Legislature(2005 - 2006)SENATE FINANCE 532
04/08/2006 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 305 | TELECONFERENCED | |
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
April 8, 2006
9:02 a.m.
CALL TO ORDER
Co-Chair Lyda Green convened the meeting at approximately
9:02:54 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Donny Olson
Senator Fred Dyson
Senator Lyman Hoffman
Also Attending: SENATOR TOM WAGONER; SENATOR BEN STEVENS;
SENATOR GARY STEVENS; SENATOR CHARLIE HUGGINS; Juneau public
testimony was heard in the order reflected in the minutes.
Attending via Teleconference: Statewide public testimony was
received in the order reflected in the minutes.
SUMMARY INFORMATION
SB 305-OIL AND GAS PRODUCTION TAX
The Committee heard statewide public testimony on the bill. The
bill was held in Committee.
CS FOR SENATE BILL NO. 305(RES)
"An Act providing for a production tax on oil and gas;
repealing the oil and gas production (severance) tax;
relating to the calculation of the gross value at the point
of production of oil or gas and to the determination of the
value of oil and gas for purposes of the production tax on
oil and gas; providing for tax credits against the tax for
certain expenditures and losses; relating to the
relationship of the production tax on oil and gas to other
taxes, to the dates those tax payments and surcharges are
due, to interest on overpayments of the tax, and to the
treatment of the tax in a producer's settlement with the
royalty owners; relating to flared gas, and to oil and gas
used in the operation of a lease or property under the
production tax; relating to the prevailing value of oil or
gas under the production tax; relating to surcharges on
oil; relating to statements or other information required
to be filed with or furnished to the Department of Revenue,
to the penalty for failure to file certain reports for the
tax, to the powers of the Department of Revenue, and to the
disclosure of certain information required to be furnished
to the Department of Revenue as applicable to the
administration of the tax; relating to criminal penalties
for violating conditions governing access to and use of
confidential information relating to the tax, and to the
deposit of tax money collected by the Department of
Revenue; amending the definitions of 'gas,' 'oil,' and
certain other terms for purposes of the production tax, and
as the definition of the term 'gas' applies in the Alaska
Stranded Gas Development Act, and adding further
definitions; making conforming amendments; and providing
for an effective date."
This was the ninth hearing for this bill in the Senate Finance
Committee.
Co-Chair Green noted that in order to accommodate all persons
desiring to comment, a time limit on testimony might be imposed
as the hearing progressed.
JUDY BRADY, Executive Director, Alaska Oil & Gas Association
(AOGA), testified via teleconference from an offnet site. AOGA
member companies have maintained a presence before the
Legislature in regards to this legislation, as they "have as
much at risk as the State of Alaska in the outcome of this
legislation." These companies would be providing the "final
grade on the success or failure" of any action undertaken by the
Legislature. "They will either continue to invest in Alaska at
the levels needed to stop production decline or they won't. ….
The oil and gas companies operating in Alaska want this
experiment in tax strategy to be successful".
Ms. Brady characterized this legislation as "unprecedented". She
quoted Dr. Pedro van Meurs, an international oil and gas
consultant hired by Governor Frank Murkowski's Administration,
as saying the Petroleum Profits Tax (PPT), which is the term
used when referring to the tax proposed in this bill, "will make
Alaska's tax system unique in the world. It represents the
largest tax increase against a single industry in the history of
the United States. It has a paradoxical goal of increasing
taxes" while attempting to encourage investment. "Alaska's tax
system will either be a model or a lesson. This is a huge
challenge for" both Legislators and the oil and gas industry.
Ms. Brady disclosed that AOGA is running its first television
advertising campaign in 15 years. The campaign consists of a
review of the past 50 years of oil and gas activity in the State
and a preview of the activity over the next 50 years. Today, the
industry affects 34,000 jobs and provides 90 percent of the
revenue in the State's general fund. The future of the industry
would be affected by the actions taken on this bill.
Ms. Brady noted legislators share many of the industry's
worries: "a half empty pipeline; declining production on the
North Slope; declining oil and gas production in Cook Inlet. The
high prices are masking the affects of falling production. We
worry about how this legislation will affect the industry's
ability to stop the decline. The precarious balance between
increasing taxes, increasing investment. We worry that each time
you change the tradeoffs you risk that balance. If the tax rate
is too high and in addition too much value is taken off the
medium to high price end, Alaska jumps to the high cost, high
tax [indiscernible] in worldwide competition for investments
without the reserves to justify the jump. It is entirely
possible for Alaska to price itself out of the investment
market. How much is too much? As more information is made
available through these hearings, concepts of what is too much
and what is reasonable for Alaska's environment are evolving."
Ms. Brady noted that in recent testimony before the House of
Representatives Finance Committee, Dr. Anthony Finizza, an
energy economist with Econ One Research Inc., a consulting firm
hired by the Murkowski Administration, cautioned against
implementing a production tax or credit structure exceeding 20
percent. The question is "how much is too much, what is
reasonable for Alaska's resource base?" While Mr. Finizza's
presentation had urged Legislators to include in their decision-
making consideration of such things as full cycle Net Present
Value (NPV) and post [indiscernible] development discount rates,
she suggested Legislators also conduct "the look out the window
test. Who's out there and what are they investing? Just how
competitive is Alaska right now at the highest oil prices in
years?" Legislation should be developed that would make Alaska
more competitive. This would encourage exploration companies to
invest in Alaska rather than in Canada and in other parts of the
United States. The worry is that the higher tax rate and the
concept of progressivity might be detrimental to business. "Some
ideas historically have never worked out the way they were
intended and a windfall profits tax is one of them. You seem to
have lost track of the fact that a net profits tax is
progressive."
9:07:40 AM
Ms. Brady addressed "the question of whether or not it might be
a good idea to set tax rates high, and then lower them later if
Alaska doesn't get investment", by restating a warning issued by
Dr. van Meurs: "it takes ten years to recover your investment
position if you lose it with a faulty tax strategy". Continuing,
she noted, "this tax legislation is not intended to lose
Alaska's investment position, it is an attempt to improve it. We
don't have ten years to get it right." Each consultant and
industry company has communicated "this tax legislation must be
transparent; to be effective it must be simple. All of us need
to understand the tradeoff and the likely consequences. The
State and the companies must understand it in the same way.
Right now, AOGA's tax committee is working on technical
amendments, which we hope will promote this understanding, or at
least help clarify where there are differences of opinion. We
will submit these amendments for your consideration next week.
You are spending hundreds of hours asking the right questions.
Thank you. Keep asking them. Please don't pass this legislation
out until you are satisfied you have the answers you need. How
is Alaska challenged? What is the production potential? How can
we insure this production? How can we attract the investment
required? Who is our competition? And the most important
question: How can Alaska break out of pack? The stakes are very
high. We were being very serious when we said in our ads,
Legislators, you are writing Alaska's future."
Co-Chair Green appreciated Ms. Brady's testimony and asked her
to submit a copy of her remarks.
Ms. Brady agreed to provide her remarks. She voiced appreciation
for the Committee's endeavor to compile a list of questions to
be further addressed. [NOTE: The Question and Answer Panel
discussion was conducted at the April 10, 2006 Committee
hearing. See SFIN 0410060903AM.]
Co-Chair Green acknowledged and understood that AOGA would be
submitting a response to the questions.
9:09:23 AM
Senator Dyson appreciated Ms. Brady's comments and recognized
her knowledge of the industry. To that point, he asked her
opinion in regards to how the Legislature could best "represent
the interests of the people of Alaska when oil prices are above
the point at which the companies appear to have made their
economic decisions. Should the people of Alaska be able to enjoy
more of a return off the depletion of their resource and how
should we go about figuring out what that return to the people
of Alaska should be in order to be fair to them?"
9:10:16 AM
Ms. Brady judged this to be a "really good … basic question".
Her response first addressed the concern that the Economic Limit
Factor (ELF), which is the State's current oil tax structure,
"has not been working through the years" and has not provided
the people of the State "their fair share over the years". To
that point, she noted that during the past 40 years, the State
has received in excess of "40 percent of the revenues from the
oil industry". During the years 1986 through 2003, when oil
prices ranged between $17 and $22, the State received a minimum
of 64 percent of oil revenues.
Ms. Brady pointed out that "the State continues to benefit every
time there's more production". The price of oil would be
insignificant were there no increase in production. Production
has declined much faster than what was anticipated in 1989 when
the ELF was modified. As a result of that modification, the
State provided an additional two billion dollars from Prudhoe
Bay and Kuparuk field production. The State would be in "serious
trouble" were production levels to decline to 600,000 barrels a
day, as it would be "unable to fulfill its royalty contract with
Flint Hills in Fairbanks". That would have "huge consequences"
in that area.
Ms. Brady identified increased investments, additional
production, and the gas pipeline as the key elements to the
future of the State.
