Legislature(2007 - 2008)SENATE FINANCE 532
11/14/2007 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB2001 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
November 14, 2007
9:21 A.M.
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:21:30 AM.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice-Chair
Senator Kim Elton
Senator Donny Olson
Senator Joe Thomas
Senator Fred Dyson
MEMBERS ABSENT
None
ALSO PRESENT
Senator Lyda Green; Senator Gary Stevens; Senator Hollis
French; Senator Bill Wielechowski; Senator Gene Therriault;
Representative Mark Neuman; Representative Mike Kelly; Pat
Galvin, Commissioner, Department of Revenue; Steve Porter,
Legislative Consultant, Legislative Budget and Audit
Committee; Kevin Mitchell, Vice President, Finance &
Administration, ConocoPhillips; Tom Williams, Senior Tax
Counsel, British Petroleum, Alaska; Pat Foley, Land &
External Affairs Manager, Pioneer; Mark Hanley, Manager,
Public Affairs, Anadarko-Alaska; Dan Seckers, Tax Counsel,
ExxonMobil; Dan Dickinson, Consultant, Legislative Budget
and Audit Committee; Bob George, Consultant, Gaffney, Cline
and Associates, Inc.; Bernard Hajny, Production Tax and
Royalty Manager, British Petroleum, Alaska; Claire
Fitzpatrick, Senior Vice President, Commercial, British
Petroleum, Alaska.
PRESENT VIA TELECONFERENCE
Craig Haymes, Production Manager, ExxonMobil, Alaska; John
Zager, General Manager, Chevron-Alaska.
SUMMARY
CSHB 2001(FIN) am
OIL & GAS TAX AMENDMENTS
SCS CSHB 2001 (FIN) was reported out of committee
with a "no recommendation" and with zero fiscal
note 1 by the Department of Administration, new
fiscal note 9 by the Department of Revenue, new
fiscal note 10 by the Department of Revenue, and
new fiscal note 11 by the Department of Natural
Resources.
CSHB 2001(FIN) am
"An Act relating to the production tax on oil and gas
and to conservation surcharges on oil; providing a
limit on the amount of tax that may be levied on the
production of certain gas that is produced outside of
the Cook Inlet sedimentary basin; relating to the
sharing between agencies of certain information
relating to the production tax and to oil and gas or
gas only leases; expanding the period in which the
Department of Revenue may assess the amount of oil and
gas production tax and conservation surcharges;
prohibiting a producer or explorer from receiving tax
credits if certain judgments are not satisfied and
requiring, as a condition of receiving the tax
credits, the deposit of the amount of certain unpaid
judgments and certain interest on those judgments in
the court during an appeal and relating to that
interest; relating to state oil and gas audit masters;
making conforming amendments; and providing for an
effective date."
9:26:04 AM
Co-Chair Hoffman MOVED to ADOPT SCS CSHB 2001 (FIN), GH-
0014\R, dated 11/13, as the working document. There being
NO OBJECTION, it was so ordered.
9:27:27 AM
DAN DICKINSON, CONSULTANT, LEGISLATIVE BUDGET AND AUDIT
COMMITTEE, reviewed "Summary Comparison between Various
Approaches to Production Tax" (copy on file.) He said the
new document was prepared based on a draft version of the
Committee Substitute (CS), therefore the bill sections are
incorrect.
Mr. Dickinson addressed some of the major economic issues
in the bill before the committee. The base tax rate is
22.5 percent. The progressivity is a formula which starts
out at .6 percent, and at a margin of $90 it flattens out
and only goes up at a rate of .1 percent for every dollar
of increased profitability per barrel, and caps out at 50
percent. The gross floor looks like the floor under
current law with a caveat that there are certain credits
that can not be taken against that floor.
Mr. Dickinson referred to a handout entitled "Proposed
Senate Finance CS - Illustrated" (copy on file.) He
compared the "Structure of the Levy" between AS
43.55.011(e), .011(g), and .011(h) in each of the four
bills.
9:34:05 AM
Senator Dyson questioned the relevance of AS 43.55.011(i).
Mr. Dickinson explained that it referred to private
landowners, which is probably less than 1 percent of the
production.
Mr. Dickinson explained the differences in the "Credits
Against Floor" chart related to the different versions of
the bill. Under current law, when the floor is in place,
.023 credits cannot be deducted, whereas .024 and .025 can.
Under the Governor's bill, none of them can be deducted.
The House version of the bill mirrors current law, and in
the proposed Senate Finance bill only .024 credits can be
deducted.
Senator Huggins noted that the Senate Finance version is
more protective at low price rates than the House bill.
Mr. Dickinson agreed. Senator Huggins pointed out that the
Governor's floor is not in any version. Co-chair Stedman
clarified that the original PPT floor is being retained.
Mr. Dickinson agreed.
9:39:23 AM
Mr. Dickinson reviewed comparisons of "Investment Credits."
The Senate Finance version retains the Governor's proposal
in which an investment credit is spread over two years.
The House version and current law state that the credit
would be taken in the year of investment.
Mr. Dickinson explained "Loss Carry Forward Credits" in the
various versions. In the Senate Finance version a current
producer and a new entrant are treated equally at 22.5
percent.
Senator Huggins asked about differences between the Senate
Finance version and the House version. Mr. Dickinson
clarified that both versions line up with the tax rate.
Co-Chair Stedman remarked that this was more of a clean up
language issue.
Senator Dyson requested an explanation of why the Senate
Finance bill does not allow the exploration credit.
9:42:39 AM
Mr. Dickinson explained "Transitional Investment Credits"
(TIE). The Senate Finance version eliminates TIE credits
with some exceptions. In the House Finance version there
is a five-year period in which capital spending "fills the
bucket." All taxpayers are allowed application of TIE
matching spending during that period. If there was no
production before 2008, the TIE credits would be figured by
a formula based on previous spending. Everyone would be
treated equally.
Co-Chair Stedman remarked that would be about $200 million
a year.
9:47:27 AM
STEVE PORTER, LEGISLATIVE CONSULTANT, LEGISLATIVE BUDGET
AND AUDIT COMMITTEE, LEGISLATIVE AFFAIRS AGENCY, clarified
that the $200 million number is minus the producers' tax
credits.
Senator Huggins remarked that TIE credits are an incentive
to produce. Mr. Dickinson agreed.
9:49:05 AM
Mr. Dickinson moved on to the Senate Finance version of the
TIE credits comparison - page 5. It has the same five-year
period of matching spending with the same formula as the
House version of the bill. An entity that did not produce
between April 1, 2006, and December 31, 2007, is no worse
off than if the TIE credit were not repealed. There is a
six-year window involved through 2013. TIE credits end
December 31, 2007.
Page 6 combines the information provided on pages 4 and 5
of the handout.
9:52:15 AM
Co-Chair Stedman requested more information about operating
and capital spending trends in 2005 and 2006. Mr.
Dickinson thought that would be best answered by the
Department of Revenue (DOR). Mr. Dickinson understood that
there was a spending increase during those years. Co-Chair
Stedman rephrased his question regarding TIE's. He related
that the intent under PPT was to have a 2 for 1 incentive
for the petroleum industry to increase capital spending to
help stem the decline in production. Mr. Dickinson
remarked that the intent was to give the reward to the
taxpayer who was investing.
9:55:50 AM
Mr. Dickinson moved on to comparisons of "Exploration
Credits" on page 2. The Senate Finance version of the bill
reflects closely to what was contained in the Governor's
bill. Confidentiality of well data is limited to two
years; however, DNR can decline disclosure of the data.
Senator Olson asked how private landowners are affected by
the bill. Mr. Dickinson replied that the specific
exclusion regarding private landowners, as found in the
House Finance version of the bill, is not included.
Mr. Dickinson discussed pre-existing well comparisons,
where the season is expanded to two consecutive drilling
seasons so that delineation wells could also qualify for
the 40 percent credit. Any seismic data previous to 2003
is eligible for up to 5 percent credit.
10:00:26 AM
Mr. Dickinson moved on to explain "Exceptions to Tax
Credits". Non-profits are excluded from buying and selling
credits.
Mr. Dickinson compared "State Purchase of Credits". The
Senate Finance bill reflects current law in that there is
no special fund created. He said he believes that the $25
million cap may still be in state law.
Mr. Dickinson explained "Allowable Lease Expenditures" on
page 3. The Senate Finance bill contains all of the
concepts contained in current law and adds that deductions
must be authorized by the Department of Regulations.
Producer audits of operators are allowed, but only costs
that have been approved by other owners are allowed.
