Legislature(2007 - 2008)BUTROVICH 205
11/01/2007 09:00 AM Senate JUDICIARY
| Audio | Topic |
|---|---|
| Start | |
| SB2001 | |
| Dan Dickinson, Consultant to the Legislative Budget & Audit Committee | |
| Steve Porter, Consultant to the Legislative Budget & Audit Committee | |
| Marilyn Crockett and Tom Williams, Aoga | |
| Jonathan Iversen, Director, Tax Division, Department of Revenue | |
| Julie Houle, Section Chief, Resource Evaluation, Division of Oil & Gas, Dnr | |
| Public Testimony | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB2001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE JUDICIARY STANDING COMMITTEE
November 1, 2007
9:05 a.m.
MEMBERS PRESENT
Senator Hollis French, Chair
Senator Charlie Huggins, Vice Chair
Senator Bill Wielechowski
Senator Lesil McGuire
Senator Gene Therriault
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Senator Gary Stevens
Senator Bettye Davis
Senator Thomas Wagoner
Senator Lyda Green
Senator Johnny Ellis
Senator Joe Thomas
COMMITTEE CALENDAR
SENATE BILL NO. 2001
'An Act relating to the production tax on oil and gas and to
conservation surcharges on oil; relating to the issuance of
advisory bulletins and the disclosure of certain information
relating to the production tax and the sharing between agencies
of certain information relating to the production tax and to oil
and gas or gas only leases; amending the State Personnel Act to
place in the exempt service certain state oil and gas auditors
and their immediate supervisors; establishing an oil and gas tax
credit fund and authorizing payment from that fund; providing
for retroactive application of certain statutory and regulatory
provisions relating to the production tax on oil and gas and
conservation surcharges on oil; making conforming amendments;
and providing for an effective date.'
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB2001
SHORT TITLE: OIL & GAS TAX AMENDMENTS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
10/18/07 (S) READ THE FIRST TIME - REFERRALS
10/18/07 (S) RES, JUD, FIN
10/19/07 (S) RES AT 9:00 AM BUTROVICH 205
10/19/07 (S) Heard & Held
10/19/07 (S) MINUTE(RES)
10/20/07 (S) RES AT 8:00 AM BUTROVICH 205
10/20/07 (S) Heard & Held
10/20/07 (S) MINUTE(RES)
10/21/07 (S) RES AT 1:00 PM HOUSE FINANCE 519
10/21/07 (S) Heard & Held
10/21/07 (S) MINUTE(RES)
10/22/07 (S) RES AT 11:30 AM BUTROVICH 205
10/22/07 (S) Heard & Held
10/22/07 (S) MINUTE(RES)
10/23/07 (S) RES AT 9:00 AM BUTROVICH 205
10/23/07 (S) Heard & Held
10/23/07 (S) MINUTE(RES)
10/24/07 (S) RES AT 10:00 AM BUTROVICH 205
10/24/07 (S) Heard & Held
10/24/07 (S) MINUTE(RES)
10/25/07 (S) RES AT 10:00 AM BUTROVICH 205
10/25/07 (S) Heard & Held
10/25/07 (S) MINUTE(RES)
10/26/07 (S) RES AT 1:30 PM BUTROVICH 205
10/26/07 (S) Heard & Held
10/26/07 (S) MINUTE(RES)
10/27/07 (S) RES AT 9:00 AM BUTROVICH 205
10/27/07 (S) Moved CSSB2001(RES) Out of Committee
10/27/07 (S) MINUTE(RES)
10/28/07 (S) RES AT 0:00 AM BUTROVICH 205
10/28/07 (S) -- MEETING CANCELED --
10/29/07 (S) RES RPT CS 1NR 6AM NEW TITLE
10/29/07 (S) NR: GREEN
10/29/07 (S) AM: HUGGINS, MCGUIRE, STEVENS, STEDMAN,
WIELECHOWSKI, WAGONER
10/29/07 (S) JUD AT 9:30 AM BUTROVICH 205
10/29/07 (S) Heard & Held
10/29/07 (S) MINUTE(JUD)
10/30/07 (S) JUD AT 9:00 AM BUTROVICH 205
10/30/07 (S) Heard & Held
10/30/07 (S) MINUTE(JUD)
10/31/07 (S) JUD AT 9:00 AM BUTROVICH 205
10/31/07 (S) Heard & Held
10/31/07 (S) MINUTE(JUD)
11/01/07 (S) JUD AT 9:00 AM BUTROVICH 205
WITNESS REGISTER
DAN DICKINSON, Consultant
to the Legislative Budget & Audit Committee
POSITION STATEMENT: Testified and answered questions during
hearing on SB 2001.