Senator Dyson agreed that "reasonable" efforts must be
undertaken to increase production and further the gas pipeline.
The question is, were production to increase, "what is the fair
return to the people of Alaska for the depletion of their oil
when the prices go above the point at which the companies have
been making their economic decisions?"
9:13:09 AM
Ms. Brady stated "the net production tax is progressive: when
prices go up and profits go up, the State benefits…hugely."
Continuing, she noted that oil companies do not anticipate
prices continuing at current prices for longer than the next two
or three years. When prices are low, the oil industry "takes the
hit and they take the risk"; therefore to counter that, high
prices are necessary in order to allow them "to continue to
invest". Oil price levels during the last 40 years have been
insufficient to entice new companies to invest in the State.
Therefore, she asserted that a 20 percent net profit tax would
be fair to the State.
Due to the number of people desiring to testify, Co-Chair Green
limited testimony to two minutes per person.
9:15:04 AM
JAMES GARHART testified via teleconference from Matanuska-
Susitna (Mat-Su). The 20 percent tax proposed in the Governor's
bill is insufficient and should be increased. The prices being
charged to consumers at the gas pump and the record profits
being experienced by the oil companies substantiate increasing
the proposed State tax. 25 percent would be a more reasonable
tax rate. Legislators are more concerned with political
positioning than working to benefit the people of the State.
9:16:47 AM
CHRIS JOHANSEN testified via teleconference from Fairbanks. He,
"like many others, has a strong opinion on this issue". His
engineering degree from the University of Alaska and his
experience working with oil activities in Prudhoe Bay, have
assisted him in understanding the complexity of this
legislation. He could understand furthering this legislation
were the State to enact a long-term fiscal plan and were current
revenues unable to provide for the basic needs of the State.
"However, just the opposite is true." Some Legislators take
great pleasure "in placing their hands around the neck of the
goose that lays the golden egg, choking it until it passes out,
hoping they don't kill it." He recounted a story about an
attempt "to do the right thing" that failed. Rather than
increasing tax revenue to the State, the increased taxes would
result in decreased production, reduced employment
opportunities, and increased prices.
9:19:14 AM
KAREN CONOVER testified via teleconference from Fairbanks. She
is a fourth generation Alaskan whose family has been long-term
participants in the transportation industry. The majority of the
family's business is dependent on the oil industry. While the
family is supportive of the gas pipeline and increased
exploration, the impacts of changing the provisions in this
legislation beyond that proposed by the Governor are of concern.
9:20:10 AM
JIM GILBERT, President, Alaska Support Industry Alliance and
President, Udelhoven Oilfield Services, Inc. testified via
teleconference from Kenai in support of the original PPT bill as
introduced by Governor Murkowski. He read his written testimony
[copy on file] as follows.
April 4, 2006
Petroleum Production Tax CS SB 305
Every one of the changes in the Senate Finance Committee CS
jeopardizes oil and gas investment in our state, which
means the Senate Finance Committee is jeopardizing the
future of every small business owner in Alaska that
supports the oil and gas industry. Every current and
prospective producer has testified to that effect,
including the independents Alaska is trying to lure to
explore here.
The gas fields of Cook Inlet provide gas to the local
utilities that supply electricity and distribute natural
gas to Anchorage and Kenai Peninsula area residents. The
PPT as currently proposed will increase the severance tax
on the majority of the gas used to supply the utility
companies. The utility sales contracts recognize that
production taxes are a cost. Any increase in taxes will
therefore result in a direct increase in the cost of
natural gas and electricity supplied to residential and
business consumers. In addition, the two large industrial
users of gas, the fertilizer plant and the LNG [liquefied
natural gas] plant, ultimately must absorb any increase in
the cost of gas making them less competitive in the world
market.
If enacted, the CS will leave Alaska with the highest tax
rate and highest cost structure in the United States,
putting Alaska at a competitive disadvantage for new
investment.
Our concern for the future of Alaskans is compounded by the
lack of a state fiscal plan for managing surpluses in a
high-price environment like we're currently experiencing.
How will we balance the budget when prices are low? The
state budget was slightly more than $2 billion two years
ago; it's projected to be as high as $3.8 billion in
another two years.
As the President of the Alliance and also as President of
my own company, I urge you to choose sustainable economic
growth through new investment over unsustainable government
growth through higher taxes in crafting new severance tax
methodology.
Reject changes represented in CS SB 305.
9:22:39 AM
WILLIAN PHILLIPS testified via teleconference from Kenai and
read from his prepared testimony [copy on file] as follows.
Testimony on Oil Taxes, Senate Hearing, 8 Apr 2006
I am here to present a reality check and a big Hoorah to
those Legislators who have developed the backbone to stand
up for Alaska and honor their oaths despite pressure from a
gullible governor and legions of oil industry lobbyists.
To the honorable: HOORAH!
Reality check: Big Oil is engaged in a disinformation
campaign to con Alaskans on oil taxes and a gas pipeline.
No matter how often a phony story is repeated, it does not
make it true.
There are no state or Federal laws or regulations requiring
Big Oil's ad campaign to be truthful. They're not trying to
sell you a product or get you to buy stock. It is the legal
duty of oil executives to maximize return to stockholders
by any legal means necessary.
I expect you'll get non-profits testifying for no taxes in
response to what is essentially extortion by Conoco. Conoco
representatives effectively threaten to stop their funding
if taxes were changed. If Alaska had an independent
attorney general there would likely be a criminal
investigation.
Big Oil will not walk away from Alaska because oil taxes
are raised to a level compared to other countries in the
world. Other oil companies are prepared to step in to earn
the huge profits available.
The oil companies were making profits in the 80's when oil
was about $9 a barrel and wages were high enough for little
Kenai to support a Nordstrom store. Since then, they have
run off most unions, dropped wages, and Kenai's Nordstrom's
is long gone.
Other countries are nationalizing their oil resources
freezing Big Oil out. Why else do you think some big
players who left Alaska in the past are returning? Remember
the oil executive who last week smiled and declined to
answer if they were going to pay Libya's 90% to get back in
country?
The oil was not created by the oil industry as Big Oil
would like the gullible to believe. If they could get the
oil without hiring a single person, they would. When the
oil is gone, they will leave and likely leave a mess
behind.
Big oil is implying that lower oil taxes will soon get a
natural gas pipeline built. And pigs will fly too! Big Oil
is using it as a carrot to con some Alaskans, like out
governor, into lower taxes on oil.
Conoco/Phillips is buying Burlington Resources, a major
holder of natural gas reserves in the lower 48 and Canada
for about $30 billion. Does anyone think CP management is
stupid enough to flood the market with Alaska gas and
destroy its investment in Burlington?
Other big holders of Alaska gas have gas interests
elsewhere they can bring to market sooner and at higher
profit. There is no benefit to them to build an Alaskan
natural gas pipeline any time within the next 10 to 15
years, and the Canadians are insisting their gas goes to
market first maybe by 2011. Alaskan gas is in the ground.
It won't go anywhere. There is no big cost to keep it
there, and it will just keep increasing in value. Pure
economics and pure profit motives drive big companies!
Stand firm for Alaska's fair share on oil! Hoorah!
9:25:39 AM
PAUL LAIRD, General Manager, Alaska Support Industry Alliance,
testified via teleconference from Anchorage and read his
testimony [copy on file] as follows.
Thank you, Chairwoman Green. My name is Paul Laird, and I'm
general manager of the Alaska Support Industry Alliance.
I'm testifying on behalf of the Alliance, a trade
organization representing companies that provide goods and
services to Alaska's oil, gas and mining industries.
Madam Chairwoman, members of the Finance Committee, the
Alliance, and our 400 members, and their 30,000 Alaskan
employees have one simple message for you with regard to a
new profits-based oil and gas production tax: Don't gamble
with our future.
We need a healthy oil and gas industry and steady, long-
term oil production.
We need a gas pipeline.
We need sustainable state revenues.
We need oil and gas investment, and the jobs and business
opportunities it provides.
The original 20/20 deal negotiated with the producers
brings us closer to all of them.
The committee substitute to Senate Bill 305, in its current
form, puts all of them at risk.
A billon dollars a year in the hand beats two billion in
the bush, and there's too much at stake to jeopardize it
all just to make state government even bigger.
Don't gamble with our future. Adopt the 20/20 plan in its
original form.
9:26:52 AM
MARY SHIELDS, General Manager, Northwest Technical Services,
testified via teleconference from Anchorage. Her testimony [copy
on file] is as follows.
As General Manager for Northwest Technical Services, a
company which provides employees to a variety of
industries, including the oil industry, I usually approach
you and other members of the Legislature on matters that
deal very specifically with Wage and Hour, Worker's
Compensation and Workforce Training both in title and
content. In this case, however, I am concerned that the
impact on the workforce and future employment for NWTS'
100+ employees and other Alaska workers may not be quite as
evident to others as it is to us.