10:05:30 AM
Senator Elton asked for clarification of "can use" versus
"must use". Mr. Dickinson answered that there is a great
amount of discretion by the department of what is allowed.
The state wants to take advantage of work going on between
producers, but not be taken advantage of. There is much
sensitivity around this issue.
Mr. Dickinson discussed the disallowing of bad acts.
Insertion of AS 43.55.165(e) says that royalties and net
profit shares are not deductible costs. The Senate Finance
bill adds a footnote that says a net profit share or lease
granted by the Department of Natural Resources (DNR) is
deductible.
Mr. Dickinson discussed the corrosion issue. There is a
disallowance provision at $.30 a barrel. Unscheduled
interruption costs and field topping plants are not
allowed. The language found in the Governor's bill
regarding off leases is the same as in the Senate version
of the bill. There is a list of public outreach costs.
Unlike the House bill, this bill maintains that actual
costs are used to calculate the operating cost deduction.
10:09:46 AM
Senator Thomas questioned if the language "shall consider,
among other factors" allows for enough discretion. Mr.
Dickinson pointed out the location of that language on page
40, lines 6 and 7, of the Senate version of bill and in AS
43.55.165(b). Mr. Dickinson emphasized that the
regulations still have to tie back to the list of allowable
lease expenditures.
Mr. Dickinson called attention to AS 43.55.165(c), which
looks at the unit operating agreement. First, the
department has to find that the unit operating agreement
meets the standards and only allows direct costs, and that
there is a working interest owner party with substantial
incentive and ability to effectively audit billings under
the agreement - lines 26 and 26 on page 40. He continued
to read from line 27, "subject to conditions prescribed
under regulations adopted by the department, to treat as
that portion of its lease expenditures for a calendar year
applicable to oil and gas produced from a lease or property
in the state" for only those costs incurred by the
operator.
Senator Thomas talked about the differences in the use of
the words "may" or "shall." Mr. Dickinson agreed with
Senator Thomas' interpretation. Senator Thomas referred to
page 41, lines 25 and 26, the language used regarding fraud
and willful misconduct, and asked for Mr. Dickinson to
comment. Mr. Dickinson replied that the House Finance
added "criminal language".
10:16:07 AM
Mr. Dickinson turned attention to disclosure of tax
information found on page 3 of the handout. In the Senate
Finance version of the bill, the information regarding DNR
sharing royalty information with DOR, and DOR sharing tax
information with DNR, is the same as in the Governor's
proposal.
Mr. Dickinson addressed "Statute of Limitations." The
current bill states four years for statute of limitations.
Senator Elton questioned if having four years puts more
pressure on oil and tax auditors than six years, as
provided for in other versions of the bill. Mr. Dickinson
replied that if, after four years, the tax information has
not been attained, there are three options. One is to let
the statute of limitations expire, which is not a good
option. The other choices are to assign an extension or to
issue a "blue sky assessment".
10:20:01 AM
Mr. Dickinson moved on to "DOR Auditors" and the creation
of new exempt positions of master auditors in DNR and DOR.
Mr. Dickinson discussed the "Effective Date" differences.
He announced that there would be a technical amendment that
would make the "unscheduled interruption" language
retroactive to April 1, 2006. Senator Thomas questioned
the 6-year versus 4-year statute of limitations, auditor
increase, and the deletion of the penalty. He wondered if
the increase in the number of auditors would be enough to
speed up the auditing of returns. Mr. Dickinson replied
that under the federal system the way to avoid the gross
understatement penalty is to flag the issue. He agreed
that Senator Thomas had correctly identified a way, in the
first year of a new tax, that the taxpayer could meet
obligations, but not over meet them. He predicted that
there still would be issues.
10:24:42 AM
Mr. Dickinson moved to "Downstream Costs" on page 4. In
the current bill, the language says that downstream costs
are actual costs unless reasonable costs are lower. He
opined that in "a tankering business" the state already
looks at actual costs. He predicted that there would be a
change in the Trans Alaska Pipeline System (TAPS) tariff.
He summarized that the expectation is to lower actual and
reasonable costs for both tankers and transportation.
In response to a request by Co-Chair Stedman, Mr. Dickinson
defined TAPS, which is owned by BP, ConocoPhillips, and
ExxonMobil. There are companies on the North Slope that
don't have ownership of TAPS.
10:29:29 AM
Mr. Dickinson moved on to "Gas Ceilings thru 2002" on page
4. The current bill does not include the exception of Cook
Inlet and gas used in the state. It does include an
interaction between ceilings and credits that was not well
delineated in the original regulation.
Senator Thomas asked what impact the pipeline tariff has on
the state's royalty shares shipped through the pipeline.
Mr. Dickinson explained that the change for how taxes are
calculated will not have any effect on royalties. In
response to a question by Senator Thomas, Mr. Dickinson
replied that there would be no effect on the wellhead
value.
Senator Thomas asked for information on the range between
Cook Inlet gas and potential Prudhoe Bay gas. Mr.
Dickinson said that the range would be large because Cook
Inlet price has been below market price and moving toward a
world market standard. The problem on the North Slope is
that there is essentially no established market. The tax
will affect gas sellers, but not gas purchasers.
Typically, gas sales contracts include a reimbursement for
the severance tax.
10:35:40 AM
Senator Huggins asked if the House Finance and the Senate
Finance versions of the bill raise the tax on both gas and
oil. Mr. Dickinson related that the tax and progressivity
apply to both gas and oil in both versions. Senator
Huggins expressed concern that gas is not being adequately
addressed and that Alaskans have been misled.
Mr. Dickinson spoke to "Additional Penalties", which were
in the House Finance version, but not in the Senate Finance
version.
Mr. Dickinson reviewed "Intent "Language. The dollars that
float from retroactivity will flow to the public education
fund. Incremental dollars will go to other investments.
10:39:21 AM
Co-Chair Stedman referenced page 2, line 15, of the CS; a
list of the public education fund, the budget reserve fund,
unfunded liabilities of state employees, and the
development and implementation of a long-range fiscal plan
for the state. He noted that there is a substantial
revenue change to the state with the implementation of the
legislation. There is an opportunity for the legislature
to move funds forward to help the state get to the point
when there is a gas pipeline or "first gas." If a gas line
does not move forward and become a reality, the Senate
Finance Committee will be looking at long-term fiscal plan
for the state. The intent of the funds is not to increase
the size and the scope of the operating account of the
state.
10:41:38 AM
Senator Elton referred to page 2, line 21, of the work
draft, the areas to where the appropriations would be made.
He stressed the importance of moving forward with a plan to
use the funds from the gas and oil tax as intended in the
bill and not to increase the size and scope of the
operating budget. Senator Elton referenced page 2, line
21, regarding the development of a long-range fiscal plan.
He opined that some of the revenue stream would be reserved
"to implement, but not to develop" such a plan. Senator
Stedman agreed.
10:42:51 AM
Mr. Dickinson discussed the administrative provisions in
the bill. The monthly estimated payments language was
changed to clarify ambiguities. There is a technical
amendment to whistleblower provisions regarding bad faith.
Mr. Dickinson noted that a report to the legislature would
be required in 2011. This provision was deleted in the
House Finance version.
In response to a question by Senator Elton, Mr. Dickinson
responded that in the Senate Finance version, the
whistleblower language allows for a $500,000 recovery.
10:45:29 AM
Senator Thomas questioned language in the progressivity
section regarding the installment plan. Mr. Dickinson
referenced page 14, section 21. On page 15, line 3,
mentioned is made of the installment payment and it does
not include progressivity. Page 17, line 5, states that
any tax levied by AS 43.55.011(e)-(i) is due at the end of
the year. Even though progressivity is calculated on a
monthly basis in the bill, it retains the Governor's
proposal that the payments are not due until March 31.
RECESS: 10:47:13 AM
RECONVENE: 11:14:05 AM
11:15:15 AM
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, commented
on his disappointment regarding the fiscal terms in the
bill. The Administration believes that the appropriate
base rate is 25 percent and the progressivity rate in the
Senate Judiciary and House Finance versions of the bill is
reasonable, when not including a robust floor. In looking
at the comparison between the House Finance version and the
Senate Finance version, there is a tradeoff of looking to
get a higher share at substantially high prices, versus a
fair share when looking at a long-term future. The
crossover point of $71 West Coast price is an example of a
recent phenomenon. The Administration looks at the tax
proposal as a long term solution to provide a reasonable
share at the cost and price expectation for the next 25
years.
