Legislature(2005 - 2006)CAPITOL 106
07/26/2006 10:00 AM House STATE AFFAIRS
| Audio | Topic |
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| Start | |
| HB3005 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB3005 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE STATE AFFAIRS STANDING COMMITTEE
July 26, 2006
10:16 a.m.
MEMBERS PRESENT
Representative Paul Seaton, Chair
Representative Carl Gatto, Vice Chair
Representative Jim Elkins
Representative Bob Lynn
Representative Jay Ramras
Representative Berta Gardner
Representative Max Gruenberg
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 3005
"An Act providing for an additional production tax on oil when
the price index on oil is above a certain amount; and providing
for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB3005
SHORT TITLE: PROGRESSIVE TAX ON OIL
SPONSOR(s): STATE AFFAIRS
07/25/06 (H) READ THE FIRST TIME - REFERRALS
07/25/06 (H) STA, FIN
07/26/06 (H) STA AT 10:00 AM CAPITOL 106
WITNESS REGISTER
CHERIE NIENHUIS, Petroleum Economist
Tax Division
Juneau Office
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Answered questions on behalf of the
division during the hearing on HB 3005.
ACTION NARRATIVE
CHAIR PAUL SEATON called the House State Affairs Standing
Committee meeting to order at 10:16:34 AM.
HB3005-PROGRESSIVE TAX ON OIL
10:16:50 AM
CHAIR SEATON announced that the only order of business was HOUSE
BILL NO. 3005, "An Act providing for an additional production
tax on oil when the price index on oil is above a certain
amount; and providing for an effective date."
10:17:26 AM
CHAIR SEATON directed attention to handouts in the committee
packet, including, "Projected Government Takes with Sliding
Scale Tax DOR Forecast Production (FY 2007-2030)" - provided by
Econ One Research, Inc. ("Econ One"), and the fiscal note. He
referred to the sponsor statement and asked the committee to
remember that every committee - both Senate and House - that has
passed a production profits tax (PPT) or a change in tax
structure has included a progressivity element. Some
progressivity elements have been "on the gross," while others
have been "on the net." He continued:
What came out of [the House Resources Standing
Committee] was .3 percent on the gross .... Of
course, that was in conjunction with a total rewrite
of the PPT for the initial part of the tax, which
would have raised it from the ... [economic limit
factor (ELF)] that we have right now - which is
basically an average of a little less than 6 percent
statewide - to the ... 20-20 or 22.5 percent on the
net. So, those two were in conjunction when this econ
ONE data went forward.
And also, from the Senate side we got passed over here
a progressivity of .2 on the gross during the regular
session, going out of [the House Finance Committee] we
were looking at .25 on net at $35 a barrel. And the
$35 dollars a barrel roughly corresponds with $50 a
barrel. There will be some questions about what index
to use, and the differences between those indexes.
What came out of [the House Resources Standing
Committee], which several members here sit on, was
using West Texas Intermediate, and part of the
reasoning for that was that would be [an] index that -
no matter what happened with ... producers on the
North Slope ... - could not be influenced or changed
as an index. So, it was viewed as more of an
independent index, and that's what we've incorporated
here at this point.
10:21:08 AM
CHAIR SEATON said HB 3005 starts with the progressivity at .35
percent, and there is a $50 WTI index. He asked the committee
to remember that the WTI is only the index trigger; the tax is
on wellhead value of Alaska crude. He continued:
And then that increases between $50 a barrel and $150
a barrel at the .35 percent, and then it caps at $150
a barrel. And the reason it's constructed that way is
that if we look at our production tax now, the
production tax is 15 percent. That's modified by ...
all fields in Alaska, but the actual production tax on
gross is 15 percent. So, if you add 15 percent, plus
35 percent, you get that equal split or equal share
that all the bills have decided, "Okay, this is where
we want to cap the production tax." Because if you
didn't cap that, let's say there was something really
crazy and that the price went to $300 or $400 a barrel
for a short period of time - for a month - you'd
actually end up taking 100 percent of the value in the
production tax. So, that's why it caps at an equal
share. ... So, the 35 percent, which would be
captured at the highest rate by this windfall property
or progressivity tax, would add to the 15 percent of
the current production tax - even though that's not
paid. If we had said, in conjunction with the tax as
paid - in other words that ELF - it would have meant
that those fields that were paying no production tax
under ELF could actually end up paying more tax on
progressivity than fields such as Prudhoe Bay, which
is paying about 9 percent.