The crux of the matter is - the more money that goes into
the State government in taxes, the less money there will be
for investment by the companies in the private sector into
new projects and the redefinition of current fields to stem
declining production. Reduction of investment will mean
reduction of jobs some of which are directly related to the
oil and gas industry, many of which are the "fallout jobs"
where most Alaskans work, i.e. at grocery stores, hardware
stores, the State of Alaska, etc.
It has also been made very clear that the PPT is, in some
fashion, being tied to the gas contract. This impacts even
more jobs and opportunities - for Alaskans and, to go
beyond our borders, for other U.S. citizens. It has taken
us far too long to get to this point in history to
jeopardize it now with a taxation rate that could result in
a tax and cost rate higher than anywhere else in the United
States. This gas line is our future and the future of our
state. The monies it will generate will far outweigh those
we might realize by the change in the tax rate that has
been proposed by the House Resource Committee.
I ask that as you deliberate over the next few days as to
which changes you are going to retain prior to sending this
Bill forward, you step back and consider all the
ramifications of these decisions, particularly the impact
on jobs, future development and the quality of life for
this and the next generations of Alaskan citizens.
With the resistance of the U.S. Congress to the opening of
ANWR, this is our next "big strike". As Senator Ted
Stevens' affirmed in his address to the Legislative body,
it is a decision that will set the course of the State of
Alaska for many years to come.
At this time, I ask that you and your committee reexamine
the changes made to SB 305, which are contained in Senate
Resources Committee substitute, CSSB 305.
9:29:36 AM
KATHY WASSERMAN, Representative, Alaska Municipal League (AML),
testified in Juneau. AML has endeavored to inform members about
the PPT bill, as part of the services AML provides to its
members "to keep them involved" and apprised of Legislative
activities. To that point, she conveyed municipalities' support
of the efforts Legislators are making to address this difficult
issue. "It is time to address it." While good healthy industry
contributes to the well being of municipalities, AML also
believes the citizens of the State "should have the opportunity
and benefits when oil prices are high and large profits are
being realized by the oil company." Like ELF, the proposed PPT
bill might require modifications over time. To that point, AML
is confident that the Legislature would appropriately address
any changes deemed necessary in the future.
9:31:21 AM
Senator Olson asked whether AML is supportive of a 20/20
tax/credit rate or a 25/20 tax/credit rate.
Ms. Wasserman responded that AML member communities have not
taken a position on that issue. AML would defer to the judgment
of the Governor and the Legislature.
9:32:02 AM
CHARLIE FANNON testified via teleconference from Mat-Su and
stated that the reality is that the world needs and is willing
to pay for oil and gas resources. "The companies that produce
and market these resources are making record profits." Federal
government economists predict continuing high prices. The
Organization of Oil Producing Countries' (OPEC) oil minister has
indicated the desire to control production to obtain a price of
$80 per barrel. "Don't gamble with Alaska's future, hold the oil
companies to a fair and equitable contract based on what you see
going around in the rest of the world." He also recommended
developing a flexible contract "that could be changed in ten
years" as opposed to one that must be adhered to for 30 years.
The work being conducted by the Legislature on behalf of the
people of the State is appreciated. There is no "need to hurry"
on this legislation, as the State's oil and gas reserves would
not dissolve, and the oil and gas needs of the world would
continue. He requested the Committee take its time and develop
legislation that would best benefit the people of the State.
9:33:48 AM
ERNEST LINE testified from Mat-Su and asked whether Committee
members completely understood the bill. Continuing, he
questioned whether the Committee had determined this bill to be
to the "best possible" solution for the State and its people.
The Governor's bill "is the result of" long-term negotiations by
the Administration. Therefore, he questioned the reason the
Legislature felt "incumbent" to reconfigure the legislation
within the confines of a short time period. Passage of an
imperfect bill would bind the State. He asked members to read
both the Editorial and an article written by former Legislator
Ray Metcalfe, which appeared in the April 7, 2006 edition of the
Frontiersman newspaper.
Mr. Line supported constructing an All-Alaska gas pipeline
terminating in Valdez as opposed to the proposed gas pipeline
route would be transiting over and "subject to " the dictates of
a foreign nation. Alaskans would benefit more from the
construction of a domestic pipeline.
9:36:29 AM
TOM ZIMMERMAN, JR., testified via teleconference from Fairbanks
in support of the Governor's 20/20 proposal. Considering the
industry projections of a six percent annual decline in
production of oil, "it would be ill-advised to risk the loss of
capital investment from the oil companies at any level because
of an unfair and unrealistic level of taxation. … A doubling of
investments would be required to decrease" the projected decline
to three percent. He believed that oil companies provide
approximately 90 percent of the State's funding. Increasing the
tax rate on the oil industry could be likened to "going beyond
squeezing" the neck of the Golden Goose to a point of
strangulation. While he has been able to earn a living in the
State, all of his three children have "sought their futures
outside of the State". He worried as to how the State could
provide job opportunities for future generations of Alaskans if
"we unfairly, through greed, try to extract and squeeze the last
nickel from the very source that generates" employment
opportunities.
9:38:15 AM
DENNY SCHLOTFELDT testified via teleconference from Fairbanks
and testified as a lifelong resident of Fairbanks. Only three of
his high school classmates continue to reside in the community
as most others left due to the lack of employment opportunities.
Fortunately, due to increasing private industry "investment in
Alaska", employment opportunities are expanding. Many of those
businesses support oil company or mining activities. Private
industry rather than government efforts have changed the
employment scene. He thanked the Legislature for its actions "to
encourage private development in this area".
Mr. Schlotfeldt was uncertain of his support for the options
being presented in regards to the PPT. To that point, he
suggested that the Legislature take no action on the PPT until
the Governor publicly provided the details of the Gas Pipeline
negotiations. It would be "unfair" to the people of Alaska to
testify on this bill while the Governor treats the gas pipeline
as "the carrot on the stick" in regards to the PPT, but "leaves
everyone in the dark" about it.
Mr. Schlotfeldt declared that due to the fact the oil companies
have determined that the construction of a gas pipeline through
Canada with a timeline of 2012 would be the most economical
decision the Legislature need not rush to make a decision this
year. Further information should be sought.
9:41:35 AM
HAROLD HEINZE testified via teleconference from Anchorage and
stressed, as a citizen of Cook Inlet, that the impact of the PPT
on Cook Inlet production has not been "adequately addressed". He
forecast a "looming supply disaster and major cost increases to
the consumers" in the Cook Inlet area. Cook Inlet differs from
other oil and gas production areas of the State "in that that
production is used in the area." In addition, the approximate
two-thirds of the State's population who reside in the Railbelt
area of the State rely on "the production of gas in this area
for their supply of electricity and heat." Any increase to the
cost of gas would impact those prices. The current provisions in
the bill "are based upon evaluations and considerations of the
investment" and economic decisions on the North Slope. "The
economics of Cook Inlet are much more difficult." He supported
the [unspecified] issues raised by Senator Tom Wagoner and
requested that consideration be given to either zeroing out or
insuring "no changes be made to the current severance tax
provisions in Cook Inlet … until further consideration to Cook
Inlet production has transpired."
Mr. Heinze, a former commissioner of the State's Department of
Natural Resources, suggested "the usage within the State that's
associated with Cook Inlet, provides more than an adequate basis
in terms of taxation and fees for this area to receive a
different treatment based upon valuation by" the Legislature.
Co-Chair Green asked Mr. Heinze to fax his testimony. She also
requested other testifiers to fax or otherwise provide their
written remarks as well.
Mr. Heinze indicated he had spoken extemporaneously.
Co-Chair Green informed Mr. Heinze that the Committee has
developed a set of questions regarding the PPT. She would send a
copy of the questions to him and would appreciate his response.
Mr. Heinze affirmed.
Co-Chair Green offered to send the questions to any interested
party.
9:44:59 AM
MICHAEL KOY, Former British Petroleum Employee, testified via
teleconference from Anchorage and spoke to the question of
whether increasing the tax on the oil and gas industry would
affect their investment in the State. Based on his experience in
"economic evaluations and business development in the oil and
gas industry", he determined "the answer simply is maybe". A
correctly designed tax structure might not have a negative
impact, as the tax is one of several components affecting the
investment decision. He likened the PPT to the United States
income tax structure with standard deductions, which "is based
on the premise that the more you earn, the higher the tax
bracket should be … This is an accepted practice, and there's
little reason" to believe that the same premise could not be
applied to the oil and gas industry. However, to determine
whether or not it would impact investment, three important per
barrel oil price ranges should be considered: prices less than
$20 per barrel; $20 to $30 per barrel; and prices higher than
$30 per barrel. "Most oil companies and all the major companies
use fixed prices when making investment decisions." That price
has traditionally ranged between $20 and $30.
