Legislature(2019 - 2020)SENATE FINANCE 532

03/22/2019 09:00 AM FINANCE

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09:02:04 AM Start
09:06:27 AM Presentation: Severance Tax - Order of Operations
10:26:16 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ - Severance Tax - Order of Operations TELECONFERENCED
<Item Above Rescheduled from 3/18/19>
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                      March 22, 2019                                                                                            
                         9:02 a.m.                                                                                              
9:02:04 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 9:02 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Natasha von Imhof, Co-Chair                                                                                             
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Click Bishop                                                                                                            
Senator Lyman Hoffman                                                                                                           
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Mike Shower                                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator David Wilson                                                                                                            
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Senator  Cathy Giessel;  Senator  Chris  Birch; Senator  Mia                                                                    
Costello;  Bruce   Tangeman,  Commissioner,   Department  of                                                                    
Revenue;  Dan Stickel,  Chief  Economist, Economic  Research                                                                    
Group, Tax Division, Department of Revenue.                                                                                     
PRESENT VIA TELECONFERENCE                                                                                                    
Colleen  Glover,  Director,   Tax  Division,  Department  of                                                                    
PRESENTATION: SEVERANCE TAX - ORDER OF OPERATIONS                                                                               
Co-Chair Stedman informed that  the committee would consider                                                                    
the order of operations dealing  with oil production tax and                                                                    
would receive a tax audit update.                                                                                               
Co-Chair Stedman asked for the  presenters to stay on topic.                                                                    
He  stated that  the  purpose  of the  meeting  was to  walk                                                                    
through the  mechanical operations of the  severance tax. He                                                                    
reminded that the  state's oil revenue came  from four major                                                                    
categories:  royalties,  severance   tax,  income  tax,  and                                                                    
property  tax.  The  severance  tax  was  considered  to  be                                                                    
complex.  He emphasized  that the  state's oil  and gas  tax                                                                    
structure  was very  complex.  He thought  it  would not  be                                                                    
possible to conclude  if the state's tax  structure was high                                                                    
or low, as the analysis was not comparative.                                                                                    
Co-Chair   Stedman  continued   his   opening  remarks.   He                                                                    
mentioned that cost structures around  the world had changed                                                                    
when  the price  of  oil dropped;  including  in Alaska  and                                                                    
significantly in the  Permian Basin in East  Texas, in North                                                                    
Dakota,  and other  areas. He  cautioned that  the severance                                                                    
tax information  should not  be compared  without additional                                                                    
analysis. He asked that people  take the presentation with a                                                                    
grain of salt.                                                                                                                  
^PRESENTATION: SEVERANCE TAX - ORDER OF OPERATIONS                                                                            
9:06:27 AM                                                                                                                    
BRUCE   TANGEMAN,  COMMISSIONER,   DEPARTMENT  OF   REVENUE,                                                                    
reiterated that Alaska  had one of the most  complex oil and                                                                    
gas  tax  structures  in  the world.  He  relayed  that  the                                                                    
presentation would  give a glimpse  of a small piece  of the                                                                    
audit process.  He affirmed  that he was  not going  to talk                                                                    
about oil policy  or comparisons, rather to  explain how the                                                                    
state's tax  structure worked. He  recalled that  since 2011                                                                    
or 2012  the State  of North  Dakota thought  its break-even                                                                    
point  was  in the  70s,  and  now it  was  in  the 30s.  He                                                                    
commented  that   the  world   had  changed  quite   a  bit,                                                                    
especially with regard to shale.                                                                                                
9:07:57 AM                                                                                                                    
DAN STICKEL,  CHIEF ECONOMIST, ECONOMIC RESEARCH  GROUP, TAX                                                                    
DIVISION, DEPARTMENT OF  REVENUE, discussed the presentation                                                                    
"Alaska Oil  and Gas Production  Tax Calculation  ("Order of                                                                    
Operations")" (copy on file).                                                                                                   
Mr.  Stickel  turned to  slide  2,  "Acronyms used  in  this                                                                    
     ?ANS Alaska North Slope                                                                                                    
     ?Avg -Average                                                                                                              
     ?Bbl Barrel                                                                                                                
     ?CBRF Constitutional Budget Reserve Fund                                                                                   
     ?CIT Corporate Income Tax                                                                                                  
     ?DOR Department of Revenue                                                                                                 
     ?GVPP Gross Value at Point of Production                                                                                   
     ?GVR Gross Value Reduction                                                                                                 
     ?Min Minimum                                                                                                               
     ?NPR-A National Petroleum Reserve Alaska                                                                                   
     ?PTV Production Tax Value                                                                                                  
     ?Ths Thousands                                                                                                             
     ?FY Fiscal Year                                                                                                            
Mr.  Stickel acknowledged  that there  was a  great deal  of                                                                    
jargon used in  oil and gas industry, and  in production tax                                                                    
policy in particular.                                                                                                           
Co-Chair Stedman was optimistic  that the presentation would                                                                    
be shorter than  what was expected. He  asked the testifiers                                                                    
to  avoid  using acronyms  in  order  for people  to  follow                                                                    
Mr. Stickel agreed.                                                                                                             
Mr. Stickel discussed slide 3, "Overview":                                                                                      
     ?Oil and Gas revenue sources how production tax fits                                                                       
          o FY 2017 FY 2021 oil and gas revenues                                                                                
     ?Production tax calculation "order of operations"                                                                          
          o Detailed walk-through of each step of tax                                                                           
          o Defining commonly used jargon                                                                                       
          o Focus on North Slope oil                                                                                            
          o FY 2017 FY 2021 comparison                                                                                          
Mr. Stickel  affirmed that the  purpose of  the presentation                                                                    
was to  explain the production tax  and how it fit  into the                                                                    
overall  oil and  gas  fiscal system.  He  noted that  North                                                                    
Slope oil was the main revenue  source to the state from the                                                                    
petroleum industry.                                                                                                             
9:10:06 AM                                                                                                                    
Mr. Stickel referenced slide 4, "Disclaimer":                                                                                   
     ?Alaska's severance tax  is one of the  most complex in                                                                    
     the world,  and portions are subject  to interpretation                                                                    
     and dispute                                                                                                                
     ?These  numbers  are   rough  approximations  based  on                                                                    
     public data  as presented in the  spring 2019 forecasts                                                                    
     and other revenue forecasts.                                                                                               
     ?We are economists, not  auditors. This presentation is                                                                    
     not an official  statement of the Department  as to any                                                                    
     particular    tax    liability,   interpretation,    or                                                                    
     treatment. This  is not tax  advice or guidance.   This                                                                    
     presentation   is  solely   for  illustrative   general                                                                    
Co-Chair  Stedman asked  for the  testifiers to  address the                                                                    