11:18:46 AM
Co-Chair Stedman questioned whether there was an analysis
done on the base rate. Mr. Galvin responded that the
analysis provided looked at a range of net values as well
as gross tax rates. It showed that a move to a base rate
of 25 percent provided a positive investment environment
and did not have a negative impact in that the state could
position itself in the price range that is within
expectations, and balance the state's share with having an
investment environment.
Co-Chair Stedman recalled testimony from the
Administration's experts that they were not involved in the
selection of the ACES combination of lowering progressivity
and keeping the base at 25 percent. He questioned whether
the Commissioner was not now advocating for ACES.
Commissioner Galvin said he recognized that the votes were
not there and so had to adapt to the direction the
legislature was headed, recognizing that there was a
balance to be had. The primary focus is the price/cost
relationship and the appropriateness of a 25 percent rate.
Co-Chair Stedman noted that EconOne reviewed the Senate CS
taking into consideration expected price ranges in the
marketplace. He summarized that the price of oil is
volatile at best. He recalled discussion of oil at $40 per
barrel. He asked if the Administration wants to set the
price at that range.
Mr. Galvin replied that they were not advocating for
setting the rates for $40 per barrel. He explained that
when the various versions of the bill are compared, the
issue is not a tradeoff between $80 and $40, but rather
whether oil will fall below a $71 price.
Co-Chair Hoffman commented that Alaskans don't relish the
concept of higher prices. There needs to be a tax
structure that anticipates the possibility of higher
prices. The finance structure recognizes that. At $100
per barrel the tax structure difference between the House
version and the Senate version brings $400 million into the
state treasury. He agreed that the price of oil would be
changing and the Senate version's tax structure anticipates
higher prices, which makes more sense and provides
protection from higher savings.
Commissioner Galvin commented on fair share and the
question of retroactivity, which he maintained is a
separate question. He discussed fair share in terms of the
House version and of the Senate version. He felt
comfortable with the House version, which does not include
retroactivity.
Senator Huggins felt that Alaskans were being mislead in
terms of limiting the discussion to 22.5 versus 25 percent.
He pointed out the economics of highly populated countries.
He observed that futures markets are at $80 a barrel. He
questioned the durability of the bill. He noted that
progressivity and other factors add to the debate.
11:39:47 AM
Co-Chair Stedman maintained that a fair share was
inadequate in PPT and not supported by the Administration.
He did feel that the current Administration's proposal
represented a fair share. The fair share is up to $2
billion at $100 per barrel. There is little correlation at
high oil prices between the fair share in ACES and in the
legislature.
Mr. Galvin responded that the allocation of risk is at
issue. Risk sharing is across the spectrum. The
Administration's proposal was a derivative of more data,
which was not available to the previous legislature. The
previous legislature was also considering AGIA. The
current proposal is based upon an analysis of the
relationship between the state and the industry and the
sharing of oil revenues. It points to the appropriateness
of a 25 percent rate.
Co-Chair Stedman disagreed.
11:43:52 AM
Co-Chair Hoffman pointed out that the Administration's
proposal is only 30 days old. He opined that the tax rate
cannot be isolated and ought to take progressivity into
consideration. He pointed out that Alaska's take increased
by over 100 percent from the Administration's previous
proposal. He questioned how supporting the House version
relates to fair share.
11:45:50 AM
Mr. Galvin discussed the relationship between progressivity
and the base rate. When the swing is down there is no
progressivity. The question is whether the state can live
with the floor. The legislature has changed the dialog.
The Administration is comfortable with the floor.
Co-Chair Hoffman responded that the delta between the
Administration's proposal at $80 - $100 is far greater than
the delta between what the House or the Senate numbers are.
AT EASE: 11:47:49 AM
RECONVENE: 1:49:00 PM
1:49:12 PM
Commissioner Galvin returned to the issue of progressivity.
Under the House Finance version, both the base rate and
progressivity payments would be monthly; under the Senate
Finance version base rate payments would be made monthly,
but there would be an annual progressivity payment due on
March 31.
Co-Chair Stedman noted that it was an oversight and would
be corrected to monthly payments.
Commissioner Galvin spoke to the language differences
related to allowable deductions for lease expenditures.
One of the primary rules associated with ACES was to put
the Department of Revenue in the position of having to
define, through regulations, what are allowable lease
expenditures as opposed to having it being open ended. The
administration would prefer to return to the original ACES
language in this area as well as for joint interest
billings. The purpose is to allow the department to use
those joint interest billings as a tool to begin the
auditing process and identify the appropriate costs, but
not to bind the department in how they are to be used. He
mentioned the flexibility of the ACES language.
1:51:39 PM
Commissioner Galvin highlighted the Transitional Investment
Credits (TIE), whose purpose was to have parity between new
explorers and existing incumbents. Under the House
version, those companies that did not have any production
yet could freeze the TIE credits earned and use them
against future production. The Senate version changes that
entirely to where, upon the effective date, expenditures
that a new entrant has made during the PPT period would
have no consequence. Only from the effective date forward
would the explorers earn TIE credits on new investments.
The intent of the Administration is to create equity. He
requested a reinstatement of the language in the House
version, which is the same as the House Judiciary version.
1:54:11 PM
Senator Elton asked what the net fiscal impact would be
when comparing the old and new language. Commissioner
Galvin replied that there is no difference. The goal is to
have the same "deal" for both producers and explorers.
Commissioner Galvin addressed the exploration incentive
program (EIC), which predated PPT. With PPT there was a 20
percent credit for all capital expenditures. The EIC
provided either a 20 percent or a 40 percent credit
depending on certain conditions. Because of the limited
nature of the EIC program, given 20 percent for PPT or for
EIC, there would be no reason to choose the EIC option.
The ACES 30 percent credit for mid-range EIC's was dropped
in the Senate Finance Committee Substitute. It is the
Administration's opinion that 30 percent needs to be
reinstated.
Commissioner Galvin discussed the language that was added
on the House side as it relates to seismic data generated
on private lands. There is a choice to be made by the
party applying for the credit in that if they want to avail
themselves of the credit, they must provide the state with
the seismic data. The question became how much of the data
should be made public. The crafted language states that if
the seismic data is shot on private lands, and the state is
going to pay its share through the credit program, that
data will be made available to the state, but it won't be
made public without the consent of the private landowner.
The Administration feels that that language should be
reinstated.
Commissioner Galvin mentioned concern with the statute of
limitations. Tax programs in the state have a 3-year
statute of limitations. He stated support for a 6-year
statute of limitations for production taxes due to the
complexity of the tax. He felt a 4-year statute of
limitations puts both the state and the taxpayer into a
situation where a decision has to be made whether to go to
a formal discussion, which could become confrontational.
He assured the committee that the auditing process would
continue to be productive in spite of the extended time
period.
2:00:47 PM
Commissioner Galvin addressed the corrosion provisions
which are going to be retroactive to April 1. He addressed
concerns about in-state gas issues. During the special
session, several interests requested that the Cook Inlet
tax treatment apply to their potential projects. There
were projects brought forward from other locations dealing
with local gas and local areas. Commissioner Galvin
maintained that production tax was not intended to address
tax statewide. The resolution was to make it clear that
those developing gas for instate purposes would get the
same tax rate treatment as Cook Inlet. These are parity
issues. He hoped that the Regulatory Commission of Alaska
would be in alignment with the tax savings to be enjoyed by
the consumer.
2:03:37 PM
Co-Chair Hoffman referenced parity. He reported that
during the initial discussion of PPT, it was well known
that the tax structure in Cook Inlet was well below the tax
structure in other places and that resulted in gas being
sold cheaper than in the lower 48 states. He said, "We
would be at parity if the rest of the state was using gas,
such as the Anchorage Bowl and now Fairbanks is currently
converting to that." He questioned the issue of parity
when vast portions of Alaska are not using natural gas for
consumption.
Commissioner Galvin agreed that there is not parity in the
costs. The only focus of this provision is production tax
that is applied to gas that is produced within the state.
"We can't affect the cost of fuel oil that's arriving
because it's not produced here, necessarily," he added.
Co-Chair Hoffman asked if there was assurance that those
using gas would continue to have lower costs than Lower 48
states, but those not using gas would surpass Anchorage and
all other states in cost. He wondered how all Alaskans
could benefit. Commissioner Galvin responded that the cost
of gas is based upon factors that are beyond the production
tax. The Administration wants to insure that the imposed
production tax does not provide a higher burden for some.
2:06:41 PM
Co-Chair Hoffman voiced concern about the policy associated
with consumption of energy, whereby "the rich get richer
and the poor get poorer." He asked if there was a way for
all to win. Commissioner Galvin explained that the
Administration does recognize the current high oil costs
and higher energy costs for communities. It is the
responsibility of the state to take that into account and
find a way to buffer it.