Mr. Koy communicated that a tax structure developed in
consideration of this $20 to $30 oil price range would assist in
making Alaska an attractive location for investment. The Senate
Resources Committee version of the bill "creates a higher tax
burden on industry within this" price range than does the
State's current Economic Limit Factor (ELF) tax structure, which
already places the State at a disadvantage in comparison to
other global tax structures. In order to attract investment or
lessen the dis-attraction, the State's tax regime should be
lowered below the 25-percent tax proposed in the Senate
Resources committee substitute. It would be reasonable to
develop a tax structure on prices exceeding $30 a barrel. This
would assist in maintaining the health of the underlying
business and would not negatively impact investments. A
graduated progressive tax system could be implemented.
Mr. Koy opined that furthering the Senate Resources provisions
would incur significant risk to the State in terms of "price,
cost risk and exploration risk", in particular. The State would
benefit were it to "eliminate the investment tax credit on its
exploration costs; thereby eliminating the State's exposure to
this risk". The State should instead "place a greater investment
tax credit on heavy oil". Large heavy oil discoveries near
existing infrastructure exist. Heavy oil could be brought on
line fairly fast and the "technical risk" would be to the
industry rather than to the State. In conclusion, he urged the
Committee to keep the gas pipeline project separate from the PPT
issue.
9:49:19 AM
MERRICK PIERCE, North Pole Resident, testified via
teleconference from an offnet site and communicated that, while
the State's existing oil tax structure should have been revised
earlier, the Governor's PPT bill "is a disaster". Of primary
concern is its net profit tax basis, as the net profits tax
imposed on the mining industry has only earned the State ten
million dollars of the mining industry's gross revenues of $1.5
billion. "That's less than one percent". Representative Paul
Seaton's proposal to implement a mining tax based on gross
profits rather than net "is the right direction to go" with the
PPT.
Mr. Pierce urged the Committee not to "repeat history" and pass
a complex bill, as it would echo the "complex litigation" that
has accompanied the existing oil tax structure and cost the
State billions in lost revenue. Progressivity should be included
in the structure as well as an effective date of January 1,
2006. This date would assist in mitigating the millions of
dollars the State has lost due to ELF. The Legislature should
listen to the recommendations of their consultants. "The very
worst aspect" of Governor Murkowski's proposal is his effort "to
tie oil taxes to the gas pipeline … There is no reason in the
world we should be giving concessions on our oil since a
competing proposal for a gas line" from the Alaska Gas Pipeline
Port Authority does not include "oil giveaways and no State
subsidies."
Mr. Pierce referred to remarks included in a memorandum from
former Department of Natural Resources Commissioner Tom Irwin,
which specified that no "quantitative evaluation of alternatives
such as applications submitted under the Stranded Gas
Development Act" had been conducted. A full public disclosure of
alternatives should be provided for gas pipeline contract
evaluation purposes. The Legislature should pass a simple bill
separate from consideration of the gas pipeline.
Co-Chair Green asked that Mr. Pierce provide his written
testimony to the Committee.
9:53:10 AM
GARY HUTCHISON, Fairbanks Resident, testified via teleconference
from an offset site and voiced appreciation for the effort to
adjust oil and gas production taxes. The desire is that this
legislation would implement "the right thing". Current concerns
include an aging pipeline and declining North Slope oil
production. "It is also frustrating … that our major industry is
subject to international market pressures." Emotions should not
influence the development of good public policy. "Higher taxes
will not attract investment, but they can force investment to
other locations." The development of a gas-line is imperative.
He urged the Committee to support the Governor's proposed 20
percent tax structure. He told a story about how the community
of Fairbanks lost a project to another region of the State due
to greed. Doing the "wrong thing" with this tax structure would
not result in industry investment.
9:56:01 AM
MIKE MILLIGAN, Former Member, Kodiak Island Borough Assembly and
Former Charter Member of the Cook Inlet Regional Advisory
Committee under the Oil Pollution Act of 1990, Parent, and
Taxpayer, testified via teleconference from Kodiak in opposition
to the Governor's tax proposal. The oil companies professing
they would invest elsewhere were the State to increase its oil
tax should disclose where they would be investing due to "a
better situation". They should disclose how they would generate
profits in places such as Angola, Nigeria, and Bolivia, which
have oil and gas reserves. Committee members should also
question what the State could do to "create another ARCO" as
"oil and gas development in this State is still coasting on the
innovation and the risk and the initiative that was taken by"
that one company. The State should endeavor to develop policies
to attract "a medium sized oil company that's going to resume
that role…" Large oil companies such as British Petroleum and
Exxon "are going to leave no matter what because we're dealing
with a commodity".
Mr. Milligan stressed that the tax structure on Cook Inlet
should be differentiated from that imposed on the North Slope.
Concessions should be made for Cook Inlet, as it is a different
operation. The gas pipeline issue should also be a separate
discussion.
9:58:52 AM
HILLARY MCINTOSH's remarks [copy on file] were read into the
record by SHIRLEY NELSON, testifying via teleconference from
Anchorage, as follows.
Thank you for this opportunity to speak on the Committee
Substitute to SB 305. Madame Chairman, my name is Hillary
McIntosh and I live in South Anchorage. I am here to tell
you how your decisions on this tax bill will affect my
family. My husband and I both derive our livelihood from
the oil and gas industry … reaching further, so does my
sister, brother-in-law, uncle and many friends. I am sure
this is a common statement among most Alaskans.
Every producer, majors and independents, has indicated that
higher taxes as proposed by the legislature will result in
less investment in the Slope. What does that mean to me?
What does that mean to my husband, my family members and
friends that support the oil and gas industry? I believe it
means fewer opportunities for professional growth, a fear
of job instability and a distinct disincentive to stay in
Alaska.
Short term revenues for government are not worth throwing
away long-term investment for Alaska's future. How will
this all pan out when my daughter graduates from college in
2027? Will she want to stay in Alaska? Will the oil and gas
market be thriving then? It may not be if you overstep the
producers' threshold. Don't let Alaska's biggest export
become its children.
Less money to invest in the majors' own industry will
certainly mean less money to invest in Alaska's communities
as well. Between my husband and me, we sit on several
boards and are involved in many area non-profit entities.
In fact, I even work for a non-profit. The oil industry,
majors and their contractors, have been very generous to
the non-profit community and it would be detrimental if
their support is reduced due to your important decisions on
this tax. Less investment in our communities means less
support for programs that I value and feel Alaska's
children need.
In the event that community support is reduced, will the
State of Alaska subsidize the difference? What plan is in
place to manage these windfall profits?
You can shave a sheep many times, but you can only skin him
once. I watch gavel to gavel, I read the papers, I watch
the news, I've seen the bills themselves …. and I think the
changes made to the Governor's bill have destroyed the
delicate balance between state and industry needed to
ensure a healthy economy and much-needed gas line. Let's
not forget that two years of negotiations went into the
agreement. I am not asking you to "give in" to the
producers' every whim, but I am asking you to think about
the negative externalities your changes will cause and how
Alaska's future may look in 10, 20 or 30 years. Do not
stray too far from the Governor's proposal. Please do not
jeopardize my family's future in Alaska.
10:02:24 AM
LYNN JOHNSON, President, Dowland-Bach Corporation, testified via
teleconference from Anchorage and read his testimony [copy on
file] as follows.
Good morning Chairwoman Green and other distinguished
members of the Senate Finance Committee. My name is Lynn
Johnson, and I am a 32-year Alaska resident and President
and co-founder of Dowland-Bach Corporation, a 31 year old
Alaska manufacturing and specialty design and fabrication
firm. As you know, I have spoken to most of you in person
in Juneau, and am once again very honored to be able to
present my opinions on the PPT taxation issue. I am a past
President of the Alaska Support Industry Alliance, the
Anchorage International Rotary Club, and currently serve on
several boards, including the American Red Cross of Alaska,
Girdwood 2020, the Whittier Ports and Harbors Commission,
and the Alaska Export Council.
As many of you know, our firm is one of the rare
manufacturing firms in the State of Alaska. We employ 28
people year round, and have taken great pride that we have
essentially avoided the cyclical ramp up and ramp down over
the past 31 years. We were the Export Council's "Small
Business" Exporter of the Year in 2002, primarily for our
manufacturing and exporting of wellhead control systems to
Colombia, South America. In this instance, we used the
knowledge and expertise that we learned on the North Slope
to expand our controls and systems business to another oil
basin of the world. This controls and systems niche that we
compete in serves us well worldwide, but the bulk of our
business still does originate from the North Slope and Cook
Inlet. For that reason, I urge you to think very seriously
about substantially changing any portion of Governor
Murkowski's PPT proposal. To make additional investment in
Alaska not attractive through excessive taxation would
devastate companies like ours and my fellow member
companies of the Alaska Support Industry Alliance.