... So, what we didn't want to do is make this bill
into a recapture of ELF for some fields, so that's why
we used the entire production tax of 15 percent, ...
combined with 35 percent gave us the equal share.
CHAIR SEATON noted that the bill has a retroactive date of April
1, [2006], and the payment is due 30 days after the effective
date of the tax, not the retroactive effective date, and it can
be made at that time, no interest due. However, if the company
wishes to split the payment up into 6 equal payments after that
effective date, then the interest would be due on the unpaid
balance, as required by law.
10:24:59 AM
CHAIR SEATON, in response to a query by Representative Gatto,
clarified the value of .35 percent.
10:26:48 AM
REPRESENTATIVE GARDNER directed attention to a sentence in the
sponsor statement that read: "It may be paid in a lump sum
without interest or remitted in six equal monthly payments with
any unpaid balance accruing interest at the rate proscribed in
AS 43.05.225." She pointed out that "proscribed" means
"prohibited," and she suggested the word the sponsor meant to
use is "prescribed."
10:28:34 AM
CHAIR SEATON noted that the previously mentioned Econ One
handout was done in conjunction with "a 20-20 PPT," and he
stated that "under the PPTs that we've been considering, ...
gross taxes are deductible from the net profit." He said, "If
this is used in conjunction with a net profit tax scheme, ...
then this can be used in conjunction with that." He stated:
The intention of introducing this bill is not to
circumvent, to supplant, or replace a comprehensive
bill ... which is used, based on the net or on the
gross. If we're able to arrive at that consensus ...
I'm all in favor of it; but if we're not able to
arrive at that consensus, what I think the committee
is wanting to do is have a bill that we can go forward
with ... [which would capture] some of the high oil
prices. And that's just what this bill deals with.
It only deals with capturing some of the ... windfall
profits that were derived from high oil prices going
back to April 1. So, it doesn't change the ELF
system, it doesn't change the production tax system,
it doesn't make a change to net or anything else, but
it can be used in conjunction with either system.
And, again, that was obvious because we had
progressivity proposed from the Senate on the gross,
which passed over to us during the regular session
[and subsequently] passed out of [the House Resources
Standing Committee] ... on the gross progressivity in
conjunction with a present profits tax. And then, ...
if it's decided to change this to net, we of course
had several other bills that later came with
progressivity on the net, in conjunction with the net
profits tax. So, hopefully what we'll be doing is
looking at some of the elements of progressivity very
deeply and figuring out what analysis the committee
wants on all of these things.
10:32:05 AM
REPRESENTATIVE GRUENBERG asked for confirmation that the intent
is that if the legislature cannot reach agreement on all the
other related bills, [HB 3005] could be passed as a standalone
bill.
10:32:26 AM
CHAIR SEATON answered that's correct. He said he thinks there
is unanimous agreement in the legislature that some
progressivity is needed to capture the high oil prices.
10:33:22 AM
REPRESENTATIVE GRUENBERG asked for confirmation that there were
no amendments on the House floor to eliminate the progressivity
concept.
10:33:44 AM
CHAIR SEATON responded that there were some amendments to modify
the progressivity element, but there were no amendments proposed
to take it away.
10:34:02 AM
CHAIR SEATON directed attention to another handout in the
committee packet, which shows the Alaska North Slope average
monthly wellhead price per barrel and the Alaska North Slope
average monthly volume in millions of barrels for January - May
2006. The information on this portion of the page was supplied
by the Department of Revenue. Chair Seaton noted that by using
that information, his office figured the average value
multiplied by the average volume to arrive at the approximate
monthly value, and multiplied the monthly value times the West
Texas Intermediate (WTI) minus 50, then multiplied that by .35
percent to produce the total tax due. That information, he
noted, shows at the bottom of the page. He reviewed the
examples shown on the page. He noted that the last figure on
the page is his "estimated max tax."
10:38:20 AM
CHAIR SEATON directed attention to a [two-page] handout from the
Energy Information Administration, included in the committee
packet, which shows the monthly WTI spot price and is the index
that would be used for HB 3005. He said the index that is used
throughout the bill is WTI minus $50. He offered an example,
which he clarified upon request from committee members.
10:41:41 AM
REPRESENTATIVE GATTO recalled hearing that the volume [of oil]
was less than anticipated, and he said he would like to know if
there was shut down sometime in June or July to account for it.
