELS noted the Mr. Eason said small companies want
cost recovery definitions laid out in statute, but it has been
the large companies requesting such from him. He added that if
it is in statute, the industry will ask future legislators to
change it "and into the political system we go where common
sense sometimes doesn't quite bubble to the top." The benefit
of putting it in regulation is the bureaucrats can speak the
same language, but then the industry complains about the power
of the regulators, who are the most qualified people to make the
determinations. He asked for Mr. Eason's opinion.
2:49:51 PM
MR. EASON told the committee to prioritize the policies that
need the most clarification. He said to focus on costs that may
be the greatest, and then define or limit those costs. He
suggested to think of it as a negotiation, and it will not be
unusual to "split, refine, qualify, place sideboards." There
could be a limit on the percentage of recovery that tries to
measure the production profile with its expected revenue. "The
worst possible event you would want is to have falling prices
when you didn't expect them, really declining production because
the fields haven't materialized, and a bill for the
[indecipherable]. And that's the worst case...I can remember
when, back in the early 80s, we were looking very seriously at
statute to make sure that we had the statutory minimum in case
the prices fell below the field costs and all the other
considerations for the state's royalty oil. So...those thing
can change very dramatically in very short order."
2:53:26 PM
REPRESENTATIVE SEATON surmise that Mr. Eason is saying is that
terms defined in statute need to be modifiable in regulation,
giving the state more flexibility but more chance of lawsuits
because people understand the terms differently.
2:53:59 PM
MR. EASON said he would stop short of calling for all of them in
statute. He suggested defining them in advance by the
department or by consensus, "so that there's an understanding."
He said to identify places where there have been problems and
fix them or come to an understanding. He said a working group
has been recommended for all of the producers, and he noted that
the Alaska Oil and Gas Association may have done that. He
stressed that there are broad terms in [HB 488] that can be
interpreted in costly ways, and he said to resolve those.
2:55:37 PM
MR. EASON he said there was some language in HB 488 with
historic themes. He noted that when negotiating agreements and
appeals, the state was urged to resolve them by resorting to the
unit operating agreements for guidance or clarification.
Regarding the bill he said, "anytime I see a legislative
directive to an administrative agency that they'll use
'substantial weight', I know that somewhere there's somebody
that's going to tell you what that is, and it's likely to have a
different opinion between parties." He added that the fact that
it's connected with an operating agreement, again, "is sort of a
recurring theme. You may, as a matter of policy, want to do
that if you have more comfort or exposure to them. But...they
are agreements among the working interest owners in a unit.
They aren't agreements with the state. The state has no control
over the terms and prove them or deny them." He said some
things that the parties agree to will not be in the state's
interest. There are many operating agreements and they differ,
he stated, and they are given to the state as a courtesy and are
not required. The agreements are routinely amended and the
state often doesn't have the current agreement. As a royalty
owner the state needs to explore that more, he said. The
implications are unknown.
3:00:01 PM
MR. EASON said another recurrent theme is adopting the royalty
settlement agreement values for determining value for severance
taxes. He noted that three different settlement agreements were
negotiated in resolving the oil phase of Amerada Hess. At any
point in time those numbers usually were different, he said.
Sometimes the calculation of crude is dramatically different,
because one agreement allows actual costs "and then some." "If
you start thinking about which one of those you might want to
use, there's probably a concern there...how would you do that
mechanically and why would you do that?"
MR. EASON said looking back at the performance of the state's
royalty settlement values against the severance tax payments in
the first ten years showed consistent higher average severance
tax value than royalty settlement agreement value. That number
has grown larger in the last five years, he stated, with an
average of about $0.40 a barrel. There is a concern that it
will grow. Theoretically, the department has the authority to
consider all these things for indicators of value, and the
effort to memorialize it in statute raises a flag, because doing
that has produced a lower result.