STEVE PORTER, Consultant
to the Legislative Budget & Audit Committee
POSITION STATEMENT: Testified and answered questions during
hearing on SB 2001.
MARILYN CROCKETT, Executive Director
Alaska Oil and Gas Association (AOGA)
POSITION STATEMENT: Introduced Tom Williams and answered
questions during hearing on SB 2001.
TOM WILLIAMS, Chair
Alaska Oil and Gas Association Tax Committee
POSITION STATEMENT: Testified and answered questions during
hearing on SB 2001.
JONATHAN IVERSEN, Director
Tax Division
Department of Revenue
Anchorage, AK
POSITION STATEMENT: Testified and answered questions during
hearing on SB 2001.
JULIE HOULE, Section Chief
Resource Evaluation
Division of Oil & Gas
Department of Natural Resources
Anchorage, AK
POSITION STATEMENT: Testified and answered questions during
hearing on SB 2001.
JACKIE STEWART
Juneau, AK
POSITION STATEMENT: Testified on SB 2001 during public hearing.
TIM ARNOLD
Juneau, AK
POSITION STATEMENT: Testified on SB 2001 during public hearing.
DONALD BENSON
Matanuska-Susitna Borough
POSITION STATEMENT: Testified on SB 2001 during public hearing.
MARK SHARP
Fairbanks, AK
POSITION STATEMENT: Voiced concerns during hearing on SB 2001.
BUZZ OTIS
Great Northwest
Fairbanks, AK
POSITION STATEMENT: Testified on SB 2001 during public hearing.
JERRY McCUTCHEON
Anchorage, AK
POSITION STATEMENT: Stated concerns during hearing on SB 2001.
STU GRENIER
Anchorage, AK
POSITION STATEMENT: Testified on SB 2001 during public hearing.
AVES THOMPSON, Executive Director
Alaska Trucking Association
Anchorage, AK
POSITION STATEMENT: Testified on SB 2001 and PPT issues.
JASON BRUNE, Executive Director
Resource Development Council
Anchorage, AK
POSITION STATEMENT: Testified on SB 2001 and PPT.
JEFFREY KNAUF
Girdwood, AK
POSITION STATEMENT: Testified in support of original SB 2001.
EMILY FORD, Government and External Affairs Manager
Anchorage Chamber of Commerce
Anchorage, AK
POSITION STATEMENT: Testified on SB 2001 and PPT.
JIM SYKES
Palmer, AK
POSITION STATEMENT: Testified on SB 2001 during public hearing.
DAWN MENDIAS
Chugiak, AK
POSITION STATEMENT: Testified on SB 2001 during public hearing.
SIG RUTTER
POSITION STATEMENT: Testified on SB 2001 during public hearing.
MARY AND JIM ODDEN
Nelchina, AK
POSITION STATEMENT: Testified on SB 2001 via a joint statement
read by Mary Odden.
MALCOLM RAY
Eagle River, AK
POSITION STATEMENT: Voiced concerns during hearing on SB 2001.
DANIEL B. WINN
Homer, AK
POSITION STATEMENT: Testified on SB 2001 during public hearing.
KELLY WALTERS
POSITION STATEMENT: Testified on SB 2001 during public hearing.
PAUL KENDALL
POSITION STATEMENT: Voiced concerns during hearing on SB 2001.
TOM LAKOSH
POSITION STATEMENT: Voiced concerns during hearing on SB 2001.