As a business owner, I am a firm believer that economics
grow through the private sector, and not necessarily public
sector expansion. Several of you on the Finance Committee
are small business owners like me and I am sure that you
have a great deal of empathy for my point here. Greatly
increased production taxes on North Slope oil will curtail
investment in facilities and additional expansion necessary
on the North Slope and Cook Inlet to extend production to
keep TAPS full. With excessive taxation, as we have all
heard time and time again, investment capital from the
major producers will flow to other oil basins of the world.
In summary, lets think about this increased taxation issue
from our personal perspective. If the personal tax rate on
our individual incomes suddenly doubled or tripled, would
you be that willing to work that extra two or three house
of overtime? In addition, let's consider the message that
we are sending to the oil industry head corporate offices
worldwide. We want to double or triple your taxes on oil,
we want you to continue to invest hundreds and hundreds of
millions of dollars yearly in our Alaskan economy and we
also want you to build a 25 billion dollar gas pipeline as
soon as possible. Does that sound like a good plan to a
shareholder of one of the major producers that owns stock
and has no real concern about Alaska? That shareholder is
just concerned that his investment in that oil company
stock and where the oil comes from is none of his or her
concern. For that very reason, hold the tax rates down and
keep Alaska competitive with other oil producing basins of
the world. Do we want the industry in Alaska for another
ten or fifteen years or another fifty??? I think the answer
to that question is crystal clear. We need to let the
industry know this by making Alaska a good climate in which
to invest over the long term. Please think long and hard
about any substantial changes in taxation. The Governor's
original PPT plan as submitted is a compromise that
benefits everyone in the long run. Please keep your
committee substitute as close as possible to the original
version. The economic future of Alaska depends on it. Thank
you.
Co-Chair Green asked Mr. Johnson to fax his written testimony to
the Committee.
JIM SYKES testified via teleconference from Mat-Su and thanked
Legislators for considering options other than those proposed by
the Governor. It is good to compare a variety of options. It is
also important "to de-link the system". The tax structure could
be simplified by implementing a structure similar to that
proposed by the Department of Revenue. The Department has
suggested that taxes could be increased to a rate as high as 30
percent. A 1999 report compiled by Oil Watch Alaska found that
oil companies continued to show a profit at the 1999 price of
ten dollars a barrel, which was a twenty year low. The State has
not recovered anything from the "upside" under the existing ELF
tax structure. The "simplest system would be to take the federal
share out" and split the remainder of the profits 50/50, as the
State and its citizens should be considered "equal partners in
the development of oil" and should therefore, "have equal share
of the profits" generated from the State's resources. This would
equate "to an effective tax rate" ranging from 33 to 35 percent.
Mr. Sykes opined that had the State acted upon the information
compiled in the aforementioned 1999 report, the State would have
garnered an additional six billion dollars. Oil companies are
threatening to leave, slow investment, or curtail support of
charities, were the tax rate changed. Such response indicates
that the State is "on the right track". The tax rate should be
increased from the currently proposed 25 percent rate to 35
percent. The fact is that "oil companies don't have many places
to go". "Alaska offers one of the most profitable and one of the
most safe places to develop oil anywhere in the world." Were a
company to leave, another company would "immediately replace"
them or the State could also utilize the subcontractors
currently used by the major oil companies.
Mr. Sykes stated that the State should ignore the oil companies'
"whining and grumbling" and be successful in its negotiations by
"holding the upper hand". A higher tax rate would be fair. Let
the oil companies, who "have recovered more than they have lost
through slowdowns", "call the bluff". He reminded the Committee
that both British Petroleum and ARCO "threatened not to develop
oil fields" when ELF was written in 1989. After ELF was enacted,
both companies "quietly" went back to work. "If they want our
oil", they should pay a fair price. The "overall question" is
"who should control Alaska's economy" going forward? It could
either be the multinational oil companies or the people of
Alaska, as represented by the Legislature. He urged the
Committee to consider a variety of tax options, a higher tax
rate, and suggested that the 50/50 tax option would be "the most
workable of all".
10:11:02 AM
CHARLES PASKVAN, 30-year Oil Industry Employee, testified via
teleconference from Fairbanks and spoke in support of the
Governor's tax proposal. He also favored using a portion of the
Permanent Fund to support the gas pipeline and issuing stock
certificates to each Alaskan. The State would do its citizens "a
great favor by building the gas line" ourselves.
10:12:20 AM
JOHN POLAHN testified via teleconference from Fairbanks and
spoke in support of the Governor's bill. During his time in
Fairbanks, he has witnessed the economic impact that big
industry slowdowns resulting from low oil prices, have had on
the economy. Unfortunately, since the economy of Fairbanks is on
the upswing, people forget the times when "the oil companies
stop spending money" and jobs dissipate, stores close, and homes
are foreclosed. Were the Governor's proposal not advanced, the
oil companies have stated their spending and their investments
in the State would decline. We cannot "afford to take this
chance". The State's economy would suffer.
10:15:45 AM
JIM SAMPSON, testified via teleconference from Fairbanks, and
encouraged the Legislature to make good decisions based on
information provided by their consultants and what would be in
"the best interest of Alaska" rather than acting due to threats
from the Governor and the oil industry. The Governor should
release the conditions of the Gas Pipeline contract prior to any
decision being made on the PPT. The nature of the oil companies'
advertising campaigns is counterproductive to their intended
goals. The threats to non-profits would also generate negative
feedback. He referenced a new television show called "Deal or No
Deal" and stated that, unless the Governor releases the
conditions of the gas pipeline proposal, there should be "No
Deal".
10:18:28 AM
MAYNARD TAPP, testified via teleconference from Anchorage, and
presented his testimony [copy on file] as follows.
My name is Maynard Tapp, I am an Alaska dreamer since 1954;
an Alaskan worker since 1972; an Alaskan business owner
since 1985; and an Alaskan resident since 1990.
I prefer a Productions Profits Tax of 15 percent over 20
percent.
What should be the primary driver in the debate regarding
CSSB 305 and CSHB 488?
Create an investment climate that puts Alaska at (or near)
the top of investment opportunities for our partners the
"Producers". This same climate will also raise our
opportunity to attract new investors.
How do we increase production to ensure the long-term
benefits from Alaska's people's resources?
What can you as Legislators do to grow the source of our
wealth?
I believe we must trust our partners, our fellow citizens,
those who have invested billions in the State of Alaska
accruing billions to the Alaska treasury.
Undeveloped Alaskan resources have no value to Alaska's
people if those resources are left in the ground.
I have learned from the various presentations on the PPT
presented by the economists, and producers, and the
legislators of the State of Alaska. You, the
Leaders/Managers of Alaska's resources must use this
information to help make informed decisions. Ultimately the
experts will leave and we will be left with the results of
your actions, not theirs. The experts don't live here, we
do.
Do you do everything your dentist/doctor/lawyer tells you
to do? No! You make informed choices based on the
information they've given to you.
These bills need to be fashioned as "Resource Development"
legislation not as tax revenue bills.
Are you looking at the right set of numbers, tax, or return
on investment?
Is our goal to grow the resource or grow the government?
We are all partners in this deal; the government, the
people, and the "producers". The "producers" reinvest the
revenues and grow the source of those revenues. The people
get jobs from/and related to the "producers" reinvestment,
grow their wealth; reinvest in the community, and grow its
wealth, and viability.
As a partner, shouldn't the government support the growth
of the revenue resource and not the growth of the
government? Ultimately, the growth of the revenue source
supports the growth of government but within our means.
I believe the 20% / 20% is the wrong number, it should be
closer to a 15% / 20% PPT. What do your expert say the PPT
number should be to attain 0 % to 3% rate of decline? What
are you doing to ensure the state's revenue source lasting
long enough to meet the needs of Alaska's next generation?
Today production is declining at 6% per year. Starting at
880,000 bbld I calculate the pipeline being mechanically
inoperable by 2015. Then what?
The new technologies to bring viscous oil to market are not
easy, guaranteed, or cheap.
What can you do to encourage investment? It doesn't seem
like raising the tax does anything to put more money into
exploration. We cannot tax our way to state solvency, in
the long run we must invest/grow our way to state solvency
and success.
I started a business here twenty years ago waiting for the
stars to align.
1. Continuing investment on the North Slope
2. Build the Alaska Gas Pipeline to the lower 48.
3. Get legislation in place to encourage development of
ANWR.
What are you, our state representatives in the House and
Senate, doing to encourage development and growth of our
resource pool, the source of our population's wealth and
source of Alaska's state revenues? Please invest in growing
the "seed corn" to keep Alaska growing now and into the
future.
SHIRLEY NELSON, testified via teleconference from Anchorage, and
read her testimony [copy on file] as follows.
My name is Shirley Nelson and I am here to tell you how I
feel about the Tax bill before the legislature and how it
will affect my family. My husband and my livelihood both
depend on the oil and gas industry. All of the producers
have stated that higher taxes will reduce investments on
the slope. We need to look at the long term effects of this
bill versus the short term.