aggregation issue.  He referenced  the Revenue  Sources Book                                                                    
(copy  on  file),  which was  published  the  Department  of                                                                    
Revenue  (DOR) in  the fall  and updated  in the  spring. He                                                                    
asked Mr. Stickel to discuss aggregated numbers.                                                                                
Mr. Stickel  explained that oil  and gas tax was  levied for                                                                    
each  separate  company.  There   was  a  handful  of  major                                                                    
taxpayers on the North Slope,  and numerous small producers;                                                                    
each with  a different portfolio of  fields, exploration, or                                                                    
development activities. Each company  would have a different                                                                    
cost structure and tax.  Proprietary company information was                                                                    
not  allowed  to be  shared,  so  the department  aggregated                                                                    
total  spending  and  production  for  the  North  Slope  to                                                                    
illustrate the  tax calculation for the  purposes of revenue                                                                    
Co-Chair  Stedman  summarized   that  Mr.  Stickel  compiled                                                                    
monthly  data from  multiple companies  to  combine into  an                                                                    
annual calculation.  He emphasized that the  Revenue Sources                                                                    
Book  was working  with rounded  numbers  rather than  exact                                                                    
dollar amounts.                                                                                                                 
Mr. Stickel  explained that  the historical  revenue numbers                                                                    
were  "cash in  the door"  to the  treasury. When  reporting                                                                    
company  lease  expenditures and  tax  rates,  there was  an                                                                    
aggregate calculation.                                                                                                          
Mr.  Stickel  spoke  to  slide   5,  "Oil  and  Gas  Revenue                                                                    
     ?Royalty - based on gross value of production                                                                              
          o plus bonuses, rents & interest                                                                                      
          o Paid to owner of the land: State, Federal, or                                                                       
         o Usually 12.5% in Alaska, but rates vary                                                                              
     ?Corporate Income Tax  based on net income                                                                                 
          o Paid to State (9.4% top rate)                                                                                       
          o Paid to Federal (21% top rate, used to be 35%)                                                                      
          o Only C-corporations pay this tax *                                                                                  
     ?Property Tax  based on value of oil & gas property                                                                        
          o Paid to State (2% of assessed value or "20                                                                          
          o Paid to Municipalities  credit offsets state                                                                        
          tax paid                                                                                                              
     ?Production Tax  based on "production tax value"                                                                           
          o Paid to State  calculation to follow                                                                                
     * "C-corporation"  is a business  term that is  used to                                                                    
     distinguish  the type  of business  entity, as  defined                                                                    
     under  subchapter C  of  the  federal Internal  Revenue                                                                    
Mr. Stickel  clarified that the  terms "production  tax" and                                                                    
"severance  tax"  were  sometimes used  interchangeably.  He                                                                    
explained  that production  tax  applied  to all  production                                                                    
anywhere in the state regardless who the landowner was.                                                                         
9:14:31 AM                                                                                                                    
Mr. Stickel showed  slide 6, "Oil and Gas  Revenue Sources                                                                      
5 year  comparison of state  revenue," which showed  a table                                                                    
that enumerated  different revenue  sources. He  pointed out                                                                    
that the  table looked at  all state revenue,  regardless of                                                                    
which fund  the monies went  to. Property tax  included only                                                                    
the state portion  and not the municipal  portion. The table                                                                    
illustrated the  entire revenue to  the state  treasury from                                                                    
the oil and gas industry.                                                                                                       
Mr.   Stickel   discussed   settlements   to   the   state's                                                                    
Constitutional   Budget  Reserve   Fund   (CBR),  based   on                                                                    
settlements of disputes on past  years' taxes and royalties.                                                                    
Many of  the settlements were  several years old.  Under the                                                                    
constitution,  any mineral  assessments or  settlements were                                                                    
deposited  to the  CBR.   He furthered  that shared  revenue                                                                    
from  the  National Petroleum  Reserve  was  a fairly  small                                                                    
revenue source  shared with the federal  government that was                                                                    
forecast to grow up to $100 million per year in FY 28.                                                                          
Senator Wielechowski asked about  FY 17 corporate income tax                                                                    
as listed on the table.                                                                                                         
Mr.  Stickel explained  that  in FY  16, FY  17  and FY  18;                                                                    
corporate income  tax had been  artificially reduced  due to                                                                    
refunds of prior years' taxes.                                                                                                  
Co-Chair Stedman asked  for Mr. Stickel to  elaborate on the                                                                    
matter. He reminded  that there had been a  reduction in oil                                                                    
Mr.  Stickel agreed  that there  was  an aggregated  number.                                                                    
Within corporate income  tax law, there was  a provision for                                                                    
a five-year carry back for  a net operating loss (NOL). When                                                                    
there was a  very low oil price in 2016  and 2017, companies                                                                    
with  a  NOL were  able  to  offset current  year  corporate                                                                    
income tax  liability as well as  carry it back to  the five                                                                    
preceding years for tax refunds.  The refunds worked through                                                                    
the system,  oil prices recovered, and  major producers were                                                                    
paying positive  tax. He added that  the department expected                                                                    
around $200 million  per year to be a  more stable long-term                                                                    
corporate income tax number around current prices.                                                                              
9:18:04 AM                                                                                                                    
Co-Chair Stedman  asked for further definition  of corporate                                                                    
income tax.  He thought corporate income  tax was controlled                                                                    
by federal  law rather  than the state  and was  a different                                                                    
mechanical issue than production  tax that was controlled by                                                                    
the state.                                                                                                                      
Mr. Stickel explained the corporate  income tax applied to C                                                                    
corporations, which  was a term  defined under  the Internal                                                                    
Revenue  Code.  He  furthered that  corporations  that  were                                                                    
involved in oil and gas  production or transportation in the                                                                    
state were subject to oil  and gas corporate income tax. The                                                                    
corporations' worldwide net income  was calculated, then the                                                                    
amount was apportioned to Alaska  based on the state's share                                                                    
of production,  sales, and property.  He continued  that the                                                                    
9.4 percent  was the top  marginal tax rate that  applied to                                                                    
corporations' Alaska net income.                                                                                                
Senator  Wielechowski thought  hypothetically  of a  company                                                                    
that made billions  of dollars in the State  of Alaska, then                                                                    
had  a huge  oil  spill in  the Gulf  of  Mexico which  cost                                                                    
billions  of   dollars.  He  asked  if   the  company  could                                                                    
theoretically  pay  nothing  or  very  little  of  corporate                                                                    
income taxes because of worldwide apportionment.                                                                                
Commissioner   Tangeman  could   not  speak   hypothetically                                                                    
regarding how  a tax might  be treated.  He did not  want to                                                                    
make a hypothetical assumption.                                                                                                 
Senator Wielechowski  considered FY  20 and looked  ahead at                                                                    
