Legislature(2021 - 2022)SENATE FINANCE 532

02/12/2021 09:00 AM FINANCE

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as

Audio Topic
09:01:51 AM Start
09:03:25 AM Oil and Gas Severance Tax - Order of Operations
10:23:11 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Oil & Gas Severance Tax - Order of Operations TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                     February 12, 2021                                                                                          
                         9:01 a.m.                                                                                              
                                                                                                                                
9:01:51 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 9:01 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Click Bishop, Co-Chair                                                                                                  
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Lyman Hoffman (via teleconference)                                                                                      
Senator Donny Olson                                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator David Wilson                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Natasha von Imhof                                                                                                       
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Dan Stickel,  Chief Economist, Economic Research  Group, Tax                                                                    
Division, Department of Revenue.                                                                                                
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
^OIL AND GAS SEVERANCE TAX - ORDER OF OPERATIONS                                                                              
                                                                                                                                
9:03:25 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman discussed  the  topic of  the meeting  and                                                                    
emphasized that Alaska  had one of the most  complex oil tax                                                                    
structures on the planet. He  mentioned that some considered                                                                    
the system to be overly  complex and led to difficulties and                                                                    
unknown  results. He  informed that  the state  had multiple                                                                    
oil  basins, but  the focus  of the  day's meeting  would be                                                                    
mostly on  the North Slope.  He relayed that  corporate data                                                                    
was  consolidated, which  made  it  challenging in  numerous                                                                    
areas.  He  stressed  that each  company  was  different  in                                                                    
ownership, corporate structure, and profitability.                                                                              
                                                                                                                                
9:04:16 AM                                                                                                                    
                                                                                                                                
DAN STICKEL,  CHIEF ECONOMIST, ECONOMIC RESEARCH  GROUP, TAX                                                                    
DIVISION,  DEPARTMENT   OF  REVENUE   (via  teleconference),                                                                    
discussed    the    PowerPoint,   "Order    of    Operations                                                                    
Presentation; Senate  Finance Committee" (copy on  file). He                                                                    
expressed that the  purpose of the presentation  was to give                                                                    
a  high-level  overview  of  how the  state's  oil  and  gas                                                                    
production tax worked for the North Slope.                                                                                      
                                                                                                                                
Mr. Stickel looked at slide 2, "Acronyms":                                                                                      
                                                                                                                                
     ANS-Alaska North Slope                                                                                                     
     ANWR-Arctic National Wildlife Refuge                                                                                       
     Avg-Average                                                                                                                
     Bbl-Barrel                                                                                                                 
     CBRF-Constitutional Budget Reserve Fund                                                                                    
     CIT-Corporate Income Tax                                                                                                   
     DOR-Department of Revenue                                                                                                  
     FY-Fiscal Year                                                                                                             
     GVPP-Gross Value at Point of Production                                                                                    
     GVR-Gross Value Reduction                                                                                                  
     NPR-A National Petroleum Reserve Alaska                                                                                    
     OCS-Outer Continental Shelf                                                                                                
     PTV-Production Tax Value                                                                                                   
     SB21-Senate Bill 21, passed in 2013                                                                                        
     TAPS-Trans Alaska Pipeline System                                                                                          
     Thousand-Thousands                                                                                                         
                                                                                                                                
Mr. Stickel pointed to slide 3, "Agenda":                                                                                       
                                                                                                                                
     ?Oil and Gas Revenue Sources                                                                                               
          o How production tax fits in                                                                                          
          o FY 2019 FY 2023 oil and gas revenues                                                                                
     ?Production Tax Calculation "Order of Operations"                                                                          
          o Detailed walk through of each step of tax                                                                           
          calculation                                                                                                           
          o Defining commonly used terms                                                                                        
          o Focus on North Slope oil                                                                                            
          o FY 2019 FY 2023 comparison                                                                                          
                                                                                                                                
Mr. Stickel reiterated Co-Chair  Stedman's point that Alaska                                                                    
had one  of the  most complex  oil and  gas tax  regimes. He                                                                    
asserted  that the  presentation was  not about  policy, but                                                                    
rather how the system worked.                                                                                                   
                                                                                                                                
Mr. Stickel looked at slide 4, "Overview":                                                                                      
                                                                                                                                
     ?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 Fall 2020 Revenue                                                                         
     Sources Book and other revenue forecasts.                                                                                  
     ?This presentation is solely for illustrative general                                                                      
     purposes.                                                                                                                  
     ?Not an official statement as to any particular tax                                                                        
     liability, interpretation, or treatment.                                                                                   
     ?Not tax advice or guidance.                                                                                               
     ?Some numbers may differ due to rounding.                                                                                  
                                                                                                                                
Mr.  Stickel  discussed  slide   5,  "Oil  and  Gas  Revenue                                                                    
Sources":                                                                                                                       
                                                                                                                                
     ?Royalty based on gross value of production                                                                                
          o Plus bonuses, rents, and interest                                                                                   
          o Paid to Owner of the land: State, Federal, or                                                                       
          Private                                                                                                               
          o Usually 12.5 percent or 16.67 percent in                                                                            
          Alaska, but rates vary                                                                                                
                                                                                                                                
     ?Corporate Income Tax based on net income                                                                                  
          o Paid to State (9.4 percent top rate)                                                                                
          o Paid to Federal (21 percent top rate, used to                                                                       
          be 35 percent)                                                                                                        
          o Only C Corporations* pay this tax                                                                                   
                                                                                                                                
      Property Tax based on value of oil and gas property                                                                       
          o Paid to State (2 percent of assessed value or                                                                       
          "20 mills")                                                                                                           
          o Paid to Municipalities credit offsets state tax                                                                     
          paid                                                                                                                  
                                                                                                                                
     ?Production Tax based on "production tax value"                                                                            
          o Paid to State calculation to follow                                                                                 
                                                                                                                                
Mr. Stickel pointed out that  corporate income tax was based                                                                    
on  worldwide  income that  was  apportioned  to Alaska  and                                                                    
applied to many  but not all the companies  operating in the                                                                    
state. He explained  that the production tax  applied to all                                                                    
production in  the state, regardless  of landowner,  and any                                                                    
production  within the  state's three-mile  limit. He  noted                                                                    
there would be  a slide towards the end  of the presentation                                                                    
that  would  address  how   different  taxes  and  royalties                                                                    
applied to each different category of land in the state.                                                                        
                                                                                                                                
9:08:45 AM                                                                                                                    
                                                                                                                                
Senator Wielechowski made  note of the 9.4  percent top rate                                                                    
for corporate income  tax listed on the slide.  He asked for                                                                    
the total corporate income tax for the North Slope.                                                                             
                                                                                                                                
Mr. Stickel  replied that the  9.4 percent was  the marginal                                                                    
tax  rate. He  discussed the  effective tax  rate and  cited                                                                    
that some  companies paid  more than  9.4 percent,  and some                                                                    
companies paid  less. In aggregate,  the average  across the                                                                    
North Slope was slightly less than 9.4 percent.                                                                                 
                                                                                                                                
