Legislature(2003 - 2004)

04/14/2004 07:04 AM W&M

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
           HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS                                                                          
                         April 14, 2004                                                                                         
                           7:04 a.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Mike Hawker, Chair                                                                                               
Representative Bruce Weyhrauch, Vice Chair (via teleconference)                                                                 
Representative Vic Kohring                                                                                                      
Representative Dan Ogg                                                                                                          
Representative Norman Rokeberg                                                                                                  
Representative Ralph Samuels                                                                                                    
Representative Peggy Wilson                                                                                                     
Representative Max Gruenberg                                                                                                    
Representative Carl Moses                                                                                                       
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
OTHER LEGISLATORS PRESENT                                                                                                     
Representative Beth Kerttula                                                                                                    
Representative Paul Seaton                                                                                                      
Representative Harry Crawford                                                                                                   
Representative David Guttenberg                                                                                                 
Senator Hollis French                                                                                                           
COMMITTEE CALENDAR                                                                                                            
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 441                                                                                       
"An  Act   amending  the  oil   and  gas   properties  production                                                               
(severance) tax as it relates to  oil to require payment of a tax                                                               
of  at least  five percent  of the  gross value  at the  point of                                                               
production before  any price adjustments authorized  by this Act,                                                               
to modify the  mechanism for calculating the  effective tax rate,                                                               
to provide for  adjustments to the tax when  the prevailing value                                                               
of the oil  exceeds $20 per barrel or falls  below $16 per barrel                                                               
and to  limit the  effect of the  adjustments, to  exempt certain                                                               
kinds of  oil from application  of the adjustments, and  to waive                                                               
and  defer  payment of  portions  of  the  tax  on oil  when  its                                                               
prevailing value  falls below $10  per barrel; and  providing for                                                               
an effective date."                                                                                                             
     - HEARD AND HELD                                                                                                           
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB 441                                                                                                                  
SHORT TITLE: MODIFICATION OF OIL SEVERANCE TAX                                                                                  
SPONSOR(S): REPRESENTATIVE(S) GARA                                                                                              
02/05/04       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/05/04       (H)       W&M, O&G, RES, FIN                                                                                     
02/16/04       (H)       SPONSOR SUBSTITUTE INTRODUCED                                                                          
02/16/04       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/16/04       (H)       W&M, RES, FIN                                                                                          
03/29/04       (H)       O&G REFERRAL ADDED AFTER W&M                                                                           
04/14/04       (H)       W&M AT 7:00 AM HOUSE FINANCE 519                                                                     
WITNESS REGISTER                                                                                                              
REPRESENTATIVE LES GARA                                                                                                         
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Testified as sponsor of HB 441 and answered                                                                
questions pertaining to the bill.                                                                                               
DEBORAH VOGT                                                                                                                    
Haines, Alaska                                                                                                                  
POSITION STATEMENT:  Testified during the discussion of HB 441.                                                                 
MARK HANLEY, Public Affairs Manager                                                                                             
Anadarko Petroleum Corporation;                                                                                                 
Member, Board of Directors                                                                                                      
Alaska Oil and Gas Association (AOGA)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified during the discussion of HB 441.                                                                 
DANIEL SECKERS, Chair                                                                                                           
Tax Committee                                                                                                                   
Alaska Oil and Gas Association (AOGA)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified in opposition to HB 441.                                                                         
TOM WILLIAMS, Alaska Tax Counsel                                                                                                
British Petroleum (BP)                                                                                                          
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified in opposition to HB 441.                                                                         
WILLIAM CORBUS, Commissioner                                                                                                    
Office of the Commissioner                                                                                                      
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:   Testified  on behalf of  the Office  of the                                                               
Governor against  changes in the  economic limit factor  (ELF) at                                                               
this time.                                                                                                                      
ACTION NARRATIVE                                                                                                              
TAPE 04-23, SIDE A                                                                                                            
Number 0001                                                                                                                     
CHAIR MIKE HAWKER called the  House Special Committee on Ways and                                                             
Means  meeting to  order at  7:04 a.m.   Representatives  Hawker,                                                               
Samuels,  Kohring, Moses,  and Ogg  were present  at the  call to                                                               
order.     Representatives   Rokeberg,  Wilson,   Weyhrauch  (via                                                               
teleconference),  and Gruenberg  arrived  as the  meeting was  in                                                               
progress.      Representatives    Kerttula,   Seaton,   Crawford,                                                               
Guttenberg, and Senator French were also present.                                                                               
HB 441-MODIFICATION OF OIL SEVERANCE TAX                                                                                      
Number 0200                                                                                                                     