slide 7. He made note  of $12.7 billion in production value,                                                                    
with  a gross  value  of  the point  of  production of  $9.8                                                                    
billion. He  asked what the  9.4 percent  marginal corporate                                                                    
income tax rate was based on.                                                                                                   
Co-Chair  Stedman  wanted  to   bifurcate  the  subject  for                                                                    
further  understanding. He  explained that  corporate income                                                                    
tax was a  different structure than the  petroleum profit or                                                                    
severance tax.  The corporate income  tax structure  was not                                                                    
controllable by the legislature.                                                                                                
9:22:21 AM                                                                                                                    
Commissioner   Tangeman   commented   that   companies   had                                                                    
different  interests in  different  parts of  the world.  He                                                                    
understood  Senator  Wielechowski's  question  but  did  not                                                                    
think  it  was   appropriate  to  put  a   percentage  to  a                                                                    
hypothetical company.                                                                                                           
Senator Wielechowski  thought the  state did  have a  lot of                                                                    
say on the  issue and pointed out that the  state had made a                                                                    
policy choice to use worldwide  apportionment. He was trying                                                                    
to  establish what  the  9.4 percent  income  tax was  taken                                                                    
Co-Chair Stedman  asked for definition of  the apportionment                                                                    
issue  on a  broad scale,  as  well as  the alternative.  He                                                                    
considered  that there  had been  a policy  decision to  use                                                                    
apportionment. He asked for historical information.                                                                             
Mr. Stickel  stated that the  9.4 percent marginal  tax rate                                                                    
was applied  to Alaska net  income for corporate  income tax                                                                    
purposes. The  Alaska net income  was derived by  taking the                                                                    
worldwide net  income for a  company and apportioning  it to                                                                    
Alaska  based  on  the  Alaska's   share  of  the  company's                                                                    
worldwide production,  sales, and property. The  concept was                                                                    
known  as apportionment  methodology.  He  added that  there                                                                    
were a few  years in which the state switched  to a separate                                                                    
accounting  methodology,   where  a  company   attempted  to                                                                    
calculate its  Alaska net  income directly.  The methodology                                                                    
had been repealed.  He thought it would be easy  to fill the                                                                    
time  of   a  committee   hearing  discussing   the  various                                                                    
provisions  of corporate  income tax,  but that  the current                                                                    
presentation was focused on production tax.                                                                                     
Senator  Micciche asked  if the  apportionment was  only for                                                                    
oil and  gas companies, or if  it was for any  C corporation                                                                    
Mr. Stickel  answered in  the negative.  He stated  that oil                                                                    
and gas companies had  a different apportionment methodology                                                                    
than  for other  companies. Other  companies calculated  its                                                                    
United   States  "water's   edge"   net   income  and   then                                                                    
apportioned  the  amount  based   on  the  Alaska  share  of                                                                    
property, payroll, and sales.                                                                                                   
9:25:53 AM                                                                                                                    
Mr.  Stickel displayed  slide 7,  "Production Tax  "Order of                                                                    
Operations"   FY 2020," which  showed a table presenting the                                                                    
income statement table  which could be found in  the back of                                                                    
the Revenue  Sources Book. He  specified that  the following                                                                    
several  slides   would  address   the  table.   The  income                                                                    
statement started  with a  forecast price  of $66/bbl  and a                                                                    
daily  production forecast  of  529.5  thousand barrels  per                                                                    
day. He pointed out that FY 20  had 366 days as a leap year,                                                                    
which was reflected in the  calculations. The total expected                                                                    
value of all oil produced on  the North Slope in FY 20 would                                                                    
be  approximately $12.8  billion.  The  next several  slides                                                                    
would focus on where the money went and how it was taxed.                                                                       
Mr.  Stickel noted  that the  table was  an aggregation  and                                                                    
would not reflect any specific  companies' economics or cost                                                                    
structure.  He reminded  that the  data was  only for  North                                                                    
Slope oil,  which was the  largest source of  production tax                                                                    
revenue in the state.                                                                                                           
Co-Chair  Stedman  explained that  the  table  on the  slide                                                                    
could  be found  at the  back of  the Revenue  Sources Book,                                                                    
which could be  found on the DOR website.  He furthered that                                                                    
the  Senate Finance  Committee had  requested the  format to                                                                    
help members and the public  keep track of the operation and                                                                    
monies when the state converted to a net profits tax.                                                                           
Mr.  Stickel addressed  slide 8,  "Production Tax  "Order of                                                                    
Operations"   FY 2020,"  which showed  a table  highlighting                                                                    
royalty   and  taxable   barrels.  He   explained  that   in                                                                    
calculating  production   tax,  any  royalty   barrels  were                                                                    
subtracted regardless  of the ownership of  the barrels. The                                                                    
typical rate in  the state was one-eighth, which  was a 12.5                                                                    
percent royalty, but  the rates varied by  unit. In addition                                                                    
to state  royalty, federal and  private land  was subtracted                                                                    
from   the   taxable   barrels.  Additionally,   the   state                                                                    
subtracted  any barrels  not  subject to  tax  due to  being                                                                    
produced  in federal  waters beyond  the state's  three-mile                                                                    
limit. A  portion of  the North  Star field,  and production                                                                    
from the Liberty  field would fall into  the category. After                                                                    
subtracting  royalty, there  was about  172 million  taxable                                                                    
barrels in FY 20, for a total value of $11.36 billion.                                                                          
9:30:00 AM                                                                                                                    
Mr. Stickel  highlighted slide 9, "Production  Tax "Order of                                                                    
Operations"    FY 2020," which  showed a  table highlighting                                                                    
the  calculation  of  gross value  at  point  of  production                                                                    
(GVPP). He mentioned  the term "well head  value," which was                                                                    
used interchangeably.  He noted  that GVPP was  an important                                                                    
term in  the production  tax calculation. He  explained that                                                                    
to  arrive at  GVPP, transportation  costs (net  back costs)                                                                    
were  subtracted from  the total  taxable  value. The  sales                                                                    
value of  the oil (on  the West Coast) was  established when                                                                    
the oil  was delivered, and then  the various transportation                                                                    
items  were  "netted  back"  to achieve  the  value  at  the                                                                    
wellhead.  Transportation costs  per barrel  (or "net  back)                                                                    
included marine  costs for transport,  Trans-Alaska Pipeline                                                                    
System  (TAPS) tariffs,  any  feeder  pipeline tariffs  were                                                                    
subtracted, and  a quality bank differential.   He estimated                                                                    
that  for FY  20,  after  subtracting transportation  costs,                                                                    
there was a GVPP of about $9.8 billion.                                                                                         
Co-Chair  Stedman   thought  the  net  back   was  sometimes                                                                    
Mr.  Stickel Tangeman  looked at  slide 10,  "Production Tax                                                                    
"Order  of Operations"     FY 2020,"  which  showed a  table                                                                    
highlighting lease  expenditures. The  production tax  was a                                                                    