Senator  Wielechowski asked  if the  tax rate  signified 9.4                                                                    
percent of gross profits.                                                                                                       
                                                                                                                                
Mr. Stickel explained that the  9.4 percent corporate income                                                                    
tax  marginal rate  applied to  Alaska's taxable  income. He                                                                    
continued  that  income  was  determined  by  looking  at  a                                                                    
company's  modified worldwide  income  and apportioning  the                                                                    
amount  to Alaska  based on  a factor  that was  the state's                                                                    
share of  production, property, and  sales and  tariffs. The                                                                    
items in Alaska were compared  to the worldwide figures, and                                                                    
the  worldwide  income  was  apportioned  to  the  state  to                                                                    
determine Alaska taxable income.                                                                                                
                                                                                                                                
Senator  Wielechowski  asked  if   the  system  allowed  for                                                                    
corporations  to write  off expenses  that occurred  outside                                                                    
the state.                                                                                                                      
                                                                                                                                
Mr. Stickel explained that  determining worldwide net income                                                                    
of  a company  would  incorporate expenses  anywhere in  the                                                                    
world.  Similarly,  Alaska  expenses would  be  incorporated                                                                    
into the  net income  determined for corporate  income taxes                                                                    
at a federal level and in other states.                                                                                         
                                                                                                                                
Senator  Wielechowski  asked  if  there had  been  any  past                                                                    
analysis of  how much  it had  cost or  earned the  state to                                                                    
change from separate accounting to worldwide apportionment.                                                                     
                                                                                                                                
Co-Chair  Stedman  thought Senator  Wielechowski's  question                                                                    
had  two parts.  He recalled  that the  current process  had                                                                    
been  in place  since the  Hammond Administration.  He asked                                                                    
Mr. Stickel  to define  separate accounting  and how  it was                                                                    
different than proportional accounting.                                                                                         
                                                                                                                                
9:12:12 AM                                                                                                                    
                                                                                                                                
Mr. Stickel explained that there  were two methodologies for                                                                    
corporate income tax that had been  used in the state in the                                                                    
past.  The  methodology  of apportionable  income  currently                                                                    
used in Alaska was widely  used across the United States for                                                                    
corporate  income  taxes  in   various  states.  The  method                                                                    
started   with    federal   taxable   income    (with   some                                                                    
modifications) and  then used the federal  income tax return                                                                    
as  a starting  point to  determine a  state taxable  income                                                                    
using apportionment factors. He  continued that in the past,                                                                    
Alaska had used what is  known as separate accounting, which                                                                    
attempted to  account for revenues and  expenditures just in                                                                    
the state.                                                                                                                      
                                                                                                                                
Mr. Stickel  affirmed that  the state  had done  analysis of                                                                    
the  potential  impacts  of  apportionment  versus  separate                                                                    
accounting but did not have the information at hand.                                                                            
                                                                                                                                
Co-Chair  Stedman thought  the committee  would address  the                                                                    
subject at a later time if  there was a corporate income tax                                                                    
bill for the committee's consideration.                                                                                         
                                                                                                                                
Senator  Wielechowski requested  the information  pertaining                                                                    
to   the  analysis   between  worldwide   apportionment  and                                                                    
separate accounting,  and what  it may  have cost  or earned                                                                    
the state since the change in practice.                                                                                         
                                                                                                                                
Co-Chair Stedman asked Mr. Stickel  to provide the requested                                                                    
information.  He  thought it  might  be  helpful to  clarify                                                                    
about corporate  income tax deductions and  how amortization                                                                    
or  depreciation  potentially  affected the  calculation  of                                                                    
production tax.                                                                                                                 
                                                                                                                                
Mr.  Stickel offered  to provide  further  information as  a                                                                    
response  or   as  a   future  presentation.   He  discussed                                                                    
production  tax expenditures  and  noted the  state did  not                                                                    
have  depreciation of  production  tax. The  state did  have                                                                    
depreciation of  corporate income  tax, and the  topic would                                                                    
be addressed in upcoming slides.                                                                                                
                                                                                                                                
Co-Chair  Stedman clarified  that  both  production tax  and                                                                    
corporate   income  tax   deducted  operating   and  capital                                                                    
expenditures.                                                                                                                   
                                                                                                                                
Mr. Stickel agreed.                                                                                                             
                                                                                                                                
Co-Chair Stedman thought  it was nice to  keep things clear.                                                                    
He  thought  it was  important  to  establish that  the  tax                                                                    
structures were different and for different purposes.                                                                           
                                                                                                                                
Senator Wilson  deferred his  question regarding  oil income                                                                    
tax structure.                                                                                                                  
                                                                                                                                
Co-Chair  Stedman thought  there would  be more  meetings on                                                                    
the topic,  and there  was a potential  bill coming.  He had                                                                    
asked departments to prepare.                                                                                                   
                                                                                                                                
9:16:05 AM                                                                                                                    
                                                                                                                                
Senator  Wielechowski observed  that the  slide pointed  out                                                                    
that  only  C corporations  paid  corporate  income tax.  He                                                                    
asked how  many S corporations (or  non-C corporations) were                                                                    
currently on the  North Slope, and how much  tax revenue the                                                                    
state was losing or not collecting as a result.                                                                                 
                                                                                                                                
Co-Chair Stedman  thought a  separate discussion  was needed                                                                    
to address Senator Wielechowski's  entire question. He asked                                                                    
Mr.  Stickel to  discuss the  number of  different types  of                                                                    
corporations and  the aggregate  dollar balance  between the                                                                    
types.                                                                                                                          
                                                                                                                                
Mr. Stickel thought the question  of the relative proportion                                                                    
of  C corporations  and  non-C  corporations was  important,                                                                    
because the corporate income tax  applied to C corporations.                                                                    
There were other types of  corporations that were considered                                                                    
pass-through   entities  for   tax  purposes,   whereby  the                                                                    
entities  did not  pay a  corporate tax  but instead  passed                                                                    
through income  to the individuals.  He used a  subchapter S                                                                    
corporation  and  a partnership  as  two  examples of  pass-                                                                    
through entities, both of which  were not taxed at the state                                                                    
level as Alaska did not have a personal income tax.                                                                             
                                                                                                                                
Mr.  Stickel did  not have  available numbers  of individual                                                                    
companies.  He  shared  that for  FY  22,  approximately  70                                                                    
percent  of   production  was  estimated  to   come  from  C                                                                    
corporations, while  approximately 30 percent  of production                                                                    
was estimated to come from  non-C corporations (pass through                                                                    
entities).                                                                                                                      
                                                                                                                                
Co-Chair  Stedman  asked  for Mr.  Stickel  to  put  further                                                                    
analysis  into addressing  Senator Wielechowski's  question,                                                                    
so  as  to  discuss  the  topic in  more  detail  at  future                                                                    
meetings.                                                                                                                       
                                                                                                                                
