Legislature(2005 - 2006)SENATE FINANCE 532
04/21/2006 10:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 305 | TELECONFERENCED | |
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
April 21, 2006
10:24 a.m.
CALL TO ORDER
Co-Chair Lyda Green convened the meeting at approximately
10:24:57 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Bert Stedman
Senator Lyman Hoffman
Senator Donny Olson
Also Attending: SENATOR BEN STEVEN; SENATOR GARY STEVENS,
SENATOR TOM WAGONER; DAN DICKINSON, CPA, former Director of the
Tax Division, secured as a consultant by the Office of the
Governor; CHERIE NIENHUIS, Petroleum Economist, Department of
Revenue; Students from Academy Charter School, Palmer, Alaska.
Attending via Teleconference: From an Offnet Location: ROBERT
MINTZ, Assistant Attorney General, Oil, Gas & Mining Section,
Department of Law
SUMMARY INFORMATION
SB 305-OIL AND GAS PRODUCTION TAX
The Committee reviewed the Finance committee substitute with the
assistance of the Department of Law, the Department of Revenue,
and a consultant to the Office of the Governor. The bill was
held in Committee.
CS FOR SENATE BILL NO. 305(RES)
"An Act providing for a production tax on oil and gas;
repealing the oil and gas production (severance) tax;
relating to the calculation of the gross value at the point
of production of oil or gas and to the determination of the
value of oil and gas for purposes of the production tax on
oil and gas; providing for tax credits against the tax for
certain expenditures and losses; relating to the
relationship of the production tax on oil and gas to other
taxes, to the dates those tax payments and surcharges are
due, to interest on overpayments of the tax, and to the
treatment of the tax in a producer's settlement with the
royalty owners; relating to flared gas, and to oil and gas
used in the operation of a lease or property under the
production tax; relating to the prevailing value of oil or
gas under the production tax; relating to surcharges on
oil; relating to statements or other information required
to be filed with or furnished to the Department of Revenue,
to the penalty for failure to file certain reports for the
tax, to the powers of the Department of Revenue, and to the
disclosure of certain information required to be furnished
to the Department of Revenue as applicable to the
administration of the tax; relating to criminal penalties
for violating conditions governing access to and use of
confidential information relating to the tax, and to the
deposit of tax money collected by the Department of
Revenue; amending the definitions of 'gas,' 'oil,' and
certain other terms for purposes of the production tax, and
as the definition of the term 'gas' applies in the Alaska
Stranded Gas Development Act, and adding further
definitions; making conforming amendments; and providing
for an effective date."
This was the fourteenth hearing for this bill in the Senate
Finance Committee.
Finance committee substitute, Version 24-GS2052\P, was before
the Committee.
Co-Chair Green acknowledged the attendance of students from
Academy Charter School in Palmer, Alaska.
10:25:58 AM
Co-Chair Green stated that the first order of business would be
to address a list of questions and concerns [copy on file],
specific to Version "P" which were developed by Senator Dyson.
10:27:35 AM
DAN DICKINSON, CPA, former Director of the Tax Division, secured
as a consultant by the Office of the Governor, addressed the
first question on Senator Dyson's list. The question "From what
may the taxpayer deduct taxes paid under AS 43.55?" was in
reference to language in Sec. 3 subsection (c) page 2 lines 20
through 23 of the Finance committee substitute.
Mr. Dickinson specified that language in Sec. 3(c) pertained to
the State's income tax Statute, AS 43.20; specifically that in
the "computing of the tax under this chapter, the taxpayer is
not entitled to deduct any taxes based on or measured by net
income. … The taxpayer may deduct the tax paid and levied under
AS 43.55", when calculating their worldwide income for purposes
of AS 43.20.
10:29:16 AM
Mr. Dickinson next addressed the question of whether a comma
should be included after the word "state" in Sec. 5 subsection
(f) page 3 line 21. While doing so might be appropriate, he
would advise allowing the bill drafters to make that
determination.
10:29:45 AM
Mr. Dickinson advised that the "department" being referenced in
Sec. 5 subsection (f)(1), page 3 line 29, was the Department of
Revenue; specifically that discussions regarding AS 43.55 would
involve the Department of Revenue. Typically, the full name of
the Department of Natural Resources would be depicted when that
department was being referred to in the bill. Another
distinction would be that a lower case "d" in the word
"department" would refer to the Department of Revenue and an
upper case "D" would refer to the Department of Natural
Resources.
