Legislature(2005 - 2006)SENATE FINANCE 532
04/21/2006 01:00 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 305 | TELECONFERENCED | |
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
April 21, 2006
1:20 p.m.
CALL TO ORDER
Co-Chair Lyda Green convened the meeting at approximately
1:20:50 PM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Bert Stedman
Senator Lyman Hoffman
Also Attending: SENATOR BEN STEVENS; SENATOR TOM WAGONER;
DARWIN PETERSON, Staff to Co-Chair Green; DAN DICKINSON, CPA,
and consultant to the Department of Revenue; MARK HANLEY, Public
Affairs Manager, Anadarko Petroleum Corporation;
Attending via Teleconference: From an offnet location: ROB
MINTZ, Assistant Attorney General, Oil, Gas and Mining Section,
Civil Division, Department of Law
SUMMARY INFORMATION
SB 305-OIL AND GAS PRODUCTION TAX
The Committee heard from a consultant to the Department of
Revenue, from the Department of Law, and from a representative
of the oil and gas industry. Five amendments to the committee
substitute were considered and four were adopted. The bill was
held in Committee.
1:20:59 PM
CS FOR SENATE BILL NO. 305(RES)
"An Act providing for a production tax on oil and gas;
repealing the oil and gas production (severance) tax;
relating to the calculation of the gross value at the point
of production of oil or gas and to the determination of the
value of oil and gas for purposes of the production tax on
oil and gas; providing for tax credits against the tax for
certain expenditures and losses; relating to the
relationship of the production tax on oil and gas to other
taxes, to the dates those tax payments and surcharges are
due, to interest on overpayments of the tax, and to the
treatment of the tax in a producer's settlement with the
royalty owners; relating to flared gas, and to oil and gas
used in the operation of a lease or property under the
production tax; relating to the prevailing value of oil or
gas under the production tax; relating to surcharges on
oil; relating to statements or other information required
to be filed with or furnished to the Department of Revenue,
to the penalty for failure to file certain reports for the
tax, to the powers of the Department of Revenue, and to the
disclosure of certain information required to be furnished
to the Department of Revenue as applicable to the
administration of the tax; relating to criminal penalties
for violating conditions governing access to and use of
confidential information relating to the tax, and to the
deposit of tax money collected by the Department of
Revenue; amending the definitions of 'gas,' 'oil,' and
certain other terms for purposes of the production tax, and
as the definition of the term 'gas' applies in the Alaska
Stranded Gas Development Act, and adding further
definitions; making conforming amendments; and providing
for an effective date."
This was the 15th hearing for this bill in the Senate Finance
Committee. During a previous hearing, CS SB 305 (FIN), 24-
GS2052\P, was adopted as a working document. The amendments
considered at this hearing are to the committee substitute,
Version "P".
1:22:13 PM
Amendment #1: This amendment deletes "tax for certain
expenditures and losses" and inserts "production tax on oil and
gas" in the title of the bill on page 1, lines 4 and 5. The
amended language of the bill title reads as follows.
An Act repealing the oil production tax and the gas
production tax and providing for a production tax on oil
and gas; relating to the calculation of the gross value at
the point of production of oil and 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 production tax on oil and gas; 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 and
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 amendment also deletes "during" and inserts "for" to the
language of AS 43.55.011(g), added through Section 5 on page 4,
line 7. The amended language reads as follows.
In addition to the taxes levied under (e) and (f) of this
section, for each month for which the price index
determined under (h) of this section is greater than zero,
there is levied on the producer of oil or gas a tax for all
oil and gas produced during that month from each lease or
property in the state…
This amendment also inserts "tax" following "may take a" in
subsection (a) of Sec. 43.55.170. Additional nontransferable tax
credit., added by Section 26 on page 23, line 29. The amended
language reads as follows.
(a) For a month that ends before July 1, 2016, and for
which a producer's tax liability under AS 43.55.011(e)
exceeds zero before application of an credits under this
chapter, a producer that qualifies under (c) of this
section may take a tax credit under this section. …
This amendment also deletes "credit applied" and inserts
"credits applied by the producer" to the language of Sec.
43.55.170(b)(4) and (5) on page 24, line 13 and lines 15 and 16.
The amended language reads as follows.
(4) except as provided in (5) of this subsection,
may not be applied if it would cause the total of the tax
credits applied by the producer under this section during a
calendar year to exceed $14,000,000; and
(5) may not be applied if it would cause the
total of the tax credits applied by the producer under this
section during 2016 to exceed $7,000,000.
This amendment also makes a technical correction to the new
paragraphs added to AS 43.55.900 in Section 34 on page 27, line
30. The paragraph was numbered as (2). This amendment numbers
the paragraph as (20).
Co-Chair Green moved for adoption of the amendment and objected
to provide an explanation.
1:22:22 PM
DARWIN PETERSON, Staff to Co-Chair Green, testified that the
amendment to the title language is necessary to conform to the
addition of a new bill section that provides for a tax exemption
on the first 5,000 barrels of oil produced. Credits would no
longer be limited to expenses and losses.
Mr. Peterson outlined the other changes made in this amendment
to provide conformity or clarity.
1:24:36 PM
Co-Chair Green withdrew her objection to the adoption of the
amendment.
The amendment was ADOPTED without further objection.
1:24:49 PM
Amendment #2: This amendment includes the provisions of AS
43.55.011(g) under which the provisions of AS 43.55.020(d) is
subject. The amended language of AS 43.55.020(d), amended by
Section 9 on page 5, line 19 through page 6, line 2, reads as
follows.