MARSHALL BYRD
Anchorage, AK
POSITION STATEMENT: Testified on SB 2001 during public hearing.
GLORIA DESROCHERS
Fairbanks, AK
POSITION STATEMENT: Testified on SB 2001 during public hearing.
JARED HAMLIN
POSITION STATEMENT: Testified on SB 2001 during public hearing.
BILL WARREN
Nikiski, AK
POSITION STATEMENT: Testified on SB 2001 during public hearing.
JIM ADAMS
Nome, AK
POSITION STATEMENT: Testified on SB 2001 during public hearing.
RANDY SELMAN
Wasilla, AK
POSITION STATEMENT: Testified on SB 2001 during public hearing.
SHANNYN MOORE
POSITION STATEMENT: Testified on SB 2001 during public hearing.
JOHN RANDALL
Wasilla, AK
POSITION STATEMENT: Testified on SB 2001 during public hearing.
STEVE MORAWITZ
Wasilla, AK
POSITION STATEMENT: Testified on SB 2001 during public hearing.
ACTION NARRATIVE
CHAIR HOLLIS FRENCH called the Senate Judiciary Standing
Committee meeting to order at 9:05:24 AM. Present at the call to
order were Senators Huggins, McGuire, Therriault, Wielechowski,
and Chair French. Also in attendance were Senators Stevens,
Davis, Wagoner, Green, Ellis, and Thomas.
9:05:42 AM
SB 2001-OIL & GAS TAX AMENDMENTS
CHAIR FRENCH announced the consideration of SB 2001. Members
would hear from the legislative consultants about net-versus-
gross tax systems and other topics including their reactions to
the model presented yesterday by Rich Ruggiero and Bob George of
Gaffney Cline & Associates (Gaffney Cline). They'd also hear
from the Alaska Oil and Gas Association (AOGA) on net versus
gross. Then a few cleanup matters relating to legal issues
would be addressed; these include the size of settlements from
litigation and royalty versus tax. The administration might
provide input about defining the point of production; a handout
was available. There also might be testimony about sharing
information. Public testimony was scheduled for the evening.
^Dan Dickinson, Consultant to the Legislative Budget & Audit
Committee
DAN DICKINSON, Consultant to the Legislative Budget & Audit
Committee, concurred with yesterday's testimony about net versus
gross. He indicated Commissioner Galvin of the Department of
Revenue (DOR) had articulated a number of things clearly, and
Gaffney Cline had laid out the reasons a net tax is always
preferable to a gross tax when focusing on investment objectives
and trying to have a degree of progressivity.
MR. DICKINSON told members he'd always heard that the main
reason for wanting a gross tax is because of lack of trust, that
somehow companies will find a way to increase their deductions
and manipulate it so the state gets nothing. He gave an
historical perspective, saying he'd spent seven or eight years
involved with the Amerada Hess litigation, which was related to
royalty under the net system.
9:08:32 AM
MR. DICKINSON, in response to Chair French, said he'd worked as
a consultant on that, building models and doing quantitative
work, and then as the liaison between the litigation team headed
by Wil Condon and the settlement team headed by Julian Mason.
He explained that the Amerada Hess litigation was filed in June
1977, within days of the first oil going into the Trans-Alaska
Pipeline System (TAPS), and it proceeded throughout the 1970s
and 1980s. The case was called Amerada Hess because that
company was listed first alphabetically; when that company
settled in perhaps 1989, it became the Arco case because Arco
was listed next; and when Arco settled, it became Amerada Hess
et. al. because people didn't want to keep changing the title.
MR. DICKINSON said final settlement of those issues didn't occur
until 1996 or perhaps 1997. Thus there was nearly 20 years of
litigation about a so-called simple gross royalty. Referring to
a question from Senator Wielechowski previously, he emphasized
that this wasn't just fighting about one deduction. There were
huge issues. For the first 10 or 15 years, the big issue
related to the value of the oil.