10:30:57 AM
Senator Dyson questioned whether delineating a specific
department by either a "d" or an "D" would suffice.
Co-Chair Green qualified that any reference to AS 43 would be
specific to the Department of Revenue. The department referenced
in relation to another Statute would be identified.
Mr. Dickinson affirmed. He also noted that this issue was
further addressed in the Definition section of the bill.
Senator Dyson remarked that the objective was to be "consistent
and clear" in these distinctions.
10:31:58 AM
Mr. Dickinson next addressed Senator Dyson's question specific
to Sec. 5 subsection (f)(B) page 4 lines 5 and 6 of Version "P".
The question reads as follows.
Increases the royalty tax on gas from Senate Resources
version of 1.5% of the gross for Cook Inlet gas to 7.5% of
gross production for gas anywhere in the state. For non-
Cook Inlet the increase is from the previous 5% to 7.5%.
Isn't that a pretty big increase for Cook Inlet gas?
Especially when we want more Cook Inlet gas? It appears
that this change increases the private royalty tax for gas.
Do we really want to increase [the] tax on gas?
Mr. Dickinson first approached the question from a "technical"
perspective, as the language in question should be viewed in the
"context" of Sec. 5 subsection (f) which pertained to the
special tax applied to private royalty interests in the State.
"The department was concerned that, in those private royalty
contracts between an oil company and a private lessor, you could
create a situation where you would say, well, let's say we've
always had a 12.5 percent interest, but instead, we're going to
double it to a 25 percent interest, but then we'll have some
mechanism here that we re-equalize when we calculate our costs."
As a result, when it was time to pay the tax, "suddenly, instead
of 12.5 percent receiving the lower rate, 25 percent would
receive the lower rate".
10:34:33 AM
Mr. Dickinson explained that the language in Sec. 5 subsection
(f)(3) page 3 line 29 through page 4 line 2, specified that the
7.5 percent gas rate depicted in Sec. 5 subsection (f)(B) would
be levied were the State to determine there had been "collusion"
between a royalty owner and a lessee. Otherwise, the statewide
tax on gas would be 1.667 percent of the gross value at the
point of production of the gas as specified in Sec. 5 subsection
(f)(2) page 3, lines 27 and 28.
Mr. Dickinson stated that the special tax rate applied to oil
relative to private royalty interests would be five percent of
the gross value at the point of production for oil as specified
in Sec. 5 subsection (f)(1) page 3, lines 25 through 27. That
rate would increase to 22.5 percent of the gross value at the
point of production for oil, were collusion to occur in that
regard.
Mr. Dickinson pointed out that while language in Sec. 5
subsection (e) page 3 lines 15 through 19 specified that the tax
would be 22.5 percent of the production tax value of the taxable
oil and gas, language in Sec. 26 subsection (a) page 18, lines
10 and 11 qualified that the tax calculation for gas could only
consider "one-third of the gross value of the point of
production of the gas that is taxable". One third of 22.5
percent would equate to approximately 7.5 percent.
Mr. Dickinson next addressed the question pertaining to Sec. 7,
subsection (a) page 5 lines 7-14. The question was as follows:
Lines 7 & 8 say that overpayments can be applied to taxes
due for a later month. Lines 13 & 14 indicate that interest
is paid on overpayments are not refunded. Are we applying
taxes to future liabilities or refunding them?
10:37:00 AM
Mr. Dickinson specified that the Version "P" would provide
options to a taxpayer. Were an overpayment to occur one month,
the overpaid amount could be applied to the following month's
tax. The company would not receive interest on any overpayment
during that 30 day period.
Mr. Dickinson noted however that, were the carried forward
overpayment to exceed the tax obligation of the following month,
the company could apply for a refund. Interest would be applied
to that overpayment were the State unable to refund the money 90
days after the request was made.
10:38:18 AM
Senator Dyson concluded therefore that interest would not
typically be paid on an overpayment.
10:38:30 AM
Mr. Dickinson affirmed. The State did not desire to act as "a
bank" and provide interest on overpayments. Companies should
estimate their tax to the best of their abilities.
Senator Dyson understood however that the State would levy an
interest penalty were a company to underpay.
Mr. Dickinson clarified that no interest would be charged were a
company to underpay by five percent. However, interest would be
charged on any underpayment beyond that "95 percent threshold".
Senator Dyson asked Mr. Dickinson to further explain the process
through which a company could request an overpayment be
refunded.