(d) In making settlement with the royalty owner for
oil and gas that is taxable under AS 43.55.011, the
producer may deduct the amount of the tax paid on taxable
royalty oil and [OR] gas, or may deduct taxable royalty oil
or gas equivalent in value at the time the tax becomes due
to the amount of the tax paid. Unless otherwise agreed
between the producer and the royalty owner, the amount of
the tax paid under AS 43.55.011(e) and (g) on taxable
royalty oil and gas for a month other than oil and gas the
ownership or right to which constitutes a lessor's royalty
interest under an oil and gas lease is considered to be the
gross value at the point of production of the taxable
royalty oil and gas produced during the month multiplied by
a figure that is a quotient, in which
(1) the numerator is the producer's total tax
liability under AS 43.55.011(e) and (g) for the month of
production; and
(2) the denominator is the total gross value at
the point of production of the oil and gas taxable under AS
43.55.011(e) and (g) produced by the producer from all
leases and properties in the state during the month.
New Text Underlined [DELETED TEXT BRACKETED]
This amendment also inserts "is claimed" following "credit", in
subsection (d) of Sec. 43.55.024. Tax credits for certain losses
and expenditures., added by Section 12 on page 8, line 18. The
amended language reads as follows.
…(2) if the applicant is required under AS
43.55.030(a) and (e) to file a statement on or before March
31 of the year following the calendar year in which the
qualified capital expenditures or carried-forward annual
loss for which the credit is claimed was incurred, the date
the statement was filed; …
This amendment also inserts three statutory references following
"AS 43.55.025" to the language of to AS 43.55.024(i)(3)(C) in
Section 5 on page 10 line 17 to read as follows.
(C) if a credit for that expenditure was
taken under AS 38.05.180(i), AS 41.09.010, AS
43.20.043, or AS 43.55.025;
This amendment also deletes "5,000 or more" and inserts "more
than 5,000" to the language of Sec. 43.55.170(a)(2) on page 24,
line 3. The amended language reads as follows.
(2) more than 5,000, the amount of the credit is
22.5 percent of the producer's production tax value for
that month under AS 43.55.160(a) multiplied by the quotient
of 5,000 divided by the average number of barrels of oil
equivalent produced a day during that month and taxable
under AS 43.55.011(e).
This amendment also inserts a new section to AS 43.55 in Section
26 on page 24, following line 26 to read as follows.
Sec. 43.55.180. Required reports. (a) The Department
of Revenue shall
(1) study
(A) the effects of the tax rates under AS
43.55.011(f) and of potential changes in those tax
rates on state revenue and on oil and gas exploration,
development, and production on private land; and
(B) the fairness of the tax rates under AS
43.55.011(f) and of potential changes in those tax
rates for private landowners; and
(2) prepare a report on or before the first day
of the 2013 regular session of the legislature on the
results of the study made under (1) of this subsection,
including a recommendation as to whether those tax rates
should be changed; the department shall notify the
legislature that the report prepared under this paragraph
is available.
(b) the Department of Revenue shall
(1) study the effects of the credits authorized
by AS 43.55.025 and 43.55.170 on state revenue, on the
encouragement of exploration, development, and production
of oil and gas deposits located in the state, and on the
encouragement of new entrants into the oil and gas industry
in the state; and
(2) prepare a report on or before the first day
of the 2015 regular session of the legislature on the
results of the study made under (1) of this subsection, and
shall include with the report a recommendation as to
whether the legislature should extend the availability of
the credits under AS 43.55.025 and 43.55.170 beyond June
30, 2016; the department shall notify the legislature that
the report prepared under this paragraph is available.
This amendment also deletes the language of Section 36 on page
28, lines 4 through 27, which reads as follows.
Sec. 36. The uncodified law of the State of Alaska is
amended by adding a new section to read:
REQUIRED REPORTS. (a) The Department of Revenue shall
(1) study
(A) the effects of tax rates under AS
43.55.011(f) and of potential changes in those tax
rates on state revenue and on oil and gas exploration,
development and production on private land; and
(B) the fairness of the tax rates under AS
43.55.011(f) and of potential changes in those tax
rates with respect to private landowners; and
(2) prepare a report on or before the first day
of the 2013 regular session of the legislature on the
results of the study made under (1) of this subsection,
including a recommendation as to whether those tax rates
should be changed; the department shall notify the
legislature that the report prepared under this paragraph
is available.
(b) the Department of Revenue shall
(1) study the effects of the credit authorized by
AS 43.55.170, added by sec. 26 of this Act, on state
revenue, on the encouragement of exploration, development,
and production of oil and gas deposits located in the
state, and on the encouragement of new entrants into the
oil and gas industry in the state; and
(2) prepare a report on or before the first day
of the 2015 regular session of the legislature on the
results of the study made under (1) of this subsection, and
shall include with the report a recommendation as to
whether the legislature should extend the availability of
the credit under AS 43.55.170, added by sec. 26 of this
Act, beyond June 30, 2016; the department shall notify the
legislature that the report prepared under this paragraph
is available.
This amendment also makes numerous conforming changes to the
bill to accommodate the provisions of this amendment.
Co-Chair Green moved for adoption and objected to provide an
explanation.
Mr. Peterson informed that AS 43.55.011(g) under which the
provisions of AS 43.55.020(d) would be subject, relates to
progressivity. AS 43.55.020(d) stipulates the formula utilized
to calculate the royalty share of the production tax for
overriding royalties, i.e. royalties other than lessor
royalties. This amendment would include the progressivity tax in
the calculation.
Mr. Peterson noted the addition of language to AS 43.55.024(d)
was to correct an omission made in the drafting process.
Mr. Peterson stated the additional statutory references included
in AS 43.55.024(i)(3)(C) relate to information provided to the
Committee by the Department of Revenue and provides that
producers could not "double dip" and receive credit under this
subsection if credit was taken under the provisions of the
Petroleum Production Tax (PPT).