Co-Chair Stedman added that access to economic benefits
must be addressed when building the state gas system. The
issue is huge.
Senator Thomas commented that the intention of the
resolution was to add equity throughout the state. He
summarized that the Cook Inlet rate was 5 percent and the
effective rate at Prudhoe Bay would be 22.5 or 25 percent,
depending on the version of the bill. Commissioner Galvin
said that was the base rate, but there would also be
progressivity at higher oil prices.
2:09:33 PM
Senator Thomas noted that there was gas currently sold at
Prudhoe Bay. He questioned how that rate was determined.
Commissioner Galvin replied that there is a prevailing
value that is set based upon regulations, which are
currently being rewritten.
2:10:42 PM
Senator Elton inquired about additional penalties.
Commissioner Galvin replied that penalties are an important
tool to ensure that there is a disincentive for under
reporting income or for overstating costs. There are
criminal penalties for fraud. The Administration
appreciates the desire of the legislature to create an
additional disincentive for potential underpayment and for
inclusion of provisions requiring recoupment of costs
associated with recovery.
Senator Elton suggested that Commissioner Galvin's answer
was ambivalent. Commissioner Galvin stressed that they do
not know what might happen regarding understating
production tax. He acknowledged the skepticism around the
issue.
2:14:24 PM
In response to a question by Senator Huggins, Commissioner
Galvin spoke to "unscheduled interruption or reduction".
He noted that the issue has been evolving throughout
discussions of SB 80. The struggle has centered around
determining what standards should be used for making sure
deductions for improperly maintained equipment are not
allowed. A bright line standard was identified and is
included in the current version of the bill. Triggers
occur with violations of criminal or AOGCC standards.
2:20:41 PM
BOB GEORGE, CONSULTANT, GAFFNEY, CLINE, AND ASSOCIATES
INC., provided members with a power point presentation
entitled "Government and Petroleum Tax Take" (copy on
file). He compared government take in PPT, HB 2001, Senate
Judiciary CS, and Senate Finance CS.
There is an underlying assumption of $20 per barrel for
this model. The Y axis represents percent of government
take, less costs, and the X axis is oil price. The take in
Norway and the UK are represented. UK has a 50 percent
take for new fields. Legacy fields, those developed before
1983, have a higher take. Together, that amounts to 75
percent of profits. Norway has the highest take with two
taxes, which amounts to 78 percent of profits. The graph
shows that there is royalty take in all categories. It
also shows production tax take and total government take.
In response to a question by Co-Chair Stedman, Mr. George
reported that he used a flat $20 cost in creating the
slides.
2:25:47 PM
The red line in each of the slides represents the
production tax. The blue line represents the total
government take, which includes the take from royalty, the
take from property tax, and the take from state/federal
income tax.
Mr. George turned to the slide on government take as it
relates to ACES, or HB 2001. It shows the base rate at 25
percent and a slight lowering of the progressivity.
Mr. George discussed the Senate Judiciary CS in terms of
government take. It has a 25 percent base rate with a
progressivity that increases at .4 percent for every dollar
up until there is a total take of 50 percent.
The Senate Finance version has a 22.5 percent base rate and
a sliding progressivity scale.
2:28:46 PM
Co-Chair Stedman spoke to "fair share." In response to a
question by Co-Chair Stedman, Mr. George pointed out that
the legislature would consider where the fair share line
would be. Co-Chair Stedman asked if the Senate Judiciary
version would have a similar shape to the blue line. Mr.
George replied that it would. Co-Chair Stedman thought
there would have to be a significant policy change to take
the "belly" out. He questioned if a substantial overhaul
would be needed.
Mr. George noted the difficulty of finding a suitable
level. Co-Chair Stedman questioned if there were models
used in the comparison. Mr. George said none were used.
Senator Thomas asked if the various credits are factored
in. Mr. George observed that none were factored into this
chart. The UK does not have any uplift or credits. Norway
has an uplift for some of the credits, but has not been
included.
2:32:42 PM
Co-Chair Stedman inquired if Alaska modeled its legacy
field with government take similar to UK and Norway, would
the economy in Alaska be subjected to possible acceleration
of volume declines in the pipeline, or would it stimulate
production volume. Mr. George stressed that the specific
proposals would have to be considered in order to answer
that question. One of the facets of the structure of all
of the proposed systems, with the progressivity feature
included, is that while there may be a higher rate on
legacy properties, it can, at the same time, help those
fields by lowering the tax across the portfolio as a whole.
2:34:20 PM
Co-Chair Hoffman asked if costs would go up as prices
continue to rise and if there is a model to show that. Mr.
George explained that the projections could be changed to
depict different relationships between price and cost.
2:35:05 PM
Senator Thomas asked for feedback on standard deductions.
Mr. George could not respond to the request.
Senator Huggins inquired about the Zulu Fields, the
marginal fields, and how the Senate Finance version of
progressivity would affect them. Mr. George reviewed
progressivity as investments were added, which would lower
the effective tax rate on the investments below what they
would attract as a stand alone investment. He reiterated a
past presentation on progressivity.
Senator Huggins summarized that steeper progressivity
equaled potentially enhancing marginal fields. Mr. George
did not agree with that interpretation. He clarified that
existing reservoirs begin with higher rates than the other
three rate systems.
Senator Huggins wondered if, without PPT, the Senate
Finance version would assist marginal fields better than
the other two systems. Mr. George agreed.
RECESS: 2:39:58 PM
RECONVENED: 2:46:01 PM
Co-Chair Stedman explained that industry representatives
had been contacted and would be given an opportunity to
speak to the Senate Finance Committee regarding Version R
of HB 2001. He observed that the industry would bear the
brunt of a new tax adjustment.
KEVIN MITCHELL, VICE PRESIDENT, FINANCE AND ADMINISTRATION,
CONOCOPHILLIPS, highlighted prior written comments from
ConocoPhillips regarding HB 2001 which still stand. He
maintained that the CS has serious concerns. Higher taxes
will have an impact on investment. It is unrealistic to
expect that an increase of this magnitude would not have an
impact. He maintained that testimony given that increased
taxes would not have an impact was misleading. He observed
that the legislation has moved significantly away from the
Governor's original proposal with a 25 percent base rate,
with progressivity at .2, starting at $30 profit per
barrel. That proposal would have been effective January 1,
2008. The current version has the same base rate, but has
a very steep progressivity rate with a retroactive
effective date of July 1, 2007. He said he understood the
desire to have a higher take at higher prices.
2:53:16 PM
Mr. Mitchell emphasized that the potential upside of higher
oil prices is being removed. The retroactive application
of tax law is almost universally seen as unfair. There
should be some time to transition into the new tax
structure. Under this proposal there would be two
consecutive years of retroactive tax change, which
reinforces concerns regarding the stability of the
investment climate in Alaska. The retroactive component is
a penalty.
2:55:31 PM
Mr. Mitchell spoke to the overall unfairness of the bill
and hidden taxes. The proposal abolishes TIE credits,
which were put in place to provide some measure of
transition from ELF into PPT. Removing them hurts
investors that have invested in the past and plan to
continue investing into the future. TIE credits soften the
transition, and removing them results in another tax
increase.
Capital credits can be taken at 100 percent in the year
which they occurred under PPT. In the current version of
the bill, they are split over two years which amounts to
another form of tax increase because of the timing change.
Lease expenditures are subject to definition by the
Department of Revenue through regulation. The CS allows
the department to put in place allowable deductions through
the regulatory process. It provides the opportunity for
legitimate lease expenditures to be excluded, which is, in
effect, another tax increase. The unscheduled maintenance
provision language from the Governor's bill is back in the
current CS. It disallows expenditures related to
unscheduled maintenance.
Mr. Mitchell provided a graph on "Daily Kuparuk Production"
that demonstrated the constant change in production over a
12-month period (copy on file.) He stressed the difficulty
in administering the unscheduled maintenance provision. He
felt that the House version was more workable. The Senate
language would equate to another tax increase.
Mr. Mitchell spoke to transportation costs, which will add
another layer of complexity and will likely result in
another tax increase.
3:00:21 PM
Mr. Mitchell commented that the period of confidentiality
on exploration well data was being reduced from ten years
to two years. The receipt of the credit is conditional
upon the receipt of the data. He argued that this is a
disincentive. The Senate version gives the state access to
non-state land, which is a potential conflict.
Mr. Mitchell maintained that credits alone will not get
explorers to invest. The entire development scenario will
be taken into consideration. If the revenue stream is
subject to higher taxes, it would offset the value created
by the credits.