10:39:40 AM
Mr. Dickinson stated that the State had 90 days in which to
process a company's request for a refund, in the case where that
overpayment exceeded the following month's tax obligation.
Interest would be paid on that money after that timeframe. While
refunds were typically paid in less than 90 days, extended time
might be required to thoroughly review a company's tax
calculation.
10:40:36 AM
In response to a question from Senator Bunde, Mr. Dickinson
expressed that the State would not levy interest were a company
to remit between 95 and 100 percent of their monthly tax. Were a
company to remit 90 percent of the amount due, interest would
only be charged on the five percent beyond the 95 percent. The
outstanding tax and the interest on that five percent would be
due by the annual true-up date.
10:41:34 AM
ROBERT MINTZ, Assistant Attorney General, Oil, Gas & Mining
Section, Department of Law testified via teleconference from an
offnet location and disagreed with Mr. Dickinson on one aspect
of his remarks pertaining to a company's request for an
overpayment refund. Language in Sec. 7 subsection (a) page 5
lines 9 and 10 of Version "P" would indicate that interest would
not be paid on that money unless the refund was paid more than
90 days after the annual March 31 true-up date.
Mr. Dickinson confirmed that Mr. Mintz was correct.
10:43:05 AM
Mr. Dickinson addressed the next issue raised by Senator Dyson.
The question was whether a comma would be required after the
word "gas" in Sec.9 subsection (d) page 5, line 25 or after the
word "lease" on line 26 of that same subsection.
Co-Chair Green understood that the language in question would
not require the addition of commas. Nonetheless, the issue would
be further reviewed with the bill drafters.
10:44:14 AM
Mr. Dickinson disagreed with Senator Dyson's next conclusion
that language in Sec. 10 subsection (e), page 6, line 3-10 of
Version "P" would delete "the penalty currently found in AS
43.55.020(e) for wasteful flaring of gas".
Mr. Dickinson stated the both the Senate Resources committee
substitute and Version "P" changed the existing three category
approach to flared gas "to a much simpler structure" in that a
tax would be levied on gas that the Alaska Oil and Gas
Conservation Committee (AOGCC) considered "wasted". No tax would
be levied on gas used to produce oil and gas. AOGCC could levy a
separate tax in this regard, aside from this legislation.
Mr. Mintz concurred.
Senator Dyson understood that typically taxes had not been
levied on gas flared in the case of an emergency such as
equipment failures. He assumed that gas used in such situations
would continue to be exempt from taxation. However, AOGCC would
likely consider whether the operator should have addressed the
source of the equipment failure in making that determination.
Mr. Mintz affirmed that AOGCC would review "several factors"
when determining whether the flared gas was wasteful or not.
Emergency situations would be evaluated by established
guidelines on a case by case basis.
10:47:06 AM
Mr. Dickinson deferred to Mr. Mintz to address the question
pertaining to language in Sec. 12 subsections (c),(d),(e) and
(f) on page 8 of Version "P". The question was as follows.
The CS refers to "person" whereas elsewhere it refers to
"taxpayer", "producer", or explorer. Are we confident that
"person" is satisfactorily defined?
Mr. Dickinson noted that the person reference was used in the
context of the entity which had purchased the tax credit to
reduce their tax liability.
Mr. Mintz explained that the term "person" could serve several
"functions". In this case it could be considered "shorthand" for
referring to either an explorer or a producer. In addition, it
would indicate there being no limit on who could purchase a
transferable tax credit certificate. "It might not be a producer
or an explorer", even thought the certificate would have no
value to anyone other than one of those entities because it
could only be applied to the production tax.
Mr. Mintz would foresee however, there being "intermediary
brokers" who might "buy and sell these certificates".
Co-Chair Green recalled a Senate Resources Committee hearing on
this bill in which the definition of a person had been
discussed. It could apply to a corporation or another entity.
She was unsure whether the word defined in State Statute was a
widely accepted definition.
Mr. Mintz communicated that the term "person" was included in
the listing of general applications definitions under Alaska
Statute, Title 1, Sec. 01.10.060. That Statute defined "person"
as a "corporation, company, partnership, firm, association,
organization, business, trust, or society as well as a natural
person".
Senator Dyson acknowledged.
10:49:48 AM
Mr. Dickinson addressed the question of whether there should be
"either an 'and' or 'or' after the semi-colon" in Sec. 12
subsection (i)(2)(B) page 10, line 9. He agreed that a
correction to this language was in order as it was unclear
whether both or one of the conditions listed would be required.