Mr.  Stickel  offered that  he  would  be happy  to  provide                                                                    
additional analysis if there was  an associated bill to come                                                                    
before the committee.                                                                                                           
                                                                                                                                
Co-Chair Stedman was  sure that the committee  would also be                                                                    
considering  a look-back  provision  on separate  accounting                                                                    
versus apportionment accounting.                                                                                                
                                                                                                                                
Senator Wielechowski was  not aware of whether  a bill would                                                                    
come before the  committee and requested to  see analysis of                                                                    
C corporations versus non-C corporations regardless.                                                                            
                                                                                                                                
Co-Chair Stedman  did not see  an issue with  requesting the                                                                    
information.                                                                                                                    
                                                                                                                                
Co-Chair Stedman explained that  the corporate tax issue was                                                                    
one  of  four component  parts  in  examining the  split  of                                                                    
sharing  the  profits  with  the  state.  He  stressed  that                                                                    
changes  to  any  of  the   four  components  would  make  a                                                                    
difference  in  the  balance of  the  fiscal  structure.  He                                                                    
observed that  there had been significant  changes in recent                                                                    
years,  and  it was  important  for  the committee  to  stay                                                                    
abreast of the magnitude and direction of movements.                                                                            
                                                                                                                                
9:21:03 AM                                                                                                                    
                                                                                                                                
Mr.  Stickel  looked  at  slide  6,  "Oil  and  Gas  Revenue                                                                    
Sources: Five  Year Comparison of State  Revenue." He stated                                                                    
that the  slide showed all  sources of state revenue  for FY                                                                    
19  through FY  23; the  oil price;  and ANS  oil production                                                                    
that went into the numbers.  He stated that the property tax                                                                    
on  the  slide  represented   only  the  state's  share.  He                                                                    
remarked that there were several  hundred million dollars of                                                                    
oil and gas property tax  that accrued to municipalities. He                                                                    
noted that the  corporate income tax only applied  to the C-                                                                    
corporations  only.   He  remarked  that  there   were  some                                                                    
temporary impacts  for FY 20  - 22 that  had to do  with low                                                                    
oil prices  and federal  law changes as  was discussed  in a                                                                    
previous  meeting related  to the  fall  forecast. He  noted                                                                    
that  the  production tax  would  be  addressed in  upcoming                                                                    
slides. He pointed out that  the royalties included bonuses,                                                                    
rent,  and  related  interest.  He  noted  that  there  were                                                                    
settlements   to  the   CBR  fund,   which  were   based  on                                                                    
assessments  or disputes  regarding  past years'  production                                                                    
tax  royalties, or  other  oil, gas,  or  mineral taxes.  He                                                                    
stated  that, under  the  state  constitution, the  revenues                                                                    
from  settling the  revenues or  disputes were  deposited to                                                                    
the Federal Reserve  Fund. He stated that 50  percent of any                                                                    
shared royalties from  the NPRA were shared  with the state,                                                                    
but  had special  descriptions around  its  usage. He  noted                                                                    
that there  would be a  bigger piece of the  revenue picture                                                                    
beyond the time  horizon of the slide, as the  line item was                                                                    
forecasted  to grow  $94  million by  FY  30 with  increased                                                                    
production in NPRA.                                                                                                             
                                                                                                                                
Senator Wilson queried the impact  of Covid-19 on the Alaska                                                                    
oil  and  gas  industry,   particularly  as  it  related  to                                                                    
production and  federal regulatory  changes, and  its impact                                                                    
on the forecast over the upcoming four years.                                                                                   
                                                                                                                                
Mr. Stickel replied  that the impact of Covid-19  on the oil                                                                    
and gas industry  was very significant in FY  20. He pointed                                                                    
out that  there was an  unprecedented drop in oil  price. He                                                                    
noted that  ANS oil prices  fell below  zero for one  day in                                                                    
April  2020. He  stressed that  the combination  of the  low                                                                    
price  and the  difficulty  in figuring  out the  operations                                                                    
through  the Covid-19  situation  led  several companies  to                                                                    
suspend activities and reduce  production. He remarked that,                                                                    
since then, prices and production had rebounded.                                                                                
                                                                                                                                
Senator  Wilson  asked  about any  federal  changes  in  the                                                                    
corporate  tax structure  that  may  have impacted  Alaska's                                                                    
future financial standing in some of the companies.                                                                             
                                                                                                                                
Mr.  Stickel  replied that  the  CARES  Act, passed  at  the                                                                    
federal  level,  included  some  changes  to  the  corporate                                                                    
income tax.  He explained that the  change allowed companies                                                                    
to tax  net operating losses  in calendar years  2018, 2019,                                                                    
or 2020,  and carry those losses  back up to five  years and                                                                    
obtain refunds  for prior  year paid  taxes. He  stated that                                                                    
the  CARES  Act  refunds  were  incorporated  into  Alaska's                                                                    
corporate income tax forecast for FY 21 and FY 22.                                                                              
                                                                                                                                
9:25:55 AM                                                                                                                    
                                                                                                                                
Senator  Wielechowski wondered  whether  the companies  were                                                                    
allowed to  write-off their  net losses  on their  state and                                                                    
federal taxes in the CARES Act refunds.                                                                                         
                                                                                                                                
Mr. Stickel  replied that  he may  not fully  understand the                                                                    
question, but  stated that any  net operating loss  would be                                                                    
based on worldwide net income as a portion to Alaska.                                                                           
                                                                                                                                
Senator  Wielechowski surmised  that  a company  with a  net                                                                    
operating loss  had the  ability to write  that loss  off on                                                                    
the federal taxes, as a result  of the CARES Act. He further                                                                    
explained that  Alaska's state law  was tied to  the federal                                                                    
taxes, so  the company could  do an additional  write-off on                                                                    
their state taxes.                                                                                                              
                                                                                                                                
Mr.  Stickel  explained that  a  company  would be  able  to                                                                    
potentially claim refunds  for prior year taxes  at both the                                                                    
state and  federal level  if a company  had a  net operating                                                                    
loss in one of the three years.                                                                                                 
                                                                                                                                
Senator  Wielechowski wondered  whether the  state had  been                                                                    
"writing checks"  to the  companies for  refunds of  the net                                                                    
operating  losses. He  also  asked how  much  the state  had                                                                    
issued for the net operating losses.                                                                                            
                                                                                                                                
Mr. Stickel agreed to provide that information.                                                                                 
                                                                                                                                
Co-Chair  Stedman   recalled  that  sometimes   checks  were                                                                    
issued, and other times it  was a deduction on paperwork. He                                                                    
wondered whether  there was a  $60 million swing in  the oil                                                                    
and gas basin.                                                                                                                  
                                                                                                                                
Mr. Stickel  replied in the  affirmative. He  explained that                                                                    
the  oil and  gas  corporate  income tax  had  an impact  of                                                                    
approximately  $6.6 million  for  FY  21, and  approximately                                                                    
$62.9 million FY  22. The net impact over the  two years was                                                                    
approximately $70  million. He  stated that the  $20 million                                                                    
was for FY 22  was the net result of what  would have been a                                                                    
positive revenue of approximately $40 million.                                                                                  
                                                                                                                                