CHAIR SEATON mentioned a pipeline that had been recently shut
down due to a leak.
10:42:43 AM
CHERIE NIENHUIS, Petroleum Economist, Tax Division, Juneau
Office, Department of Revenue, offered her understanding that
"there is still some oil that is being shut in," but she said
she doesn't know the extent of it. She said she believes the
department is approximately 2 percent off its forecast for
fiscal year 2006 (FY 06), and "a lot of it was due to the shut
in wells."
10:43:05 AM
REPRESENTATIVE GATTO asked if, absent the shut-in, the oil is in
continual decline and, if so, at what percent.
10:43:24 AM
MS. NIENHUIS answered yes, but said she doesn't have the exact
numbers available.
10:43:51 AM
CHAIR SEATON referred back to the handout showing the
information from his office and the Department of Revenue, and
talked about fluctuation in volume of oil. He said he doesn't
know the cause of the fluctuation. He indicated that the
handouts are rough estimates, and he said the committee could
look forward to hearing from representatives from Econ One and
possibly from the Department of Revenue for further information.
10:45:07 AM
MS. NIENHUIS said each field has a different wellhead value,
which has to do with quality bank and feeder pipe deductions and
additions. She said the information presently before the
committee is a rough average with which the committee could
work.
10:45:58 AM
REPRESENTATIVE GATTO asked Ms. Nienhuis if she has heard the
slogan, "No decline after '99." He said that certainly has not
occurred, and he asked if there is some factor that has been
identified to explain the decline.
10:46:34 AM
MS. NIENHUIS said she believes the reason for the decline in
production is that the state has not appropriately incentivized
the oil companies to "invest back in our fields in Alaska."
Without that investment, she said, there will be a natural
decline in field productions over time.
10:47:35 AM
MS. NIENHUIS, in response to a follow-up question from
Representative Gatto, said exploratory drilling has not been
happening at the rate that the department would like. She said
the department would like to not only see exploratory drilling
take place, but also to not have the companies penalized for
"drilling a dry hole." She stated, "By having capital credits,
we believe that we will appropriately incentivize someone to go
out and take a chance, ... drill that well, and ... see if
there's more oil."
10:48:18 AM
REPRESENTATIVE GATTO responded, "We want to incentivize oil
coming out of the ground, not sticking holes in the ground." He
expressed concern over the idea of incentivizing to drill dry
holes.
10:48:58 AM
MS. NIENHUIS said the cost of drilling a well - approximately
$20 million - would prohibit a company from doing so with the
advance knowledge that it would be a dry well. She explained,
"If the state picks up 40 ... or 60 percent of it, [the oil
companies] still are out some $10 or $8 million." Furthermore,
she said most companies have to answer to their shareholders,
and to be drilling dry holes for the purpose of having a tax
decrease would not make a lot of sense.
10:49:56 AM
CHAIR SEATON stated that under the existing ELF, there is a tax
advantage for having more wells producing, because the average
volume per well is a "big multiplier of how you reduce your
taxes." "So," he said, "people could actually spend money ...
and keep wells that [are] producing hardly anything to lower
their tax rate under ELF." He said he is not saying that
everyone is trying to do this, but he said he thinks this is one
of the reason that the legislature is trying to change the tax
structure.
10:50:37 AM
MS. NIENHUIS confirmed that Chair Seaton's statement is correct
- the more producing wells oil companies have, the lower the ELF
is. She mentioned the relationship of the wells and volume.
However, she explained, "There's a difference between a
developmental well, which is a well that is within a field that
you know is producing, versus a wildcat well, which is one where
someone goes out to an area ... [where] they believe there's oil
but ... the certainty is less."
CHAIR SEATON explained that he just wants to make certain that
the committee understands that one of the reasons that ELF is
broken is the legislature has given incentives to drill wells in
order to lower a company's tax rate. He offered further
details. He concluded, "It doesn't matter how many wells you
get the profit out of, the tax rate is based on the profit, and
the more wells you put in that ... are costing you money, you
lose money, as well."
MS. NIENHUIS confirmed that's correct.
CHAIR SEATON said, "Once you're at zero, you can't go any lower
than zero, ... and most of the fields are zero in Alaska, under
ELF."
