Legislature(2005 - 2006)SENATE FINANCE 532
04/19/2006 01:00 PM 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 19, 2006
1:08 p.m.
CALL TO ORDER
Co-Chair Lyda Green convened the meeting at approximately
1:08:00 PM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Bert Stedman
Senator Lyman Hoffman
Senator Donny Olson
Also Attending: DAN DICKINSON, CPA, Consultant to the Office of
the Governor;
Attending via Teleconference: From an offnet location: ROB
MINTZ, Assistant Attorney General, Oil, Gas and Mining Section,
Civil Division, Department of Law.
SUMMARY INFORMATION
SB 305-OIL AND GAS PRODUCTION TAX
The Committee heard from a consultant to the Office of the
Governor and continued discussion on a committee substitute
adopted at the previous hearing. The bill was held in Committee.
1:08:40 PM
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 12th hearing for this bill in the Senate Finance
Committee.
At the previous hearing on this bill, the Committee adopted CS
SB 305, 24-GS2052\P, as a working document.
Co-Chair Green noted information requests were made at the
previous meeting, including a comparison spreadsheet of the
various bill versions under consideration.
DAN DICKINSON, CPA, Consultant, Office of the Governor, noted
that not all the requested information was included but would be
forthcoming. He outlined a document titled "Structure of the
Senate Finance CS for SB 305" [copy on file], which references
page numbers of the committee substitute and reads as follows.
Calculate the tax base:
Calculate the gross value at the Point of Production
(May use a Royalty Settlement Agreement) (150(d))
page 17
Take the Gas Revenue Exclusion (160(a)) page 18
Subtract lease expenditures including qualified
capital expenditures to arrive at the net "Production
Tax Value" page 18
Apply the three tax rates:
Base PPT rate: 22.5% applied against the Production
Tax Value (.011 (e)) page 3
Private Royalty Rate applied against gross value at
point of production (.011 (f)) page 3
Progressivity: .001 * index applied against the
Production Tax Value (0.11 (g)) page 4
Index = ((Production Tax Value/Barrel of oil
Equivalents) -45) (.011 (h)) page 4
To arrive at tax liability before credits
Apply the five credits
5,000 a day barrel equivalent credit, capped at
$14,000 million (non transferable) (.170) page 23
TIE credit equal to 1/2 of current investment (with
other limits (.024 (i)) page 10
Alternative Exploration Credit of up to 40% (SB 185
extended) (.025) page 11
Qualified Capital Expenditure of 25% (.024 (a)) page 7
Any loss at the end of the year converted to a Carry
Forward Credit (.024 (b)) page 8
To arrive at tax liability after credits
Estimated monthly payments, must be trued up for prior year
in by 3/31 of each year (.020 (a)) page 5
If any month is estimated at less than 95%, interest due
(.020 (a)) page 5
Taxpayer can either use annualized or monthly actual costs,
and can opt for the whole year at any time - however - must
be one way or the other for all effects. (.024 (a)) & (160)
page 7 & 22
Mr. Dickinson explained the five credits could be applied to
reduce tax liability.
Mr. Dickinson stressed that a number of the credits had been
categorized as deductions in previous versions of the bill. The
intent was to make the various incentives into credits. Once
done, these incentives for investments would be applied against
the base. This method would be "cleaner".
Mr. Dickinson commented on the progressivity, which is based on
net and would be calculated on the price of oil. Credits for
investments could be timed against higher oil prices. This would
preferably be annualized rather than calculated on a month by
month basis.
1:17:48 PM
Mr. Dickinson directed attention to a spreadsheet titled
"Comparison of PPT Bill Versions - Highlights" [copy on file],
dated 4/19/06. This is similar to previous spreadsheets, with
the exception of an additional column to represent the Senate
Finance draft committee substitute. Various provisions of the
bill versions are listed as rows on this spreadsheet and several
are referenced as follows.
1:18:59 PM
Credit Rate
Senator Hoffman noted the introduction of the 25 percent credit
rate compared to the rate of 20 percent included in the
Governor's original version of the bill and the legislation
under consideration in the House of Representatives. He asked
why the higher credit rate is being considered in the Senate
Finance committee substitute.
1:19:35 PM
Mr. Dickinson responded that a 25 percent credit rate would
offset the increased tax rate proposed in the committee
substitute Version "P" and would attempt to retain the balance
achieved by the "20/20 proposal". More investments could be
expected with the allowance of higher credits.
1:20:53 PM
Private royalty tax rate
Mr. Dickinson noted the changes to the private royalty tax rate
in each bill version. Version "P" provides "5% of oil & 1.67%
gas/ Report from Commissioner .011 (f)" and is contained on
pages 3 and 28.