3:02:56 PM
Mr. Mitchell reported that the House version of the bill
contained a standard deduction for operating expenses for
Prudhoe Bay and for Kuparuk. That standard deduction would
be a disincentive to investing in new activity and new
production. He explained the standard cost deduction.
Mr. Mitchell did not know how ConocoPhillips would be
affected by the requirement that lease expenditures must be
incurred in the state, but felt that it would be a
disincentive.
He noted that all of the previously mentioned components of
the bill have the impact of reducing allowable expenditures
by about 5 percent and are equivalent to a one percent tax
rate increase. He asserted that some of the changes would
have staggering affects.
Mr. Mitchell concluded that the changes are moving in the
direction of a hybrid tax system.
Mr. Mitchell discussed the penalty provisions for
underpayment. He maintained that payments will be off
without any deliberate intent due to the lack of clarity in
the regulations.
3:08:06 PM
Mr. Mitchell summarized that the legislation is a huge tax
increase at today's prices. It is not just about the base
rate and the progressivity having an impact to the overall
structure. It is the administrative complexity and
difficulty of compliance which give grave causes for
concern. The tax structure in Alaska has become more
restrictive to investors.
Senator Olson asked if the legislation was a disincentive
to offshore exploration activity. Mr. Mitchell noted that
off-shore activity would not be subject to the legislation.
He described the permitting difficulties associated with
off-shore exploration.
3:11:44 PM
Co-Chair Stedman questioned how the impact of progressivity
after capital/operating/shipping could be weighed. Mr.
Mitchell acknowledged that the cost structure will move as
prices move. An aggressive progressivity removes the
upside and causes the downside to be reevaluated. He
acknowledged the state's role.
3:14:56 PM
In response to a question by Co-Chair Stedman, Mr. Mitchell
discussed base tax versus progressivity. Mr. Mitchell said
it depends on future prices that are difficult to pick.
3:15:47 PM
Senator Elton asked for clarity as to why investment
decisions should change dramatically. PPT is higher than
any of the alternatives. Given the expected tax bite of
PPT, it is as if ConocoPhillips knew projections were
wrong. Mr. Mitchell responded that cost assumptions were
higher now. PPT is higher due to a much lower cost
assumptions. With the different cost assumptions the
projections seem better. He spoke to ConocoPhillips
testimony regarding trends in the previous legislature.
3:19:07 PM
CLAIRE FITZPATRICK, SENIOR VICE PRESIDENT, COMMERCIAL,
BRITISH PETROLEUM, ALASKA, addressed the Committee
Substitute. She referred to the handout by Mr. Dickinson.
Ms. Fitzpatrick asserted that there are "many, many hidden
taxes" contained in the legislation. She expressed
pleasure that the CS contained a 22.5 percent tax base,
which removes one element of concern.
Ms. Fitzpatrick spoke to the steepness of the progressivity
in the bill. She acknowledged the desire to use
progressivity as a tool, but noted that adding
progressivity would prevent investment.
3:26:05 PM
BERNARD HAJNY, PRODUCTION TAX AND ROYALTY MANAGER, BRITISH
PETROLEUM, ALASKA, commented on investment credits spread
over a two-year period creating a hidden tax. He spoke of
administrating difficulties with such a time period. He
asked the committee to re-evaluate the provision.
3:28:04 PM
Co-Chair Stedman asked for specific numbers on the hidden
taxes. Mr. Hajny thought it would be over "tens of
millions". Co-Chair Stedman guessed at $150 million and
Mr. Hajny said he would not be surprised at that figure.
Mr. Hajny talked about the TIE credits. He noted that two
dollars for everyone dollar of fixed credit would need to
be spent to reach that benefit. The credits expire in 2013
according to the current PPT formula. The Department of
Revenue testified that the credits in 2006 were
approximately $114 million.
3:31:59 PM
Ms. Fitzpatrick added comments about removing the
transition credits. It assumes a risk for all other
available credits.
Ms. Fitzpatrick noted that BP does not do exploration, but
she echoed and endorsed the remarks of Mr. Mitchell.
Ms. Fitzpatrick described allowable lease expenditures and
unscheduled interruptions. She thought that it was nearly
impossible to identify an unscheduled interruption, which
is complicated to define and identify.
3:34:50 PM
Ms. Fitzpatrick said that a failure problem or event is not
allowed and costs would prevent improvements that could
occur at the same time. The question is should credits be
given now or later. She concluded that it is a policy
choice, but there is a financial impact.
Mr. Hajny discussed regulations for lease expenditures and
information sharing.
TOM WILLIAMS, SENIOR TAX COUNSEL, BRITISH PETROLEUM,
ALASKA, reported that current law defines lease
expenditures in AS 43.55.165 and joint interest billing is
found in subsections (c) and (d). Both areas say that the
Department of Revenue "may authorize or require" the use of
joint interest billing. He observed that Commissioner
Galvin testified that he wants to be able to use joint
interest billings as a tool. He discussed compliance. He
remained concerned about unintended consequences related to
billed costs. He addressed discretion and the need to take
care to establish clear intent.
3:40:26 PM
Mr. Hajny requested more information about the use of
regulations to define lease expenditures. Mr. Williams
referred to page 38, line 28, of version R. He said, "For
purposes of this chapter, a producer's lease expenditures
for a calendar year are cost, other than forbidden items
under (e) of this section, that are (A) incurred by the
producer during the calendar year after March 31, 2006, to
explore for, develop, or produce oil or gas deposits in the
state." He continued to explain (B), on page 39, line 6,
"allowed by the department by regulation". He noted that
the costs must be upstream, ordinary and necessary, and
direct.
3:44:10 PM
Mr. Williams continued to describe direct costs on page 39.
The definition of "ordinary and necessary" is found in
subsection (j): "ordinary and necessary" has the meaning
given in 26 U.S.C. 162 (Internal Revenue Code), as amended,
and regulations adopted under that section. It is a term
of art. He didn't think there was anything in these
categories that the legislature intended to disallow. He
suggested that this section not be rewritten by regulation.
He questioned if the commissioner should be allowed to
change those items that are currently not allowed as direct
costs.
3:50:27 PM
Senator Elton pointed out that DOR cannot put anything in
regulation that contravenes any of these three points. The
Regulatory Review Committee would prevent that from
happening. It should not be a problem, but if it is, DOR
would be directed that the regulations were not supported
by statute.
Mr. Williams described allowable costs and said that the
commissioner's list would only exclude items.
Senator Elton assumed the list would be helpful to
industry. Mr. Williams acknowledged that a list could be
helpful and pointed to the Senate Judiciary version of the
bill where items are added to subsection (b). That context
gives clarity.
3:54:40 PM
Mr. Hajny discussed sharing confidential information. He
had concerns with information leaking and pointed to a
$1,000 a day penalty for something that might not be
forthcoming. He questioned the definition of "not
forthcoming".
Ms. Fitzpatrick touched on the sharing of information
between departments. She requested confidentiality during
that process.
Mr. Hajny added concern about the additional three years
proposed in the statute of limitations.
3:59:11 PM
Mr. Hajny described concerns regarding pipeline
transportation costs. In the event that there is a
retroactive adjustment to the pipeline tariff, BP's
liability would be affected. The CS creates uncertainty in
this area. He described the most straight-forward approach
which would continue to utilize the current TAPS Tariffs.
4:01:23 PM
Ms. Fitzpatrick brought up the issue of retroactivity and
the concerns she has regarding the inconsistencies. She
questioned whether this type of provision would incentivize
investment. She further commented on cost increases. She
said that the costs will go up with the price of oil. In
addition, she noted the high costs of extracting heavy oil
and that many of those costs would be done out of state
because the technology is not available in the state. She
addressed penalties, which she felt was just an additional
tax as there is never 100 percent accuracy in tax returns.
With a 400 percent tax increase, investment is highly
unlikely. She said her company put a plan together to
provide sustainability in the future but many of things in
the plan will not be possible.
4:07:22 PM
Co-Chair Steadman asked if there is anything that would
stimulate production. Ms. Fitzpatrick said perhaps some of
the exploration credits.
Co-Chair Steadman asked Ms. Fitzpatrick which of the
combinations of the lower/higher base and lower/higher
progressivity is the most palatable to British Petroleum.
Ms. Fitzpatrick made a comment equating both the base tax
and progressivity as important ingredients.
Senator Hoffman asked if standard deductions were removed
from heavy oil, would projects fall off as a result.
Ms. Fitzpatrick said she could not give definitives as she
would have to plug all variables into her business plan.
She noted that the standard cost acts as a cap or a gross
floor.