modified form of net profits  tax. Companies were allowed to                                                                    
deduct  capital expenditures  and operating  expenditures in                                                                    
calculating production  tax liability. One  major difference                                                                    
in  the production  tax (as  opposed to  an income  tax) was                                                                    
there   was  not   a  depreciation   schedule  for   capital                                                                    
expenditures,  and  companies  were allowed  to  deduct  the                                                                    
entire  amount  in  the  year  it  was  incurred.  Operating                                                                    
expenditures  were essentially  any allowable  expenses that                                                                    
were not a capital expenditure;  such as the ongoing cost of                                                                    
labor, operating  a field,  and producing  oil once  a field                                                                    
was up and running.                                                                                                             
Mr. Stickel stated  there was two important  terms to define                                                                    
when   considering  lease   expenditures:  allowable   lease                                                                    
expenditures,   and   deductible  lease   expenditures.   He                                                                    
specified that  allowable lease expenditures  were generally                                                                    
any cost in the unit  directly associated with producing the                                                                    
oil   and  was   defined   in   statute.  Deductible   lease                                                                    
expenditures   were   developed  solely   for   presentation                                                                    
purposes   and  was   not  in   statute.  Deductible   lease                                                                    
expenditures were the share  of allowable lease expenditures                                                                    
that was applied  in the tax calculation in a  given year. A                                                                    
company could apply  lease expenditures up to  the GVPP, and                                                                    
the  amount became  the deductible  lease expenditures.  Any                                                                    
lease   expenditures  beyond   GVPP  were   considered  non-                                                                    
deductible lease  expenditures and could be  carried forward                                                                    
by the company to apply in a future year.                                                                                       
9:34:55 AM                                                                                                                    
Co-Chair Stedman thought there  were some companies that had                                                                    
production that could  be deducted, and others  that may not                                                                    
have oil  production and would  not be in the  severance tax                                                                    
calculation and would carry forward.                                                                                            
Mr. Stickel answered  in the affirmative and  noted that the                                                                    
lease   expenditures  listed   on   the   summary  were   an                                                                    
aggregation of  all the  different companies  doing business                                                                    
on  the North  Slope. There  were some  companies that  were                                                                    
able to  apply all  lease expenditures, some  companies that                                                                    
had no  production carried  forward all  lease expenditures,                                                                    
and some companies  with some production and  able to deduct                                                                    
some expenditures  and carry some excess  lease expenditures                                                                    
forward. All the information was aggregated in the slide.                                                                       
Co-Chair   von   Imhof   looked  at   non-deductible   lease                                                                    
expenditures  that were  carried  forward and  asked if  the                                                                    
legislature  had addressed  the  matter in  2017  and put  a                                                                    
finite amount of time on the carry-forwards.                                                                                    
Mr. Stickel stated that the  legislature had made changes as                                                                    
to how the  lease expenditures were treated.  Prior to 2018,                                                                    
the  lease expenditures  became a  tax credit.  Beginning in                                                                    
2018, the  lease expenditures became a  carry-forward. There                                                                    
was  a  phase-out  provision where  the  lease  expenditures                                                                    
started to deteriorate in 8  or 11 years, depending upon the                                                                    
status of the lease.                                                                                                            
Co-Chair von  Imhof asked about the  allowed full deductions                                                                    
of  capital  expenditures  in   the  year  the  expenditures                                                                    
occurred;  and not  allowing depreciation  in future  years.                                                                    
She thought  the policy was a  significant accounting choice                                                                    
for capital. She assumed that  by not allowing capital to be                                                                    
depreciated over time,  net income would be  higher in years                                                                    
of production.                                                                                                                  
Mr.  Stickel stated  that the  impact of  allowing immediate                                                                    
reduction would be  to reduce net income in  early years and                                                                    
increase net income in later  years. He thought allowance of                                                                    
immediate  deduction  generally was  seen  as  a benefit  to                                                                    
Co-Chair  Stedman thought  the  two  expenditure items  were                                                                    
included in  corporate income tax,  and would be  subject to                                                                    
amortization  and  depreciation   schedules.  Severance  tax                                                                    
allowed  for  immediate  deduction,  which  he  thought  was                                                                    
standard around the  world. It was standard  to allow write-                                                                    
offs. He stated that the  practice was not abnormal, and the                                                                    
tax percentage  was set in  Alaska and elsewhere,  given the                                                                    
immediate deductions.                                                                                                           
9:39:17 AM                                                                                                                    
Senator Shower addressed deductibles.  He asked if the items                                                                    
being considered were all state-affiliated,  or if the items                                                                    
were mixed with federal items.                                                                                                  
Mr.  Stickel explained  that the  state deferred  to federal                                                                    
definitions for capital expenditures.                                                                                           
Commissioner Tangeman  added that capital  expenditures that                                                                    
occurred in Alaska were being discussed.                                                                                        
Senator  Shower asked  if there  was  a mix  of federal  and                                                                    
state  regulations   at  play  when   discussing  deductible                                                                    
operating and capital expenditures.                                                                                             
Mr.  Stickel  stated  that  the  department  estimated  $4.7                                                                    
billion of deductible  lease expenditures in FY  20. Some of                                                                    
the definitions  of what qualified as  a capital expenditure                                                                    
versus   an   operating   expenditure  relied   on   federal                                                                    
Co-Chair Stedman  emphasized that severance tax  was totally                                                                    
different  than corporate  income tax.  He noted  there were                                                                    
decades of  Internal Revenue Service rulings  on the subject                                                                    
of operating and capital expenditures.                                                                                          
Senator Wielechowski discussed  depreciation, and thought he                                                                    
heard Mr. Stickel  say that depreciation was  allowed at 100                                                                    
percent in the year an expense was incurred.                                                                                    
Mr. Stickel answered in the affirmative.                                                                                        
Co-Chair Stedman wanted more clarity.                                                                                           
9:42:55 AM                                                                                                                    
Senator  Wielechowski thought  in  other  industries in  the                                                                    
state, such as  an apartment building; an owner  did not get                                                                    
100  percent deduction  in  the first  year,  but over  many                                                                    
years.  He asked  if there  was  any other  industry in  the                                                                    
state  that had  the ability  to deduct  100 percent  in the                                                                    
year the cost was incurred.                                                                                                     
Mr.  Stickel  did  not  want to  speculate  and  offered  to                                                                    
provide the information at a later time.                                                                                        
Co-Chair  Stedman answered  Senator Wielechowski's  question                                                                    
in the negative. He did not  know of any other industry that                                                                    
had  a severance  tax. He  reminded that  severance tax  and                                                                    