To this point, he thought the word "and" would be appropriate.
Co-Chair Green stated that this issue would be further reviewed
with the bill drafters.
10:50:26 AM
Mr. Dickinson characterized Senator Dyson's next suggestion to
add the word "or" after the semi-colon in Sec. 24 subsection
(a)(2) on page 17 line 6 as being "a substantive issue", which
had also been discussed by the Senate Resources Committee.
Mr. Dickinson stated that Sec. 24 AS 43.55.150(a) had been
amended, as specified on page 16 line 28 through page 17, line
8, to specify that the Department of Revenue would recognize
that "the reasonable costs of transportation will be the actual
costs except … when" the three conditions specified in Sec. 24
subsection (a)(1)(2)and (3) were present. These conditions were
"when the parties of the transportation of the oil or gas are
affiliated; when the contract for transportation of oil or gas
is not an arm's length transaction or is not representative of
the market value of that transportation; or when the method of
transportation of oil or gas is not reasonable in view of the
existing alternative methods of transportation".
Mr. Dickinson stated that including the word "or", as suggested
by Senator Dyson, would infer that only one of the tree
conditions must be experienced. The intent was that all three
conditions must be present. Therefore, were a word required to
clarify that intent, he would suggest that that word be "and".
Senator Dyson understood therefore that the intent was to
require all three of the conditions to be met.
Mr. Dickinson affirmed. Were further clarity required, the word
"and" could be inserted.
Senator Dyson suggested that the bill drafter review this
language for clarity purposes.
Co-Chair Green concurred.
10:52:31 AM
Mr. Dickinson addressed the last of Senator Dyson's written
observations.
Dan Dickinson's Presentation of April 20, 2006 re: 5,000
BOE allowance. In Dan Dickinson's first slide of April 20,
2006, related to Daily Production of Oil and Gas in Cook
Inlet, the slide seems to indicate that producers of oil
and gas get two allowances - one for oil and one for gas -
while the producers of only oil or gas get only one
allowance.
10:54:38 AM
Mr. Dickinson referred the Committee to the April 20, 2006 "PPT
Studies" presentation (copy on file). He explained that the
5,000 Barrels of Oil Equivalency (BOE) allowance would allow a
producer to exclude 5,000 BOE of their daily production. An
entity producing only oil would be able to exclude 5,000
barrels. An entity producing only gas would be able to exclude
30,000 cubic feet of gas daily which was the equivalent of 5,000
barrels of oil.
Mr. Dickinson agreed that in the effort to simplify the
material, the chart was misleading. A producer producing both
oil and gas would not be allowed a 5,000 BOE exclusion for each.
The oil and gas production would be combined for a total 5,000
BOE exclusion.
Senator Dyson concluded therefore that "the energy content" of
the production would be measured.
Mr. Dickinson affirmed that the measurement would be the total
barrel of oil equivalent. He noted that producer "f" on the
aforementioned chart exampled a combined production scenario.
In response to a remark by Co-Chair Green, Senator Dyson
credited his staff for developing the list of questions.
10:55:50 AM
PPT Revenue Studies
Senate Finance Committee
April 21, 2006
10:56:37 AM
CHERIE NIENHUIS, Petroleum Economist, Department of Revenue,
reviewed the Department's handout titled "PPT Revenue Studies"
[copy on file] dated April 21, 2006. The presentation was
designed to address questions or requests that arose during the
April 20th hearing on this bill.
[Note: The pages in this document are not numbered and thus, the
Senate Finance Committee Secretary made a notation on each page
of the corresponding timestamp in which that page was addressed
in this hearing. General descriptive information of each page is
provided in the body of these minutes when feasible. A copy of
the handout can be obtained by contacting the Legislative
Research Library at (907)465-3808.]
Ms. Nienhuis stated that for comparison purposes, revenues that
would be expected under the status quo tax regime, the Economic
Limit Factor (ELF), were added for comparison purposes to the
graph titled "Effect of Tax Rate: Annual Oil Severance Tax
($Millions) Status Quo and Senate Finance CS with 22.5% and 25%
Tax Rate at $20, $40, and $60 per bbl, Low Volume Scenario" for
the years 2007 through 2030.
Ms. Nienhuis "cautioned" the Committee against focusing on
actual revenues. Instead the focus should be on the trends
depicted on the graph.