Mr. Peterson explained this amendment would also codify the
reporting requirements of the Department of Revenue to the
legislature and make conforming changes to the bill to
accommodate the addition of Sec. 43.55.180. In addition the
"credit extension language" enacted through SB 185 of a previous
legislative session, was included in this section. Subsequently,
three reports would be received by the legislature from the
Department of Revenue and relate to private royalty, the lapse
of the base allowance of 5,000 barrels of oil per day, and the
lapse date of the credits provided in SB 185.
1:28:25 PM
Senator Hoffman asked the relation of the "double dipping"
prohibition inserted to AS 43.55.024(i)(3)(C) to the similar
language of AS 43.55.024(a)(1).
Mr. Peterson replied that the statutory references in subsection
(a) refer to the 25 percent tax credit against capital
expenditures. A producer could not take a tax credit under the
provision of subsection (i), if a credit was taken under the
provision of (a). The intent is to ensure consistency.
Senator Hoffman clarified that the inclusion of the statutory
references was omitted in error from the language of subsection
(i) of the committee substitute.
Mr. Peterson affirmed.
Mr. Peterson continued that the remaining changes included in
this amendment are conforming and technical to the sectional
changes made in this amendment.
1:31:25 PM
Senator Stedman assumed the purpose of codifying the reporting
requirement is to prevent the task from being "overlooked".
Co-Chair Green affirmed.
1:31:47 PM
Co-Chair Green removed her objection to the adoption of the
amendment.
There was no further objection and the amendment was ADOPTED.
Amendment #3: This amendment deletes the language of subsection
(d)(2)(B) of Sec. 43.55.160. Determination of production tax
value of oil and gas., added by Section 26 on page 20, line 25,
and inserts new language to read as follows.
(B) oil or gas royalties, production
payments, lease profit shares, or other payments or
distributions of a share of oil or gas production,
profit, or revenue;
This amendment also inserts "in a gas processing plant"
following "processing" to AS 43.55.900(6)(B)(i) and (ii),
repealed and reenacted by Section 31, on page 26, line 4 and
line 6. The amended language reads as follows.
(i) are recovered by mechanical
separation of well fluids by gas processing in a
gas processing plant; and
(ii) exist in a gaseous phase at the
completion of mechanical separation and any gas
processing in a gas processing plant; and
This amendment to AS 43.55.900(7)(B)(i),(ii) and (iii), and (C)
repealed and reenacted by Section 32 on page 26, also deletes
"gas processing" and inserts "run through a gas processing
plant" on lines 23 and 26, deletes "subjected to or recovered by
gas processing" and inserts "run through a gas processing plant"
on line 28, deletes "after completion of gas processing" and
inserts "downstream of the plant" on line 30, and inserts
"plant" following "processing" on line 31. The amended language
reads as follows.
(B) for gas, other than gas described in (C)
of this paragraph, that is
(i) not subjected to or recovered by
mechanical separation or run through a gas
processing plant, the value of the gas at the
first point where the gas is accurately metered;
(ii) subjected to or recovered by
mechanical separation but not run through a gas
processing plant, the value of the gas at the
first point where the gas is accurately metered
after completion of mechanical separation;
(iii) run through a gas processing
plant, the value of the gas at the first point
where the gas is accurately metered downstream of
the plant;
(C) for gas run through an integrated gas
processing plant and gas treatment facility that does
not accurately meter the gas after the gas processing
and before the gas treatment, the value of the gas at
the first point where gas processing is completed or
where gas treatment begins, whichever is further
upstream;
This amendment also inserts "in a gas processing plant"
following "processing" to AS 43.55.900(10) repealed and
reenacted by Section 33 on page 27, line 9. The amended language
reads as follows.
(10) "oil" means
(A) crude petroleum oil; and
(B) all liquid hydrocarbons that are
recovered by mechanical separation of well fluids or
by gas processing in a gas processing plant;
This amendment also deletes the language of AS
43.55.900(18)(A)(iii) on page 27 lines 21 and 22 and makes
necessary technical conforming changes. The deleted language
reads as follows.
(iii) upstream of any gas treatment and
upstream of the inlet of any gas pipeline system
transporting gas to a market;
This amendment also adds a new paragraph to AS 43.55.900 amended
by Section 34 on page 27 following line 23 and makes necessary
technical conforming changes to read as follows.
(19) "gas processing plant" means a facility that
(A) extracts and recovers liquid
hydrocarbons from a gaseous mixture of hydrocarbons by
gas processing; and
(B) is located upstream of any gas treatment
and upstream of the inlet of any gas pipeline system
transporting gas to a market;
(20)…
This amendment also inserts a new subparagraph to AS
43.55.900(19) [renumbered (20) by the preceding portion of this
amendment] amended by Section 34 on page 27, following line 29
to read as follows.
(C) does not include
(i) dehydration required to facilitate
the movement of gas from the well to the point
where gas processing takes place;
(ii) the scrubbing of liquids from gas
to facilitate gas processing;
This amendment was NOT OFFERED.
1:32:03 PM
Amendment #4: This amendment deletes "INTENT OF SEC. 11 OF THIS
ACT.", and inserts "LEGISLATIVE INTENT. (a)" and adds a new
subsection (b) to Section 1 on page 2, line 13. The amended
language reads as follows.
Section 1. The uncodified law of the State of Alaska is
amended by adding a new section to read:
LEGISLATIVE INTENT. (a) It is the intent of the
legislature through sec. 11 of this Act to confirm by
clarification the long-standing interpretation of AS
43.55.020(f) by the Department of Revenue.
(b) It is the intent of the legislature that the
division or other unit of the Department of Environmental
Conservation assigned responsibility for administration of
the programs under AS 46.08 that are principally supported
by the conservation surcharges on oil levied under AS
43.55.201 - 43.55.299 and 43.55.300 - 43.55.310
(1) reduce program costs, including personnel
costs, as necessary to operate within the revenue
anticipated to be generated by those surcharges, in the
amounts of those surcharges as amended by secs. 27 and 29
of this Act; and
(2) request appropriations for exceptional
program needs and expansions beyond what can be provided
from the estimated amounts collected form those surcharges
from alternative funding sources.