income  tax  were separate.  He  stated  that there  was  no                                                                    
instance of deductibility of  expenditures not being allowed                                                                    
in severance tax.                                                                                                               
Senator  Wielechowski asked  if  there was  any other  state                                                                    
that  allowed for  100 percent  deductions  on expenses  for                                                                    
calculation of severance taxes.                                                                                                 
Mr.  Stickel  offered  to provide  the  information  to  the                                                                    
Senator  Wielechowski asked  if  there was  any other  state                                                                    
that had a net severance tax.                                                                                                   
Mr. Stickel stated he was  prepared to speak to how Alaska's                                                                    
production tax worked.                                                                                                          
Co-Chair Stedman  affirmed that the department  could return                                                                    
to  speak to  a rough  outline  of tax  structures in  other                                                                    
states.  He stated  that Alaska  was the  only state  in the                                                                    
union that  owned sub-surface rights  of the land.  He would                                                                    
be surprised if  there was another severance tax  in a state                                                                    
that did not own sub-surface rights.                                                                                            
Co-Chair von  Imhof thought  one of  the issues  of Alaska's                                                                    
uniqueness and  the construct of  the tax system was  due to                                                                    
the state's  uniqueness and higher costs.  She mentioned the                                                                    
ConocoPhillips form  10K, which had listed  the average cost                                                                    
per barrel in  various areas in the world  and showed Alaska                                                                    
was the highest.  She thought in order to  get businesses to                                                                    
come to the  state, the state's tax system must  be equal to                                                                    
Co-Chair Stedman  asked members  to refrain  from comparison                                                                    
and acknowledged the high-cost environment in the state.                                                                        
Co-Chair Stedman  asked to direct  conversation back  to the                                                                    
topic at hand.                                                                                                                  
9:47:13 AM                                                                                                                    
Senator  Wielechowski  lamented  confidentiality  laws  that                                                                    
prevented  the knowledge  of profits  per  barrel, rates  of                                                                    
return per barrel, and costs  per barrel. He emphasized that                                                                    
he  had been  asking for  the information  for 12  years. He                                                                    
asked if it  was possible to get the  information and stated                                                                    
he was willing to sign a confidentiality agreement.                                                                             
Co-Chair  Stedman  stated   that  the  legislature  received                                                                    
aggregated information  from consultants. The  committee had                                                                    
an inability  to look at  each individual  company. Multiple                                                                    
consultants  looked at  the data  and produced  figures, and                                                                    
thought the  state had  substantially more  information than                                                                    
previously  under a  gross  tax system.  He  thought it  was                                                                    
possible  to extrapolate  information  on  average from  the                                                                    
figures  that  were  available.  He  reiterated  that  state                                                                    
consultants were in communication  with the industry as well                                                                    
as the  Department of  Natural Resources  and DOR  to ensure                                                                    
that calculations were accurate.                                                                                                
Co-Chair Stedman thought the state  understood the range and                                                                    
magnitude  of  profitability  in  order to  set  policy.  He                                                                    
stated that there were audits  that would be discussed later                                                                    
in  the   meeting.  Severance   taxes  and   royalties  were                                                                    
constantly checked  for accuracy.  He emphasized  that while                                                                    
the data  was aggregated,  it was  not fictitious.  He would                                                                    
not sign  a confidentiality  agreement but would  set policy                                                                    
using publicly available information.                                                                                           
9:51:23 AM                                                                                                                    
Mr.  Stickel  showed slide  11,  "Production  Tax "Order  of                                                                    
Operations"   FY 2020,"  which showed  a table  highlighting                                                                    
production  tax  value  (PTV). He  explained  that  PTV  was                                                                    
simply the gross value  minus deductible lease expenditures.                                                                    
Aside  from  the  capital expenditure  immediate  deduction,                                                                    
there was  a measure of net  profit. He stated that  PTV was                                                                    
an important  number in tax  calculation. He  furthered that                                                                    
each company calculated  its own PTV based on  all its North                                                                    
Slope activity,  including all producing  fields as  well as                                                                    
any exploration  and development  costs. Each  company would                                                                    
have  a  unique  PTV,  and  a  unique  PTV  per  barrel.  He                                                                    
summarized that  PTV was  essentially the  tax base  for the                                                                    
production tax.  Any analysis of  productive tax  rates, PTV                                                                    
was used as the base.                                                                                                           
Co-Chair  Stedman wanted  the public  to recognize  that PTV                                                                    
was  the pile  of profit.  The amount  was gross  value less                                                                    
Mr.  Stickel  agreed, and  noted  that  the PTV  was  before                                                                    
deducting any taxes.                                                                                                            
Mr. Stickel  turned to slide  12, "Production Tax  "Order of                                                                    
Operations"    FY 2020," which  showed a  table highlighting                                                                    
gross  minimum  tax.  He  explained   that  there  were  two                                                                    
calculations  done side  by side:  a net  profits tax  and a                                                                    
minimum tax  that was a  tax floor calculation.  The minimum                                                                    
tax rate  when annual oil  prices were greater  than $25/bbl                                                                    
was 4  percent of gross  value. For  FY 20, the  minimum tax                                                                    
was  4 percent  multiplied  times the  gross  value of  $9.8                                                                    
billion, or about $394 million in aggregate.                                                                                    
Mr.  Stickel  noted that  there  were  two columns  for  the                                                                    
production  tax calculation;  one which  showed the  minimum                                                                    
tax, and one  showed the net tax. A company  took the higher                                                                    
of the minimum tax or the  net tax and apply credits against                                                                    
the amount.                                                                                                                     
Co-Chair  Stedman asked  if  Mr.  Stickel's explanation  was                                                                    
clear. He  had requested a  column format for  the inclusion                                                                    
of the information  in the Revenue Sources  Book. He thought                                                                    
there was a significant  difference in the calculations when                                                                    
there were low oil prices.                                                                                                      
9:55:26 AM                                                                                                                    
Mr. Stickel  discussed slide 13,  "Production Tax  "Order of                                                                    
Operations"    FY 2020," which  showed a  table highlighting                                                                    
net  tax calculation  and gross  value reduction  (GVR). The                                                                    
statutory net tax before credits  was 35 percent of the PTV,                                                                    
which  was  the net  profit  after  deducting the  costs  of                                                                    
operation. For companies with  qualifying new production, it                                                                    
was possible  to reduce  PTV for tax  calculation by  at the                                                                    
GVR process.  The GVR was  a new development  incentive that                                                                    
allowed  companies to  exclude  20 or  30  percent of  gross                                                                    
value from  its PTV  calculation. The  GVR was  an incentive                                                                    
that expired  after seven years  of production or  any three                                                                    
years at greater  than $70/bbl oil price. He  noted that the                                                                    
amount  was  relatively  small   amount  currently.  The  35                                                                    