We need to provide a strong incentive for the oil industry
to re-invest in Alaska. This will ensure jobs now and jobs
for our children and their children. This will also provide
an incentive for our children to stay in Alaska instead of
leaving the state to find employment.
The outcome of this tax will affect every community in the
state, and the economy in each community would suffer if we
force the oil industry to take their investment dollars to
other countries and the lower 48.
Please think long and hard before you tax the oil companies
out of the State of Alaska.
10:23:13 AM
JOE RIORDON, Engineer and Consultant, testified via
teleconference from Anchorage and noted he has developed many
projects for oil companies in Valdez. Imposing a rate that would
discourage oil development would have significant negative
impacts on the communities of Delta, Valdez, and Glennallen as
oil companies might make decisions curtailing activities south
of Fairbanks. The North Slope crude oil could be refined in
Fairbanks rather than being transited via the Trans Alaska
Pipeline to Valdez. The cost of transporting via the pipeline
including maintaining the pipeline could also be factors in the
decision. "The decision made today will have far-reaching
implications, and I am certain that the future viability of
Delta, Glennallen, and Valdez would weigh in the balance of the
outcome of this tax proposal." He encouraged the Committee to
develop a tax system that would encourage oil production, as
this would keep those communities "thriving".
10:25:24 AM
JOAN JOHNSON testified via teleconference from Fairbanks and
communicated the positive impact that oil companies operating
under a profit have on a community. She questioned the wisdom of
increasing taxes on oil companies, as they provide the largest
source of income to the State. Many businesses, including her
freight and transportation company, work with the oil companies
and are affected by their welfare. She would support a 20/20 PPT
tax structure. It is an increase over the current ELF. Any
decision that is made should be based on the truth, fairness,
the "best for all concerned" and whether it would promote "good
will".
10:28:46 AM
MARK SHARP testified via teleconference from Fairbanks and
remarked about the "tipping point" phase that has been used in
discussions as to what tax rate would serve to increase or
decrease investment in oil production. His tipping point would
be triggered by another legislator asking an oil company
representative another "softball question" during a hearing.
Legislators, particularly those from the Fairbanks areas, need
to ask the oil industry "hard" questions. Recent ConocoPhillips
remarks before the Legislature's Finance Committees "threaten to
visit financial distress on charitable organizations throughout
the State." British Petroleum also communicated that non-
acceptance of its "lowball tax restructure" would assure
"destruction" of the State's urban centers. The major oil
companies "seem intent on shredding the last little bit of
goodwill they have" remaining with the State's citizens. Recent
PPT provisions being proposed would shift the risk from the
industry to the State. "Clawbacks" and "looking forward
incentives" could be likened to subsidies and would cost the
State billions of dollars. The oil industries' "threats" and
"arm-twistings" also include furthering incentive provisions
that confuse the Legislature's and Administration's accountants,
economists, and consultants. Oil companies are also involved in
the gas pipeline negotiations. He warned against accepting
"lowball numbers dictated to us on a take it or leave it basis"
and against committing to a tax structure for long terms. In
summary, "government does not belong in private sector business
and large projects must stand alone on their own merits without
government subsidies". He asked why the oil industry has not
reinvested "some of the huge profits" it has obtained from the
State's resources into the infrastructure rather than
threatening to move those profits to other locations. He urged
Legislators to thoroughly evaluate, and strike, the "clawback"
provisions being proposed.
Co-Chair Green reminded testifiers of the two-minute limitation.
10:34:15 AM
WAYNE STEVENS, President and CEO, Alaska State Chamber of
Commerce, testified in Juneau. His testimony [copy on file] is
as follows.
The Alaska State Chamber of Commerce supports a revision to
the current Alaska oil & gas production tax. We also
support a change in production tax, to a net profit tax
with tax incentives for oil & gas exploration and
reinvestment.
Through the PPT legislation, the Legislature has the
opportunity to help define the pace of North Slope oil
production for both the near-and long-term.
While the oil and gas industry in the State appears to be
generally supportive of the Governor's 20/20 oil tax
proposal, the State Chamber of Commerce stands firm with
its traditional position that any increase in taxes needs
to be carefully scrutinized for detrimental impacts on
investment in the State.
If the Legislature chooses a tax rate that is higher than
that proposed by the Governor, the Chamber has serious
concerns about the impact on exploration and other
investment, job growth and economic development in the
State. We believe higher taxes could accelerate the rate of
production decline, with even greater impact on jobs and
economic growth in the State.
The Chamber is concerned that calls for a greater tax take
from the oil and gas industry may result in damage to the
long-term future for Alaskans in favor of a short term
unsustainable revenue gain.
Current North Slope production is not declining because
taxes are too low.
While the Legislature addresses an increase in oil taxes,
the Chamber recommends they also consider developing a
long-term state fiscal plan that would make Alaska a more
stable economy attractive to private sector investment.
10:36:05 AM
TADD OWENS, Executive Director, Resource Development Council,
testified via teleconference from Anchorage and thanked the
Committee for addressing "this very important issue". While the
current ELF tax structure should be revisited, the Council is
concerned about the tax changes being proposed to "the one
industry responsible for nearly 90 percent of the State's
general fund revenue." The Senate Resources Committee version of
the bill is particularly "worrisome". At current oil prices, it
would add millions of dollars to the State's treasury, which is
already "experiencing a revenue surplus". Little discussion has
occurred in regards to how this money would "be managed over
time", and the worry is that State government would grow to fit
the surplus revenue. A fiscal plan should be developed that
would consider times of lower oil prices. The Legislature's
actions on this bill must consider how the State could become "a
more competitive place for capital investment", as only through
increased investment could Alaska's economy continue to be
healthy. The new system must provide long-term fiscal stability
rather than continuance of the historical "peaks and valleys".
10:39:01 AM
CARL PORTMAN testified via teleconference from Anchorage and
communicated higher tax rates would negatively affect Alaska's
competitiveness in attracting new industry and investment to
address declining production on the North Slope. Even were oil
prices to remain high, "lower production would compromise
Alaska's revenue picture". The long-term forecast for oil
production "is based on investment yet to be made by industry;
moreover, that future production is based on a substantial
increase in industry's annual rate of investment to slow today's
steady decline in production". Thus "the key to maximizing
State's revenue in the long term is tied directly our ability to
attract new investment." Alaska must remain competitive with
other areas of the world, and the "tax system must offset higher
operating costs and the shrinking resource base". A lower tax
rate than that proposed in either the Governor's bill or the
Senate Resources bill should be considered.
10:41:26 AM
CHARLES KELLY testified via teleconference from Fairbanks and
voiced appreciation for the efforts being exerted by the
Legislature in regards to the PPT; particularly since "all the
facts" are difficult to get. The majority of his 17-year career
in the State has been dependent on the oil industry. There is
concern that an excessive tax rate could harm the State. The
proposed PPT would significantly increase the State's revenue
beyond that received at current oil prices under the existing
ELF rate structure. "The tax is only a small portion of what the
State" receives from oil, as such things as royalties,
employment opportunities, and support business activities should
be considered. In addition, gas pipeline negotiations should be
a separate issue "with no ties" or "no blackmailing by the oil
industry telling us what they will or won't do". The State's PPT
tax structure should include "some flexibility" rather than
being a 20 or 30-year agreement.
10:43:37 AM
GEORGE BERRY, Retired Oil Industry Employee, testified via
teleconference from Fairbanks and urged the Committee to
consider oil and gas taxation as separate but "intertwined"
issues. Today's Legislators should use a similar approach on
this tax legislation as that taken by the 55 Alaskans who
created the State's Constitution in that they should "do what's
good for Alaska first". While the existing oil tax structure
"should be changed and updated", he did not support the
Governor's PPT proposal for it would not provide the State "its
fair share as owners of our resource" as well as most of the
land on which developers are operating. He approved of the
Senate's versions of the bill; particularly the progressivity
factor. Credits should be limited to expenses relating to
activities occurring in the State. The PPT proposal should be
considered separately from gas pipeline negotiations. In the
1980s the oil industry had threatened to take their "investment
dollars to Russia"; however, they are "still here". "The threats
and the innuendos and all the high pressure" advertising
currently being run by the oil industries should be taken with
"a grain of salt". Legislators should trust their consultants'
"guidance" that a tax of "25 percent is a fair balance". He
questioned whether there is "sound merit" behind the Governor's
"secret deal" with the major oil producers. A nationally
renowned financial company recently released a crude oil price
forecast of $100 by the year 2007. As owners of the land and the
resources, the Legislature should bargain for its fair share of
the revenue "from a position of strength".
10:47:23 AM
GLENN DESPAIN testified via teleconference from Fairbanks and
exclaimed that the Governor's bill "is an absolute sellout". Oil
companies have "never been honest" with the State. The fact that
the Courts have ruled in favor of the State in cases involving
existing oil taxes is proof of this. He spoke in support of a
tax based on the quantity of oil rather than on financial
statements. He voiced disbelief of the Governor's attempt to get
the Legislature to act on the PPT without providing the details
of the gas pipeline negotiations, which is the "second part" of
"a two part deal". Oil companies have made billions of dollars
from the State's resources; however, have not made an adequate
investment in further exploration. They are purposefully
withholding those activities until an acceptable tax deal is
reached. A reasonable tax would not drive them out of the State.