MR. DICKINSON observed that now people are accustomed to having
a publicly reported spot price, futures, NYMEX, and a huge
market in what are called "paper barrels" that are traded - much
larger than the number of liquid barrels traded. In addition,
there are three reporting-assessment services to which someone
can subscribe, and many newspapers publish information. There
is constant talk of "the price of oil." In the 1980's, however,
the so-called official price was typically set by Saudi Arabia,
although other companies had official prices. "We didn't know
how much our oil was worth," he said, characterizing oil as a
barter game, a barter business.
MR. DICKINSON explained that companies have production and
refineries all over the world. Rather than taking their own oil
to their refineries, they get oil from the nearest production.
Thus barrels get traded, all over the place. For example, one
tanker from Saudi Arabia contained oil that had changed hands 27
times before it hit the Gulf coast. There also were price
controls. He recalled in 1980, under President Carter's "phased
decontrol," every month part of a barrel had a price control on
it and part didn't; every month it changed. It was a nightmare
to figure out the value.
9:12:09 AM
MR. DICKINSON continued with the history, noting Mark Rich was
pardoned for the crime of buying tankers of controlled oil and
selling it as uncontrolled oil. The controlled price was
perhaps $6 or $7, whereas the decontrolled price was $30. "Huge
fights," Mr. Dickinson remarked. Under President Reagan,
decontrol went away. But the windfall profits tax came in, with
a series of challenges. For example, Prudhoe Bay was controlled
under one regime and Kuparuk under another. This required
tracing the oil. A huge panoply of issues focused around price.
MR. DICKINSON added that a small group of DOR auditors grappled
with that issue for 15 years; simultaneously, it was grappled
with on the royalty side. It never went all the way to court
because both sides had fairly decent arguments. By the time
those cases settled out, billions of dollars had been paid to
the state, including interest.
9:13:42 AM
CHAIR FRENCH welcomed Senators Stevens and Davis.
SENATOR THERRIAULT referred to the dispute over the royalty
valuation; he recalled testimony yesterday that because it is a
contractual arrangement, litigation might take longer. However,
what is being discussed with PPT - known as both the petroleum
production tax and the petroleum profits tax - relates to a
sovereign entity carrying on its duties. Thus there is hope,
though no guarantee, that the litigation track on that would be
less, because the courts give the agencies administrative
discretion.
MR. DICKINSON responded that he believes the record would almost
exactly prove Senator Therriault's point. Noting he was talking
about information in the public record, Mr. Dickinson said if
one looks at price control and the "bubble era" until the price
crashed in 1986 - the first ten years of Alaska North Slope
(ANS) production - two cases, involving BP and Arco, were
resolved earlier than Amerada Hess. But for Exxon, the third
major producer, it took a couple of years longer to finalize
settlement of the tax issues than for Amerada Hess.
MR. DICKINSON added that said he was being a little simplistic,
because Amerada Hess had TAPS as the first big issue; then the
pricing issue, which dominated that; and then the tanker issues.
In conclusion, however, he agreed it can go on a quicker track
for tax issues.
SENATOR THERRIAULT surmised that instead of arguing over a
definition of price or delivery point, for instance, the
standard is whether the tax system is fair or whether it is
applied in an arbitrary or capricious manner; if not, the
decision typically goes with the sovereign entity.
9:16:15 AM
MR. DICKINSON replied yes and no. If the statute uses a term
like "price" or "value," the question that arises is what was
meant. Those words still have to have meaning brought to them,
and the government doesn't automatically prevail over the
taxpayer. There is a question of who has the burden of proof
and so forth.
MR. DICKINSON referred to Spencer Hosie's memo, saying he was
talking about how long one goes through the internal process.
In support of Senator Therriault's point, Mr. Dickinson recalled
that Mr. Hosie had said once something leaves what was then the
office of tax appeals - now the administrative law judge - and
goes to court, it is just like any other court dispute, with
discovery and so on. It may not be like a contractual dispute,
but the state is essentially just another party in court along
with the defendant. The case he'd mentioned earlier would have
moved through the internal appeals more quickly.
9:18:02 AM
SENATOR WIELECHOWSKI asked whether there are regulations in
effect that deal with write-offs under the net-profit section in
the royalty statutes, AS 38.05.180.