CHAIR HAWKER announced that the only order of business was                                                                      
SPONSOR SUBSTITUTE FOR  HOUSE BILL NO. 441, "An  Act amending the                                                               
oil and gas  properties production (severance) tax  as it relates                                                               
to oil to  require payment of a  tax of at least  five percent of                                                               
the  gross value  at the  point  of production  before any  price                                                               
adjustments authorized by  this Act, to modify  the mechanism for                                                               
calculating the  effective tax rate,  to provide  for adjustments                                                               
to the tax  when the prevailing value of the  oil exceeds $20 per                                                               
barrel or falls  below $16 per barrel and to  limit the effect of                                                               
the adjustments, to exempt certain  kinds of oil from application                                                               
of the  adjustments, and to  waive and defer payment  of portions                                                               
of the tax  on oil when its prevailing value  falls below $10 per                                                               
barrel; and providing for an effective date."                                                                                   
CHAIR HAWKER noted the arrival of Representative Wilson.                                                                        
Number 0229                                                                                                                     
REPRESENTATIVE LES GARA, Alaska  State Legislature, sponsor of HB                                                               
441, related that seven legislators  have joined in the filing of                                                               
this bill  and a companion  Senate bill.   He said their  view is                                                               
that the state,  especially at high oil prices,  is not receiving                                                               
the maximum  benefit of oil  resources.  Former  governors Hickel                                                               
and Hammond  have said it  is time  to revisit the  oil severance                                                               
tax  structure.    Former senators  Halford  and  Torgerson,  and                                                               
voices from across the spectrum,  believe that current tax breaks                                                               
under the  economic limit factor  (ELF) are no  longer justified,                                                               
he noted.   Representative Gara  suggested that the  ELF produces                                                               
loopholes that need to be closed,  at least in the tax structure.                                                               
"Under the constitution  we've got a duty to  provide the maximum                                                               
benefit  to  the people  from  our  publicly-owned resource,  and                                                               
that's oil,"  he said.  He  opined that the [oil  companies] have                                                               
done very well  with a similar duty to  their shareholders, which                                                               
is  to  produce  the  maximum   benefit  to  their  shareholders;                                                               
however, [the state] is not doing as well.                                                                                      
Number 0404                                                                                                                     
REPRESENTATIVE GARA,  continuing with his  PowerPoint production,                                                               
explained  that  oil income  comes  from  four areas:  royalties,                                                               
production or severance taxes, property  taxes, and corporate oil                                                               
taxes.  The severance tax is  a 15 percent tax the state receives                                                               
on the  value of the  oil, minus transportation and  other costs,                                                               
he said.   The  tax is  adjusted downward by  the ELF,  which has                                                               
been  around for  over 20  years in  varying forms.   The  ELF, a                                                               
number between 0  and 1, depending on the size  of the oil field,                                                               
is multiplied  by the 15  percent severance tax to  determine the                                                               
field's  actual production  tax rate,  he explained.   There  are                                                               
decreasing numbers  of higher ELF  fields and  increasing numbers                                                               
of lower ELF fields, he added.                                                                                                  
REPRESENTATIVE GARA stated  that the ELF rate is  determined by a                                                               
combination  of  factors:   the  size  of  a field,  the  field's                                                               
production, and the  per well production at a field.   In theory,                                                               
the  purpose  of the  ELF  is  to produce  a  lower  tax rate  at                                                               
marginal oil fields and a higher  tax rate at very profitable oil                                                               
fields.   The  $500 million  question  is whether  tax rates  are                                                               
being erased at the more profitable oil fields, he said.                                                                        
REPRESENTATIVE GARA said  that in 1993 most of the  oil came from                                                               
very  high production  tax fields,  and the  average North  Slope                                                               
production  tax was  13.5 percent.   Today,  with smaller  fields                                                               
taking up the  capacity of a declining Prudhoe Bay,  a very large                                                               
proportion of  oil now comes from  fields that pay no,  or almost                                                               
no production  tax.  The  average production  tax is down  to 7.5                                                               
percent  today and,  if nothing  is done,  it will  fall below  4                                                               
percent by 2013, he noted.   Last year the production tax brought                                                               
in about $600 million in revenue, and  by FY 06 it is expected to                                                               
decrease to $341 million, followed  by a decrease to $180 million                                                               
by FY  13, he explained.   Part of  the increasing budget  gap is                                                               
due  to  the  declining  amount  of  oil  revenue  received  from                                                               
relatively stable  oil production, which should  only decrease by                                                               
5-7 percent over the next 10  years, he said.  The production tax                                                               
revenue's decrease  will be  50 percent by  2013, largely  due to                                                               
the ELF, he added.                                                                                                              
Number 0800                                                                                                                     
REPRESENTATIVE  GARA,   comparing  North  Slope   oil  companies'                                                               
profits  to state  revenues  brought in  by  oil production,  and                                                               
using figures  from the Department  of Revenue (DOR),  noted that                                                               
at $35  a barrel,  corporate profits exceed  the total  state oil                                                               
revenues by  $1.72 billion a  year.   At $40 a  barrel, corporate                                                               
profits  would  exceed  total state  revenues  from  North  Slope                                                               
production  by $2.3  billion, which  shows the  disparity between                                                               
corporate  profits  and  state  revenues.    In  terms  of  total                                                               
corporate profits  at $22 a  barrel, the average  forecast price,                                                               
companies will take  in about $1.7 billion  in corporate profits,                                                               
