Legislature(2003 - 2004)
04/14/2004 07:04 AM House W&M
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ 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
Sak.
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
concluded.
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
working.
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
today.
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
enacted.
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
itself.
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
investments.
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
upside.
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
concluded.
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.]
ADJOURNMENT
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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