This amendment also deletes "$.04" and inserts "$.05" to
subsection (a) of Sec. 43.55.300. Surcharge levied., amended by
Section 29 on page 25, line 15. The amended language reads as
follows.
(a) every producer of oil shall pay a surcharge of
$.05 [$.03] per barrel of oil produced from each lease or
property in the state, less any oil the ownership or right
to which is exempt from taxation.
New Text Underlined [DELETED TEXT BRACKETED]
Co-Chair Wilken offered a motion to adopt the amendment and
objected to provide an explanation.
Co-Chair Wilken identified this amendment as pertaining to "the
old split nickel fund", which currently levies six cents per
barrel of oil. The three-cent per barrel surcharge specified in
the original language of this statute is appropriated to the
Department of Environmental Conservation for oil spill
prevention and education activities. The additional two-cent per
barrel surcharge was levied and deposited into a fund dedicated
to addressing a potential catastrophic oil spill until the
balance of that fund reached $50 million, at which time
collection of the surcharge was suspended. This amendment would
increase the current three-cent surcharge for administration of
spill prevention and education to five cents and would decrease
the two-cent surcharge for spill response to one cent. The spill
response fund would subsequently grow at one-half the current
rate in the event monies were withdrawn from that fund. However,
withdrawals from the fund had not been necessary.
Co-Chair Wilken referenced supporting documentation for this
amendment [copy on file], which includes a spreadsheet titled,
"Department of Environmental Conservation Response Fund -
Balance Projection, Change Nickel Split from 2¢/3¢ to 1¢/5¢,
Minimum Capital Cleanup, Known PS Cost Increases and 1.8 mil
Transfer from CPVF" and a line graph titled, "Response Fund
Balance". These utilize information he requested of the
Department of Environmental Conservation.
[Note: The line graph estimates the fund balance for FY 06 at
$4.5 million, FY 07 at $2.5 million, FY 08 at $3.5 million, FY
09 at $4 million, and FY 10 at $4 million.
The spreadsheet details Revenues from the three-cent surcharge,
Cost Recovery/Fines/Penalties, Interest, FY 07 Transfer 1.8
million from DPVF to RF (Language), and Change Nickel Split to
1¢/5¢; Total Expenditures categorized as DEC + annual Salary
Increases - FY 2008 and Out Years, DMVA - Continue Annual
Approp. from RF, and DOT - Continue Annual Approp.; Expenditures
in Excess of Revenue; Capital Expenditures; and Estimated Fund
Balance for the fiscal years 2006 through 2010.]
Co-Chair Wilken remarked that "the bureaucracy has grown through
the funding." Decrease in oil production and increase in
bureaucracy has culminated and the program would have
insufficient revenues to cover its costs for FY 06. Future
legislatures should not be required to address this same problem
and therefore an increase in the surcharge from three cents to
five cents has been proposed. However, the program would again
have insufficient funds to cover expenses beginning in FY 10.
Co-Chair Wilken cited this as the reason the intent language is
proposed; to direct the Department to take necessary actions to
ensure that the program is operated within its budget.
1:35:40 PM
Senator Stedman asked the status of the deductibility of the
surcharge.
Co-Chair Wilken responded that this issue was not addressed in
this amendment.
Co-Chair Green announced that the surcharge would not be
creditable or deductible. The original version of the bill
allowed for a credit against the PPT; however, all committee
substitute versions stipulate otherwise.
1:36:31 PM
Senator Bunde assumed that as revenue decreased as a result of
lower oil production, the workload of the program would also
decrease. He asked if this was the reason for the intent
language directing the Department to "live within their means."
1:36:51 PM
Co-Chair Wilken affirmed that decreased production would
decrease the workload to some extent; however, the exposure to
the possibility of a major oil spill would remain. More
importantly, the intent is to "restrain and not grow the
Department given the funding available."
Co-Chair Wilken withdrew his objection to the adoption of the
amendment.
The amendment was ADOPTED with no further objection.
1:37:37 PM
Amendment #5: This amendment changes the effective date of most
provisions of the legislation from July 1, 2006 to April 1,
2006.
Senator Bunde moved for adoption.
Co-Chair Green objected.
Senator Bunde stated that at the current oil price of
approximately $60 per barrel, the State would generate an
additional $400 million by implementing the PPT structure three
months earlier than proposed in the Senate Finance Committee
substitute. Future prices are unknown and therefore the
legislature should not forgo collection of this revenue.
1:39:20 PM
Senator Hoffman noted he had an amendment drafted by the
Division of Legal and Research Services to accomplish the same
change in the effective date, although that amendment covers
four pages. He asked if the amendment before the Committee was
also drafted by the Division of Legal and Research Services and
if so, the substantive differences between the amendments.
1:39:48 PM
Senator Bunde responded that this amendment was not drafted by
the Division of Legal and Research Services and its only intent
is to reinsert the effective date of the PPT structure as
adopted by the Senate Resources Committee.
Co-Chair Green suggested the Committee defer to the longer
amendment, as it includes all necessary conforming changes.
Senator Bunde WITHDREW his motion to adopt the amendment to
defer to the forthcoming amendment sponsored by Senator Hoffman.
AT EASE to 1:48:27 PM
1:48:33 PM
Amendment #6: This amendment deletes "July 1, 2006" and inserts
"April 1, 2006" where it appears in subsections (h) and (i) of
Sec. 43.55.024. Tax Credits., added by Section 12 on page 9,
lines 21, 29-30 and 30-31, and page 10, line 3. This amendment
also deletes "July 1, 2001, and before July 1, 2006" and inserts
"April 1, 2001, and before April 1, 2006" to subsection (i) on
page 9 line 28. The amended language reads as follows.