MR. EASON said the royalty settlement agreements provide for
arbitration rather than litigation. He spoke of his involvement
in the agreements and DOR's role. He said DOR enjoys some
deference from the courts. The arbitration proceedings for the
settlement doesn't have full discovery opportunities and the
decision-making process is much narrower. He said adopting the
royalty settlement agreements isn't clear whether that is the
fiscal terms only or the arbitration option for making tax
decisions, which is a very different world with risk.
3:06:26 PM
CO-CHAIR RAMRAS asked Mr. Eason how the House Resources Standing
Committee was handling the legislative proceedings on HB 488.
3:08:12 PM
MR. EASON said the process and effort is good, and Daniel
Johnston will give the committee his sense of the appropriate
way to go.
CO-CHAIR RAMRAS asked about Mr. Eason's confidence in DOR.
MR. EASON said he said the DOR people are qualified, but "you
would be well-served to have as many eyes looking at this
problem as you can." He said the bulk of the expertise in the
state is in DNR, which works every day with every aspect of the
oil and gas industry. He said to make sure that DNR people are
complementing and consulting with DOR, which he achieved when he
was the director of the Oil and Gas Division.
3:12:57 PM
CO-CHAIR RAMRAS said there are rumors that "our guys" are not
smart enough to take on "their guys," because the best people
migrate to the high paying jobs in the industry. He asked if
the state can handle this task or if the producers will be
"high-fiving each other on their way out of town."
3:14:29 PM
MR. EASON said he has met people in the state who are as good as
anyone in the industry, but industry has "more of them and
generally they stay up longer and start earlier." There is a
built-in competitive advantage that goes beyond intellect and
talent. He said the "resources were always insufficient...to
assure you that you were covering all the bases." The state's
work is precipitated by events out of its control. The industry
has the advantage of pursuing specific programmatic agendas into
the future.
REPRESENTATIVE GARA brought up the royalty settlement
methodology issue. Section 20 of HB 488 comes up with a new way
of assessing the gross value of oil that will be taxed. He
asked if the rewrite raises the potential to lose millions or
billions of dollars compared to current law. He asked if a
producer will be able to choose between two tax methods, giving
them the opportunity to choose the lowest tax formula.
3:17:49 PM
MR. EASON said the PPT is based on profits. He said the
producers have always wanted both royalty and tax "using those
values." Historically, "had you done that under the existing
production tax gross system, you would have lost money eight out
of the last ten years that the settlement has been in effect."
In the last five years, the state would have lost more money-"a
big number." He said the intent and exact rules and procedures
are not clear. "If you can find out what that is you will get a
better sense of what it might cost you." He added that all the
numbers are averages, and "all we know at this point is that on
the average the royalty settlement values have not performed as
well as the severance tax values under the existing system."
REPRESENTATIVE GARA asked, "If we said 'no', we're just going to
go with how we calculate the value under current law...could we
do that under the PPT? Would it mesh or do we have to change
our definition of how we calculate the value?"
MR. EASON said the way values are calculated now, the department
has regulations that they would presumably follow. "I believe
they have the authority now, under regulations, to make changes
in how they value, and I presume they would just continue to do
that...The flag that is raised is why the emphasis in this bill
to reinforce that option exclusive of others." He said the
concern is not knowing what the operating agreements provide and
that the state can't affect them, "but you're being asked in
this bill to do something that is-raises a question as to why.
You're being asked to say in statute that the agency must give
substantial weight to those." He asked what that weight is, and
said it will be resolved in law or arbitration. He asked if and
why operating agreements are intended to be used since operating
agreements can be changed and are out of the state's control.
3:23:36 PM
REPRESENTATIVE SEATON mentioned that allowable costs do not
include headquarter operations. If there were two operators who
agreed to take off $600 million for headquarter costs, for
example, "then we would be stuck into recognizing those
headquarter costs as an allowable deduction because we're giving
substantial weight to the operation agreement?"