Mr. DeSpain spoke in support of taxing the oil developers who
make no effort to develop their known oil reserves. Since the
Governor is not releasing "the secret details" of the gas
pipeline negotiations, he must be selling the State "down the
river".
10:50:39 AM
JOE HEGNA, Oil and Gas Sector Leader, MWH Global, testified via
teleconference from Mat-Su and noted his company was intending
to increase its professional oil and gas engineering and
environmental staff in the State; however, this action would be
negated were the oil and gas industry to curtail its investment
in the State. He worried about future employment opportunities
available for his four sons, as "a healthy future" would require
oil and gas investment. That in turn is dependant on taxation
levels, as "the higher the tax, the lower the investment". He
urged the Committee "to seek the lowest possible tax rates while
encouraging future oil and gas investment".
10:52:04 AM
DAVID LOWER, Senior Vice President and General Counsel, First
National Bank Alaska, testified via teleconference from
Anchorage and noted the process involved in making the PPT
decision should be "no different" than the process involved in
making any "fundamental investment decision". He urged the
Committee to support the Governor's PPT proposal, as it would
"invest the State's resources to achieve an attractive sustained
return for" approximately 50 years rather than putting "its
resources at risk to achieve a potentially higher rate of
return" for a short-term period. The oil and gas industry
support of the Governor's proposal would "assure … an additional
billion dollars a year in oil revenue" and further investment in
the State's resources. This would also contribute to the overall
State's economy. While a higher tax would produce increased
revenues for a while, it might not incentivize future investment
or further the development of gas reserves and the industries'
support of a gas pipeline.
10:54:13 AM
CHUCK BECKER testified via teleconference from Anchorage and
voiced disbelief that Legislators are considering doubling or
tripling the tax on the oil and gas industry. Such action would
"have a crippling affect" on the State's economy. He recently
judged 45 business plan entries in the Alaska Federation of
Natives' Alaska Marketplace Contest. The entries were creative
and consisted of sound business strategies. Awards ranging from
$1,000 to $50,000 were provided. To this point, the cumulative
half a million dollars in awards was contributed by British
Petroleum and ConocoPhillips. Without their support, the contest
could not have been a success. The question is whether such
generosity would continue were the State to significantly
increase the tax on the industry. In summary, he urged the
Committee "to keep Alaska competitive. Develop a tax regime that
is equitable and that would spur investment."
10:57:44 AM
RAY METCALFE, Former Legislator, testified via teleconference
from Anchorage in support of a tax rate that would provide "a
better rate of return for Alaskans," not for the oil companies.
Those who have testified against high taxes have not provided
any comparisons to tax levels of other countries. The
Legislature appropriately hired consultant Daniel Johnston to
gather and present information on tax rates in other countries.
Information on page 47 of Mr. Johnston's report [copy not
provided] indicates that "the average government take" on a $60
barrel of oil "is 92 percent". "The rest of the world gets their
oil produced and shipped to market for about eight percent of
the cost of a $60 dollar barrel of oil." Were the price $20 per
barrel, the government's take would equate to 67 percent. In
essence the report would indicate that it doesn't cost more to
ship and produce a $100 barrel of oil than it does to ship and
produce a $40 barrel or a $20 barrel of oil." Alaska is paying
producers more than seven times as much as other states and
countries are.
Mr. Metcalfe characterized Mr. Johnston as "one of the most
renown" oil and gas industry consultants in the world, and urged
the Committee to heed his advice. The State should not give its
oil away. ELF was written in 1977 "and was substantially
rewritten in 1982 and then again in 1989". As a Legislator at
the time of the 1982 ELF rewrite, he recalled remarking to the
lobbyists for British Petroleum, ARCO, and Exxon whether the tax
formula they were proposing could eventually be applied to
Prudhoe Bay. Their response, as well as that of the Commissioner
of the Department of Revenue at the time, was "absolutely not,
couldn't happen." "In hindsight" he now has determined that each
of those individuals had "lied to me, and the oil companies will
lie to you today". The oil companies would not quit activities
in this State were the State's tax rate to continue to be one of
"the lowest taxing major producer in the world". The chart on
page 47 of Mr. Johnston's report indicates that Alaska's current
tax take of approximately 33 percent ranks it as "the lowest
taxing major oil producer in the world". According to Mr.
Johnston, the average take is 92 percent. Even were the State to
double its current tax rate, it would continue to rank as the
lowest major producer.
Mr. Metcalfe urged the Committee to "look at what the oil
companies do, not what they say". In the 1980s, the State asked
oil companies' bids to include how they would "share the
production of the oil" once their costs were recovered. The
responses included sharing 67 to 89 percent to the State. The
world average at that time was approximately 80 percent, as
attested to in Mr. Johnston's report. Some of those wells
continue to produce today. The terms of the agreements in the
1980s did not drive producers away and an increase today would
not either. While the oil companies "screamed bloody murder"
when new bidding procedures were implemented in the 1980s, they
continued to bid and participate in bringing Alaska's oil to
market.
11:03:35 AM
KLAUS NASKE testified via teleconference from Fairbanks. He was
"upset about the Governor's proposal" as it is a "huge giveaway
and sellout to the oil companies". One provision of particular
concern in the Governor's bill is that denying "citizen's right
for initiative to bypass the Legislature in raising taxes". Most
people have forgotten the Amerada Hess lawsuit the State filed
against ARCO, Exxon, and British Petroleum, which continued from
1977 to 1992. While the oil industry's accountants and
"aggressive" attorneys "totally outclassed" the State, the State
eventually settled for $600 million, or approximately two-thirds
of the revenue it was seeking, and "dropped all criminal
charges" against the oil companies. Oil companies reap
tremendous profits. While the State's Constitution specifies
that State resources should be developed to provide "the maximum
benefit" to the State's citizens, that has not happened.
Mr. Naske referenced a recent Letter to the Editor that
specified that in order to recoup the 17 billion barrels of oil
remaining on the North Slope, British Petroleum would be
required to invest approximately $100 billion dollars. That
would equate to $5.88 per barrel. He agreed with Mr. Metcalfe
that oil companies would not leave the State. Unlike the
automobile industry, which has abandoned Detroit, oil companies
would continue to operate in the State because oil, unlike cars,
could not be produced just anywhere. He urged the Legislature
"to reject the Governor's" PPT proposal. He also spoke against
basing the tax on net profits, as it would be "an invitation to
cheating". Oil company auditors are more sophisticated than the
State's. He supported a "sliding scale tax based on the per
barrel price with a beginning tax rate of 25 percent, as
supported by the State's consultants. Legislators must assure
the State would receive its fair share of the revenue from its
resources. "The gas pipeline would be built when the time is
right."
11:07:37 AM
TIM BECK testified via teleconference from Fairbanks and spoke
to a recent newspaper headline heralding "Conoco Oil Taxes May
Hurt Non-Profits". This concern prompted him to testify in
support of the Senate's efforts on the PPT rather than the
Governor "and the industry's" proposal. A higher tax would not
drive the industry from the State, as the industry must operate
where the non-renewable resource is located. Also, due to the
small State population and remoteness, there is "limited
opposition" to the industry. He encouraged the Legislature "to
suspend" its work on this issue until other routine legislation
was acted upon and both the PPT and the gas pipeline could be
addressed together.
11:09:33 AM
DON GRAY testified via teleconference from Fairbanks and urged
the Committee to develop a simple and transparent taxation
system. A tax rate based on net profit "is a very elusive kind"
of accounting concept, as it would allow "many legal
discretionary choices;" particularly when taxing a multinational
company, which "could show great profits to its shareholders and
at the same time show only marginal profitability in Alaska".
The focus should be to determine what should be taxed. For
instance, the decision could be made to tax oil at the wellhead
before it is transited on a pipeline. In addition, a new tax
rate that would produce revenue equivalent of what the State is
currently receiving could be implemented for a two-year
timeframe. That rate could then be revisited as opposed to
"locking in a rate" now for 30 years. That would "relieve some
of the time pressure" Legislators are experiencing. When
determining the appropriate tax rate and incentives, Legislators
should remember global oil reserves are limited and oftentimes,
the economic climate of the sovereignty is unstable. For
instance, oil producers have been unable to ship Nigerian oil
because they were forced to remove their employees due to safety
concerns.