(h) A person may not elect to take a tax credit under
(a) of this section for an expenditure incurred to acquire
an asset (1) the cost of previously acquiring which was a
lease expenditure under AS 43.55.160(c) or would have been
a lease expenditure under AS 43.55.160(c) if it had been
incurred on or after April 1, 2006; or (2) that has
previously been placed in service in the state. An
expenditure to acquire an asset is not excluded under this
subsection if not more than an immaterial portion of the
asset meets a description under (1) or (2) of this
subsection. For purposes of this subsection, "asset"
includes geological, geophysical, and well data and
interpretations.
(i) For the purposes of this section,
(1) a producer's transitional investment
expenditures are the sum of the expenditures the producer
incurred on or after April 1, 2001, and before April 1,
2006, that would be qualified capital expenditures if they
were incurred on or after April 1, 2006, less the sum of
the payments or credits the producer received before April
1, 2006, for the sale or other transfer of assets,
including geological, geophysical, or well data
interpretations, acquired by the producer as a result of
expenditures the producer incurred before April 1, 2006,
that would be qualified capital expenditures, if they were
incurred on or after April 1, 2006;
This amendment also deletes June 30, 2013" and inserts "March
13, 2013" to Sec. 43.55.024 (i)(3)(A) on page 10, line 15. The
amended language reads as follows.
(3) a producer may not take a tax credit for
transitional investment expenditure
(A) in any month that ends after March 21,
2013
…
This amendment also deletes "July 1, 2006" and inserts "April 1,
2006" to subsection (c)(1) of Sec. 43.55.160. Determination of
production tax value of oil and gas., added to AS 43.55 by
Section 26 on page 19, lines 7 - 8. The amended language reads
as follows.
(c) for the purposes of this section,
(1) a producer's leas expenditures for a period
are the total costs upstream of the point of production of
oil and gas that are incurred on or after April 1, 2006, by
the producer during the period and that are direct,
ordinary, and necessary costs of exploring for, developing,
or producing oil or gas deposits…
This amendment also deletes "July 1, 2006" and inserts "April 1,
2006" to Sec. 43.55.160(g)(2)(A) on page 22, line 15. The
amended language reads as follows.
(3) the sale or other transfer of
(A) an asset, including geological,
geophysical, or well data or interpretations, acquired
by the producer as a result of a lease expenditure on
an expenditure that would be a lease expenditure if it
were incurred on or after April 1, 2006; …
This amendment also deletes "July 1, 2016" and inserts "April 1,
2016" to subsection (a) of Sec. 43.55.170. Additional
nontransferable tax credit., added to AS 43.55 by Section 26 on
page 23, line 27. The amended language reads as follows.
(a) For a month that ends before April 1, 2016, and
for which a producer's tax liability under AS 43.55.011(e)
exceeds zero before application of any credits under this
chapter, a producer that qualified under (c) of this
section may take a credit under this section…
This amendment also deletes "$7,000,000" and inserts
"$3,500,000" to Sec. 43.55.170(b)(5) on page 24, line 16. The
amended language reads as follows.
(b) A tax credit under this section
…
(5) may not be applied if it would cause the
total of the tax credit applied under this section during
2016 to exceed $3,500,000.
This amendment also deletes "June 30, 2016" and inserts "March
31, 2016" to subsection (b)(2) of REQUIRED REPORTS., added to
the uncodified law of the State of Alaska by Section 36 on page
28, line 25. The amended language reads as follows.
(b) the Department of Revenue shall
…
(2) prepare a report on or before the first day of the
2015 regular session of the legislature on the results of
the study made under (1) of this subsection, and shall
include with the report a recommendation as to whether the
legislature should extend the availability of the credit
under AS 43.55.170, added by sec. 26 of this Act, beyond
March 31, 2016; …
This amendment also deletes "July 1, 2006" and inserts "April 1,
2006" to subsection (a) of APPLICABILITY., added to the
uncodified law of the State of Alaska by Section 37 on page 28,
line 31. The amended language reads as follows.
(a) Sections 5, 7 -10, 12, 13, 15 - 18, 20, and 24 -
35 of this Act apply to oil and gas produced on or after
April 1, 2006.
This amendment also deletes "July 1, 2006" and inserts "April 1,
2006" where it appears on page 29, lines 6-7, 9, 12, 16, 22, 28
and 31 and page 30, lines 1, 4, and 17; deletes "4 1/16 percent"
and inserts "2 7/9 percent" on page 29, line 10; deletes "last
six months" and inserts "last nine months" on page 29, line 14
and 20; deletes "1/12" and inserts "1/18" on page 29, line 18;
deletes "for each of the last six months of 2006, one-sixth of
the producer's adjusted lease expenditures for that six-month
period" and inserts "fore each of the last nine months of 2006,
one-ninth of the producer's adjusted lease expenditures for that
nine-month period" on page 29, lines 25 and 26; deletes
"$7,000,000" and inserts "$10,500,000" on page 29, line 30;
deletes "June 30, 2006" and inserts "March 31, 2006" on page 30,
lines 8, 22, and 27-28; to TRANSITIONAL PROVISIONS., added to
the uncodified law of the State of Alaska by Section 38. The
amended language reads as follows.
TRANSITIONAL PROVISONS. (a) Notwithstanding any
contrary provision of AS 43.55.024(a), enacted by sec. 12
of this Act, for oil and gas produced on or after April 1,
2006, and before January 1, 2007, the phrase "every month
an annualized tax credit in an amount equal to 2 1/12
percent" in AS 43.55.024(a)(1), enacted by sec. 12 of this
Act, shall be replaced by the phrase "every month during
the period April 1, 2006, through December 31, 2006, and
annualized tax credit in an amount equal to 2 7/9 percent."