percent tax rate was applied to  the PTV net of any GVR. For                                                                    
FY 20, the  statutory production tax before  credits came to                                                                    
approximately  $1.76  billion.  The  state  would  take  the                                                                    
higher of the minimum tax or the net tax.                                                                                       
Senator Micciche asked  for Mr. Stickel to  explain when the                                                                    
minimum tax would kick in versus the net tax.                                                                                   
Mr.  Stickel explained  that the  minimum tax  would prevail                                                                    
primarily in  times of low  oil prices,  as it was  based on                                                                    
gross  value instead  of  net value.  In  a situation  where                                                                    
price was low or costs were  high, a company may have a very                                                                    
small or  zero PTV; and it  would be subject to  the minimum                                                                    
tax and ensure  the state received some tax  revenue even at                                                                    
low oil prices.                                                                                                                 
Co-Chair Stedman stated  that the minimum tax  was 4 percent                                                                    
of the wellhead value.                                                                                                          
Mr. Stickel agreed.                                                                                                             
9:58:32 AM                                                                                                                    
Senator Wielechowski observed that  the GVR was $128 million                                                                    
on  the  slide.  He  asked  which  fields  or  projects  the                                                                    
reduction applied to.                                                                                                           
Mr.  Stickel  specified  that  the  $128  million  reduction                                                                    
represented an aggregated number  for those companies with a                                                                    
positive PTV that were operating GVR-eligible fields.                                                                           
Senator Wielechowski  wondered which fields  were considered                                                                    
GVR-eligible  and wondered  if  the  fields were  considered                                                                    
"new oil."                                                                                                                      
Mr. Stickel  answered in the  affirmative. He stated  that a                                                                    
field  qualified for  up to  seven years  of production.  He                                                                    
gave examples  of Point Thomson, Ugaruk,  Nakaitchuq as GVR-                                                                    
eligible fields.                                                                                                                
Co-Chair Stedman added that the  state had highly profitable                                                                    
old fields  as well  as marginal  new fields.  The mechanism                                                                    
was to ensure that new fields were not disadvantaged.                                                                           
Commissioner  Tangeman  answered   in  the  affirmative.  He                                                                    
thought  there  were  good  examples   of  the  gross  value                                                                    
reduction.  He mentioned  Prudhoe Bay  and TAPS.  He thought                                                                    
the  further east  and west  from the  trunk line,  the more                                                                    
costly it was to transport oil.                                                                                                 
10:01:01 AM                                                                                                                   
Mr. Stickel  referenced slide 14, "Production  Tax "Order of                                                                    
Operations"    FY 2020," which  showed a  table highlighting                                                                    
tax  credits   against  liability.   The  per-taxable-barrel                                                                    
credits were the  largest value of tax  credits and included                                                                    
two  different credits:  the 024  "i" and  "j" credits.  The                                                                    
024j credits were per-taxable barrel credits for non GVR-                                                                       
eligible  production on  a sliding  scale ranging  from zero                                                                    
when wellhead  values were over  $150/bbl, and up to  $8 per                                                                    
barrel wellhead  values were less  than $80/bbl.  At current                                                                    
and  upcoming forecast  prices, the  company would  generate                                                                    
the $8  per barrel credit. The  credit could not be  used to                                                                    
reduce  the tax  floor  of the  minimum  tax, and  companies                                                                    
claiming the credit could not pay below the minimum tax.                                                                        
Mr.  Stickel continued  to address  slide  14. He  explained                                                                    
that  the   024i  credit  was  a   credit  for  GVR-eligible                                                                    
production, which  were newer fields. The  fields received a                                                                    
flat $5 per barrel of  taxable production credit. The credit                                                                    
could be  used to reduce  tax below  the minimum tax  if the                                                                    
company  did not  take the  sliding scale  credit. Any  per-                                                                    
barrel  credits used  in  the year  generated  could not  be                                                                    
forwarded or transferred;  which was also true  of the small                                                                    
producer credit. He  used the example of FY 20,  which had a                                                                    
little  over  $1.3  billion  in  per-taxable-barrel  credits                                                                    
generated; and  there was  a little  over $1.2  billion were                                                                    
actually  applied  in  the tax  calculation.  Other  credits                                                                    
included small producer  credits as well as  some prior year                                                                    
Senator Wielechowski asked  if there was a  breakdown of how                                                                    
many of the per-taxable-barrel credits 024j versus 024i.                                                                        
Mr.  Stickel stated  that the  credits  were aggregated  for                                                                    
Senator Wielechowski asked for a breakdown of the credits.                                                                      
Co-Chair  Stedman  estimated  that   there  was  about  $140                                                                    
million on the $5 024i  credit, using a percentage of barrel                                                                    
split that  was in the  Revenue Sources  book for FY  20. He                                                                    
thought most of the amount was of the $8 024j credit.                                                                           
Senator  Wielechowski asked  if it  was possible  to have  a                                                                    
negative tax rate on a field using the 024i tax credit.                                                                         
Mr. Stickel stated that a  company may use the $5/bbl credit                                                                    
to bring the tax  below a minimum tax if it  did not use the                                                                    
sliding scale  credit. The  tax due would  not be  less than                                                                    
Co-Chair  Stedman stated  that  a small  producer could  not                                                                    
apply a  severance tax  to a negative  number, zero  was the                                                                    
Mr. Stickel  stated if not taking  the sliding-scale credit,                                                                    
a company could  use credits to reduce its tax  down to zero                                                                    
but not  below. For a company  taking sliding-scale credits,                                                                    
it could  use credits to reduce  to the minimum tax  but not                                                                    
10:06:30 AM                                                                                                                   
Senator  Wielechowski thought  a  big producer  with a  very                                                                    
expensive field  could also  reduce to  the minimum  tax. He                                                                    
asked if  a company could drive  its tax rate down  to zero,                                                                    
and then use any amount below zero as a carry-forward.                                                                          
Mr. Stickel answered in the  negative. If per-barrel taxable                                                                    
credits were not  applied in the year they  were earned, the                                                                    
credits were forfeit.                                                                                                           
Co-Chair  Stedman  recalled  that previous  legislation  had                                                                    
stripped some credits and further hardened the tax floor.                                                                       
Senator  Shower asked  federal  and  state interaction,  and                                                                    
assumed the slide showed just state taxes.                                                                                      
Mr. Stickel answered "yes."                                                                                                     
Senator  Wielechowski recalled  a provision  that allowed  a                                                                    
reduction in  the tax rate  or GVR allowance on  fields that                                                                    
had royalty  higher than 12.5  percent. He wondered  how the                                                                    
magnitude was affecting the state's production tax.                                                                             
Co-Chair  Stedman  asked  Mr.  Stickel  to  explain  the  20                                                                    
percent and 30 percent GVR.                                                                                                     
Mr. Stickel stated that there  were two different categories                                                                    
of   GVR,  which   was   subtracted   from  production   tax                                                                    
calculations. A qualifying new field  would get a 20 percent                                                                    