he explained.  At today's prices  of $35 a barrel, companies will                                                               
take  in about  $4.1 billion  in profits  from North  Slope crude                                                               
oil.   The reverse  is true  at low prices;  the state  does much                                                               
better than  oil companies  do, he  added.   If oil  prices would                                                               
plummet  to $12  a barrel,  the  state would  receive about  $930                                                               
million more in  revenue than corporations take  in net earnings.                                                               
At low  prices the  state excess  never approaches  the corporate                                                               
excess over state revenue at high prices, he concluded.                                                                         
REPRESENTATIVE  GARA  continued  to  explain  that  the  ELF  was                                                               
designed  to encourage  the  development of  small  fields.   The                                                               
question  is has  the  ELF  provided companies  with  more of  an                                                               
incentive than is needed.  He  asked if taxes have been decreased                                                               
more  than  necessary.   He  gave  several examples  of  marginal                                                               
fields that  the ELF is  benefiting.  Endicott,  the twenty-ninth                                                               
largest  oil  field  in  the  United  States  as  ranked  by  the                                                               
Department of Energy's  2002 report, pays a  0 percent production                                                               
tax.  Kuparuk, the second largest  field in North America, pays 3                                                               
percent tax,  not 15  percent.   These are  not small  fields, he                                                               
emphasized.    There  are  four fields  within  the  top  hundred                                                               
largest  oil fields  in the  United States  that are  paying a  0                                                               
percent production tax:  Endicott,  Milne Point, Aurora, and West                                                               
Number 1111                                                                                                                     
REPRESENTATIVE  GARA explained  what has  happened since  the oil                                                               
production tax  was revised  in 1989.   Some  of the  fields that                                                               
have come on line pay no production  tax.  Ten of the fields that                                                               
produce  over 1  million barrels  a year  also pay  no production                                                               
tax.   It is a misnomer  to think that  the ELF is there  to just                                                               
reduce the  tax on  marginal fields,  he pointed  out.   In other                                                               
states, fields  produce at anywhere from  8 to 25 barrels  a day,                                                               
and he  termed those "small  fields that  are taxed."   In Alaska                                                               
the  fields that  are  producing  1 million  barrels  a year  are                                                               
considered marginal fields under the ELF, he repeated.                                                                          
REPRESENTATIVE GARA said another problem  with the ELF is that it                                                               
is inflexible.   Everyone knows  that the higher oil  prices are,                                                               
the more profitable it is for everyone, he opined.  He related:                                                                 
     The  way the  ELF  works is  if you  have  a 0  percent                                                                    
     production tax for your field,  like most of the fields                                                                    
     -  11 of  the  last  14 fields  to  come  on line  have                                                                    
     essentially  a  0  percent  production  tax  -  that  0                                                                    
     percent production  tax applies  at average  oil prices                                                                    
     of  $22  a barrel,  it  applies  at  $30 a  barrel,  it                                                                    
     applies at  $40 a barrel.   If oil were $100  a barrel,                                                                    
     the field would  still pay a 0  percent production tax.                                                                    
     The ELF is completely inflexible in that regard.                                                                           
REPRESENTATIVE GARA continued to  explain what has happened since                                                               
the ELF was designed in 1989.   Most of the fields that have come                                                               
on line since  then are satellite fields, fields  that don't have                                                               
their own processing  facilities which separate the  oil from the                                                               
gas from the  water, an expensive process, he said.   The thought                                                               
in  1989  was  that a  tiny  field  that  has  to build  its  own                                                               
processing  facility and  structures  is going  to  be very  cost                                                               
ineffective and inefficient.  As it  turns out, all of the fields                                                               
that  have  been  developed  since  1989  don't  need  processing                                                               
facilities, and  instead, have become  satellite fields  within a                                                               
few miles  away from the  larger fields like Kuparuk  and Prudhoe                                                               
Bay,  which  pipe their  oil  over  to  those larger  fields,  he                                                               
explained.    [Tarn Field],  for  example,  a Kuparuk  satellite,                                                               
required only  two drill sites  and sends  its oil over  in three                                                               
pipelines to be  processes at Kuparuk.   Tabasco, another Kuparuk                                                               
satellite, didn't even  require a drill site and  has seven wells                                                               
off an existing pad.  It  produces about 1 million barrels a year                                                               
and pays a 0 production tax, he stated.                                                                                         
Number 1514                                                                                                                     
REPRESENTATIVE GARA showed a list  of fields that are exempted by                                                               
the  ELF  and pay  essentially  no  production  tax.   Tarn  pays                                                               
roughly  1.5 percent  and  the  others pay  0  percent  tax.   He                                                               
pointed out  that each of  the fields in  the left column  of the                                                               
list  have  no  processing  facilities and  process  at  a  large                                                               
oilfield.   Midnight Sun  produces 1.7 million  barrels of  oil a                                                               
year paying 0 percent production tax.   He continued to point out                                                               
the various satellite fields that  pay no production tax and have                                                               
no  expense of  building their  own processing  facilities.   The                                                               
question is, should these fields  be paying no production tax, he                                                               
asked.  "In our view, the answer is no," he concluded.                                                                          
Number 1626                                                                                                                     
REPRESENTATIVE GARA clarified  how [HB 441] bill works.   He said                                                               
it slightly  increases the production  tax at higher  prices, and                                                               
slightly lowers  it at  lower prices -  it's price  sensitive and                                                               
reflects the  realities of  the market place.   Many  people have                                                               