(b) Notwithstanding any contrary provision of AS
43.55.024(e), enacted by sec. 12 of this Act, for oil and
gas produced on or after April 1, 2006, and before January
1, 2007, the phrase "calendar year" in AS 43.55.024(e),
enacted by sec. 13 of this Act, shall be replaced by the
phrase "the last nine months of the calendar year."
(c) Notwithstanding any contrary provision of AS
43.55.024(i)(2), enacted by sec. 12 of this Act, for oil
and gas produced on or after April 1, 2006, and before
January 1, 2007,
(1) the number "1/24" in AS 43.55.024(i)(2)(B),
enacted by sec. 12 of this Act, shall be replaced by the
number "1/18";
(2) the phrase "calendar year" in AS
43.55.024(i)(2)(B), enacted by sec. 12 of this Act shall be
replaced by the phrase "last nine months of the calendar
year."
(d) Notwithstanding any contrary provision of AS
43.55.160(f), enacted by sec. 26 of this Act, for oil and
gas produced on or after April 1, 2006, and before January
1, 2007, the phrase "for every month of a calendar year,
1/12 of the producer's adjusted lease expenditures for the
calendar year" in AS 43.55.160(f), enacted by sec. 26 of
this Act, shall be replaced by the phrase "for each of the
last nine months of 2006, one-ninth of the producer's
adjusted lease expenditures for that nine-month period."
(e) Notwithstanding any contrary provision of AS
43.55.170(b), enacted by sec. 26 of this Act, for oil and
gas produced on or after April 1, 2006, and before January
1, 2007, the amount of "$14,000,000" in AS 43.55.170(b)(4),
enacted by sec. 26 of this Act, shall be replaced by
"$10,500,000."
(f) For oil and gas produced before April 1, 2006, the
provisions of AS 43.55, and regulations adopted under AS
43.55, that were in effect before April 1, 2006, and that
were applicable to the oil and gas continue to apply to
that oil and gas.
(g) Notwithstanding any contrary provision of AS
43.55.020(a), as repealed and reenacted by sec. 7 of this
Act, for oil and gas produced on or after April 1, 2006,
and before the first day of the first month that begins at
least 180 days after the effective date of sec. 7 of this
Act,
(1) the amount of the taxes that would have been
levied on the producer under AS 43.55, as the provisions of
that chapter read on March 31, 2006, is due on the last day
of each calendar month on the oil and gas that was produced
from each lease or property during the preceding month;
(2) the portion, if any, of the taxes levied
under AS 43.55.011(e)-(g), enacted by sec. 5 of this Act,
that is due under AS 43.55.020(a), as repealed and
reenacted by sec. 7 of this Act, and that remains unpaid,
net of any credits applied as allowed by law, is due on the
last day of the first month that begins at least 180 days
after the effective date of sec. 5 of this Act.
(h) Notwithstanding any contrary provision of AS
43.55.030(a), as amended by sec. 18 of this Act, for oil
and gas produced on or after April 1, 2006, and before the
first day of the first month that begins at least 180 days
after the effective date of sec. 18 of this Act, the person
paying the tax shall file with the Department of Revenue,
at the time an amount of tax is due
(1) under (g)(1) of this section, the statement
required under former AS 43.55.030(a), as that subsection
read on March 31, 2006; and
(2) under (g)(2) of this section, the statements
required under AS 43.55.030(a), as amended by sec. 18 of
this Act.
(i) For purposes of taxes to be calculated and due
under (g)(1) of this section and statements to be filed
under (h)(1) of this section, regulations that were adopted
by the Department of Revenue under AS 43.55, as the
provisions of that chapter read on March 31, 2006, and that
were in effect on that date apply to those taxes and
statements.
This amendment also deletes the language of Section 41 and
Section 42, on page 31, lines 22 - 29, and inserts new language
to read as follows.
Section 41. The uncodified law of the State of Alaska
is amended by adding a new section to read:
RETROACTIVITY OF PROVISIONS OF ACT. Sections 5, 7 -
10, 12, 13, 15 - 18, 20, 24 - 35, 37, and 38 of this Act
apply retroactively to April 1, 2006, and apply to oil and
gas produced after March 31, 2006.
Section 42. This Act takes effect immediately under AS
01.10.070(c).
Senator Hoffman offered a motion to adopt the amendment.
Co-Chair Green objected.
Senator Hoffman pointed out this amendment would accomplish the
same goal as proposed in Amendment #5 in generating for the
State approximately $140 million a month for the period of April
through June of 2006.
Senator Bunde asked about the additional changes to the
committee substitute contained in this amendment compared to the
previous amendment.
Senator Hoffman assured that his request to the bill drafter was
limited to the change in the effective date.
1:50:21 PM
Senator Wagoner asked why the dollar amount contained in
subsection (e) of TRANSITIONAL PROVISIONS., would be different
for the year 2006 than for future years.
Co-Chair Green surmised the amount would be less for 2006 than
the $14 million provided for each year following 2006 because
the new tax structure would not be in effect for all 12 months
of 2006. The original language of the committee substitute
provided for $7 million for 2006 and the amendment would
increase that amount to $10.5 million to account for the
additional three months in which the PPT system would be in
effect.
Co-Chair Green assumed the language of this amendment would be
conformed to the changes adopted in the previous amendments.
A roll call was taken on the motion.
IN FAVOR: Senator Dyson, Senator Hoffman, Senator Olson, Senator
Bunde and Co-Chair Wilken
OPPOSED: Senator B. Stevens and Co-Chair Green
The motion PASSED (5-2)
The amendment was ADOPTED.