MR. DICKINSON affirmed that.
SENATOR WIELECHOWSKI asked where those regulations are in the
Alaska Administrative Code (AAC). He suggested Mr. Dickinson
could tell him later.
MR. DICKINSON said those regulations are specifically referenced
in the PPT law as a standard the state can consider, among other
things, when writing its regulations for the tax.
SENATOR WIELECHOWSKI explained that he has been hearing concern
from people in his district about lease expenditures as they
relate to the deductions. He said there are no regulations,
although regulations were promised last year within 30 days.
MR. DICKINSON replied he wasn't sure it was physically possible
to do it in 30 days. The minimum process is about 120 days.
SENATOR WIELECHOWSKI recalled hearing they'd be rolled out
within 30 days.
9:18:50 AM
MR. DICKINSON said there are regulations in place that deal with
lease expenditures, although they might not deal with great
specificity for those portions. In further response, he said he
believes those are part of the AAC, fully adopted.
SENATOR WIELECHOWSKI asked whether work currently is being done
on new regulations to further define lease expenditures.
MR. DICKINSON answered that those specific concerns were put off
"for a phase two." What is expressed in the current regulations
may be viewed as more general.
9:19:49 AM
SENATOR WIELECHOWSKI explained that the concern relating to
lease expenditures is this tremendous gray area of what is or
isn't a cost. He asked about ways to tighten it in the current
legislation. He asked whether it is possible to tie either the
regulations or auditing requirements to federal Securities
Exchange Commission (SEC) and Internal Revenue Service (IRS)
filings. Those are much stricter, with heavier penalties.
MR. DICKINSON answered not only is it possible, but to the
extent it's feasible, "we've done that." Because the SEC and
IRS are federal agencies, what exists is a negative test. For
example, a company cannot get a capital credit unless it told
the federal government it was a capital investment. Typically,
companies try to move things to the expense side to get an
immediate write-off; for something labeled "capital" there is no
write-off until it is placed in service, and then there is a 5-
or 6- or 10- or 19-year write-off.
MR. DICKINSON noted a company looks at its worldwide expenses.
The problem is how to parse Alaska expenses from non-Alaska
expenses, because the SEC and IRS don't really care. The large
companies have interrelationships in certain fields in Alaska,
and thus they'll look over their shoulder and audit expenses of
the other companies. He said this was one attempt to get at
that problem. Clearly, there are places where that doesn't
work, such as Badami and Milne Point, which are owned
100 percent by BP; there is no second-guessing there, and nobody
looking over the shoulder.
MR. DICKINSON said people can also create scenarios, such as:
What if Exxon agrees to overpay in Prudhoe Bay, meaning the
State of Alaska bears the brunt, and then they get it back in a
different field Exxon operates for BP? He personally believes
such behavior isn't seen frequently. Rather, auditors from
Exxon typically look at Prudhoe Bay with respect to keeping
costs down.
9:23:32 AM
MR. DICKINSON suggested what one oil company is willing to
reimburse another company for is a pretty good standard - though
not perfect - of how to capture the costs, looking at the
tensions that exist among these different companies. He added
that when the department writes regulations, he isn't sure how
much more specific it can get. He expressed hope that the
department's list won't be ten pages long, because some of those
will be vague and folks will have to figure out whether
something is included or not.
SENATOR WIELECHOWSKI noted the statute says producers' lease
expenditures for a calendar year include costs. The question is
how to define costs to be written off, although there is some
guidance and statutory reference. He said this is a highly
important area, and he didn't know that the committee had spent
enough time on it. Potentially. $1 billion could be coming to
the state and yet a company could claim costs of $800 million to
write off.
9:25:25 AM
MR. DICKINSON responded that the language says costs have to be
actual, direct, ordinary and necessary - which ties to the IRS
filter - costs of exploring for, developing, or producing oil or
gas. In some sense, it's a broad category, everything necessary
to find the oil, get it out of the ground, and get it into a
pipeline. But it doesn't include the kinds of things people
have talked about such as lobbying costs, donations, and so on.