4:10:51 PM
CRAIG HAYMES, PRODUCTION MANAGER, EXXONMOBIL, ALASKA,
(TESTIFIED VIA TELECONFERENCE). He read from written
testimony regarding ExxonMobil's views on the
Administration's proposed tax increase (copy on file.) He
related that ExxonMobil believes that the proposed increase
will not result in additional investment needed to maximize
the development of Alaska's resources. Taking into
consideration Alaska's resource potential and the current
production decline, ExxonMobil does not support the
proposed tax increase and will need to re-assess all
current and future projects in Alaska. In addition to the
significant increase in base and progressivity aspects of
the proposed tax bill, there is also significant
uncertainty in allowable cost recoveries and credits. This
uncertainty combined with another tax increase will
significantly reduce the attractiveness of future projects
in Alaska.
Mr. Haymes predicted that at today's prices, since 2005,
there would be a 580 percent increase in production tax
within three year.
Mr. Haymes pointed out that Alaska has significant
undiscovered resources. He said that ExxonMobil is pleased
to see that the Senate Finance CS does not increase the
base tax rate beyond 22.5 percent. He reported that oil
production is declining and Alaska's world ranking has
thth
declined from 14 to 30. Increasing the base tax rate and
progressivity will not help attract investments. He urged
the committee not to adopt Section 17 of the bill.
4:15:45 PM
Mr. Haymes addressed Alaska's future oil production. He
maintained that Section 24 limits to 50 percent the amount
of a tax credit that may be claimed in a single calendar
year. He did not see how reducing the 20 percent tax
credit would increase the capital investments necessary to
mitigate Alaska's oil decline.
Mr. Haymes drew attention to the DOR North Slope Production
Forecast and described the declining revenue forecast. He
thought that between $30 to $40 million in investments
would be needed in the next ten years to achieve DOR's
forecast. The impact on all economic parameters must be
weighed before a decision to invest is made. Investment
tax credits enhance the present value economics of new
investments and help alleviate a project's otherwise high
cost. The tax rate and investment tax credit levels must
be carefully balanced.
4:18:42 PM
Mr. Haymes discussed Section 28, line 12, of page 21, which
proposed to eliminate the availability of tax credits for
capital expenditures incurred during the five years
immediately preceding the enactment of PPT for producers
with existing production. He described ExxonMobil's
position on the transition provision and suggested that the
committee reinstate the transition credits originally
intended by the legislature to mitigate the impacts of
converting to PPT.
4:20:01 PM
Mr. Haymes pointed out that Alaska has large oil fields.
He reported that ExxonMobil was pleased to see Section 50
removed from the bill. Mr. Haymes opined that it is unfair
for industry to be held to a 3 percent benchmark versus
actual costs. This proposed limitation denies true
recovery of costs to operate fields.
Mr. Haymes emphasized that fiscal predictability is
important. The chart on page 7 shows that the proposed tax
increases are significant.
Mr. Haymes said that all provisions in the CS amount to tax
increases, cause greater uncertainty, and are excessive.
He addressed page 8 of the handout, additional reporting
requirements for exploration tax credits, which ExxonMobil
is opposed to. The confidentiality provisions in the bill
are also of serious concern.
4:25:13 PM
DAN SECKERS, TAX COUNSEL, EXXONMOBIL, reported that he was
happy to see the substantial penalties removed from the
bill. Regarding information requests, he said it is
troubling to see the legislature try to craft broad tax
statutes. He addressed page 30, section 41, line 8, where
DOR requests information every month. He objected to the
request for other records and information the department
considers necessary.
4:27:56 PM
Mr. Seckers addressed the production of taxpayer
information. He voiced two concerns. He spoke against the
proposal that taxpayers with at least 100,000 barrels a day
production must report their gross sales revenues and
expenses. He testified against a four-year statute of
limitations. He reported that the statute of limitation in
federal law is three years. There are exceptions to six
years, but three is standard.
Mr. Seckers addressed paragraph 6 of Section 52, line 26,
page 41, which disallows costs from non-compliance. He
questioned why the state should draft tax policy.
Contracts have specified remedies. He discussed the
disallowance for scheduled maintenance. He agreed with the
previous testimony on regulations by Mr. Williams. Mr.
Seckers echoed concerns regarding what will be allowable
under regulations. He pointed out that regulations change
all the time without legislative approval.
4:35:32 PM
Mr. Haymes concluded that ExxonMobil does not support the
proposed changes and questioned what would be allowed for
cost recovery and credits. Current and future projects
would be uncertain. Alaska needs a long-term resource
development policy.
4:37:52 PM
Senator Elton referred to the graph comparing the various
tax increase proposals. He thought that it was not helpful
because it does not refer to the "sweet spot", but rather
to the price of oil today. He requested information about
industry profits at current prices in order to determine
the issue of fair share. He question the 580 percent
increase in taxes and wanted to know if that is a tax
increase for ExxonMobil, a blended rate, or something else.
He understood that the more profits exported from the
state, the higher the tax.
Mr. Haymes responded that the graph is based on DOR's four-
year 2008 production forecast. It includes CAPEX and OPEX
spending, is representative to the industry, and the
estimate is conservative.
4:41:59 PM
In response to a question by Senator Elton, Mr. Haymes
explained that ExxonMobil is involved in all Prudhoe Bay
activities. They have invested over $20 billion in Alaska
and are active investors in Alaska.
Senator Elton asked about reinvestment. Mr. Haymes
reported that they invest as actively as any company in
Alaska.
Senator Thomas asked if the 580 percent increase is based
on the entire field. Mr. Haymes confirmed that. The graph
came from the Department of Revenue's current 2008
CAPEX/OPEX numbers and reflects the entire industry.
4:47:19 PM
Senator Thomas asked what the total net revenue is. Mr.
Haymes replied that the graph depicts a 44 percent net tax
rate based on the Department of Revenue's model; for PPT
the effective net tax rate would be 29 percent. He
concluded that it is a significant increase.
4:48:45 PM
Senator Thomas asked if it is a little less than half of
what would be $16 billion of revenue "if we ran the chart
up". Mr. Haymes reported that he had not done a government
take analysis. He summarized that PPT was around 61-62
percent of government take; ACES increased to about 68-70
percent, heading toward 75 - 80 percent.
Co-Chair Stedman referenced a similar table from EconOne.
AT EASE: 4:51:02 PM
RECONVENE: 5:39:32 PM
Senator Steadman noted he had invited Chevron earlier but
they were not available. He wanted to provide the courtesy
to them to address the CS.
JOHN ZAGER, GENERAL MANAGER, CHEVRON-ALASKA, (TESTIFIED VIA
TELECONFERENCE). He outlined his concerns as follows: the
latest revisions regarding progressivity are a considerable
adjustment to what was originally fair and equitable in
ACES.
He referenced the EconOne chart, "Total Revenue Under
Various Scenarios", and noted a $1.5 billion difference
between the original progressivity and the latest figures
in the Senate Finance CS. He said the underlying
assumption in the graph is that taxes do not affect
investment, and therefore, do not affect production. He
shared calculations needed to maintain the 6 percent
decline and to shift the decline to 8 percent. He looked
at the effects five years and ten years forward. He
suspected that if one looked at the curve and how it
affects investment, things could change significantly.
Mr. Zager pointed out that when the legislation moved from
ACES progressivity to the more aggressive progressivity,
part of the rational was the removal of the gross floor;
however, taking the floor out had an effect. Referencing
the EconOne numbers, he noted that the gross floor provided
$200 to $300 million of downside protection to the state.
He thought that removing the gross floor may equate with
increasing the progressivity from .2 to .25.
Mr. Zager reported that according to EconOne calculations,
at the price range of $80 - $90, today's government take is
about 73 percent. He said that incremental government take
is about 85 percent. He felt that progressivity is
valuable and should lead to more stability and more durable
fiscal terms.
Mr. Zager felt that it was important to look at what
motivates investment. He cited the Gulf of Mexico,
according to the Wood Mackenzie Study, where large fields,
at $50 a barrel, have a government take of 47 percent. He
reported that at $45, the government take is 45 percent.
With increased prices the government take is less.
Mr. Zager warned of unintended consequences. He further
noted concerns about progressivity based on nominal
dollars, not real numbers.
In addition, he touched on TIE credits; he felt that it was
not fair to change the rules midstream. He found the
"corrosion language" unworkable. He discussed language
issues regarding "unscheduled events" and he cited examples
of unscheduled events such as pumps that eventually fail
and then are replaced. He suggested returning to the House
Resources version of the bill for "bad intent language" and
"criminal negligence" provisions.