10:58:55 AM
Mr. Dickinson pointed out that at a $20 per barrel oil price,
the revenue generated by ELF would exceed that generated by
either the 22.5 Petroleum Production Tax (PPT) proposed in
Version "P" or the 25 percent PPT rate proposed in CSSB
305(RES).
Senator Bunde asked for re-verification that ELF would generate
more revenue at a $20 barrel price than the 22.5 percent
proposed in Version "P".
Ms. Nienhuis concurred.
Senator Bunde observed however, that at the "more predicted"
price of $40 a barrel, the PPT terms in Version "P" would
produce "a net gain" over ELF.
Ms. Nienhuis agreed. The revenue that would be generated in a
single year at higher prices under the PPT would more than
offset the revenue generated over a number of years at lower
prices.
11:00:02 AM
Senator Bunde addressed the argument that lowering taxes would
provide a company "more money to invest". This in turn would
encourage "more production". However, no one has been able to
provide a definitive answer to his question about the sort of
production levels that could be guaranteed in that case. Thus,
he was curious to the production level the Department of Revenue
utilized in its modeling scenarios; specifically whether it was
based on the theory there would be a production increase due to
increased investment or based on no new investment.
Ms. Nienhuis responded that the Department utilized a variety of
different volume scenarios. The information depicted in this
chart was based on the Department's Spring 2006 Revenue
Production Forecast book. That forecast was adjusted frequently
with an official forecast was typically published in the fall
and spring of each year. A low volume scenario would indicate
that the "forecast doesn't take into account any kind of
incentives". While the belief was that incentives would provide
additional production, the Department avoided modeling that. It
instead attempted "to show the effect of the tax" without "the
influence of these other factors that could change".
11:01:35 AM
Senator Bunde understood therefore that the information depicted
on the Department's chart could be viewed as "worst case
scenarios". Continuing, he asked how the modeling would appear
were no increased investment to occur under the PPT regardless
of the tax rate.
Ms. Nienhuis noted that economists would argue that increased
taxes would decrease production. Conversely, the hope was that
increased incentives would increase production. The Department
attempted to avoid modeling "any of those things" as the effect
was to reflect "the effect of the tax and how the tax and
credits work". Thus, a low volume scenario would not include
such affects.
Ms. Nienhuis continued however that "in the high volume
scenario, we do include additional volumes we believe will be
discovered and produced" in conjunction with the development of
a gasline on the North Slope.
Ns. Nienhuis stated that the majority of the Department's
efforts were to the low volume scenario, as it aligned with the
data historically depicted in the Revenue Forecast book. In
addition, a low volume scenario to be one the Department was
"more certain of" at this time.
11:02:49 AM
Senator Bunde asserted that since that producers were unable to
provide "a guarantee of future investment. … Certainty is only
coming from our side, not from the other side".
11:03:05 AM
Mr. Dickinson noted that had the 20 percent tax, 20 percent
credit (20/20 tax/credit) PPT terms proposed in the original
bill, SB 305, been depicted on the chart, its revenue would also
have been higher than that generated by ELF at $40, and lower
than that generated by ELF at a $20 per barrel price.
Co-Chair Green voiced concern that the modeling did not reflect
either the negative or positive impact of the PPT on future
investment in the State.
11:03:53 AM
Mr. Dickinson responded that the effort behind the charts "was
to show the mechanical effect" of the PPT. While the
relationship between the amount of the investment and the amount
of production was undeniable, the exact level of that
relationship was unknown.
Mr. Dickinson specified that a high volume modeling scenario
would reflect the investment, production, and revenue situation
were the PPT incentives to work. The low volume scenario might
not reflect the worst case scenario, as even those forecasts
would be unobtainable were "investment to dry up"; continuing
investment would be required to support the low volume
modelings.
Mr. Dickinson reiterated that the effort was to reflect the
"mechanical effects of the PPT" or how the "the macro-economic
efforts of how this would play out, but directionally I think an
economist would tell you if you incent behavior, you'll get more
of it"; if you tax behavior, you'll get less of it". The hope
was that this legislation would "strike a balance that will in
fact create more investment". Hopefully, high prices would not
result in "misbehavior" that has not been anticipated.
11:05:21 AM
Co-Chair Green understood that the expected decline in
production had been factored into the modeling.
Mr. Dickinson affirmed. That decline, as projected in the
Revenue Source book, was depicted on the chart.