1:22:26 PM
Senator Bunde asked for additional explanation of the change
from gross to net, as he had concerns about "gaining
possibilities". He qualified that he did not begrudge oil
companies for attempting to earn as much money as possible for
their shareholders.
1:22:53 PM
Mr. Dickinson described this as "tax planning opportunities".
1:23:00 PM
Senator Bunde compared this to the legislature's duty to obtain
the maximum revenue for the State.
1:23:08 PM
Mr. Dickinson responded that some operations are more difficult
and costly to develop, while others only entail the expense of
transporting the resource. This committee substitute recognizes
the costs and attempts to equalize the tax for those more
expensive situations. Progressivity would therefore not be
driven by the price of oil, but rather the price minus costs. He
described the motivation for producers to claim their credits
during months with higher prices to maximize the tax reductions.
This could add a significant layer of complexity, which should
be considered against the anticipated results.
1:26:43 PM
Senator Bunde expressed concern that the State could lose any
savings that would have been achieved from the restructured tax
system.
1:27:24 PM
Mr. Dickinson acknowledged the tradeoff between accuracy and
simplicity. The cost of administering this system could be
higher but would be offset by the changes that would occur. This
would not be a "one-to-one tradeoff", although the Department of
Revenue would be required each year to request an appropriation
for these activities.
AT EASE 1:28:20 PM / 1:31:29 PM
Mr. Dickinson returned to the first handout, pointing out that
the five credits would only be applicable to the base Petroleum
Production Tax (PPT). The credits could not be applied to the
progressivity portion of the tax.
1:32:22 PM
Co-Chair Green announced that the committee substitute and
information presented to the Committee at this meeting would be
posted on the Senate Majority website.
1:33:08 PM
Special gas progressivity?
Mr. Dickinson pointed out that the committee substitute contains
no special rules to address progressivity on natural gas. In
calculating the progressivity, all activities of the producer
would be considered. A producer that only produces gas would not
reach the threshold in which progressivity is triggered.
Producers' activities are either mostly gas development or
include gas development as a small portion of their "portfolio".
1:34:53 PM
Transition
Mr. Dickinson noted that Version "P" contains transition
provisions similar to the Senate Resources Committee substitute
with the exception that the Senate Finance version provides a
seven-year deadline to recoup past investments. The credit rate
for past investments would remain at 20 percent
1:35:55 PM
Base Allowance
Mr. Dickinson informed that all producers would receive an
exemption on the first 5,000 barrels produced. For large
producers, such as Conoco Phillips, the exemption would equal
less than one percent of total production. The percentage would
be higher for small producers. This committee substitute inserts
a maximum exemption amount of approximately $14 million. This
calculates to approximately $62 million compared to $72 million
as proposed in the original bill.
Sunset of Base Allowance
Mr. Dickinson stated this provision would lapse in 2016, or ten
years. Before the date is reached, the commissioner of the
Department of Revenue would submit a report to the legislature
and make a recommendation whether to extend or amend the
exemption.
1:38:26 PM
Safe Harbor
Mr. Dickinson remarked that the current committee substitute
reflects a 95 percent threshold, as does the Senate Resources
Committee substitute, although the Senate Finance Committee
version provides for an annual "true up" rather than monthly
true ups.
1:39:04 PM
Senator Hoffman calculated that under this scenario producers
would pay 95 percent of the estimated tax and would pay 11
percent on the five percent remaining.
Mr. Dickinson affirmed.
1:39:35 PM
Effective Date
Mr. Dickinson pointed out that the effective date of the new tax
structure would be July 1, 2006 under the provisions of Version
"P", which is the same as proposed by Governor Murkowski.
Transitional Payment
Mr. Dickinson announced the transitional periods are also the
same as contained in the original bill.
1:40:02 PM
Spill Surcharge Total
Dan Dickinson noted the five-cent surcharge would remain
unchanged from current statute, the original bill and the House
Resources Committee substitute.
1:40:22 PM
Co-Chair Green qualified that this provision is subject to
amendment.
1:40:28 PM
Surcharge Treatment
Mr. Dickinson stated that like the Senate Resources Committee
substitute, the credit would not be transferable under Version
"P". These are different than proposed by the Governor.
SB 185 Credit
Mr. Dickinson informed that the Administration would request an
amendment to this provision, relating to legislation passed the
previous legislative session, to provide for a reporting process
before the credit automatically lapsed.
Mr. Dickinson pointed out that SB 185 provided that $20 million
in credits could be given for activities located in Cook Inlet.