Senator  Wielechowski   queried  the  breakeven   price  for                                                                    
companies producing at Prudhoe Bay.                                                                                             
                                                                                                                                
Mr. Stickel responded that he  did not have a field-specific                                                                    
number, but  agreed to calculate  a number and  provide that                                                                    
to the committee.                                                                                                               
                                                                                                                                
Senator  Wielechowski requested  a breakeven  price for  the                                                                    
legacy  fields. He  wanted to  know  what the  price of  oil                                                                    
needed to be for the industry to breakeven.                                                                                     
                                                                                                                                
9:30:02 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman asked  that the  requested information  be                                                                    
broken down into as many component parts as possible.                                                                           
                                                                                                                                
9:30:30 AM                                                                                                                    
                                                                                                                                
Senator   Wielechowski  wondered   whether  the   department                                                                    
considered a net operating loss a credit.                                                                                       
                                                                                                                                
Mr.  Stickel  referred  to  the  prior  question  about  the                                                                    
breakeven  price.   He  stated   that  the   major  producer                                                                    
breakeven price  was around  $35 per  barrel, but  the value                                                                    
varied  for each  individual producer  and  year. He  stated                                                                    
that the  presentation would  show how  individual producers                                                                    
had  very  different  economics.  In response  to  the  most                                                                    
recent question, he  stated that the net  operating loss was                                                                    
not considered a credit.                                                                                                        
                                                                                                                                
Co-Chair Stedman urged caution  in using the word, "credit",                                                                    
because it could be used for multiple angles.                                                                                   
                                                                                                                                
Senator  Wielechowski queried  the breakeven  price of  each                                                                    
individual  legacy field.  He wondered  whether the  Prudhoe                                                                    
Bay breakeven price was $35 per barrel.                                                                                         
                                                                                                                                
Mr. Stickel  replied that  the $35 per  barrel price  was an                                                                    
aggregate number  across several fields. He  would follow up                                                                    
with more detail around that number.                                                                                            
                                                                                                                                
Co-Chair Stedman  stated that the department  had been asked                                                                    
to work  on different price  ranges to examine  the movement                                                                    
of the cost  factors. He understood that some  of the fields                                                                    
could  not be  separated out,  but  asked that  there be  an                                                                    
explanation  included as  to why  a further  breakdown could                                                                    
not be  established. He  understood the  confidentiality and                                                                    
statutory requirements that must be met.                                                                                        
                                                                                                                                
Senator Wielechowski surmised that  there was still a $10.32                                                                    
profit per barrel in FY 21.                                                                                                     
                                                                                                                                
Co-Chair Stedman  felt that the  presentation needed  to get                                                                    
back on track in order to understand the bottom line.                                                                           
                                                                                                                                
9:34:55 AM                                                                                                                    
                                                                                                                                
Mr. Stickel  agreed to provide context  around the discussed                                                                    
numbers.  He highlighted  slide 7,  "Fiscal System:  Overall                                                                    
Order of Operations":                                                                                                           
                                                                                                                                
     Royalties (State, Federal, or Private)                                                                                     
     Property Tax                                                                                                               
     Production Tax                                                                                                             
     State Corporate Income Tax                                                                                                 
     Federal Corporate Income Tax                                                                                               
                                                                                                                                
Mr.  Stickel  addressed  slides 8  and  9,  "Production  Tax                                                                    
'Order of  Operations': FY 2022."  He stated that  the slide                                                                    
was based on  the income statement of the  production tax as                                                                    
referenced in the  appendix of the Revenue  Sources Book. He                                                                    
noted  the DOR  forecast of  average oil  prices of  $48 per                                                                    
barrel  and  average  daily production  of  $439.6  thousand                                                                    
barrels per day. There was  then a calculation of the annual                                                                    
number of barrels  and the dollar value  of that production.                                                                    
He stated  that the focus  of the next several  slides would                                                                    
be how the  total annual value of $7.7 billion  worth of oil                                                                    
was split and taxed. He  stressed that it was an aggregation                                                                    
and  an illustration.  He explained  that actual  taxes were                                                                    
based on  monthly filings and  annual calendar  year returns                                                                    
that were then subject to  audit. He remarked that the slide                                                                    
only  referred to  ANS oil,  which was  the state's  largest                                                                    
production tax revenue.                                                                                                         
                                                                                                                                
Mr. Stickel looked  at the income statement.  He stated that                                                                    
the  first  step  was  to   calculate  taxable  barrels.  He                                                                    
explained   that  any   royalty   barrels  were   subtracted                                                                    
regardless  of  any  ownership  of  those  barrels.  Typical                                                                    
royalty  rates  were  one-eighth  or  one-sixth,  but  rates                                                                    
varied throughout.  He stated that federal  and private land                                                                    
royalty was also  subtracted in the slide.  He stressed that                                                                    
barrels were  also subtracted that  were not subject  to tax                                                                    
due  to their  location in  federal waters,  of which  there                                                                    
were small  number in Northstar  and Liberty  production. He                                                                    
stated that after subtracting  the royalties and non-taxable                                                                    
barrels, the  taxable barrels were estimated  at 141 million                                                                    
barrels for a total value of $6.8 billion.                                                                                      
                                                                                                                                
Co-Chair Stedman  recalled that in years  past the committee                                                                    
had trouble arriving at that  number, so there had been much                                                                    
progress.                                                                                                                       
                                                                                                                                
Co-Chair  Bishop wondered  whether Alaska's  royalty-in-kind                                                                    
was included under the "royalty and other federal barrels."                                                                     
                                                                                                                                
Mr. Stickel  replied in the  affirmative. He  explained that                                                                    
the  royalty included  both royalty  in-kind and  royalty in                                                                    
value.                                                                                                                          
                                                                                                                                
9:39:32 AM                                                                                                                    
                                                                                                                                
Mr. Stickel  addressed slide 10,  "Production Tax  'Order of                                                                    
Operations': FY 2022."  He stated that the  term, "GVPP" was                                                                    
widely used in production tax  and royalty. He remarked that                                                                    
it was also referred to  as the well-head value. He remarked                                                                    
that  transportation costs  were deducted  from the  taxable                                                                    
value  to determine  the GVPP.  He explained  that the  GVPP                                                                    
began with  the sales  price at  market, then  deducted each                                                                    
individual piece of  the transportation cost to  net back to                                                                    
the well-head  value. The  oil sale showed  $48 on  the west                                                                    
coast,   then  there   was  a   deduction  of   the  various                                                                    
transportation costs  to get to  an average  well-head value                                                                    
of $38.09  per barrel  estimated for FY  22. The  total GVPP                                                                    
for tax purposes of $5.4 billion.                                                                                               
                                                                                                                                