11:05:39 AM
Senator Bunde agreed that it would be impossible to predict
investment and production levels as "capital was a very fluid
thing". There would be competition for capital in the global
marketplace regardless "of what we do".
Mr. Dickinson stated that were the State to adopt a 20/20
tax/credit, and everyone else in the world to implement a 10
percent tax /20 percent credit tax (10/20 tax/credit) regime,
business would go elsewhere.
11:06:25 AM
Ms. Nienhuis next addressed the chart titled "Distribution of
Future Cash Flows Under SQ, Gov's Bill, House Res, Sen Res* and
Proposed Sen Fin CS at 22.5/25 and at 25/25, FY 2007-2016". One
graph line on the chart reflected a hypothetical 25 percent
tax/25 percent credit (25/25 tax/credit) scenario and another
reflected the proposal being furthered in the House of
Representatives committee substitute CSSB 488(RES). Due to its
Progressivity provisions, the House graph line markedly sloped
upward and surpassed the Government Take ratio of Version "P"s
22.5 percent tax / 25 percent credit (22.5/25 tax/credit) at a
$50 barrel price, as well as the hypothetical 25/25 tax/credit
at the $70 barrel price level.
Ms. Nienhuis noted that the asterisk on the chart indicated that
the Progressivity tax was deducted only once in the CSSB
304(RES) calculation depicted on this chart even though that
bill allowed it to be deducted twice. The Progressivity tax
would not be deductible under Version "P".
11:08:28 AM
Ms. Nienhuis stated that this chart was an extension of the
previous chart; the exception being that the previous chart
ended at the year 2016 while this chart continued to 2030. The
result was "a little higher distribution of cash flow to the
Government". The Government Take percentages relating to the
original 20/20 tax/credit presented in SB 305 did not increase
in alignment with the other PPT proposals because its transition
and allowance time frame were "shorter term mechanisms. They
lose their affect over time".
Ms. Nienhuis noted that SB 305's Government Share was also
affected by the fact that the $73 million standard deduction
included in that bill would continue through 2030.
11:10:05 AM
Ms. Nienhuis next explained the chart titled "Cumulative
Severance Tax Revenues under Governor's Bill as Written, and
with 22.5/25, 22.5/20, and 25/20, Low Volume Scenario 2006 -
2030". This chart was updated to include in its Cumulative
Revenue comparisons how the original bill would perform were a
22.5 tax and 25 percent credit applied to it at $20, $40, and
$60 per barrel prices. In addition, the cumulative revenues of
ELF were also depicted.
11:10:55 AM
Ms. Nienhuis stated that the slide titled "Cumulative Severance
Tax Revenues under Governor's Bill as Written, and with 22.5/25,
22.5/20, and 25/20, High Volume Scenario 2006 - 2050" depicted
how the original bill, SB 305, would perform at alternative
tax/credit rates under a high volume scenario. The volumes would
be expected to double. She reiterated that since the High Volume
scenario also assumed there would be a gas pipeline, the
upstream costs of the gas pipeline were included in the
calculations.
11:11:23 AM
Senator Bunde asked for confirmation that the high volume
scenario would generate approximately twice the revenues
generated in a low volume scenario.
Ms. Nienhuis affirmed.
Senator Bunde understood that the additional investment being
sought by the PPT would serve "to slow the decline". To that
point, a high volume scenario would slow the decline whereas a
low volume scenario would depict "maximum decline".
Ms. Nienhuis reiterated that a number of things accompanied the
high volume scenario forecast; the development of a gas pipeline
would alter the production rate in Prudhoe Bay; while it would
continue to decline, the life of the field would be "prolonged".
In addition, the Point Thomson field would come online were
there a gas pipeline. There would also be additional
opportunities for oil exploration and thus it was likely that
more oil would be discovered.
Senator Bunde asked whether the information depicted on the
chart was limited to oil or reflected oil and gas BOE.
Ms. Nienhuis qualified that the chart solely reflected oil
revenues.
Ms. Nienhuis also noted that the high volume scenario chart
depicted cumulative revenues over a longer timeframe than the
low volume scenario chart. The high volume scenario chart
depicted revenues through the year 2050; 20 more years than the
low volume chart.
11:13:08 AM
Mr. Dickinson qualified that a large percent of the additional
revenue projected in the High Volume scenario was due to the
"additional time period".