10:52:35 AM
REPRESENTATIVE GATTO stated:
You are mostly looking at your tax rate. And the
accountants, if they say, "Hey, drill a $15 million
well," but then our rate for everything drops by a
percentage point, then it's just arithmetic: Go spend
the $15 million and reduce our ... overall taxes. So,
... what we're really working on now is we don't want
... you to have a lower tax burden by gaming the
system by saying, "I know what my accountants are
telling me to do." Rather, we're looking to increase
production. And so, I guess the question - and it
isn't a question, it's kind of a statement and an
understanding - [is] that when we work on something
like this, we don't have enough information on what it
costs to do something in return for what you save.
... What will be the end result of doing something?
Because we always have the law of unintended
consequences where somebody sees something and you go,
"That was never the intention." So, we're depending
on you to come back and say, "Here's what I know."
10:53:49 AM
MS. NIENHUIS related that there has been a presentation by the
oil companies that addresses the amount of capital spending that
has been made over the years. She offered her understanding
that it was in 2001 that the companies boosted their spending by
quite a bit, and the production decline leveled out a little bit
shortly thereafter. She stated, "As much as we'd maybe like to
build a tax around increasing or maintaining productivity or
production, the reality is the increased or maintained
production has to involve additional capital spending. And in
order to incent additional capital spending, that's why we're
doing these credits - or at least the PPT proposes credits."
10:55:02 AM
CHAIR SEATON refocused on the fact that HB 3005 would deal only
with prices above $50 a barrel, which is "outside the target
range of where the oil companies are making their decisions on
whether to sanction projects or not." He emphasized that oil
companies won't say what the their exact range dollar amount is,
because it is proprietary information.
10:57:03 AM
REPRESENTATIVE GRUENBERG suggested that the legislature ought to
look for ways to ensure as much of the oil is recovered as
possible in order to be competitive. He asked Ms. Nienhuis to
comment.
10:58:31 AM
MS. NIENHUIS said she thinks that in future years there will be
additional "heavy oil" coming on line, which she said is
typically more expensive to produce. Regarding recovering as
much oil from known fields, she said it would be appropriate to
allow additional technological improvements through incentives,
in order to have greater access to oil that is currently harder
to produce. She predicted that within the next five to ten
years, technology will have advanced to the point where some of
the heavy oil can be recovered less expensively than it is
recovered currently.
REPRESENTATIVE GRUENBERG asked if there is any way to speed up
the process.
11:00:13 AM
MS. NIENHUIS said she thinks it is important to get back to the
original proposal of providing some incentive for oil companies
to keep and spend their money in Alaska. Currently there is no
such incentive, other than the couple of credit systems in
place, and those don't include fields that "are not three miles
apart from each other."
11:00:41 AM
CHAIR SEATON told the committee that Pedro van Meurs, Ph.D.,
relayed to the House Finance Committee that if Alaska taxes on
the gross and uses incentives, then in the next couple of years,
technology will reduce the cost of recovering the heavy oil and,
if that happens, there will be a better chance of "leaving money
on the table." He explained, "Because they're going to lower
their cost, but will have had to generate a tax structure on
gross based around the current cost, and so when the costs go
down, we're not taxing on the profits - which they get more off
if their costs go down - we're taxing on a system that we have
instituted under a high-cost regime." He said the entire
purpose of the [Alaska Oil and Gas Conservation Commission
(AOGCC)] is to ensure that the state recovers the maximum
hydrocarbons throughout every field in Alaska, and it determines
how much gas can be taken out and how much must be left. Chair
Seaton said this subject goes far beyond the scope of HB 3005.
He reiterated the purpose of the bill.
11:03:20 AM
MS. NIENHUIS confirmed that what Dr. van Meurs said is correct.
She offered further details.
11:04:49 AM
CHAIR SEATON said he thinks consideration needs to be made so
that credits are self-adjusting, because if the price is $100
per barrel, the state doesn't "need to be giving capital credits
to incentivize heavy oil, because heavy oil is very economic at
$100 a barrel."
11:05:59 AM
REPRESENTATIVE GRUENBERG asked if there is anything besides tax
credits that could incentivize the complete development of the
known fields. He suggested that might include additional money
for research, grants, or partnerships, for example.
CHAIR SEATON responded that the two methods of incentivizing are
through tax credits and allowing the cost to be deducted in
taxing on net instead of on gross.