GVR, and  20 percent  of the gross  value was  excluded from                                                                    
the production tax calculation. A  higher 30 percent GVR was                                                                    
available  if  the unit  was  comprised  of entirely  state-                                                                    
issued  leases   of  greater  than  12.5   percent  royalty.                                                                    
Currently no fields met the definition.                                                                                         
10:09:17 AM                                                                                                                   
Mr. Stickel  spoke to  slide 15,  "Production Tax  "Order of                                                                    
Operations"    FY 2020," which  showed a  table highlighting                                                                    
adjustments and total tax paid.  There were some other items                                                                    
that  were  added  or subtracted  from  the  calculation  to                                                                    
arrive at the  total production tax revenue  received by the                                                                    
state's general  fund. There was  $43 million  in additional                                                                    
revenue for  FY 20 that  the department was looking  at. The                                                                    
funds represented  any prior year  tax payments  or refunds,                                                                    
any  revenue   from  the  private  landowner   royalty  tax,                                                                    
hazardous release  surcharge, revenue  from North  Slope gas                                                                    
production, and  total Cook Inlet  tax liability.  The items                                                                    
added  up to  about $43  million. The  total production  tax                                                                    
revenue for FY 20 was about $524.7.                                                                                             
Co-Chair  Stedman  asked   about  the  non-deductible  carry                                                                    
forward listed on the bottom of the slide.                                                                                      
Mr. Stickel  noted that  for FY 20,  there was  an estimated                                                                    
$524.7 million in  cash into the GF from  the production tax                                                                    
system;   and   an   additional  $800   million   of   lease                                                                    
expenditures  (largely for  explorers  and developers)  that                                                                    
would  be carried  forward and  potentially  used to  offset                                                                    
future years' production tax liabilities.                                                                                       
Co-Chair  Stedman thought  that  the credits  would be  used                                                                    
over time until they were timed out as referenced earlier.                                                                      
Mr. Stickel answered in the affirmative.                                                                                        
Co-Chair Stedman asked Mr. Stickel  to remind the public how                                                                    
long the  $800 million  of carry-forward would  flow forward                                                                    
and  phase out  if the  company did  not have  production to                                                                    
deduct the expenditure.                                                                                                         
Mr. Stickel stated that depending  upon production status of                                                                    
the  property where  the lease  expenditures were  incurred,                                                                    
the carry-forwards  would begin to decrease  by one-tenth of                                                                    
its value  each year after  the 8th  or 11th year  after the                                                                    
expenses were incurred.                                                                                                         
10:11:57 AM                                                                                                                   
Mr. Stickel showed  slide 16, "Order of Operations    5 year                                                                    
comparison,"  which  showed  a  table  showing  an  analysis                                                                    
showing a five  year spread. The table was  an expanded view                                                                    
of the previous  slides' analysis to show  five years. There                                                                    
was two  years of history,  the current year, and  two years                                                                    
of forecast represented.  He pointed out that in  FY 17, the                                                                    
state received about $160 million  in production tax for the                                                                    
North Slope, on a PTV of about $2.1 billion.                                                                                    
Mr. Stickel reported  that in the current  year, around $700                                                                    
million in production  tax revenue was expected on  a PTV of                                                                    
around $6 billion.  He remarked that FY  17 was interesting,                                                                    
as all  taxpayers had paid the  minimum tax or below  due to                                                                    
the low price of oil. The  total tax after credits was below                                                                    
the  minimum   tax  floor   based  on   companies'  specific                                                                    
calculations. Some  companies paid  at the minimum  tax, and                                                                    
some companies were  able to take the tax  below the minimum                                                                    
to zero.  He noted that from  FY 18 and beyond,  there was a                                                                    
mix where some  companies were paying above  the minimum tax                                                                    
in each year,  and the total tax after  credits exceeded the                                                                    
minimum tax.                                                                                                                    
Mr. Stickel continued to address  slide 16. He addressed the                                                                    
total non-deductible  lease expenditures were listed  at the                                                                    
bottom. He  commented on increased  spending on  new fields,                                                                    
with  investments in  major fields  that would  yield future                                                                    
production.  For FY  17 through  FY 19,  there was  a little                                                                    
more than $300  million per year of  lease expenditures that                                                                    
were not  deductible against  the production  tax liability.                                                                    
In FY  20, lease expenditures  would be about  $800 million;                                                                    
and in  FY 21 the amount  was forecast to increase  to about                                                                    
$1.4 billion.  Prior to 2018, the  excess lease expenditures                                                                    
turned into a  tax credit, and beginning  with calendar year                                                                    
2018   the   expenditures   were   a   carry-forward   lease                                                                    
Senator  Wielechowski asked  about total  tax after  credits                                                                    
and asked  about the significance  of the line  below called                                                                    
"other items/adjustments."                                                                                                      
Mr.  Stickel  went back  to  slide  15, which  aggregated  a                                                                    
number  of different  items that  were not  included in  the                                                                    
income  statement to  net out  to the  total production  tax                                                                    
revenue  forecast.   The  items  included  prior   year  tax                                                                    
payments, refunds  that affected  the general  fund, private                                                                    
landowner royal  taxes, hazardous release  surcharges, North                                                                    
Slope gas taxes, and any Cook Inlet tax liability.                                                                              
Co-Chair Stedman had asked the  department to show any other                                                                    
deductions to give further clarity to the budget.                                                                               
10:16:14 AM                                                                                                                   
Senator  Wielechowski asked  about slide  15, and  the $43.4                                                                    
million  in 'Other  items/adjustments' listed.  He asked  if                                                                    
the amount was considered part of the production tax.                                                                           
Mr.  Stickel stated  that the  items were  all parts  of the                                                                    
production  tax   and  were  aggregated  in   one  line  for                                                                    
presentation purposes.                                                                                                          
Senator Wielechowski  requested a list of  what was included                                                                    
in the aggregated number.                                                                                                       
Senator Wielechowski  asked for a list  that encompassed all                                                                    
Mr. Stickel stated  that the numbers were  aggregated to try                                                                    
and condense the table as much as possible.                                                                                     
Co-Chair Stedman had wanted the table on one page.                                                                              
Senator  Wielechowski  asked  about effective  tax  rate  on                                                                    
slide  15. He  asked if  the amount  was based  off PTV,  or                                                                    
taxable barrels.                                                                                                                
Mr.  Stickel  stated  that when  doing  effective  tax  rate                                                                    
analysis,  he  considered  PTV  to  be  the  tax  base.  The                                                                    
effective tax  rate for  the North  Slope production  was in                                                                    
the 8  percent to 9 percent  range for FY 20.  He noted that                                                                    
there  was  a  slide  in the  addendum  that  addressed  the                                                                    
Mr. Tangeman showed slide 17, "Thank you."                                                                                      