Unfortunately, the language was unclear in addressing a
situation in which more than one producer submitted credits and
the total amount was higher than $20 million. Options include
granting the credits based on earliest submission, dividing the
credits between the producers, and other remedies. The latest
committee substitute version of SB 305 would stipulate that
notice would be given to producers at the time $20 million in
credits had been granted. In the following calendar year, the
State would pay out any additional credits after which the
program would end. Although credits totaling more than $30
million could be granted, this method is rational and would
provide the necessary incentive. The Administration is
supportive of this language.
1:42:03 PM
Abandonment
Mr. Dickinson explained this relates to a definition of "an
extended period of disuse" previously considered. The
Administration had requested clarification of this term and was
satisfied that it had been removed from the language of Version
"P". Abandonment, restoration and other actions that a producer
must undertake upon completion of a lease are considered a
normal business expense and recognized as such in the committee
substitute provisions.
1:42:46 PM
Senator Stedman requested further explanation, specifically to
platforms located in Cook Inlet.
1:43:01 PM
Mr. Dickinson responded that according to Department analysis of
property tax values, once five platforms are no longer
producing, they would be dismantled and removed. The expense of
these activities is considerable, and because the platforms
cause no real navigational hazard, removing multiple stations in
conjunction with one another is most cost effective.
Senator Stedman asked if the credit would or would not apply for
these activities.
1:44:02 PM
Mr. Dickinson answered that the credit would not apply. Credits
apply to investments made with an expectation for future
benefit. Abandonment would not garner future benefit. This bill
version removes the specific prohibition contained in the Senate
Resources Committee substitute stipulating that abandonment
costs would be prorated for a platform that produced both before
and after enactment of this legislation.
1:46:03 PM
Senator Stedman surmised that a normal tax deduction would be
allowed, but that the 25 percent credit would not be allowed.
Mr. Dickinson affirmed.
1:46:17 PM
Co-Chair Wilken recalled a presentation given to the Committee
on April 1 by the Department of Law. Co-Chair Wilken requested
Mr. Mintz review the changes contained in Version "P" and report
on their impact as well as voicing any additional concerns.
Co-Chair Wilken also requested that EconOne, a consulting firm
contracted by the legislature, conduct an analysis of the fiscal
changes proposed in this committee substitute.
1:47:45 PM
ROB MINTZ, Assistant Attorney General, Oil, Gas and Mining
Section, Civil Division, Department of Law, testified via
teleconference from an offnet location that he would provide the
requested analysis.
Co-Chair Wilken excused himself for a prior commitment.
1:48:37 PM
Mr. Dickinson would also perform a comparison in conjunction
with EconOne.
1:49:01 PM
Credits Usable
Mr. Dickinson remarked that the credits would be usable against
the PPT only and that the progressivity factor could not be
reduced through credits.
Credits Refundable?
Mr. Dickinson announced that the credits would not be refundable
under the provisions of this bill version.
Credits for Annual Loss
Mr. Dickinson stated that an explorer with little or no
production could carry the credits forward at the same tax rate.
1:49:43 PM
Credits Transferable
Senator Stedman clarified that the committee substitute retains
the 80 percent limit, or 20 percent maximum reduction of PPT tax
owed using purchased credits.
Mr. Dickinson affirmed.
1:50:16 PM
Point of Production
Mr. Dickinson noted that the point of production has remained
constant in all versions of the bill, although efforts were
underway to reduce ambiguity.
DNR Royalty Value
Mr. Dickinson reminded that since the gross value at point of
production is already calculated through regulations of the
Department of Natural Resources, the question was raised as to
whether these figures could be utilized in this capacity so
administrative efforts would be reduced. The Senate Resources
Committee substitute provided that the commissioner [department
not specified] would made a determination based on the fiscal
interest of the State. The Administration recommended language
providing that "a tradeoff between efficiency and making sure
that there was no bias downward."
Co-Chair Green understood this would prevent bias toward
understating a producer's tax liability.
Mr. Dickinson agreed.
1:51:25 PM
IRC sec. 482 as a tool
Mr. Dickinson informed that Version "P" does not contain
provisions to utilize the federal Internal Revenue Code section
482 for addressing transfer pricing. However, language is
included to provide that in the instance of transfer pricing, or
a "non-arms length transaction" amounts above fair market value
would not be a direct cost and therefore would not be
deductible. This method would achieve similar results, but would
be "more usable".
1:52:05 PM
Catastrophic Oil Spill Deductible?
Mr. Dickinson stated that this committee substitute version does
not mention this issue. Therefore, unless related costs were "an
ordinary and necessary expense" they would be deductible.