1:52:42 PM
Co-Chair Wilken referenced AS 43.55.011(f), added by Section 5,
on page 3, beginning on line 20 and asked how the language of
this subsection is guaranteed to only pertain to private
royalty.
1:53:20 PM
DAN DICKINSON, CPA, and consultant to the Department of Revenue,
directed attention to lines 22 and the language "a lessor's
royalty interest under an oil and gas lease, except for oil and
gas the ownership or right to which is exempt from taxation."
This limits the provision of this subsection to not apply to
leases in which the State or federal government is the lessor.
1:54:04 PM
Co-Chair Wilken asked why this matter could not be addressed in
a manner similar to the provisions governing royalty relief.
Under those provisions, the producer petitions the Department of
Natural Resources, and the Department makes a decision, which is
validated by the legislature.
1:54:35 PM
Mr. Dickinson responded that tax rates are typically set by the
legislature and the executive branch is charged with ensuring
the payment is made. Similarly, the legislature sets the general
terms of a lease, including the right for the commissioner of
the Department to negotiate royalty reductions within the
context of the lease. The commissioner then executes the
contract and presents it to the legislature for approval.
Therefore the "rules" for the "tax function" and the "royalty
function" are different. He knew of no other instances in which
a tax rate is set by an administrator of the executive branch.
1:55:45 PM
Co-Chair Wilken requested the Department of Law comment to this.
1:55:55 PM
ROB MINTZ, Assistant Attorney General, Oil, Gas and Mining
Section, Civil Division, Department of Law, testified via
teleconference from an offnet location, that in addition to the
differences between royalty and tax functions, tax on the
royalty share does not directly affect the producer's economics.
Rather this is a tax on the share, "that goes without deductions
for cost, to the landowner". The producer retains the right to
charge back this expense to the landowner and the amount of the
royalty has already been established by agreement between the
private landowner and the producer. Royalty relief, by contrast,
pertains to the amount of royalty that the lessor producer must
pay to the State and this does affect the economics of the
producer.
1:57:04 PM
Co-Chair Wilken referenced paragraph (1) of subsection (f)
following line 24, "the rate of tax levied on oil produced from
a lease is equal to five percent of the gross value at the point
of production of the oil". He asked how the five percent figure
was determined and how it was determined that five percent would
be the appropriate amount for future years.
1:57:25 PM
Mr. Dickinson answered, "I guess I would ask that the same
question about the 22.5 or the 15 that's in current existing
statute." Research of how the five percent amount correlates to
other taxes and potential impacts on private royalty shares
could be conducted. He remarked, "How do we know that the right
numbers are the right numbers, and obviously you are asking… The
fact that this bill has made it through several committees
suggests that the current numbers aren't the right numbers."
This is the reason the establishment of the amounts is a
legislative function, as it does not involve a "mechanical
calculation of correct tax rate."
1:58:05 PM
Mr. Mintz added that the five percent figure is near the average
effective tax rate in "recent times" under the current economic
limit factor (ELF) system.
1:58:29 PM
Mr. Dickinson indicated that Mr. Mintz's statement was "close"
to being correct.
1:58:34 PM
Co-Chair Wilken asked the possibility of establishing a system
in which the commissioner would recommend a tax rate for
companies with private royalty interest and the legislature
would validate that rate on a lease by lease basis. He asked if
this would be allowable under the Alaska Constitution.
Mr. Mintz replied that a method in which the legislature
ratified a particular administrative action in a manner other
than by enacting a statute through the legislative process would
encounter constitutional "issues" that must be addressed before
such a system were adopted. This matter has been discussed in
the past in the context of legislative ratification of
administrative regulations, although he was not familiar with
all provisions of the current law pertaining to this.
1:59:58 PM
Co-Chair Wilken understood that the original version of this
bill did not stipulate a fixed rate, which he has learned was
not "correct under existing law" as an "abrogation of
responsibility". He asked if this is the reason "we moved to the
new system." He asked if the "expertise available" of the
Department could be utilized to make recommendations to the
legislature as to whether the provisions of the new system were
too "generous" or too "punitive" to a company starting to do
business in the state. He asked if such a system would be
"appropriate" and constitutional.
Mr. Mintz stated that he would research this.
2:01:25 PM
Senator Bunde furthered on this issue, expressing his
understanding that private royalty payers would not be subject
to the "certainty provisions" under consideration for inclusion
in the natural gas pipeline contract. He agreed that the
proposed 20, 25 and 22.5 percentages for the PPT structure are
policy decisions. He asked that if the percentage were deemed
too high or low whether the legislature could change the percent
without violating the certainty provision of the PPT system.
2:02:24 PM
Mr. Dickinson affirmed that the three "applicants, sponsors
under the Stranded Gas Act", ExxonMobil, BP Exploration and
ConocoPhillips "would be the signators to a contract that's
eventually negotiated and that contract will bind no one else."
The legislature would have the ability to change rates if deemed
appropriate.
Mr. Mintz excused himself, as he had a previous commitment.
2:03:32 PM
Senator Hoffman requested participation of Anadarko Petroleum
Corporation to address questions raised about the definition of
point of production at the Point Thompson, Foothills, Nevada
Basin, and Bristol Bay fields.
2:04:13 PM
Senator Hoffman recalled concerns regarding point of production
that were raised by Anadarko in testimony presented at a
previous hearing. The point of production definition would not
apply to the Foothills, Nevada Basin and other fields located on
the North Slope, but would be applicable the remainder of the
fields. He asked if the changes made in the committee
substitute, "Version P", addressed those concerns.
2:04:50 PM
MARK HANLEY, Public Affairs Manager, Anadarko Petroleum
Corporation, testified that the issue had not been resolved in
the committee substitute. He was collaborating with the
Murkowski Administration to draft language that would resolve
the matter. The provisions included in Amendment #3, which was
not offered, would have partially achieved this but required
further discussion.