MR. EASON said the if statute doesn't allow that, "I can't
believe that they would knowingly allow it through some other
mechanism." He said the concern is how far the state wants to
go regarding the costs of exploration, production, and
development. It may be a policy matter, but he has seen many
things suggested as allowable costs. He noted that anyone doing
their income tax tries to figure out every [deduction]. It is
more important to have protection for both parties without
unexpected disadvantages to either. He stressed getting the
best information from many sources.
REPRESENTATIVE LEDOUX asked where "substantial weight" is
defined.
MR. EASON said it is not defined in HB 488, and it may vary.
REPRESENTATIVE LEDOUX asked if the courts defined it in Alaska.
MR. EASON said he doesn't know.
REPRESENTATIVE CRAWFORD said he makes a great case for the
constitutional requirement that one legislature can't bind a
future legislature.
3:30:50 PM
REPRESENTATIVE KERTTULA asked him to suggest language regarding
the royalty settlement methodology and operating agreements.
MR. EASON said that is his intent.
REPRESENTATIVE GUTTENBERG said Mr. Eason is stressing getting
the definitions right. It sounds like the perception is that
DOR is a backstop, and he asked if it's possible to build in the
intent that if the call is close, "it goes to the home team."
MR. EASON said the attorneys will likely say no.
REPRESENTATIVE COGHILL said he heard discussions about the
royalty settlement methodology and the sharing of profits and
where that fits for the processing and treatment facilities. It
will be interesting "on how we set the areas." He asked for
help in understanding those parameters.
MR. EASON said one important issue on the royalty side is how to
define the point of production. With all decisions and
settlements, the legislature corrected that for the future
leases, "they just said you can't do that anymore. You can't
issue a lease that allows a field cost." There are still many
out there, and the healthy majority of the leases in Prudhoe Bay
are. There is already a field cost settlement for oil and some
allowances for gas. He said the Kuparuk original area was also
"in the deal." There are many leases that are unclear, but it
is related to how to define point of production. There is the
issue of what is merchantable, which can change depending on
where you are.
MR. EASON said the state can write the regulations "so as to
move in a situation where you are going to build facilities,
depending on how the regs define the point of production. Some
facilities potentially will be able to claim deductions and
credits under this bill, and some may not if they aren't
configured in the way that takes advantage of...I don't mean
unfairly, just does this in recognition of what the tax
consequences are." He said there isn't much gas being produced
now, but the hope is for a major gas sale. The decision on how
and where to place those facilities is not clear, he said.
Because of that uncertainty, there is a valid question of how
much and what pieces the state will assume the responsibility
for carrying those deductions and credits. It is important to
determine the intent of the parties and what is upstream or
downstream relative to the pipeline.
3:39:39 PM
REPRESENTATIVE COGHILL said, "We're going to have to start
defining what they can deduct." He noted that the movement of
gas and oil will be part of the discussion in that regard.
MR. EASON said the processing and production facilities can
change over time. Currently, "you know that from the wellhead
to the final product there's-you can control where things happen
with the technology." He said the Division of Oil and Gas may
be able to help. He said the issue has been big in the past
with large consequences. The state will be faced with a large
project, and the goal is to clarify the intent.
3:41:30 PM
REPRESENTATIVE LEDOUX said rather than incorporating nebulous
phrases into the bill such as "operating agreements will be
given substantial weight," why not just list each item that
would be accepted as a reasonable cost? It is better to argue
about it now than to argue in court for the next 15 years.
MR. EASON stated that some companies prefer this route, and it
may not be the best solution but is one solution. He said he is
not the only one who thinks that it is important to do.
CO-CHAIR SAMUELS noted that if the statute misses something, it
will be difficult to change it.
REPRESENTATIVE WILSON spoke of abandonment costs, and asked Mr.
Eason if he said the legislature has to be careful because of
the credits with no timeline. "Would you suggest that we put a
timeline on the credits so that we don't inadvertently end up
doing a bigger portion of that abandonment cost ourselves, or
did you say that maybe we should just look at a percentage?"