1:52:15 PM
DNR Gets Exploration Data
Mr. Dickinson pointed out this and the remaining provisions were
not contained in earlier versions of the bill. This provision,
however, was included in the language of SB 185 adopted by a
previous legislature. It stipulates that data relating to
exploration activities in which credits are received must be
submitted to the Department of Natural Resources. The
information would be held for ten years then become public to
allow other explorers opportunity for review. The inclusion of
this provision in Version "P" would make it applicable to all
exploration data.
020 (f) Sales Language
Mr. Dickinson indicated Mr. Mintz would detail this provision,
which is intended to more accurately reflect current practice.
NPSL Regs After Industry Practice
Mr. Dickinson explained this relates to determination of
upstream costs and provides that industry practices would be
utilized. If those practices were unclear or ambiguous,
Department of Natural Resources regulations would be consulted.
Gas
Mr. Dickinson mentioned this pertains to Gas Revenue Exclusion.
1:53:37 PM
Senator Hoffman asked if the separate severability clause in
this legislation would cause problems.
Mr. Dickinson deferred to legal counsel
1:54:08 PM
Senator Stedman, referencing the five credits listed on the
first handout, clarified that the third and fourth credits were
mutually exclusive. He understood that if a producer qualified
for the Alternative Exploration Credit, it would not be eligible
to receive the Qualified Capital Expenditure credit.
Mr. Dickinson affirmed that a producer could not receive credit
under both categories.
1:55:09 PM
Mr. Dickinson next spoke to a spreadsheet titled, "Oil
Production January 2000 - January 2006" [copy on file]. This
depicts the percentage of production from individual leases,
although it includes all units located in a portion or entirely
on State or federal interest lands. A small segment of leases
are exclusively in private ownership.
Mr. Dickinson pointed out that private royalty interests for oil
are less than 1 percent of the total. The five to six percent
from private leases on gas production would increase to about
ten percent. However, production in Cook Inlet is less than five
percent of the total North Slope production. The North Slope has
no gas production on private leases.
Mr. Dickinson qualified that this spreadsheet does not relate to
the bill before the Committee. It is intended to demonstrate the
small percentage of private leases.
1:57:55 PM
Mr. Dickinson then directed attention to pages 2 through 11 of
the Division of Oil and Gas 2004 Report titled, "Incentives and
Credits" [copy on file]. Line 26 of page 6 of the committee
substitute Version "P" lists four statutes. Those statutes are
detailed in this handout.
1:58:56 PM
Mr. Dickinson referenced a line graph titled, "Per Barrel
Progressivity Surcharge" [copy on file] that utilizes the year
2010 as an example to demonstrate the progressivity impact of
the provisions of the House Resources Committee substitute, the
Senate Resources Committee substitute and the Senate Finance
Committee substitute. It calculates the amount per barrel that
would be paid in tax based on the Alaska North Slope (ANS)
price. At an average price of $70, each barrel would be assessed
$5 in additional tax under the provisions of the House Resources
Committee substitute. The additional tax would be approximately
$3.50 per barrel under the progressivity provisions of the
Senate Resources Committee substitute, and approximately $1
would be the amount assessed under the provisions of the current
Senate Finance Committee substitute.
Mr. Dickinson pointed out that this model incorporates
approximately $15 in costs. The profit made per barrel at $70
ANS price would be more accurately $55. Due to different factors
in the various bill versions, the "driver" is more or less
predominant; with the Senate Finance Committee substitute
version resulting in the least impact.
2:02:51 PM
Senator Bunde noted that the progressivity tax would "plateau"
at prices of $120 per barrel under the provisions of the House
Resources Committee substitute. He asked if the provisions of
the other bill versions would reach a maximum amount.
Mr. Dickinson answered that the other versions do not provide
for a maximum percentage.
Senator Hoffman asked if the example provided of 2010 represents
the "base case" or a high or low volume scenario.
Mr. Dickinson understood this data to represent a low volume
scenario. The volume would likely not affect the data portrayed
on this chart.
2:03:47 PM
Senator Hoffman asked what the projected production level is for
2010. He agreed that the impact of progressivity from the
different bill versions on prices between zero and $50 must be
reviewed, as it is the most likely price range during the next
several years.
Mr. Dickinson reported the estimated the production rate for
2010 is 780,000 barrels per day.
2:04:38 PM
Senator Stedman appreciated the demonstration of the dollar
amounts. He requested a similar chart depicting percentages that
includes a comparison to the status quo.
2:05:06 PM
Mr. Dickinson indicated he would provide a more detailed version
at a later meeting.