REPRESENTATIVE GRUENBERG said he thinks he speaks for those
people who have concerns that taxing on the net is too easily
manipulatable.
11:07:49 AM
CHAIR SEATON noted that HB 3005 uses a tax on gross, thus the
committee doesn't need to worry about that concern at present.
He brought attention to a one-page handout in the committee
packet, which is an excerpt of information produced by the
aforementioned Dr. van Meurs related to progressivity, dated 5
March 2006. The handout shows Dr. van Meurs' "Option 2 - Basic
Production Tax based on a windfall profits style formula," using
WTI minus 50, multiplied by 0.25 percent. Chair Seaton turned
to another handout in the committee packet entitled, "Gross vs.
Net - Heavy Oil," which he said was distributed at the House
Finance Committee meeting. He noted that the shipping and
pipeline costs are shown on the handout. He indicated that the
numbers on the page are averages that were presented by the
[Department of Revenue] and relate to the "costs of those things
that we deducted earlier to get down to the ... $7 dollar
difference between WTI and wellhead."
CHAIR SEATON asked committee members to submit any requests they
may have for analysis or other information, so that it can be
produced by the next meeting.
11:10:08 AM
REPRESENTATIVE GRUENBERG said he would like to see all of the
other progressivity provisions that have been introduced,
whether in the form of committee or floor amendments, so the
committee can contrast and compare them to the bill.
CHAIR SEATON referred to page 1, line 9, and said HB 3005 does
not include royalty oil.
11:12:59 AM
REPRESENTATIVE GRUENBERG observed that the bill seems to be
related to tax on oil, and he asked if the committee would like
to consider such a bill related to tax on gas.
REPRESENTATIVE ELKINS [shook his head no].
CHAIR SEATON said he would like to keep the issue simple by
sticking with the topic of oil. He indicated one of the biggest
reasons is because the state is currently earning money on its
gas pipeline, whereas there is no gas pipeline built as yet.
11:14:13 AM
REPRESENTATIVE LYNN concurred.
11:14:18 AM
CHAIR SEATON directed attention to page 2, [line 3], which read,
"(2) more than $150 a barrel, the oil price index is 100", and
he explained the relationship between that language and the
previously discussed .35 percent. He stated:
What we're wanting to do is have that ... 150 be the
amount that generates 35 percent, because the 35
percent plus the 15 percent base production tax gives
us the equal share that every bill that's gone forward
has maintained.
CHAIR SEATON said [subsection (c) on page 2] outlines what
steps would be taken if the WTI "goes away." He reviewed
Sections 2 and 3 of the bill.
11:17:10 AM
REPRESENTATIVE GRUENBERG said he would, at some point, like to
hear an explanation of [page 2], lines 19-24.
11:17:52 AM
REPRESENTATIVE GATTO questioned the use of the word "may" on
page 2, line 22.
11:18:40 AM
CHAIR SEATON noted that on page 3, line 6, there is a
designation that [Section 1] of the bill is retroactive;
however, he said he would check on the word "may" with the bill
drafter.
11:19:36 AM
MS. NIENHUIS said the bill, as a stopgap measure to capture high
oil prices, is a good plan. She said she thinks there are still
problems associated with the existence of ELF; some fields
wouldn't be paying anything but the increased tax. She stated:
On the last page of the fiscal note, you'll see at $40
there's no difference between the status quo and the
tax on the bill, because it doesn't exceed the price
threshold in which the additional tax kicks in. [At]
$60 you can see there is an additional amount from
this additional tax, and so that would basically be
the difference between the status and the tax on the
bill - so, $500 million or so, in FY 07.
11:20:40 AM
CHAIR SEATON mentioned a spreadsheet by which comparisons could
be made.
11:21:26 AM
CHAIR SEATON upcoming on bill.
11:21:51 AM
REPRESENTATIVE GRUENBERG, in response to Representative Gatto's
previous question regarding page 2, line 22, referred to a
provision in the Administrative Procedures Act, and he requested
that a copy of AS 44.62.240 be distributed to the members before
the next meeting.
11:22:40 AM
REPRESENTATIVE GARDNER said she thinks the explanation the
committee has had on that point is adequate.
REPRESENTATIVE GATTO said he would like to see that
administrative code.
[HB 3005 was heard and held.]
ADJOURNMENT
There being no further business before the committee, the House
State Affairs Standing Committee meeting was adjourned at
11:23:29 AM.
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