2:05:18 PM
Senator Hoffman, referencing the proposed ten year extension on
credits to the year 2017, pointed out that many exploration
activities that would occur in the Nenana Basin, in Bristol Bay
and possibly the Foothills locations would not have begun by the
lapse date of the extension provision. He asked if this would be
problematic and whether the witness recommended a solution.
2:05:54 PM
Mr. Hanley noted two different types of credits. The exploration
incentive credits in existing statute would be extended for ten
years under the provisions of the committee substitute and the
corporation supported this "approach."
Mr. Hanley identified the challenge as the development credits,
also referenced as "allowance" and "the 5,000 barrels per day
with a $14 million credit cap." These credits would not be
transferable and could only be utilized against existing
production. Therefore any credits earned by an operator new to
the State or an operator with no production by the expiration of
the provision would be unable to benefit from the credits. These
credits would have no value to a "new player" and he predicted
that companies would not "plan their economics" on an assumption
that the legislature would extend this provision in the future.
He suggested the provision either be extended for more than ten
years, or the lapse date be eliminated.
Mr. Hanley pointed out that the "$73 million allocation"
provision in the original version of the bill did not contain a
lapse date.
2:08:03 PM
Co-Chair Green stated that the development credit includes a
provision to allow for review and possible extension.
Mr. Hanley agreed, but reiterated that most companies would not
base decisions for future activities on the possibility that the
credit would be extended.
2:08:41 PM
Senator Hoffman had similar concerns and indicated he would
propose amendments to address this issue.
Co-Chair Green also intended to address the matter.
2:09:10 PM
Mr. Dickinson began a presentation utilizing an untitled packet
of documents [copy on file].
2:09:56 PM
Page 1
Sale at Market
[Bar graph stating the following:
· $14.5 Billion North Slope Oil - 334 million barrels
(boe) - $43.43/bbl
· $300 million Cook Inlet Oil - 7 million barrels
· $700 million Cook Inlet Gas - 30 million barrels -
$22.00 (3.7 per mcf)
· $40 million North Slope Gas - 2 million barrels]
Mr. Dickinson outlined the information contained on this graph.
He indicated that $43.43/bbl represents an estimated price per
barrel of oil and $22.00 represents an estimated price per
barrel of gas.
2:10:39 PM
Co-Chair Wilken asked what question this information was
intended to answer.
2:10:54 PM
Mr. Dickinson replied that this graph demonstrates the amounts
and sources of oil and gas revenues.
2:12:36 PM
Page 2
Gross Value at Point of Production
[Bar graph containing the information of Page 1 and adds
"Transportation to Market = $1.7 billion" for all items.
The dollar amounts listed on Page 1 are not recalculated.]
Mr. Dickinson stated this shows the relationship of downstream
costs to the total value of the product.
2:13:18 PM
Page 3
Net Value or Production Tax Value
[Bar graph containing the information of Pages 1 and 2,
plus "$1.7 Capital Costs" and "$1.1 billion Operating
Costs" to North Slope and Cook Inlet Oil items, and
highlights a portion of the bars depicting North Slope and
Cook Inlet gas. The purpose of the highlight is not
identified. The dollar amounts listed on Pages 1 and 2 are
not recalculated.]
Mr. Dickinson explained that this information does not pertain
to a specific point, although it demonstrates "relative size".
The amount remaining after deduction of the operating, capital
and transportation to market amounts would be subject to
taxation.
2:14:40 PM
Page 4
Net Value or Production Tax Value
[Bar graph containing the information of Pages 1 through 3
and adds highlights to each bar to represent 22.5 percent
tax. The dollar amounts listed on Pages 1 through 3 are not
recalculated.]
Mr. Dickinson described how this graph demonstrates the amount
of tax at a rate of 22.5 percent in comparison to the operating,
capital and transportation to market amounts. Because the per
barrel price of $43.43 is utilized in this demonstration, no
progressivity tax would be levied under the provisions of the
Senate Finance Committee substitute, although a "small"
progressivity tax would be levied under the provisions of the
Senate Resources Committee substitute.
Mr. Dickinson stated that State royalty, property taxes and
income taxes, and federal taxes would be paid from the amount
remaining after deduction of the PPT tax, operating, capital and
transportation to market costs. The producer would retain the
remainder as profit.
2:15:54 PM
Page 5
Tax Before Credits
2.4 billion
Mr. Dickinson remarked that this page "translates that into
dollar terms."
2:16:09 PM
Page 6
Tax After Credits
[Bar graph listing the following:
· Tax After Credits 1.7 billion
· 3,000 bbl equivalent credit 8 users at max of 14
million = 112 million
· TIE credit 1.7 x .5 x .2 = 170 million
· 1.7b x .25 + 425 million Qualified Capital Expenditure
Credits
Mr. Dickinson outlined this information demonstrating "the
application of three credits that would apply here" and presents
the "order of magnitude". He defined TIE as "transitional
investment credit". He detailed the calculations of the credits.
2:18:49 PM
Page 7
Tax After Credits
[Bar graph listing the information of Page 6 plus a
separate bar graph labeled, "Tax Under Status Quo ~ .9
billion.]
Mr. Dickinson compared the difference in the amount of tax under
the current structure to the amount of tax under the proposed
PPT structure. The new tax would be almost double the current
tax.
2:19:39 PM
Senator Olson asked if highlighted portions of the bar graph on
Page 4 that represent the 22.5 percent tax are the $2.4 billion
amount Tax Before Credits shown on Page 5 and whether this
amount includes tax on both oil and gas.
Mr. Dickinson affirmed.
AT EASE to 2:21:29 PM
ADJOURNMENT
Co-Chair Lyda Green adjourned the meeting at 2:22:02 PM
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