Co-Chair Stedman recalled the  previous questions related to                                                                    
corporate  income tax,  and  requested  that the  department                                                                    
examine the transportation issue. He  felt that there may be                                                                    
some    federal   legislation    that   would    allow   the                                                                    
transportation  costs  to   artificially  increase,  thereby                                                                    
increasing the  deduction. He stressed  that there may  be a                                                                    
federal policy  change that would affect  the transportation                                                                    
costs just  like other tax  deductions. He queried  the cost                                                                    
of transportation and the relationship  with the cost of the                                                                    
production through TAPS.                                                                                                        
                                                                                                                                
Mr. Stickel  replied that the  total cost  of transportation                                                                    
for FY  22 was estimated  at $9.91 per barrel.  He explained                                                                    
that  as production  values declined,  the average  cost per                                                                    
barrel  would   increase,  because  some  of   the  cost  of                                                                    
operations of TAPS had fixed maintenance costs.                                                                                 
                                                                                                                                
Co-Chair Stedman  surmised that it was  advantageous to have                                                                    
more volume down  TAPS, in order to decrease  the per barrel                                                                    
transportation    costs.    He    wondered    whether    the                                                                    
transportation cost of $1.4 billion  was a relatively static                                                                    
number.                                                                                                                         
                                                                                                                                
Mr.  Stickel stated  that  Co-Chair  Stedman was  "generally                                                                    
correct",  and explained  that higher  production would  put                                                                    
downward pressure on the per barrel transportation costs.                                                                       
                                                                                                                                
Mr. Stickel highlighted slide 11,  "Production Tax 'Order of                                                                    
Operations':  FY 2022."  He stated  that the  production tax                                                                    
that was used  was a modified net profits  tax, so companies                                                                    
were   allowed  to   deduct  both   capital  and   operating                                                                    
expenditures in calculating their  production tax. He stated                                                                    
that capital  expenditures used IRS guidelines,  however for                                                                    
production  taxes there  was  no  depreciation so  companies                                                                    
could immediately deduct  all capital costs in  the year. He                                                                    
stated  that  operating   expenditures  were  any  allowable                                                                    
expenditures  that were  not a  capital  expense. He  stated                                                                    
that  there  were  important terms  in  lease  expenditures:                                                                    
allowable  and deductible  lease expenditures.  He explained                                                                    
that allowable  lease expenditures were generally  any costs                                                                    
that were  directly associated with  producing oil,  but not                                                                    
everything was allowable under the  tax code. He stated that                                                                    
some  examples  of  non-allowable  lease  expenditures  were                                                                    
financing  costs,  lease  acquisition costs,  and  costs  of                                                                    
resolving   disputes.  He   stated  that   deductible  lease                                                                    
expenditures was a term used  for presentation purposes, and                                                                    
was  not   defined  in  any   statute  or   regulation.  The                                                                    
deductible  lease  expenditures  was   the  portion  of  the                                                                    
allowable lease expenditures allowed  in the tax calculation                                                                    
for   the  year   incurred.  He   shared   that  any   lease                                                                    
expenditures beyond  the deductible lease  expenditures were                                                                    
referred  to  as  non-deductible lease  expenditures,  which                                                                    
would  turn into  carry-forwards that  could potentially  be                                                                    
used to offset a future year tax liability.                                                                                     
                                                                                                                                
9:46:26 AM                                                                                                                    
                                                                                                                                
Senator   Wielechowski   requested   a  breakdown   of   the                                                                    
deductible per field operating and capital expenditures.                                                                        
                                                                                                                                
Mr.  Stickel replied  that one  of the  issues in  obtaining                                                                    
that information  was that the expenditures  were calculated                                                                    
at a  company level, so  Alaska's production taxes  were not                                                                    
levied  on  a field  basis  rather  they  were levied  on  a                                                                    
company basis. He  agreed to provide as  much information as                                                                    
possible.                                                                                                                       
                                                                                                                                
Senator  Olson wondered  whether there  was a  limit to  the                                                                    
non-deductible carry-forwards per year.                                                                                         
                                                                                                                                
Mr.  Stickel replied  that  there  was not  a  limit to  the                                                                    
amount  of lease  expenditures  that could  be  earned in  a                                                                    
carry-forward, but  there were some  limits of how  far into                                                                    
the future a carry-forward  could be "carried." He explained                                                                    
that after  the eighth  or eleventh  year after  earned, the                                                                    
carry-forwards began to lose value over time.                                                                                   
                                                                                                                                
Co-Chair  Stedman  noted   that  the  presentation  included                                                                    
carry-forward expenditures. He  stressed that the deductions                                                                    
and expenditures  were not  the same that  were used  in the                                                                    
corporate income tax.                                                                                                           
                                                                                                                                
Mr. Stickel pointed  to slide 12, "Production  Tax 'Order of                                                                    
Operations':  FY 2022."  He stated  that the  production tax                                                                    
value  (PTV)  was  measure  of   net  profit  used  for  the                                                                    
production tax.  He explained  that each  company calculated                                                                    
its  PTV  based  on  all the  ANS  activity,  including  all                                                                    
fields,  investments,  and  new developments.  The  PTV  was                                                                    
essentially the tax base for the production tax.                                                                                
                                                                                                                                
Mr. Stickel  addressed slide 13,  "Production Tax  'Order of                                                                    
Operations':  FY 2022."  He explained  that  there were  two                                                                    
parallel tax  calculations. He stated  that the  minimum tax                                                                    
was a tax floor calculation, and  was 4 percent of GVPP when                                                                    
annual oil  prices were  $25 per barrel  or more.  He stated                                                                    
that  in FY  22, the  minimum tax  was 4  percent times  the                                                                    
gross  value  of  $5.4   billion,  or  approximately  $214.5                                                                    
million.                                                                                                                        
                                                                                                                                
9:50:44 AM                                                                                                                    
                                                                                                                                
Mr. Stickel discussed slide 14, "Gross Value Reduction":                                                                        
                                                                                                                                
     ? Gross  Value Reduction (GVR) is  an incentive program                                                                    
     for new fields.                                                                                                            
     ?  Available for  the first  seven years  of production                                                                    
     and  ends early  if  ANS prices  average  over $70  per                                                                    
     barrel for any three years.                                                                                                
     ? Allows companies to exclude  20 percent or 30 percent                                                                    
     of  the  gross  value   from  the  net  production  tax                                                                    
     calculation.                                                                                                               
     ? In lieu  of sliding scale Non GVR  Per Taxable Barrel                                                                    
     Credit, qualifying  production receives  a flat  $5 GVR                                                                    
     Per Taxable Barrel Credit.                                                                                                 
     ? The $5  GVR Per Taxable Barrel Credit  can be applied                                                                    
     to reduce  tax liability  below the minimum  tax floor,                                                                    
     assuming that  the producer does not  apply any sliding                                                                    
     scale Non GVR Per Taxable Barrel Credits.                                                                                  
                                                                                                                                
Co-Chair Stedman  surmised that  the 4  percent floor  was a                                                                    
"soft floor."                                                                                                                   
                                                                                                                                