11:12:46 AM
BILL WARREN, 45-year oil industry employee, testified via
teleconference from an offnet site and described oil and gas as
being "a precious commodity" that is currently difficult to
locate. Uncertain political regimes in other parts of the world
make "Alaska a great place to do business", and the oil industry
could operate in this State for a long time. However, the State
deserves to receive "fair payment for our non-renewable
resources". He urged the Committee to carefully devise the PPT
and to consider "a barrel production tax as well as a profit
tax". The Committee should listen to its consultants rather than
to oil producers and should review the gas pipeline proposal
before approving the PPT, as otherwise "you guys are working in
the dark". A 35-year contract should not be approved, as "the
world changes too much". The construction of a natural gas
pipeline from Prudhoe Bay to tidewater should occur before other
projects are addressed. A Stranded Gas Tax should also be
developed. Alaska rather than the oil industry should "take the
reins".
11:15:06 AM
CHARLEY WALTON testified via teleconference from Fairbanks and
urged the Committee to carefully and slowly consider this
legislation. A 35-year tax structure should not be adopted, as
the State must have the flexibility to adjust terms according to
the economic climate. This legislation should not be tied to the
gas pipeline without being aware of the conditions of that
proposal. He appreciated the efforts being made by the
Legislature. "We own the State, not the oil companies."
11:16:49 AM
STACY SCHUBERT, President, Anchorage Chamber of Commerce,
testified via teleconference from Anchorage and read her
testimony [copy on file] as follows.
The core mission of any chamber of commerce is to protect
and promote the interests of business. At the Anchorage
Chamber of Commerce, our 1,150 members are comprised
primarily of small businesses. In fact, 47% of our
membership has 10 or fewer full-time year-round employees.
Another 15% of our membership has fewer than 25 employees.
Our Board of Directors just yesterday passed a resolution
that supports the petroleum production tax proposed by the
Administration. I'll repeat that - our board of directors
supports the petroleum production tax as proposed by the
Administration.
Our Board recognizes the significant contributions the oil
industry makes to the State's revenue, and that further
exploration and development are critical to maintaining a
healthy economy. Businesses in Anchorage rely on the
expenditures made by the industry to remain vibrant and
healthy contributors. Our restaurants rely on the
disposable income of employees of explorer and producer
companies to eat in their bakeries and deli's. Our retail
stores rely on these employees for regular purchases. Our
professional services businesses rely on these employees
for their business needs.
So it is with great concern that our board of directors has
watched as the legislature considers tax proposals that
would increase government take using a "more tax revenue
now is better than more revenue later" approach. Alaskans
rely on the investment of oil and gas producers in this
state. It is disconcerning to see what our future might
look like when we disincentive industry to explore and
develop Alaska's rich resources.
Furthermore, half of our State's population lives in
Anchorage. One in nine jobs in Anchorage exist because of
our relationship with rural Alaska. Sixty-seven percent of
our State's population is dependent on the Cook Inlet for
natural gas. It is therefore important to our board that
the existing Cook Inlet tax structure remain in place, as
is, so to protect against negative, unintended consequences
that the PPT could create.
In closing, our board supports the Administration's
proposal and requests as exemption for explorers and
producers in the Cook Inlet area. Long-term investment is
much more important than short-term gains to the state
through increased tax. Alaska's future - our businesses,
jobs, economies - is at stake - and its for that reason
that we are concerned with the CS.
Thank you for the opportunity to testify today on behalf of
the Anchorage Chamber of Commerce.
11:19:34 AM
LON WILSON, President, The Wilson Agency, testified via
teleconference from Anchorage and noted that his insurance
agency "works with both public and private sectors to provide
employee benefits to their employees". He read his remarks [copy
on file] as follow.
I have concerns about the proposed new oil tax. I believe
that Alaska's future as a stable economy is dependent on
the encouragement of investment by the private sector. The
oil and gas industry is one of our most important private
sector segments. It helps support much of the service
industry by its presence. The imposition of higher taxes
will have a negative impact on jobs, business
opportunities, investment, and long-term state revenues.
If you think about it, just because you can produce doesn't
mean that you will. No matter what the available resource,
it will only be pursued if it is advantageous for you to do
so. Let's picture that working one job, 40 hours a week,
you sit squarely in the middle of your tax bracket. Now
let's say you accept a second job and that additional 20
hours a week just barely bumps you into the next tax
bracket. Let's imagine that by jumping into the next
bracket, your tax rate is such that you take home no more
money than you were taking home with one job. You make
more, but your take-home remains the same. Would you do it?
Wouldn't it seem that your time (your resources) could be
better spent invested elsewhere?
Thinking like any logical person that is working to make a
living, most likely, seeing no profit from the additional
20 hours of work a week, you would decide against that job
or that investment. I am afraid the oil companies will look
at it the same way.
Right now, they have "one job." They have production costs,
taxes, and abandonment costs associated with that one job.
If by working 20 hours more a week, or in their case,
building a gas pipeline, looking for new reservoirs, etc,
they do not see a positive net effect, or more
specifically, an economically justifiable positive net
effect, then there is no reason for them to expand their
investment in Alaska.
I ask that you be cautious with the imposition of higher
taxes. We have a lot of potential with projects such as the
gas pipeline. Don't jeopardize our state's economic future
in favor of short-term gain.
AT EASE 11:22:08 AM / 11:22:19 AM
MARK HUBER, Past President, Alaska Support Industry Alliance,
testified via teleconference from Anchorage and noted his
"intent" following of the PPT hearings. One of the "most
compelling" testimonies was presented by David Brambly, Vice
President, CRA International, who identified Alaska and the
United Kingdom as two of seven producing regions he had examined
"that failed to replace their production reserves". This is
evident in this State by the declining rates of production in
its fields. Therefore, he ascertained production, rather than
the PPT, as being the "key factor" in what would "generate
revenue for this State" in terms of taxes, royalties, and
property and income taxes. The Senate committee substitute's
recommendation of a 25 percent tax rate, which would equate to
"an overall … 55 percent take" should be considered in terms of
"risk" verses "reward". The risk of this would be the
continuance of the annual six percent decline in production.
However, adopting the Governor's 20 percent tax/20 percent
credit would "forego the incremental five percent" proposed in
the Senate. The reward generated by that action would be "an
economy and an oil and gas industry that does replace its
reserves or comes closer to replacing those reserves." Mr.
Bramley had also noted that the United Kingdom and "Alaska, in
terms of findings" have "the highest costs", and, to that point,
he urged the Committee to determine what the other five regions
were doing to encourage production. Support of the Governor's
PPT proposal would "go a long way toward making Alaska's oil and
gas industry healthy for a very very long time."
AT EASE 11:25:26 AM / 11:37:31 AM
LLOYD RUIS testified via teleconference from Fairbanks and
declared "big oil" would continue to use the same "confuse and
divide" tactics they have historically used. Big Oil used
similar tactics in the Arab countries until that area "finally
nationalized oil companies". The United States Congress admitted
they have been "out maneuvered by oil at every turn by the Big
Oil" regarding oil drilling on federal lands. Big Oil's response
to recent Congressional questioning regarding whether they would
ever construct a natural gas pipeline was yes, there are plans
to build one in Alaska "right now." Therefore, "the onus" of the
gas pipeline is on the oil companies. He cautioned against "the
Lion King [movie] phenomenon". While that successful movie
grossed approximately one billion dollars, investors who opted
to take one percent of the net profits from that movie received
nothing; the movie's accountants calculated the movie made a
zero net profit. Oil company accountants would exceed the
"creativity" of those accountants. Therefore, the State should
not base the PPT tax rate on net profit, as "there are too many
variables and the oil companies are too good about twisting and
dividing and conquering".
AT EASE 11:40:23 AM / 11:48:54 AM
BILL JOOSSE testified via teleconference from an offnet site and
proclaimed "the raw materials" belong to the people of the
State. "Oil companies have a bad environmental record", and the
State should take legal action against the oil companies who
have chosen not to develop gas resources. The Governor should
listen to advisors. Legislators who have accepted campaign funds
from oil companies should not be allowed to be involved in this
decision, as they have a conflict of interest.
11:50:08 AM
FLORENCE COLLINS, Fairbanks Pioneer Home Resident, testified via
teleconference from an offnet site regarding the operating
budget. Pioneer Home funding should be increased in order to
allow more staff to be hired.
Co-Chair Green would convey Ms. Collin's request to the
Committee's Operating Budget chairman.
AT EASE 11:52:38 AM / 11:54:00 AM
There being no further testifiers, public testimony on SB 305
concluded.
Co-Chair Green asked Co-Chair Wilken, Operating Budget Chair, to
review the afternoon's Operating Budget public testimony
schedule.
Co-Chair Wilken reviewed the schedule on the Operating Budget:
offnet testimony would begin at 1:00 PM. Testimony from Juneau
would follow.
Co-Chair Green reminded the Committee they have been invited to
join the House Finance Committee for a presentation by
Legislative Consultant, Daniel Johnston, the following afternoon
at 1:00 PM.
The bill was HELD in Committee.
ADJOURNMENT
Co-Chair Lyda Green adjourned the meeting at 11:55:05 AM.
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