He expounded on retroactivity: it is normal when tax law
changes.
He concluded that the industry provides the largest source
of jobs for the private sector. He went on to say that it
is not only the monetary value to the state that is at
stake.
5:54:14 PM
Senator Gene Therriault, Representative Mark Neuman, and
Representative Mike Kelly joined the meeting.
Co-Chair Steadman agreed with the tradeoff of the removal
of the gross floor and inserting progressivity. Mr. Zager
agreed that it is not an equal tradeoff.
Mr. Zager noted that Norway has the highest tax rate in the
world and should not be Alaska's benchmark.
5:56:18 PM
Senator Dyson asked for more information regarding trigger
points. Mr. Zager said that the value of the trigger point
will erode and he noted that costs in the oil industry
wouldn't be tracking the Consumer Price Index. Mr. Zager
said that the cost of goods and services is calculated in
the net. He posed a scenario that when barrels are at
$120, the profits to the business get smaller at the $30
trigger point.
5:59:15 PM
PAT FOLEY, LAND AND EXTERNAL AFFAIRS MANAGER, PIONEER,
reminded the committee that many of the concerns that the
big companies have, the smaller companies also have. He
noted the various projects that his company is involved in,
including involvement with Anadarko. He noted that his
company has behaved as a model new investor. He outlined
concerns regarding the tipping of the tax scale. He
reiterated that the consultants said the raising of taxes
will not affect investment. The industry says it will.
Mr. Foley related that the legislature has considered a tax
based on gross, not net. He stated opposition to that
idea.
Mr. Foley reported that during the past winter, Pioneer had
over 650 employees on the Slope. He said there were
thousands of employees in Oooguruk. He thought the message
of those employees would be to please be careful not to
jeopardize jobs.
Mr. Foley noted that there is no progressivity feature in
other states in which Pioneer does business. The effect of
the progressivity feature is that the company would prefer
to do business elsewhere when prices are high because it
does not have that feature. He did note that Alaska has
the advantage of having large amounts of oil. The
disadvantage is the amount needed for investment. He noted
that Oooguruk is unique, as it is based on net profit share
leases, and the government take is 80 percent or more.
They have made an appeal to the Governor and legislature
regarding this concern. It is the understanding, as a
result, that the lease payments can be deducted from the
production taxes. He expressed appreciation to the
Governor's office and requested the committee to retain
this provision.
Mr. Foley reported that Pioneer spent $100 million during
the window when transitional investment credits could be
earned, and has spent roughly $200 million since the
inception of PPT. They, in good faith, followed all the
provisions. Under the current CS they could not use the
last two years of investment. He noted that in the House
version, the company could enjoy the credits and he stated
support for that language.
6:10:32 PM
Mr. Foley asked the committee to adopt the language
regarding the EIC, changing the 20 percent to 30 percent.
He further noted that the Senate bill describes all data
that must be given to the state and includes all derivative
work products. He asked that the EIC version from the
House be placed in the Senate version.
He discussed splitting the credits, one half in one year
and one half in the next. From the perspective of Pioneer,
it just reduces the credits. He requested that the credits
be available to be used in the same year.
The House version says it applies only to gas. In the
Senate version it applies to both oil and gas. Mr. Foley
interpreted this to mean that the $12 million small company
exemption could be used only on the North Slope and would
not be allocated to also include an oil property in the
Cook Inlet. He voiced concerned with the change offsetting
profits.
Mr. Foley discussed the loss carry forward percentage. He
noted that the Senate version matched the House version and
said that this was agreeable to Pioneer.
6:16:59 PM
MARK HANLEY, MANAGER, PUBLIC AFFAIRS, ANADARKO-ALASKA,
outlined specific concerns.
6:18:33 PM
He said that many provisions in the bill are a tax
increase, whether it is through credits, progressivity, or
TIE credits. He underlined that these provisions have an
impact on company costs and profits.
He went on to say Anadarko supports the language in the
House Finance version giving the Cook Inlet tax rate to all
players and he noted that this provision is also in the
Senate Judiciary version. He explained that this provision
helps keep the tariffs down, which enables more volume and
lower transportation costs.
He said that Anadarko does not support retroactivity.
He noted that the EIC language that came over from the
House was a consolidation of concerns and he encouraged the
committee to adopt that language.
With regards to penalties, he said if the intent is to
apply 10 percent or ten million, it's the lesser of the
two. This is a concern as the companies do not even have
the regulations in place. He further noted that the
effective date should be a year after the regulations are
adopted so companies can consider all costs.
He addressed the lease cost issue and noted the various
concerns in the language regarding allowable lease costs.
He questioned the intent of limiting costs to in state. He
noted that under EIC the state intends to get seismic data
and requires the companies to provide this. He noted a
concern that no one does seismic data calculations in
Alaska, so the cost incurred for that would not be
allowable.
6:30:01 PM
Mr. Hanley went back to the question regarding which tax
scenario would be more palatable. Mr. Hanley referenced a
chart he made noting the curve of the progressivity. The
range in which they are making decisions are made on an
average price, rather than the current actuals. An
increase in progressivity increases costs.
AT EASE: 6:33:50 PM
RECONVENE: 9:22:17 PM
Co-Chair Hoffman MOVED to ADOPT Amendment 1, labeled 25-
GH0014\R.14, Chenoweth/Bullock, 11/14/07. He OBJECTED in
order to reference a handout entitled "Increases in Total
State Revenue under Various Production Tax Systems" which
indicates changes to the rate. (Copy on File)
Co-Chair Hoffman explained that the amendment changes the
base tax rate from 22.5 percent to 25 percent and changes
the progressivity rate from .6 percent to .4 percent and
follows the House progressivity rate with the exception
that at the tail end it goes back up. At $90 it levels out
at 1 percent with a 50 percent overall cap.
Co-Chair Hoffman pointed out that the brown line on the
chart represents the Senate Finance Committee's version of
the tax system. The green line is the new line depicting
Amendment 1.
Co-Chair Hoffman withdrew his OBJECTION.
There being NO OBJECTION, Amendment 1 was adopted.
9:24:36 PM
Co-Chair Hoffman MOVED to ADOPT Amendment 2, labeled 25-
GH0014\R.22, Luckhaupt/Bullock, 11/14/07, and OBJECTED for
discussion purposes. The amendment says that collection of
the progressive tax payments is due on a monthly basis
instead of on an annual basis. Co-Chair Hoffman removed
his objection.
There being NO OBJECTION, Amendment 2 was adopted.
9:25:02 PM
Co-Chair Hoffman MOVED to ADOPT Amendment 3, labeled 25-
GH0014\R.23, Cook/Bullock, 11/14/07, and OBJECTED for
discussion purposes. On pages 38 and 39 of the bill there
was testimony by the industry that there were serious
problems with all of the work on PPT that gave definition
to expenditures. In the bill there was language that
allowed the department to adopt those expenditures by
regulation. This amendment would remove that provision and
the status quo found in PPT would remain.
Senator Elton OBJECTED for a question. He wondered if the
amendment reverts the provision to PPT and not to the
Governor's original bill. Co-Chair Hoffman deferred to Mr.
Dickinson.
Mr. Dickinson explained the intent of the amendment which
was in agreement with the comments of Senator Elton.
Senator Elton WITHDREW his OBJECTION.
Senator Dyson OBJECTED.
AT EASE: 9:28:09 PM
RECONVENE: 9:28:41 PM
Senator Dyson spoke to the OBJECTION. He requested that
the Administration speak to the amendment.
Commissioner Galvin addressed Amendment 3. He stated that
it would undermine a fundamental part of ACES, which is to
provide the state with the ability to determine what an
allowable expense is. The existing PPT states that if the
expense is directly related to exploration production and
is ordinary and necessary, it is deductible. Under ACES
one of the requirements was to have clear rules to
establish what is deductible. Amendment 3 deletes that
provision. He stated that the Administration strongly
opposes Amendment 3.
Co-Chair Hoffman pointed out that the legislature has spent
many hours addressing the concern and is proud of the work
done on this legislation.
9:31:36 PM
Senator Dyson MAINTAINED his OBJECTION. He pointed out
that the Administration has put together a team to work on
this issue.
A roll call vote was taken on the motion.
IN FAVOR: Elton, Huggins, Olson, Thomas, Hoffman, Stedman
OPPOSED: Dyson
The MOTION PASSED (6-1).
There being NO further OBJECTION, Amendment 3 was adopted.