Mr. Stickel  agreed. He explained  that the 4 percent  was a                                                                    
minimum tax  calculation floor. He explained  that a company                                                                    
could not pay  below that floor if a company  chose to use a                                                                    
sliding scale for taxable barrel credits.                                                                                       
                                                                                                                                
Co-Chair Stedman surmised that  the five dollar credit could                                                                    
be attributed  to the fields that  had the 20 or  30 percent                                                                    
GVR.                                                                                                                            
                                                                                                                                
Mr. Stickel  agreed. He explained  that the five  dollar per                                                                    
taxable  barrel production  tax credit  applied to  the same                                                                    
GVR eligible production  that received the 20  or 30 percent                                                                    
GVR.                                                                                                                            
                                                                                                                                
Co-Chair  Stedman requested  percentages  of the  production                                                                    
that could  be expected  to be  attributed to  the 20  or 30                                                                    
percent GVR. He  assumed that the remaining  would total 100                                                                    
percent.                                                                                                                        
                                                                                                                                
Mr. Stickel  replied that  he was looking  at figure  6-7 of                                                                    
the Fall  2020 Revenue Sources Book.  He noted for FY  21, 8                                                                    
percent of oil  production was estimated to  be eligible for                                                                    
GVR. He  stated that the  number increased to 23  percent by                                                                    
FY  27, and  27  percent in  FY  28. He  noted  that as  new                                                                    
developments   come   online,   the  forecasted   share   of                                                                    
production from GVR-eligible fields would increase.                                                                             
                                                                                                                                
Co-Chair Stedman queried the referenced page number.                                                                            
                                                                                                                                
Mr.  Stickel looked  at page  51  of the  Fall 2020  Revenue                                                                    
Sources Book.                                                                                                                   
                                                                                                                                
9:55:08 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman stressed  that there  was a  concern about                                                                    
the cash  flow. He noted that  there was a breakdown  of the                                                                    
GVR-eligible fields,  and wondered whether it  split out the                                                                    
percentage of what  would be exposed to each  the 20 percent                                                                    
and 30 percent.                                                                                                                 
                                                                                                                                
Mr. Stickel replied that he would provide that information.                                                                     
                                                                                                                                
Senator Wielechowski wondered whether  a company could write                                                                    
off  their production  at Prudhoe  Bay and  Kuparuk if  that                                                                    
company was spending $1 billion in NPRA.                                                                                        
                                                                                                                                
Mr. Stickel replied that regardless  of land type, a company                                                                    
with  sufficient  GVPP  could  have the  investment  in  new                                                                    
production be considered a deductible lease expenditure.                                                                        
                                                                                                                                
Senator Wielechowski  stressed that  oil production  at NPRA                                                                    
was not  "equal", because  developing companies  could write                                                                    
off their  existing fields.  The result could  be a  cost to                                                                    
the state of  hundreds of millions of dollars  for years. He                                                                    
furthered  that  once  the  field  went  online,  the  state                                                                    
received virtually no royalties.  He stressed that under the                                                                    
GVR,  the state  received virtually  no taxes  for at  least                                                                    
seven years.                                                                                                                    
                                                                                                                                
Mr. Stickel replied that it  was a situational question that                                                                    
depended  on  the  company,  price   of  oil,  and  relative                                                                    
production.                                                                                                                     
                                                                                                                                
Co-Chair  Stedman  understood  that  deductions  created  on                                                                    
areas of  the basin  without much revenue  to the  state was                                                                    
still  subject to  deductions.  He felt  that  there may  be                                                                    
better answers  from consultants  at Legislative  Budget and                                                                    
Audit to  model the different ownership  interests. He asked                                                                    
that Mr.  Stickel provide  any possible  information related                                                                    
to Senator Wielechowski's question.                                                                                             
                                                                                                                                
Senator  Wielechowski  requested  NPRA specifics  about  how                                                                    
much  the  state  allowed  in  tax  deductions  in  existing                                                                    
fields, the state revenue, and the projected revenues.                                                                          
                                                                                                                                
Co-Chair Stedman felt that sometimes  the state had statutes                                                                    
which  created "blocks."  He shared  that Point  Thomson had                                                                    
significant  expenditures in  billions in  credits and  high                                                                    
tariffs with  questionable economics.  He requested  as much                                                                    
of  a breakdown  of information  as possible.  He felt  that                                                                    
there  would be  considerably  more  production being  moved                                                                    
outside of  the state-owned land,  so there needed to  be an                                                                    
understanding of the financial impact of that possibility.                                                                      
                                                                                                                                
10:00:33 AM                                                                                                                   
                                                                                                                                
Mr. Stickel pointed  to slide 15, "Production  Tax 'Order of                                                                    
Operations': FY  2022." He explained  that the  slide looked                                                                    
at the  calculation of net  production tax. The net  tax was                                                                    
based  on   production  tax  value  times   the  35  percent                                                                    
statutory  tax rate.  The GVR  to the  production tax  value                                                                    
shown on  the slide was  only accounting for  companies that                                                                    
had  a   positive  production  value.  The   companies  with                                                                    
qualifying  new  production  could  reduce  their  GVPP  for                                                                    
purposes  of calculation  the production  tax value.  The 35                                                                    
percent  tax rate  was then  applied to  the production  tax                                                                    
value after  subtracting the  GVR. He noted  that in  FY 22,                                                                    
there was  an estimate that  the 35 percent  tax calculation                                                                    
would be  approximately $367 million. He  furthered that the                                                                    
higher of  the gross minimum tax  floor or the net  tax, and                                                                    
in the  displayed case the "higher  of" was the net  tax. He                                                                    
stated  that  the $367  million  became  the production  tax                                                                    
before credit.                                                                                                                  
                                                                                                                                
Co-Chair Stedman  felt that there was  some confusion around                                                                    
this  subject.  He  noted that  the  tipping  point  changed                                                                    
depending  on volume  and expenditures.  He felt  that there                                                                    
would be a sliding scale on that issue in the future.                                                                           
                                                                                                                                
Mr. Stickel  looked at slide  16, "Production Tax  'Order of                                                                    
Operations': FY  2022." He explained that  the major credits                                                                    
were  the  per  taxable   barrel  credits,  which  were  two                                                                    
credits:  one  for GVR-eligible  oil  and  one for  non-GVR-                                                                    
eligible oil.  The vast  majority of  oil that  was non-GVR-                                                                    
eligible,  but the  GVR-eligible oil  would increase  as new                                                                    
fields  come online.  He  stated that  there  was a  sliding                                                                    
scale  for non-GVR  production for  taxable barrels  credits                                                                    
that  ranged  from   zero  to  $8  per   barrel  of  taxable                                                                    
production. The $8 per barrel  credit applied when well-head                                                                    
values were  less than $80  per barrel, which  was currently                                                                    
the  case, and  was  expected  in the  time  horizon of  the                                                                    
forecast. The  sliding scale  credits could  not be  used to                                                                    
reduce the tax  below the minimum tax. He  stressed that any                                                                    
company  claiming  that  credit  could  not  pay  below  the                                                                    
minimum tax.  He explained that the  GVR-eligible production                                                                    
had a flat $5 per  taxable barrel production tax credit. The                                                                    
credit, in some instances, could  be used to reduce taxes to                                                                    
below the  minimum tax for  companies that did not  take any                                                                    
sliding  scale credits.  He explained  that any  of the  per                                                                    
taxable  barrel  credits could  not  be  carried forward  or                                                                    
refunded.  He  explained  that  other  tax  credits  applied                                                                    
against tax  liability included  small producer  credits and                                                                    
some  prior year  credits earned  back when  the state  gave                                                                    
credits for net operating losses.                                                                                               
                                                                                                                                