called for  a "Shelf  the ELF" provision  that calls  for getting                                                               
rid  of  the ELF.    Every  field would  then  pay  a 15  percent                                                               
production tax.  He opined that  that would be too inflexible and                                                               
would treat small  and mid-sized production fields  unfairly.  He                                                               
suggested making the ELF more  price sensitive instead, by having                                                               
all fields pay  at least a 5 percent production  tax, which would                                                               
raise $75 million at average oil prices [$22 per barrel].                                                                       
REPRESENTATIVE GARA  reported that the  second focus of  the bill                                                               
bases the production tax  on the price of a barrel  of oil and is                                                               
fair  to all  because the  burden is  shared.   British Petroleum                                                               
(BP) just announced an increase  in shareholder dividends for oil                                                               
prices above  $20 a barrel,  saying that prices above  that level                                                               
are "in excess  of the financial needs" of the  company, he said.                                                               
Above  $20  a  barrel,  the  production  tax  would  be  slightly                                                               
increased by multiplying the price  per barrel divided by 20, and                                                               
below $16 a barrel it  would be slightly decreased by multiplying                                                               
the price  per barrel  divided by  16, he explained.   If  oil is                                                               
over  $30 a  barrel, it  would  be 30  divided by  20, times  the                                                               
field's  ELF-adjusted production  tax.    If oil  goes  to $12  a                                                               
barrel,  the formula  would  divide 12  by 16  to  yield .75,  he                                                               
explained, and  which is then  multiplied by the  field's current                                                               
production tax.   At $30 oil, the formula would  divide 30 by 20,                                                               
yielding 1.5, times  the current production tax -  say 10 percent                                                               
- to equal an adjusted 15 percent production tax, he said.                                                                      
Number 2230                                                                                                                     
REPRESENTATIVE WILSON  asked if  the amount  change daily  as the                                                               
market fluctuates.                                                                                                              
REPRESENTATIVE GARA replied  that it would be on  a monthly basis                                                               
similar to the way DOR already figures it.                                                                                      
REPRESENTATIVE GARA  explained the  incentive parts of  the bill.                                                               
He explained that at some  point oil production revenues could be                                                               
at  a loss,  and to  attract investment  to the  state, companies                                                               
would be informed  that if oil prices were to  fall below $10 per                                                               
barrel,  the bill  would waive  half  of the  production tax  and                                                               
would  defer the  other  half  until prices  rise  above $16  per                                                               
barrel.   Finally, the bill exempts  "heavy oil" from any  of its                                                               
measures because it is so expensive to drill and produce.                                                                       
Number 2503                                                                                                                     
REPRESENTATIVE  SAMUELS  asked how  much  of  the production  tax                                                               
would be dropped if oil prices fall to $9.99 from $10.01.                                                                       
REPRESENTATIVE GARA said it would not  be a substantial drop.  He                                                               
suggested  Representative Samuels  might be  referring to  a fear                                                               
that the  prices would  be manipulated down  to $9.99  instead of                                                               
$10.01 and said  that DOR with its regulatory powers  feels as if                                                               
it  can prevent  that from  happening.   He  emphasized that  the                                                               
production tax at $10 per barrel is very low anyway.                                                                            
REPRESENTATIVE  GARA  explained  that  the  bill  would  generate                                                               
additional production  tax revenue,  but is  not the  solution to                                                               
the state's  fiscal gap - it  is a partial solution.   At average                                                               
oil prices,  the bill  would raise an  additional $110  million a                                                               
year, at windfall oil prices, $30  a barrel, it would raise about                                                               
$400 million and leaves the  balance on the corporate profit side                                                               
of the  equation.  At  $32 a  barrel, an additional  $500 million                                                               
would be  raised, he said.   At 85  percent through [FY  04], the                                                               
average price per barrel is at $32,  so in a year this bill would                                                               
raise $400 to $500 million in additional revenue, he concluded.                                                                 
Number 2750                                                                                                                     
REPRESENTATIVE GARA listed other  possible incentives for the oil                                                               
industry.     He  mentioned  that  Representatives   Kohring  and                                                               
Rokeberg  pushed HB  28  last  year, which  said  if  there is  a                                                               
marginal  field [the  company] can  ask the  state to  reduce the                                                               
royalty.   He  summarized the  bill as  a fair  way to  share the                                                               
burden if  oil prices fall, and  to share the windfall  as prices                                                               
rise.   He  maintained that  by stabilizing  the oil  tax regime,                                                               
investors would  be encouraged.   At today's prices, a  0 percent                                                               
production tax  on profitable  fields no  longer makes  sense, he                                                               
Number 3043                                                                                                                     
REPRESENTATIVE  GARA introduced  Deborah  Vogt,  a former  deputy                                                               
commissioner from  DOR with  about 20 years  of experience  as an                                                               
assistant attorney  general with the  Department of Law  (DOL) as                                                               
an oil tax hearing officer.                                                                                                     
CHAIR  HAWKER noted  the  addition  of Representatives  Rokeberg,                                                               
Gruenberg,    Crawford,    Guttenberg,   and    Weyhrauch    (via                                                               
teleconference) to the meeting.                                                                                                 
Number 3259                                                                                                                     
DEBORAH VOGT  said that a  restructuring of Alaska's oil  and gas                                                               
tax   structure  is   long  overdue   and   she  commended   [the                                                               
legislature] for  taking the  time to  do so.   She  related that                                                               
what surprised her  the most was to find out  that oil production                                                               