9:32:43 PM
Co-Chair Hoffman MOVED to ADOPT Amendment 4, labeled 25-
GH0014\R.17, Kane/Bullock, 11/14/07. He OBJECTED for the
purpose of an explanation. Co-Chair Hoffman recalled a
reference to spending a percentage of the money saved with
progressivity on statewide energy needs of Alaskans to
assist with rising energy costs. That is the purpose of
Amendment 4.
Senator Dyson OBJECTED in order to hear testimony from the
Administration.
Commissioner Galvin commented that the Administration
recognizes the need for excess revenue to be spent on
rising energy costs. He spoke in favor of the amendment.
Senator Dyson WITHDREW his OBJECTION.
There being NO OBJECTION, Amendment 4 was adopted.
9:34:27 PM
Senator Olson MOVED to ADOPT Amendment 5, 25-Gh0014\R.15,
Kane/Bullock, 11/14/07, and OBJECTED for further testimony.
He explained that the amendment changes the near field
explorer tax credit from 20 to 30 percent. He reported
that the Administration is in favor of the amendment, as
are "people on the Arctic Slope". He WITHDREW his
OBJECTION.
There being NO OBJECTION, Amendment 5 was adopted.
9:35:08 PM
Senator Olson MOVED to ADOPT Amendment 6, labeled 25-
GH0014\R.13, Cook/Bullock, 11/14/07. He OBJECTED for
comment. He explained that the amendment has to do with
exploration information confidentiality and allows seismic
and geophysical information to be held in a confidential
manner, especially on private lands. Private land owners
on the North Slope have been pushing for this to happen.
Senator Olson WITHDREW his OBJECTION.
There being NO OBJECTION, Amendment 6 was adopted.
9:36:09 PM
Co-Chair Hoffman MOVED to ADOPT Amendment 7, labeled 25-
GH0014\R.19, Chenoweth/Bullock, 11/14/07. He OBJECTED for
further explanation.
Mr. Dickinson explained that there are two places in the
bill that refer to credits - AS 43.55.023 and AS.55.025.
Both have a list of "bad acts". If costs arose from those
bad acts, they would not qualify for the credits. The
lists were different and the amendment conforms that
language.
AT EASE: 9:37:39 PM
RECONVENE: 9:39:14 PM
Mr. Dickinson noted that the first part of the amendment,
on page 23, sets the costs for the .025 credits, the
exploration credits. On page 41, the same standards are
set for allowable lease expenditures.
Co-Chair Hoffman WITHDREW his OBJECTION.
There being NO OBJECTION, Amendment 7 was adopted.
9:40:05 PM
Co-Chair Hoffman MOVED to ADOPT Amendment 8, labeled 25-
GH0014\R.21, Cook, 11/14/07. Co-Chair Hoffman OBJECTED for
discussion purposes.
Mr. Dickinson explained that the amendment deals with AS
43.55.024(a) credits, which are small producer credits of
$12 million each, and new area development credits, "middle
earth", which qualify for an additional $6 million. These
credits are non-transferrable and non-saleable and, as in
ACES, no credits are allowed against the floor.
Co-Chair Hoffman WITHDREW his OBJECTION.
There being NO further OBJECTION, Amendment 8 was adopted.
9:41:46 PM
Co-Chair Hoffman MOVED to ADOPT Amendment 9, labeled 25-
GH0014\R.24, Cook/Bullock, 11/14/07. He OBJECTED for the
purpose of discussion.
Mr. Dickinson explained that the language deleted in the
amendment was not needed in the Governor's proposal for a
floor. It removes the requirement that credits move from
the legacy fields to fields like Endicott, Milne Point, or
other North Slope fields.
Co-Chair Hoffman WITHDREW his OBJECTION. There being NO
OBJECTION, Amendment 9 was adopted.
9:43:27 PM
Senator Elton MOVED to ADOPT Amendment 10, labeled 25-
GH0014\R.8, Cook/Bullock, 11/14/07, and OBJECTED in order
to provide a short explanation. Senator Elton informed the
committee that the amendment addresses an issue regarding
municipal entities, which was not clear in the original
bill. It brings clarity to the liability for production
taxes of municipal entities that are producers of gas or
oil. Under the amendment, and consistent with a Supreme
Court ruling, municipal entities are not liable for taxes
and surcharges, nor eligible for credits for production of
oil or gas used in house. Also, under this amendment,
municipal entities are liable for taxes and eligible for
credits for production of oil and gas that is sold to
another party, just as any other producer would be.
Senator Elton reported that Anchorage has been working with
the Administration on this matter. He termed the amendment
an "artful solution to the original bill." Senator Elton
WITHDREW his OBJECTION.
Co-Chair Stedman OBJECTED. Senator Dyson thanked Senator
Elton for bringing forward the change. He noted that it
was important to his district.
Co-Chair Stedman MAINTAINED his OBJECTION.
Senator Huggins requested testimony from the
Administration.
9:45:25 PM
Commissioner Galvin explained that the original language
excluded those entities that exempt from the production tax
the production tax credit. He cited an example of an
entity that was selling some product under a contract that
required it to make a production tax payment. The
amendment will allow that entity to enjoy the credits.
Co-Chair Stedman WITHDREW his OBJECTION to Amendment 10.
There being NO further OBJECTION Amendment 10 was adopted.
9:46:17 PM
Senator Elton MOVED to ADOPT Amendment 11, labeled 25-
GH0014\R.6, Mischel/Bullock, 11/13/07, and then OBJECTED in
order to provide a short explanation. He explained that
the amendment deals with the issue of exempt auditors. The
bill provides for four exempt auditors in the Department of
Revenue and two exempt audit masters in the Department of
Natural Resources. The issue has always been what happens
to this very special group. The amendment sunsets the six
exempt auditors and provides an opportunity to make a
decision on December 31, 2011, on the best approach for the
state. He pointed out that this is not the only audit
provision in the bill. There is also a provision that
provides for contract auditors. He suggested that the
Department of Revenue testify in response to Amendment 11.
Senator Elton WITHDREW his OBJECTION.
Commissioner Galvin objected strongly to Amendment 11. He
stated that the purpose of creating the exempt positions is
to allow the department to attract highly experienced
auditors. He predicted that it would be difficult to
provide incentive to attract auditors if the position is
for only three years. He emphasized that Amendment 11
would undermine the whole purpose for having exempt
positions. He stated that requesting only a few exempt
positions was already a compromise.
9:49:29 PM
Senator Elton voiced appreciation for those concerns. He
suggested that creating a new job class would make
recruitment easier.
Senator Dyson OBJECTED. He thought that the auditor
positions would be very high level positions and would not
need protection. He reflected on the Administration's
strong need for highly qualified auditors and his
willingness to accommodate the Administration's request.
A roll call vote was taken on the motion.
IN FAVOR: Elton, Stedman, Olson, Thomas, Hoffman, Huggins
OPPOSED: Dyson
The MOTION PASSED (6-1).
There being NO further OBJECTION, Amendment 11 was adopted.
9:51:26 PM
Co-Chair Hoffman MOVED to ADOPT Amendment 12, labeled 25-
GH0014\R.18, Bullock, 11/14/07. He OBJECTED for comment.
Mr. Dickinson explained the technical changes. The first
change on page 15, lines 4 and 8, removes a superfluous
reference to the tax on private leasehold interests. The
second change on page 34, following line 17, is new
language, which is an addition to the whistleblower
language, and was adopted on the House floor. It further
clarifies what comprises a whistleblower situation.
Mr. Dickinson explained the third change found on pages 47-
50 of the bill. It deals with the complications of making
the changes to AS 43.55.165.(e)(19) related to unscheduled
interruptions. Those items which cannot be included in
costs are being made retroactive to the passage of PPT.
Most of the language is in the uncodified section of the
law making sure that when the changes become retroactive,
the taxpayer is able to catch up.
9:54:29 PM
Co-Chair Hoffman WITHDREW his OBJECTION.
There being NO further OBJECTION, Amendment 12 was adopted.
Co-Chair Hoffman MOVED to REPORT SCS CSHB 2001 (FIN), as
amended, out of committee with individual recommendations
and updated fiscal notes.
Co-Chair Stedman commented on the hard work done by the
Senate Finance Committee. He thanked the committee and
staff for all their hard work.
Senator Dyson voiced his appreciation of the work done on
the bill.
SCS CSHB 2001 (FIN) was reported out of committee with a
"no recommendation" and with zero fiscal note 1 by the
Department of Administration, new fiscal note 9 by the
Department of Revenue, new fiscal note 10 by the Department
of Revenue, and new fiscal note 11 by the Department of
Natural Resources.
ADJOURNMENT
The meeting was adjourned at 9:56 P.M.
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