Co-Chair  Stedman looked  at the  Fall 2020  Revenue Sources                                                                    
Book,  which  showed $46  million  in  credit reductions  on                                                                    
55.23-A and -B,  which was some comingled  data. He wondered                                                                    
whether that was  in the category of  "other credits against                                                                    
liability."                                                                                                                     
                                                                                                                                
Mr. Stickel replied in the affirmative.                                                                                         
                                                                                                                                
10:05:08 AM                                                                                                                   
                                                                                                                                
Senator Wielechowski noted that  there was $7.701 billion of                                                                    
oil  in TAPS,  $7.68  billion in  taxable  barrels, and  the                                                                    
gross value  at the point  of production was  $5.38 billion.                                                                    
He announced  that the state  received $163.3 million  was 3                                                                    
percent  of  tax  at  the gross  value  of  production,  2.4                                                                    
percent at  taxable barrels,  and 2.1  percent tax  of total                                                                    
oil  being  produced.  He  stressed that  Alaska  had  a  35                                                                    
percent tax rate,  but only received 3 percent  of the gross                                                                    
value at  production. He stressed that  adding the royalties                                                                    
resulted in  the state receiving  13.9 percent of  the total                                                                    
value  of  the  oil.  He wondered  whether  the  state  ever                                                                    
received  a lower  amount  for  oil. He  felt  that, by  his                                                                    
calculations,  the state  was  currently  receiving half  of                                                                    
what it had  collected historically since the  passage of SB
21.                                                                                                                             
                                                                                                                                
Co-Chair Stedman  felt that the question  was to aggressive,                                                                    
but  noted that  there  were  some actuals  from  FY 19  and                                                                    
forecasted  numbers for  up to  FY 23.  He wanted  to ensure                                                                    
that  a DOR's  upcoming presentation  included a  history as                                                                    
compared to the current numbers.                                                                                                
                                                                                                                                
Senator  Wielechowski  understood   that  his  question  was                                                                    
aggressive, and stressed that the  state could lose up to $1                                                                    
billion per  year. He felt  that, if the state  received its                                                                    
historic  average  for  the  resource,  there  would  be  an                                                                    
additional  $1  billion by  his  calculation.  He wanted  an                                                                    
analysis  done by  the department,  because  they could  not                                                                    
afford to "keep giving its money away."                                                                                         
                                                                                                                                
Co-Chair  Stedman stressed  that the  there were  many other                                                                    
factors that contributed  to the issue. He  pointed out that                                                                    
there would  be some help  from the consultants  because the                                                                    
price structure in the industry was constantly changing.                                                                        
                                                                                                                                
10:08:47 AM                                                                                                                   
                                                                                                                                
Mr. Stickel  discussed slide 17,  "Production Tax  'Order of                                                                    
Operations':  FY 2022."  He explained  that after  the total                                                                    
tax after  credits calculation, there were  some other items                                                                    
that were  added to reach  the total production  tax revenue                                                                    
received by the state in  any given fiscal year. He detailed                                                                    
that the items included prior  year tax payments or refunds,                                                                    
private landowner royalty  tax, hazardous release surcharge,                                                                    
any taxes on natural gas on  the slope as well as total Cook                                                                    
Inlet  tax liability,  and  any additional  company-specific                                                                    
details.                                                                                                                        
                                                                                                                                
Co-Chair Stedman  asked if the  $163.3 million shown  on the                                                                    
slide as total tax paid to the state included Cook Inlet.                                                                       
                                                                                                                                
Mr.  Stickel answered  "yes" and  affirmed  that the  $163.3                                                                    
million was  the net cash  to the state from  the production                                                                    
tax for the fiscal year.                                                                                                        
                                                                                                                                
Co-Chair  Stedman thanked  Mr.  Stickel for  clarity in  the                                                                    
slide and  presentation with  regard to  net cash.  He asked                                                                    
for Mr.  Stickel to address  the $562.7 million in  "Net New                                                                    
Lease  Expenditures Earned  and Carried  Forward" listed  at                                                                    
the bottom  of the slide and  how it might affect  the state                                                                    
in the future.                                                                                                                  
                                                                                                                                
Mr. Stickel  said that the $562.7  million in non-deductible                                                                    
lease  expenditures  in FY22  were  expected  to be  carried                                                                    
forward by companies that were  not able to deduct the costs                                                                    
against  production tax  value in  FY 22.  The carry-forward                                                                    
could  potentially be  applied to  reduce future  year's tax                                                                    
liability.                                                                                                                      
                                                                                                                                
Co-Chair Stedman asked whether  the figure was cumulative or                                                                    
was annual for FY 22.                                                                                                           
                                                                                                                                
Mr.  Stickel replied  that the  figure reflected  the amount                                                                    
expected to be earned just for FY 22.                                                                                           
                                                                                                                                
Co-Chair Stedman thought the cumulative  figures were in the                                                                    
Revenue Source Book and asked about the page number.                                                                            
                                                                                                                                
Mr. Stickel  relayed that page 76  (row 22 of Figure  84) of                                                                    
the Fall 2020  Revenue Sources Book had  values for carried-                                                                    
forward credits  balances and  tax value  of carried-forward                                                                    
annual losses.                                                                                                                  
                                                                                                                                
10:11:56 AM                                                                                                                   
                                                                                                                                
Mr. Stickel  continued that the  value in the table  was the                                                                    
ultimate  tax  value,  which signified  the  amount  of  the                                                                    
carry-forward loss times the 35 percent net tax rate.                                                                           
                                                                                                                                
Co-Chair Stedman thought the amount  was forecast to go over                                                                    
$1 billion in 2024, and to approach $1.6 billion in 2030.                                                                       
                                                                                                                                
Mr. Stickel replied in the affirmative.                                                                                         
                                                                                                                                
Co-Chair  Stedman offered  a quick  note of  explanation. He                                                                    
stated  that  the  industry  had to  be  allowed  to  deduct                                                                    
expenditures  or  the numeric  would  not  work. He  thought                                                                    
although  the numbers  were large  and  alarming, there  was                                                                    
more to the equation.                                                                                                           
                                                                                                                                