is not declining that much, but the tax is.                                                                                     
CHAIR  HAWKER  asked if  there  could  be a  causal  relationship                                                               
between the ELF incentive and that continued production level.                                                                  
MS. VOGT replied  that she expects there is  some connection, and                                                               
that no one  suggests completely removing those  incentives.  She                                                               
opined that  oil should not  be produced that  completely escapes                                                               
taxation,  and that  it is  a part  of the  resource base  of the                                                               
state.   She said  that she  started out with  the state  in 1978                                                               
when "we  had what some  people called then a  three-legged stool                                                               
in our oil tax structure."  She  spoke of three oil and gas taxes                                                               
during  that  time:    a  separate  accounting  income  tax,  the                                                               
severance tax, and the oil and  gas properties tax.  The separate                                                               
accounting  legislation,  which  imposed  an income  tax  on  oil                                                               
profits  separate from  world-wide  or  nation-wide profits,  was                                                               
passed in 1978  after years of study, she related.   The tax rate                                                               
under separate accounting was 9.4  percent, the same as everybody                                                               
else, but the apportionment method  that the state used proved to                                                               
be peculiarly inappropriate for oil productions, she said.                                                                      
MS.  VOGT explained  that the  property  tax, AS  43.56, was  the                                                               
second leg [of the stool] and  it produced a fair chunk of income                                                               
to the state.   Over the years,  due to the way  the structure of                                                               
that tax has been interpreted,  municipalities were able to raise                                                               
their mill  rates to the point  that they absorbed almost  all of                                                               
that  tax,  she said.    In  1980  the legislature  repealed  the                                                               
separate accounting for  oil because it was  challenged in court,                                                               
which caused  a very significant  revenue decline in  income tax.                                                               
In  order to  offset that  revenue  loss, the  severance tax  was                                                               
modified  and raised  from 12  percent to  15 percent  to produce                                                               
more  income on  a temporary  basis.   The idea  was that  that a                                                               
five-year period would allow for  the separate accounting problem                                                               
to be resolved, but then in  1986 the ELF kicked in and severance                                                               
tax revenue  declined quite significantly,  she related.   That's                                                               
what prompted  the severance tax  changes in 1989, where  the ELF                                                               
was modified to  include the concept of the size  of the field in                                                               
the formula.   She opined  that the  income tax is  not currently                                                               
Number 4058                                                                                                                     
MS. VOGT  continued to say  that she believes that  the severance                                                               
tax is  "out of  whack," and that  this legislation  would retain                                                               
the  basic  structure  of  the severance  tax,  yet  include  the                                                               
concept  of price.   The  bottom line  is that  "you could  watch                                                               
another $5-$6  billion go out the  door while you study  what the                                                               
best plan  is."  The  bill includes very appropriate  changes and                                                               
would  stop some  of the  hemorrhaging  of oil  revenues that  is                                                               
happening today, she concluded.                                                                                                 
Number 4343                                                                                                                     
REPRESENTATIVE ROKEBERG  directed his comments  to Representative                                                               
Gara  and  said  he  thought  it  has  been  the  policy  of  the                                                               
legislature, particularly  in the  last decade or  so, to  try to                                                               
create incentives, particularly in the  Cook Inlet Basin, for the                                                               
continuation of  oil and gas activity.   He said he  is concerned                                                               
about the impact  of this legislation on [that area].   He stated                                                               
a concern  that $20  million in net  revenues have  been received                                                               
from that  area as  well as  $13 million  in local  revenues, and                                                               
production  there would  be wiped  out by  this legislation.   He                                                               
asked for Representative Gara's opinion.                                                                                        
REPRESENTATIVE  GARA  replied  that  Representative  Rokeberg  is                                                               
correct in  that the  margins in  the Cook  Inlet area  have been                                                               
historically lower  and the fields  a lot smaller.   He explained                                                               
that the  intention of the  bill is to  apply to fields  north of                                                               
the Brooks Range and it shouldn't apply to Cook Inlet oil.                                                                      
REPRESENTATIVE  ROKEBERG  asked why  heavy  oil  fields below  17                                                               
[Alaska Petroleum  Institute (API) gravity] were  included in the                                                               
statistics if they are intended to be exempted.                                                                                 
REPRESENTATIVE GARA replied that  the federal definition of heavy                                                               
oil is  "about 20, not 17",  and the federal definition  has been                                                               
incorporated into the  bill.  If the legislature  decides that at                                                               
17  [API] oil  is too  expensive to  produce to  pay a  5 percent                                                               
severance tax, that  would be something that  the committee could                                                               
look at, he said.                                                                                                               
TAPE 04-23, SIDE B                                                                                                            
Number 4646                                                                                                                     
MARK   HANLEY,  Public   Affairs   Manager,  Anadarko   Petroleum                                                               
Corporation;  Member,  Board of  Directors,  Alaska  Oil and  Gas                                                               
Association (AOGA), introduced himself.                                                                                         
Number 4603                                                                                                                     
DANIEL  SECKERS,  Chair,  Tax  Committee,   Alaska  Oil  and  Gas                                                               
Association (AOGA),  said his  company is made  up of  19 members                                                               
who  account  for  the  majority  of  oil  and  gas  exploration,                                                               
development, production, transportation,  refining, and marketing                                                               