Senator Hoffman pointed out that in order to accurately gauge
the revenue the State would receive under SB 305 at various
tax/credit percents and barrel prices, the amount generated by
ELF, which was also depicted on the graph, should be subtracted
from each revenue scenario.
Mr. Dickinson affirmed.
Senator Hoffman noted that the cumulative revenues shown on the
chart were for a 44 year period.
Ms. Nienhuis stated that was correct.
Senator Olson, noting the significant increase in revenues that
occurred between the $20 to $40 barrel price and the $40 to $60
barrel price, asked whether that trend would be expected to
continue as prices increased from $60 to $80 per barrel.
Mr. Dickinson pointed out that, in addition to the significant
jump in revenue that was experienced as prices increased from
$20 to $40 to $60, the revenues within each price grouping
increased as the tax/credit percents applied to SB 305
increased. It would be expected that the revenue trend at an $80
per barrel price "would be dramatically higher" than that
experienced between $40 and $60. The revenue relative to each
tax/credit percent within the $80 grouping would continue the
trend experienced at the other price levels.
Mr. Dickinson stated that because the revenues depicted on this
chart were based on the provisions of SB 305, there was no
Progressivity element. The changes would be "even more dramatic"
were the chart to reflect the Progressivity provisions included
in the House and Senate bills.
11:16:33 AM
Ms. Nienhuis addressed the final chart titled "Cumulative
Severance Tax with Estimated Capital Costs and with Double Est.
Capital Costs ($B) 2006-2030, Low Volume Scenario". She had
taken the initiative to develop this chart because she thought
the information would be of interest to the Committee as it
showed how increased capital costs could affect revenues.
Ms. Nienhuis explained that the Department's modeling forecast
indicated that capital costs in 2007 would be approximately one
billion dollars. The severance taxes that would be experienced
under the provisions of SB 305, CSSB 305(RES), CSHB 488(RES),
and Senate committee substitute Version "P" based on the one
billion dollars in capital costs, were reflected on the chart.
Ms. Nienhuis noted that the severance tax that would be expected
under the status quo ELF tax regime was also depicted on the
chart.
Ms. Nienhuis explained that in order to view how increased
capital might affect severance tax revenue, she "doubled those
capital costs". Thus, the severance taxes associated at that
level under the four bill versions were also depicted on the
chart. She noted that while an increase in capital costs would
likely result in an increase in production, the severance tax
calculations on the chart were based on the production level
expected at the one billion dollar capital cost level.
Ms. Nienhuis pointed out that the severance taxes paid under any
of the PPT bill provisions would be higher than that experienced
under ELF when barrel prices ventured beyond a $40 price.
11:18:53 AM
Mr. Dickinson used the information depicted on the chart to
respond to a question posed earlier by Senator Bunde. "The point
is, if our forecast is wildly optimistic, and what is required
is a huge influx of capital, and lets just say a doubling of the
capital, then" hopefully the provisions of the bill would be
successful in incentivizing companies to expend more capital. In
that event, "revenue figures would shift" upwards as depicted in
the chart. He noted that the chart only portrayed the effect of
an increase in capital costs as the production levels that were
considered were those that would accompany the one billion
dollar capital cost level.
Mr. Dickinson noted that "the amount of investment a company
makes is irrelevant to the taxes they pay under the status quo".
The only affect investment would have under ELF would be in
regards to how it might affect production.
11:19:52 AM
Senator Bunde understood therefore that, were this bill
successful in creating "a successful reaction from the
industry", … there would be increased" investment. This would
"maintain current levels of production".
Senator Bunde thought that the severance tax revenues generated
by the various bill versions at the forecasted one billion
dollar capital cost level would be "the more realistic
projections", as he doubted investments would double.
11:20:28 AM
Mr. Dickinson deemed the area between the projections for the
one billion dollar capital cost level and the $2.1 billion
dollar capital cost area to be "the zone in which we'll actually
be operating".
11:20:39 AM
Senator Bunde asked how a delay in the effective date of the
bill would affect revenues.
11:20:55 AM
Mr. Dickinson referred the Committee to the "Effective Date
Change From 04/01/2006 to 07/01/2006 at $60 per Barrel Oil"
chart that had been included in his April 20, 2006 "PPT Revenue
Studies" presentation [copy on file].
11:21:33 AM
Mr. Dickinson concluded that the cost of delaying the bill by
three months could be calculated by dividing the annual $418
million revenue projection on that chart by one third. Noting
that the price of oil on April 20, 2006 was $70 a barrel, he
noted that changing barrel prices would affect that revenue
figure.
