Legislature(2011 - 2012)BARNES 124
03/21/2012 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB360 | |
| HB365 | |
| Overview(s): Oil & Gas Taxes & Credits | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| += | HB 360 | TELECONFERENCED | |
| += | HB 365 | TELECONFERENCED | |
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 |