2:05:32 PM
Mr. Dickinson outlined a spreadsheet titled ""Production Tax
Value" under 160" [copy on file] that demonstrates the effect of
the "tax holiday". It shows the percentage of taxable profit
that would be "shielded" under this provision included in some
form in all versions of the bill. All bill versions provide that
smaller operators with production of less than 5,000 barrels per
day would have no tax liability. Generally as production
increases, the exemption decreases. He detailed the comparisons
between each provision and their impacts on various producers.
2:10:45 PM
Mr. Dickinson concluded his presentation by addressing a
spreadsheet and line graph titled "Distribution of Future Case
Flows Under SQ and Variations of the Senate Resources SC PPT
Proposal FY 2007 - 2030" [copy on file]. This incorporates the
20/25 provisions of the Senate Resources Committee substitute
and drafts of the progressivity factor included in the Senate
Finance Committee substitute. An additional chart would be
prepared to further demonstrate this information.
2:12:34 PM
Senator Stedman recalled the change in "government take" amounts
should decline about 1.1 percent varied over price ranges.
2:13:14 PM
Senator Bunde calculated the net tax at approximately nine
percent under the 20/20 formula and approximately 12 percent
under the 25/20 formula. He asked the net tax under a formula of
22.5 percent.
2:14:00 PM
Mr. Dickinson relayed that Senator Stedman had also requested
this information, which would be prepared.
2:14:14 PM
Senator Bunde pointed out that the Committee had not discussed
the impact of a change to the credit rate.
2:14:58 PM
Senator Hoffman noted the difference in government share between
the original 20/20 proposal and the progressivity factor
contained in Version "P" would begin at the point oil prices
exceed $40 per barrel. He asked if this is accurate for the net
value calculation.
2:15:39 PM
Mr. Dickinson replied that the government share at a price of
$50 per barrel would increase from 60.7 percent to 61.7 percent
under the progressivity provisions of the Senate Resources
Committee substitute.
2:16:15 PM
Senator Hoffman understood that the progressivity percentage
would start at a significantly higher amount under the Senate
Finance Committee substitute.
2:16:31 PM
Mr. Dickinson responded that the percentages would be identical
at a $40 per barrel price. Divergence would begin at prices of
$60 per barrel.
2:16:50 PM
Senator Hoffman concluded that the differences resulting from
the various progressivity provisions in the bill versions would
not be in effect at prices less than $50 per barrel.
Mr. Dickinson answered that the graph utilizes a "North Slope"
model. However, progressivity could begin at a lower per barrel
price for a producer with considerably low operating costs. The
trigger price listed in the committee substitute is $45 per
barrel. The production costs would be deducted from the price of
oil; therefore if the production cost per barrel was $5,
progressivity would be applicable at an actual price per barrel
of $50.
AT EASE 2:17:51 PM / 2:20:52 PM
Co-Chair Green noted the distribution of additional information.
Mr. Dickinson detailed the two tables, one depicting "Proposed
Progressivity ($ per barrel additional Tax)" and the other
depicting "CSHB 488 ($ per barrel additional Tax)" contained on
a one-page document [copy on file]. He noted the first table
pertains to the Senate Finance Committee substitute, Version "P"
and the other to the legislation approved by the House Resources
Committee. These tables list the amount of the progressivity tax
based on the price per barrel less the production cost per
barrel.
2:25:28 PM
Senator Bunde told of reports of production cost of an average
of $12 per barrel and as high as $20 per barrel. The
progressivity provision of this committee substitute would
increase the tax on a per barrel price of $60 approximately
$1.56 compared to an increase of $4.50 under the provision of
the House Resources Committee substitute.
Mr. Dickinson furthered that the provisions of the House
Resources Committee substitute would not take into account
investments made. The progressivity would be "insensitive to
cost" and would only rely on the price.
2:26:55 PM
Senator Bunde continued that the price of oil would be at least
$70 per barrel before the Senate Finance Committee substitute
progressivity provision would be in effect on production in
fields with higher costs.
Mr. Dickinson affirmed, but clarified each taxpayer would be
assessed the progressivity tax based on their average production
costs. Progressivity would not be assessed on a "field by field"
basis.
2:27:57 PM
Senator Bunde asked if the Committee would entertain comments
from affected producers. He requested testimony representative
of a large producer and testimony representative of a small
producer. He invited written statements.
2:29:16 PM
Co-Chair Green announced the ambitious timeframe for this
legislation.
AT EASE 2:29:30 PM / 2:31:08 PM
Co-Chair Green invited producers' written reaction to the
committee substitute.
ADJOURNMENT
Co-Chair Lyda Green adjourned the meeting at 2:32:24 PM
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