activities in Alaska.   He stated AOGA's strong  opposition to HB                                                               
441,  which  represents nothing  more  than  a tax  increase,  he                                                               
opined.  He related:                                                                                                            
     At  a  time when  Alaska's  struggling  to compete  for                                                                    
     exploration and development dollars,  HB 441 would make                                                                    
     field  development and  operation even  more expensive.                                                                    
     Even  worse,  HB  441 would  increase  taxes  on  those                                                                    
     investments which  have already  been made  in reliance                                                                    
     on the  rules of the  game already in place.   Governor                                                                    
     Murkowski has  stated it correctly; the  North Slope is                                                                    
     one of  the most expensive  places for our  industry to                                                                    
     operate.  One  of the worst things  this legislature or                                                                    
     any  legislature can  do is  to make  matters worse  by                                                                    
     making Alaska an even more  expensive and riskier place                                                                    
     in which to  do business, and increasing  the tax rules                                                                    
     in the  middle of the game  is one sure-fire way  to do                                                                    
     just  that.     Instead  of  furthering   the  goal  of                                                                    
     increasing   future  oil   and   gas  exploration   and                                                                    
     development  dollars  being  spent in  Alaska,  HB  441                                                                    
     would act as a disincentive to those efforts.                                                                              
     HB  441 also  represents  an attempt  to raise  current                                                                    
     revenues at the expense  of long-term investment, while                                                                    
     near-term state oil tax  revenues will likely increase,                                                                    
     future development projects may  be sacrificed, and the                                                                    
     loss  of  the  additional  production,  the  additional                                                                    
     royalty,  additional  property tax,  additional  income                                                                    
     tax, and  the loss of  all the  jobs, will result  in a                                                                    
     long-term loss of state oil revenues.                                                                                      
     We've  heard today  that the  tax laws  in Alaska  have                                                                    
     been stable  for the  last 10, 12,  13 years,  and from                                                                    
     where  you  sit  we  can appreciate  that  the  statute                                                                    
     itself has  not been changed,  but, from where  we sit,                                                                    
     the tax laws  have not remained stable.   Over the last                                                                    
     10-15 years, the Department  of Revenue, the Department                                                                    
     of  Natural  Resources  have continually  changed,  re-                                                                    
     amended  their  regulations, their  interpretations  of                                                                    
     those regulations,  all with  the result and  intent of                                                                    
     increasing taxes  on industry,  not only on  the bottom                                                                    
     line,  but  in  administrative   costs  as  well.    So                                                                    
     stability has  not been as  it's been  represented here                                                                    
Number 4253                                                                                                                     
MR. SECKERS continue:                                                                                                           
     It's  also been  stated that  ...  there are  a lot  of                                                                    
     fields  that pay  no tax.   It's  not true.   They  pay                                                                    
     royalty, which  is not  a tax,  they pay  property tax,                                                                    
     they pay income tax, and they provide jobs.                                                                                
     Is the  oil ELF as  it was  intended to operate?   Yes.                                                                    
     Does it need to be amended?   No.  HB 441 should not be                                                                    
Number 4154                                                                                                                     
REPRESENTATIVE GRUENBERG asked Mr.  Henley to provide examples of                                                               
how  regulations have  changed many  times in  the last  15 years                                                               
affecting the industry.                                                                                                         
Number 4130                                                                                                                     
MR.  HANLEY  related,  when   talking  with  Representative  Gara                                                               
earlier about  whether he  was in agreement  with the  concept of                                                               
this  bill,  that the  general  intent  is  the  same.   The  oil                                                               
industry would like  to provide more revenue to  the state, which                                                               
is also the  goal of the bill,  he opined.  However,  he said the                                                               
methods are  not the same.   "You do  a better job  of increasing                                                               
production, you'll get more revenue  than increasing taxes, which                                                               
has  the  opposite  effect,  which   I  think  will  reduce  your                                                               
revenues,"  he  said.   He  said  he  views  the  bill as  a  tax                                                               
increase, and  DOR's numbers show  it is  a tax increase  at $14,                                                               
$22, and $30 a barrel.   As Representative Gara said, at the very                                                               
low end,  "there's dozens of  millions of dollars that  the state                                                               
might give  up, but  on the  high end it's  $500 million  or $600                                                               
million that the state takes in," he noted.                                                                                     
MR. HANLEY continued:                                                                                                           
     Now,  you  represent  your shareholders,  we  represent                                                                    
     ours.  Some people have  suggested that you need to get                                                                    
     the most for  your money under the  constitution, and I                                                                    
     don't disagree with that.   I would just suggest to you                                                                    
     that you  need to  look at the  economics.   People are                                                                    
     forgetting -  the numbers are  easy in some  respects -                                                                    
     but  I suspect  that  everybody's  put a  straight-line                                                                    
     analysis  of   what  this  will  raise.     There's  an                                                                    
     assumption  in here  that the  increase in  those taxes                                                                    
     will  not decrease  production and  I would  suggest to                                                                    
     you that I don't think that's correct.                                                                                     