Co-Chair Bishop  highlighted Mr.  Stickel's use of  the word                                                                    
"potentially" when  referencing new lease  expenditures that                                                                    
could be  earned and  carried forward.  He thought  the word                                                                    
was key in discussing future deductions or production.                                                                          
                                                                                                                                
Mr.  Stickel affirmed  that  a company  would  need to  have                                                                    
sufficient future production and  sufficient future value to                                                                    
apply the lease expenditures.                                                                                                   
                                                                                                                                
Mr.  Stickel  thought  some  might make  note  of  the  $163                                                                    
million in  total production  tax and ask  why it  was lower                                                                    
than  the  minimum tax  calculation  of  $215.5 million.  He                                                                    
explained that the minimum tax  was applied on a company-by-                                                                    
company  basis.   He  noted  that  the   forecast  projected                                                                    
$48/bbl.  Some companies  would forego  using sliding  scale                                                                    
credits and use  other credits to reduce  payments below the                                                                    
minimum tax.                                                                                                                    
                                                                                                                                
Co-Chair  Stedman thought  that net  numbers were  important                                                                    
for clarity.                                                                                                                    
                                                                                                                                
Mr. Stickel looked  at slide 18, "Order  of Operations: Five                                                                    
Year  Comparison."  The  slide showed  a  5-year  comparison                                                                    
including two  years of history  and two years  of forecast.                                                                    
He pointed out  that in FY 19 and FY  20 some taxpayers paid                                                                    
above the  minimum tax.  In FY 21  through FY  23, generally                                                                    
production companies were able  to bring production tax down                                                                    
to the minimum tax. He  elaborated that the forecast assumed                                                                    
that with projected  oil prices some companies  in all three                                                                    
years would choose  to forego sliding scale  credits and use                                                                    
other credits  to pay below  the minimum tax. He  noted that                                                                    
the additional slides offered more detail.                                                                                      
                                                                                                                                
Co-Chair Stedman asked Mr. Stickel to continue.                                                                                 
                                                                                                                                
10:15:46 AM                                                                                                                   
                                                                                                                                
Mr.  Stickel  pointed to  slide  19,  "Tax Calculation  with                                                                    
Varying Non  GVR Taxable Barrel  Credit Rates:  FY2022." The                                                                    
slide was  an update of a  slide from the previous  year and                                                                    
showed  how revenue  would be  impacted by  different levels                                                                    
for the  sliding scale per-taxable-barrel  credit. Currently                                                                    
the  credit was  a sliding-scale  credit  for up  to $8  per                                                                    
taxable  barrel.  The  table  showed  what  the  FY  22  tax                                                                    
calculation  would look  like assuming  different values  of                                                                    
$5, $4, and $3 per taxable barrel.                                                                                              
                                                                                                                                
Co-Chair Stedman  asked Mr. Stickel  to run  the calculation                                                                    
using oil price at $50, $55, and $60/bbl.                                                                                       
                                                                                                                                
Mr. Stickel  relayed that he  would be happy to  provide the                                                                    
information.                                                                                                                    
                                                                                                                                
Mr. Stickel continued to look  at slide 19 and cited figures                                                                    
for  the estimated  production  tax  with per-barrel  credit                                                                    
differences. He  noted that  the figures  were not  a policy                                                                    
recommendation, but rather an  update of scenarios that were                                                                    
requested the previous year.                                                                                                    
                                                                                                                                
Mr.  Stickel discussed  slide 20,  "Illustration Assuming  a                                                                    
Single North  Slope Taxpayer: FY  2022." The  slide depicted                                                                    
what the tax  calculation would look like if  there was only                                                                    
a single taxpayer for the  entire North Slope. He elaborated                                                                    
that currently some  companies paid at or  above the minimum                                                                    
tax  while  others  chose   to  forego  using  sliding-scale                                                                    
credits  and reduce  payments below  the minimum  tax. As  a                                                                    
result, for FY 22 the  production tax forecast was less than                                                                    
the aggregate minimum tax calculation.                                                                                          
                                                                                                                                
Mr.  Stickel thought  the slide  illustrated  that a  single                                                                    
taxpayer  would  be  expected  to  only  use  sliding  scale                                                                    
credits to reduce tax liability  down to the minimum tax but                                                                    
not below. In the illustration,  total production tax in the                                                                    
treasury would  be $229  million in FY  22 compared  to $163                                                                    
million  in the  official  forecast. The  conclusion in  the                                                                    
slide   highlighted  the   impact   of  individual   company                                                                    
economics on the tax. Each  of the taxpayers had a different                                                                    
portfolio of  operation in existing fields,  and a different                                                                    
portfolio  of  investments  being made  in  exploration  and                                                                    
development.                                                                                                                    
                                                                                                                                
Co-Chair Stedman shared that he  had worked with Mr. Stickel                                                                    
on  how  to  present   the  information  to  the  committee,                                                                    
including how to depict the minimum  tax and net tax and how                                                                    
it might  cross over. He  had asked Mr. Stickel  to assemble                                                                    
the  slide  depicting  one  taxpayer.   He  thought  it  was                                                                    
beneficial to see where some  of the deductions occurred. He                                                                    
reiterated the need for clarity.                                                                                                
                                                                                                                                
Mr. Stickel  highlighted slide 21, "State  Petroleum Revenue                                                                    
by Land  Type." The  slide illustrated how  not all  oil was                                                                    
the  same.  He  explained  that  production  tax,  corporate                                                                    
income tax, and  property tax all applied  everywhere in the                                                                    
state  except  for federal  waters  that  were beyond  three                                                                    
miles offshore.  Regardless of the  ownership of  the lands,                                                                    
the  state taxes  applied. He  continued  that royalty  rate                                                                    
varied by ownership. He offered to go over each land type.                                                                      
                                                                                                                                
10:20:33 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman felt  that the  reference  sheet would  be                                                                    
useful  in  the future  when  the  committee was  discussing                                                                    
deductions  on  some  fields  where  the  potential  revenue                                                                    
source  to  the  state  was lower.  He  thought  there  some                                                                    
concern about why the deductibility  was not also different.                                                                    
He thought  the committee would  delve more deeply  into the                                                                    
topic  at  a later  date.  He  expressed  that he  had  been                                                                    
working  with  the  department   on  a  future  presentation                                                                    
dealing with varying prices and  cost structures. He thought                                                                    
a future presentation  would shed light on how  revenue in a                                                                    
basin looked at different prices.                                                                                               
                                                                                                                                
Mr.  Stickel thanked  the committee  for the  opportunity to                                                                    
present.                                                                                                                        
                                                                                                                                
Co-Chair  Stedman  thanked  Mr.  Stickel for  his  work.  He                                                                    
stated  he  would  work  with the  department  on  a  future                                                                    
presentation.                                                                                                                   
                                                                                                                                
ADJOURNMENT                                                                                                                   
10:23:11 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:22 a.m.                                                                                         
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
021221 Order of Operations SFIN.pdf SFIN 2/12/2021 9:00:00 AM
Oil and Gas Severance Tax