Senator Bunde calculated therefore that the loss would be
approximately $125 million each month the implementation of the
bill was delayed.
Mr. Dickinson thought that the cost would likely be $140 million
per month.
11:22:41 AM
Co-Chair Wilken asked for further discussion about whether the
cost of addressing oil spills would be deductible under Version
"P". The language pertaining to Version "P" as presented on the
"Comparison of PPT Bill Versions - Highlights" handout [copy on
file] discussed on April 12, 2006 was confusing as it stated
"yes, if on lease (not precluded)".
11:23:16 AM
Mr. Dickinson apologized that the information had been
abbreviated to a point that caused confusion. Currently, the
costs associated with a downstream catastrophic oil spill of
100,000 barrels or more or one that had been declared by the
Governor as such due to such things as life/safety issues would
not be deductible in the calculation of the gross value at the
point of production.
Mr. Dickinson advised that this Statute specifically addressed
marine or inland waterway spills such as the Exxon Valdez oil
spill.
Mr. Dickinson stated that this language was incorporated into
the deduction for net value in the CSHB 488(RES) PPT bill. Thus,
a catastrophic oil spill that dumped more than 100,000 barrels
of oil into an inland waterway would not be deductible. There
would have been no prohibition on those spill expenses were it
to occur on land.
Mr. Dickinson stated that the current prohibition was not
included in either CSSB 305(RES) or Version "P". Therefore the
costs associated with "reacting to an oil spill … would be
considered an ordinary and necessary cost of doing business".
11:25:52 AM
Co-Chair Wilken understood therefore that current Statute
contained a "barrel limit and a geographic qualifier".
Continuing, he directed attention to Sec. 26 subsection
(d)(2)(F) beginning on page 20, line 31. This language reads as
follows.
(F) costs arising from fraud, willful misconduct,
or negligence;
Co-Chair Wilken asked whether the costs of addressing a
catastrophic oil spill would be disallowed were the State to
prove the spill resulted from willful misconduct or negligence.
Mr. Dickinson deferred to Mr. Mintz with the Department of Law.
Co-Chair Wilken stated that this question was prompted by a
recent spill caused by a company's negligence.
11:26:57 AM
Mr. Mintz stated that one must consider that "the list of items
that are expressly not deductible" under Sec. 26 subsection Sec.
43.55.160(d)(2) beginning on page 20 line 23 through page 21
line 20 "was not intended to be an exhaustive list". The listing
included only "items that as a matter of policy a Legislature
would be declaring are not deductible whether or not they might
otherwise be direct costs, they would be deductible". Therefore,
the exclusion of an item from that list "does not mean that it's
necessarily deductible". The "general answer" would be that "the
cost of cleaning up or other costs associated with a spill would
be deductible if they are direct, ordinary, and necessary costs
of exploring for, developing or producing oil or gas, and
otherwise they are not deductible".
Mr. Mintz communicated that neither CSSB 305(RES) nor Version
"P" addressed this issue "any more than that". Thus, the State
would be required to address the issue on a case by case basis.
Things such as "industry practices under joint operating
agreements", as specified in the bill, would be considered in
each determination. Were the issue not addressed in the bill,
then the department would be required to "make its determination
based … on the meaning of direct, ordinary and necessary". Since
this issue is not specifically addressed in Version "P", the
outcome would be unpredictable.
11:28:51 AM
Co-Chair Wilken asked whether the inclusion of the word
"negligence" in Sec. 26 subsection (d)(2)(F) would provide "the
latitude" that would be required for "the department to
determine whether its deductible".
Mr. Mintz affirmed that that language would "definitely imply …
that if negligent conduct or omissions led to a spill which in
turn led to costs, then that could be excluded".
There be no further questions, Co-Chair Green requested that
Members submit their amendments today. The intent was to discuss
members' and bill drafter amendments during the afternoon
Committee hearing.
In response to a question from Senator Stedman, Co-Chair Green
expressed the desire to finalize the bill tomorrow.
Co-Chair Wilken asked whether the Legislature's PPT consultant,
Econ One Research, Inc, had provided any information pertinent
to Version "P".
Co-Chair Green stated that no information had been received from
Econ One.
The bill was HELD in Committee.
ADJOURNMENT
Co-Chair Lyda Green adjourned the meeting at 11:30:34 AM
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