Number 3909                                                                                                                     
MR. HANLEY  suggested that the  committee look at the  study from                                                               
the Wood-McKenzie Group to see  where Alaska stands competitively                                                               
around the  world.  He said  that the bottom line  is, "What does                                                               
it  cost to  produce oil  in Alaska?"   He  suggested that  it is                                                               
different for each  field.  Declining fields  have more expensive                                                               
costs, typically,  and around the  world incentives  are provided                                                               
to declining fields.   There is an insinuation  [at this meeting]                                                               
that  a smaller  field such  as a  satellite, because  it doesn't                                                               
need a  production facility, is  profitable.  He stated  that the                                                               
reason it  is a  satellite is  because it  can't afford  a stand-                                                               
alone facility.   He again  suggested that the committee  look at                                                               
the  economics  of  the  fields to  understand  what  drives  the                                                               
decisions that make companies like  the members of AOGA invest in                                                               
Alaska.   "The  danger  is if  the  tax rate  is  raised and  the                                                               
revenue is decreased," he concluded.                                                                                            
CHAIR HAWKER said that the committee  members did not have a copy                                                               
of the Wood-McKenzie document.                                                                                                  
Number 3734                                                                                                                     
MR.  HENLEY  replied  that  he would  provide  the  members  with                                                               
copies.  He related that the  report ranks 61 countries in places                                                               
around  the  world   where  oil  companies  invest.     It  is  a                                                               
professional  company that  provides  data for  oil companies  to                                                               
look at to  see what the costs and competition  of various fields                                                               
are.  He suggested that the state  do its own analysis, also.  He                                                               
said  that the  costs of  production  in Alaska  are the  highest                                                               
anywhere, and the government take  is in the middle.  Considering                                                               
those two  factors, Alaska  comes out  55th out  of 61  areas, he                                                               
noted, which means  it's not particularly competitive.   He asked                                                               
the  committee  to keep  this  in  mind  and verify  those  facts                                                               
CHAIR HAWKER asked if the  industry disputed the numbers provided                                                               
in Representative Gara's presentation.                                                                                          
MR. HANLEY replied  that he would have to check  with some of his                                                               
people.  He  didn't think that there would be  huge disputes over                                                               
those numbers.   He reiterated  the importance of looking  at the                                                               
economic factors of each field.                                                                                                 
Number 3404                                                                                                                     
MR. SEEKERS  said it  was mentioned today  that the  DOR forecast                                                               
will remain  relatively flat throughout  the rest of  the decade.                                                               
But  the economic  strain on  some of  the smaller  fields is  so                                                               
great  that an  additional  tax burden  could  lead to  declining                                                               
production, he emphasized.                                                                                                      
REPRESENTATIVE WILSON asked why an  oil company would continue to                                                               
operate if it is not making money.                                                                                              
MR.  SEEKERS said  that it  wouldn't,  but added  that there  are                                                               
marginal fields  that would  not get developed  or survive  a tax                                                               
burden.  He suggested that  the committee needs to understand the                                                               
economics  as well  as the  alternative investment  opportunities                                                               
that are out there.                                                                                                             
Number 3212                                                                                                                     
TOM WILLIAMS,  Alaska Tax Counsel,  British Petroleum  (BP), said                                                               
he came to Alaska 31 years ago.   He added that he is the one who                                                               
came up  with the  ELF in  1975-6, and  the legislature  passed a                                                               
variation  of that  ELF in  1977.   He reported  that he  was the                                                               
former commissioner  of DOR under Governor  Hammond from 1979-82,                                                               
then  acted as  the general  counsel for  Cook Inlet  Region, and                                                               
since  1987 has  worked for  BP.   As the  director of  petroleum                                                               
revenue back  in the 70s, he  said he wrote the  regulations that                                                               
Ms.  Vogt  successfully defended  in  court.   He  explained  his                                                               
lengthy involvement in oil and gas issues in the state.                                                                         
MR. WILLIAMS explained that the  reason the ELF was introduced is                                                               
because of  the nature of  the severance  tax, which is  based on                                                               
the value of the resource without  regard to what it costs to get                                                               
that  resource out  of the  ground.   He said  if there  were two                                                               
fields that  both produced a  million dollar's worth of  oil, the                                                               
tax would be the same, even  if the production costs of one field                                                               
was higher, which is unfair to the  oil company.  The ELF was put                                                               
in to raise  the amount of the severance tax.   He explained that                                                               
it works  by using a fraction  at the beginning of  the equation,                                                               
PEL/TP, which means, "What percentage  of this field's production                                                               
do you need to cover its  operating costs?"  He said the fraction                                                               
is  the key  to  gearing the  tax  down over  time  if the  field                                                               
becomes  marginal or  already is  marginal.   This proposal  from                                                               
1977  was adopted  for both  oil and  gas and  still remains  the                                                               
formula for  gas today, but  the formula  for oil was  changed by                                                               
the legislature, he related.                                                                                                    
Number 2158                                                                                                                     
MR.  WILLIAMS  continued to  say  that  the assumption  that  300                                                               