Mr.  Stickel   showed  slide   18,  "Addendum   -  Follow-up                                                                    
Questions   from  3-18-19   Senate   Finance  Hearing."   He                                                                    
explained  that  the  main  body  of  the  presentation  was                                                                    
concluded,  but there  were responses  to several  follow-up                                                                    
questions  from  a  previous   committee  hearing  when  the                                                                    
commissioner had presented the revenue forecast.                                                                                
10:19:19 AM                                                                                                                   
Mr.  Stickel looked  at slide  20,  "Follow-ups from  Senate                                                                    
Finance 3-18-19":                                                                                                               
     ?Provide FY20 effective tax rate                                                                                           
     ?At $66 ANS, estimated average effective production                                                                        
     tax rate for non-GVR oil is 8%.                                                                                            
Mr.  Stickel  stated  that  the slide  was  in  response  to                                                                    
Senator  Wielechowski's  question  about the  effective  tax                                                                    
rate.  The  effective  tax  rate   was  estimated  based  on                                                                    
aggregated  data for  non-GVR-eligible  production; and  was                                                                    
the tax  after per-barrel credits divided  by the production                                                                    
tax value  in the year. There  was a chart included  to show                                                                    
how the effective tax rate changed with different prices.                                                                       
Co-Chair  Stedman  reminded  that  as  oil  prices  went  up                                                                    
precipitously, so did capital  expenditures and other market                                                                    
forces.  He thought  the chart  depicted  general trends  of                                                                    
future price changes.                                                                                                           
Mr. Stickel agreed.                                                                                                             
Senator Micciche  asked if  the effective  tax rate  and the                                                                    
state  government  take  for oil  production  was  the  same                                                                    
Mr.  Stickel answered  in the  negative.  The effective  tax                                                                    
rate was  only the  production tax itself  and the  share of                                                                    
production tax value. Total government  revenue from the oil                                                                    
industry would  include corporate income tax,  property tax,                                                                    
and royalties.                                                                                                                  
Mr.  Stickel addressed  slide  21,  "Follow-ups from  Senate                                                                    
Finance 3-18-19":                                                                                                               
     ?Provide current Point Thomson feeder pipeline tariff                                                                      
     ?  As of  1/1/2019, oil  produced in  Point Thomson  is                                                                    
     subject to the following feeder pipeline tariffs                                                                           
          o $19.490/barrel from the Point Thomson Pipeline*                                                                     
         o $1.720/barrel from the Badami Pipeline                                                                               
          o $1.300/barrel from the Endicott          Badami                                                                     
          o Total feeder tariff charge of $22.510/barrel                                                                        
          for moving                                                                                                            
          Point Thomson production from the unit boundary                                                                       
          to the Trans-Alaska Pipeline (TAPS)                                                                                   
     * This  Point Thomson  Pipeline tariff is  currently in                                                                    
     dispute,  the  value  presented  here  is  the  initial                                                                    
     Federal  Energy  Regulatory  Commission  (FERC)  filing                                                                    
     that has been disputed                                                                                                     
Mr.  Stickel  showed  slide   22,  "Follow-ups  from  Senate                                                                    
Finance 3-18-19":                                                                                                               
     ?Provide  additional  clarification  of  when  pipeline                                                                    
    costs are included in netback vs lease expenditures                                                                         
     ? Distinction  is "point of production"    specifically                                                                    
    where processed crude passes through the LACT meter                                                                         
     ?  "Gathering  lines" bring  unprocessed  oil  / gas  /                                                                    
     water to  a production facility (upstream  of "point of                                                                    
          o Deductible as lease expenditures in production                                                                      
          tax value calculation                                                                                                 
     ?  "Feeder pipelines"  bring  processed  crude to  TAPS                                                                    
     (downstream of "point of production")                                                                                      
          o Tariffs are regulated by RCA or FERC                                                                                
          o Deductible as netback costs in gross value                                                                          
     LACT = Lease Automated  Custody Transfer; TAPS = Trans-                                                                    
     Alaska Pipeline System; RCA  = Regulatory Commission of                                                                    
     FERC = Federal Energy Regulatory Commission                                                                                
10:22:36 AM                                                                                                                   
Mr.  Stickel addressed  slide  23,  "Follow-ups from  Senate                                                                    
Finance 3-18-19":                                                                                                               
     ?Provide   estimated  amount   of  credits   that  were                                                                    
     purchased and later adjusted on audit                                                                                      
     ?  For all  of the  audits performed  through tax  year                                                                    
     2014, the certificates have already been cashed out.                                                                       
     ? A  thorough due  diligence review has  been completed                                                                    
     on all 2015  2017 credit applications.                                                                                     
COLLEEN  GLOVER,  DIRECTOR,   TAX  DIVISION,  DEPARTMENT  OF                                                                    
REVENUE (via  teleconference), explained that the  slide was                                                                    
a snapshot  of the  credits that were  audited for  the 2006                                                                    
and  2014 tax  years.  The amount  that  was disallowed  was                                                                    
about  $67 million,  about  $5 million  of  which upheld  in                                                                    
audit. The  net difference  of $61  million was  either paid                                                                    
back to  the state, or other  credits were used to  apply to                                                                    
the amount.                                                                                                                     
Mr.  Stickel referenced  slide 24,  "Follow-ups from  Senate                                                                    
Finance 3-18-19":                                                                                                               
      Provide   additional   clarification   of   difference                                                                    
     between capital (QCE) credits and per-barrel credits                                                                       
     ?Two main differences: incentive and monetization                                                                          
     ?Incentive:  QCE  credits  provided  an  incentive  for                                                                    
     spending; per-barrel  credits provide an  incentive for                                                                    
     ? Monetization:  QCE credits  could be  applied against                                                                    
     tax  liability, carried  forward, transferred,  or sold                                                                    
     to  the  state; per-barrel  credits  can  only be  used                                                                    
     against liability  in the year earned,  and are limited                                                                    
     by  a company's  liability before  credits and  minimum                                                                    
     tax floor                                                                                                                  
     QCE = Qualified Capital Expenditure                                                                                        
Mr.  Stickel noted  that  capital  expenditure credits  were                                                                    
included in  the previous tax  regime prior to  enactment of                                                                    
SB  21 [oil  and gas  tax legislation  passed in  2013]; and                                                                    
per-taxable-barrel credits were currently used.                                                                                 
Co-Chair Stedman  asked about the clarification  slides that                                                                    
addressed  questions  form   the  committee.  He  encouraged                                                                    
members  to work  with  the department  if  more detail  was                                                                    
10:26:16 AM                                                                                                                   
The meeting was adjourned at 10:26 a.m.                                                                                         

Document Name Date/Time Subjects
032219 2 OGP Credit Audit Update.DOR.3.21.2019.pdf SFIN 3/22/2019 9:00:00 AM
Credit Audit Update
032219 Order of Operations-DOR.3.21.2019.pdf SFIN 3/22/2019 9:00:00 AM
Severance Tax