MR. EASON said there are two policy calls. The bill now
includes abandonment costs as part of development and
production, so that would mean underwriting the full cost of
abandonment. The state can decide to underwrite a percentage of
those costs or decide to only allow new developments. Many
players entered into projects years ago with an understanding,
he said. But he stressed looking at the numbers. He noted that
the bill is designed to encourage exploration and development,
but there is nothing intellectually wrong with sharing in the
costs of abandonment. It could be done based on the volumes
produced, he said, and there are many options besides the bill,
which underwrites all those costs of abandonment. He said it is
important to know what those figures will be.
3:47:40 PM
REPRESENTATIVE COGHILL asked for an explanation of arbitration
as set in the bill in terms of working on the definitions.
3:48:18 PM
MR. EASON said there is currently no provision for arbitration.
He said producers have wanted to substitute arbitration for
litigation. Some arbitration is fast but not all; sometimes it
takes a year to pick an arbitration panel, he said. At times,
litigation is better for complex issues. Producers are more
comfortable with arbitration because they do a lot of it, he
stated, but they find themselves being sued a lot.
REPRESENTATIVE COGHILL said, "Do we get better definition
through litigation? And then the discovery issue, is that
because you can force proprietary information to come to the
table through litigation against arbitration?"
MR. EASON said he would not say that litigation gave better
clarification, generally. He said some judges resolve all your
concerns and others raise new ones. Some arbitrators are
limited in their decisions. He said his experience is that the
state has been disadvantaged by the relative wealth of
information when it comes to a dispute. The state has the
reports and numbers and a relatively imperfect sense of why and
how, he added. The producers don't have to discover very much;
they have all the information.
REPRESENTATIVE COGHILL noted that the state is always on the
defensive in those situations, but with rule-making the state
can be in the offensive position.
REPRESENTATIVE SEATON asked if the problem on abandonment is an
incentive to shut down in marginal production.
MR. EASON said there are probably many ways to evaluate that.
He said the cost of continuing to produce is underwritten to
some degree, and [allowing deductions of abandonment costs]
could create different outcomes. He said the fundamental issue
is figuring out how much financial exposure the state might have
and making a judgment at that point. He said the legislature
doesn't have enough information right now to make the decision
of underwriting those costs.
3:57:16 PM
REPRESENTATIVE SEATON asked about the tax flow being reduced,
and giving the industry an allowance on abandonment expenses,
and especially credits. A future legislature may have a small
flow of cash coming in, and it might be more important for
future legislatures when the fields are declining, he surmised.
MR. EASON said that is fair. "You know you've got these things
and you know somebody's going to have to abandon them, and you
know that now it's not your problem, and tomorrow it will be."
REPRESENTATIVE LEDOUX suggested fashioning an arbitration clause
to make discovery just as liberal as under litigation.
MR. EASON said it may be possible if there is agreement, but
arbitration terms can't be dictated. There is nothing in HB 488
that directs the parties to arbitration. It is suggested by
other language, he said. It is something that can be explored.
4:01:03 PM
CO-CHAIR RAMRAS spoke of previous testimony that expressed that
indemnification should not be excluded as a cost. He asked if
the bill is excluding Alaska micro-players and if there is a
special remedy for that.
MR. EASON said helping Alaskan companies is a legal issue, but
it may be able to be done creatively. He said helping small
companies, "is a perennial question...You have to be sensitive
to it but there's no end of things that people...can think of
that they need help with." The state has a commendable record
of being responsive to small companies, like providing
exploration licensing. He said that people have revisited
bonding, and those numbers have decreased. He spoke of
exploration credits, and noted that the state is already
providing incentives on a limited basis.
4:06:10 PM
MR. EASON said there have been companies and individuals that
"were really playing above their heads," and the state bears the
risk by encouraging small entities without ending up with an
uncontrolled spill and no liability or coverage. There is a
host of things that can happen, including litigation, and this
business requires a certain level of underwriting.
4:07:07 PM
[HB 488 was heard and held.]
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 4:08 PM.
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