barrels a  day are  needed to  break even  was introduced  by the                                                               
legislature.   The tax rate was  set at 12.25 percent,  times the                                                               
ELF.    That  brought  Prudhoe  Bay's tax  to  11.5  percent,  an                                                               
increase from 7.8 percent.  The  next change in the severance tax                                                               
was triggered because of separate  accounting litigation in 1981.                                                               
State revenue  was transferred  from the  income tax  sector into                                                               
the severance  tax sector,  he explained.   There  was no  way to                                                               
design a formula under the income  tax that would produce as much                                                               
money  as separate  accounting did,  he  said, so  the money  was                                                               
recovered by  raising the  severance tax.   That's when  the base                                                               
rate  after five  years went  from 12.25  percent to  15 percent,                                                               
times the ELF.                                                                                                                  
MR.  WILLIAMS  related  that  next came  the  rounding  rule  for                                                               
fields,  which  said,  during  [a field's]  first  ten  years  of                                                               
production, if  the ELF is  calculated at 7.1 percent  or higher,                                                               
it is  rounded up to  1.  This had  the effect of  suspending the                                                               
ELF for Prudhoe Bay.  When  that law took effect in 1981, Prudhoe                                                               
Bay's tax rate went from being  about 11.5 percent to 15 percent,                                                               
times an  ELF of 1, and  that's where it stayed  until it reached                                                               
its tenth anniversary  in 1987, and then the ELF  kicked back in,                                                               
he explained.                                                                                                                   
MR. WILLIAMS  noted that  the legislature  chose the  amount "300                                                               
barrels a  day" in order to  protect Cook Inlet fields.   In 1989                                                               
that number was made permanent and  the concept of field size was                                                               
added,  which lowered  the  tax  rate in  all  fields except  for                                                               
Kuparuk and  Prudhoe Bay,  which increased, he  said.   There was                                                               
opposition by the industry to this change, he added.                                                                            
Number 1808                                                                                                                     
MR.  WILLIAMS  opined  that  the  arguments  made  today  by  the                                                               
supporters of  the bill are focused  on the wrong question.   The                                                               
analysis and the arguments say, "How  much is there for the state                                                               
to take at high oil prices."   The real question should be, "What                                                               
will be  the impact on  future investments  if the state  were to                                                               
take it?"   The revenue  forecast is flat, between  1,000,000 and                                                               
900,000 barrels a day, over the  coming decade.  That is assuming                                                               
that there  continues to be  $1 billion to  $2 billion a  year of                                                               
new investment.   By changing  or increasing the tax  burden, the                                                               
hurdles for those  investments will be raised, he  concluded.  He                                                               
asked  the  committee  to  study  what  the  effect  will  be  on                                                               
Number 1546                                                                                                                     
REPRESENTATIVE  ROKEBERG  asked  Mr.  Williams  if  there  was  a                                                               
decision  made  to try  to  protect  the  state's income  on  the                                                               
downside of oil pricing.                                                                                                        
MR. WILLIAMS replied,  "You have to look at the  package of taxes                                                               
as a  whole."  When the  prices are low, that  means the wellhead                                                               
value  is even  lower, and  that's  what drives  the royalty  and                                                               
severance  tax, he  explained.   The income  tax, especially  the                                                               
worldwide income tax,  still looks at the profits  from the other                                                               
parts of the business, such as  refineries and gas stations.  The                                                               
property tax  is based on what  it would cost to  build the field                                                               
facilities  new,  minus  the  depreciation.   The  value  of  the                                                               
pipeline is based  on the tariff profit.  Neither  of those taxes                                                               
is sensitive to prices, he added.                                                                                               
REPRESENTATIVE ROKEBERG  asked if  there was  a decision  made to                                                               
protect the state's share of the  take on the downside versus the                                                               
MR.  WILLIAMS said  yes.   Twenty-five  years ago  when this  was                                                               
being  set  up,  Prudhoe  Bay  was  just  coming  on,  in  "flush                                                               
production",  and as  long as  the tax  rate didn't  approach 100                                                               
percent, "it was  a war horse that would be  hard to knock over,"                                                               
he said.   " We felt  that even though there  might be injustices                                                               
to the companies in protecting  the state's interest at low price                                                               
levels ...  those types of  mechanisms were okay to  have because                                                               
in the long  run we didn't think that prices  would collapse back                                                               
or  remain  permanently  at  those very,  very  low  levels,"  he                                                               
Number 1111                                                                                                                     
WILLIAM  CORBUS,   Commissioner,  Office  of   the  Commissioner,                                                               
Department of Revenue, introduced  Dan Dickinson, Director of the                                                               
Tax Division.   Commissioner Corbus said  that the administration                                                               
does not support  changes in the ELF at this  time.  The governor                                                               
recommended last  February that  if the ELF  were to  be changed,                                                               
extensive public  hearings were  to be held  on this  subject, he                                                               
said.   He called ELF  a complicated  subject that should  not be                                                               
addressed with less than 30 days left in the session.                                                                           
Number 0946                                                                                                                     
CHAIR HAWKER postponed Dan Dickinson's testimony until Friday.                                                                  
[HB 441 was held over.]                                                                                                       
There being no  further business before the  committee, the House                                                               
Special  Committee on  Ways and  Means meeting  was adjourned  at                                                               
8:30 a.m.                                                                                                                       

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