SENATOR WIELECHOWSKI replied, "We've asked DOR about that and
they said, 'Well, we don't think it is, but we can't really say
for sure.'" He reiterated that it is a big gray area.
MR. DICKINSON responded that he believes DOR's question was
whether those have been included in the costs the companies have
filed. He indicated the department doesn't know because it
hasn't audited yet. He clarified that he'd been talking about
whether, if DOR found those things, it could simply say they
weren't allowed. He opined that appeals officers and everybody
who has read the statute should hold the department up on that,
agreeing it was inappropriate. Rather than what is or isn't
included, he was saying what should or shouldn't be, and an
audit would reveal how closely those two match.
9:27:07 AM
CHAIR FRENCH noted it is easy to measure gross value at the
point of production. But the new variable, the new black hole,
is costs, which were 100 percent over what was projected. What
if they're wrong again? He said he didn't know whether the
legislature had the political will to come back and tinker with
the system once again, and a mistake might remain for a decade.
MR. DICKINSON highlighted two possible interpretations of a
100 percent increase in costs. One is that folks got together
and found invoices they hadn't found before; such issues will be
addressed by the auditors. The other is that as prices rose
dramatically, those who provide things to oil service companies
raised prices, and companies wanting to get production on line
quickly met those prices; thus the economic wealth flowing from
having a commodity sell for $80 a barrel - when the investment
was made with an expectation of $30 - was distributed to
everyone who served that industry. He said if the cost
structure has indeed gone up, the state needs to understand
that; it clearly wasn't anticipated previously.
MR. DICKINSON added that the commissioner was articulate in
pointing out that if there were a gross tax that couldn't
accommodate such change, possibilities might be eliminated for
development in areas that weren't anticipated. Thus it is
important to distinguish between costs rising inappropriately,
which auditors can ferret out, and rising as an unanticipated
consequence of this being a new world, with $90 oil.
CHAIR FRENCH asked Mr. Porter to comment on net versus gross and
other aspects of the tax system being contemplated. Then he
asked to hear from Mr. Porter and Mr. Dickinson about the model
presented yesterday by Gaffney Cline, including internal rates
of return (IRRs) on North Slope production, at least for Kuparuk
and Prudhoe Bay.
9:29:55 AM
^Steve Porter, Consultant to the Legislative Budget & Audit
Committee
STEVE PORTER, Consultant to the Legislative Budget & Audit
Committee, reinforced what Mr. Dickinson had said, noting PPT
may have worked exactly as it should have, but "we just were
surprised by the numbers." The companies can't just come up
with $800 million out of the air. It must be actual costs. The
padding will be when they take actual costs from Houston, Texas,
or another project that is marginally related. The question is
whether there is a direct relationship.
MR. PORTER said he'd never seen an audit where the auditor
didn't disallow something. A percentage of items will be
disallowed, based on a difference of interpretation.
Corporations are corporations. They'll look at the law. If
they think a cost may be allowed, they'll put it in. The
state's auditors will then look at it and may interpret it
differently. This is a common debate.
MR. PORTER noted each time a tax is changed, a level of legal
uncertainty is created, new interpretations of the law. It is
to be expected, whether the system is gross or net. The
responsibility with respect to this law is to tighten the range
of things over which there might be a difference of opinion.
Over the next four or five years, more certainty will be created
through regulation and litigation. He said it isn't an area he
is concerned about because it takes time, money, and process.
MR. PORTER highlighted a longer-term need to build a system that
stands the test of time. In his world, that means 15 years.
Whether it's gross or net, the need is for a system that works,
not worrying about gaming. He said gaming doesn't occur. What
occurs is people looking out for their own best interests. If
that occurs, it will happen over the next four or five years and
then get tightened down to where it isn't as big a problem as in
the past.
MR. PORTER cited oil and gas settlements as an example where
there have been huge fights but a small differential. Although
the present concerns are valid, he emphasized making sure the
tax is right. It will bring in many billions of dollars, while
the fights will be over millions of dollars. Thus the
legislature must recognize the perspective and get the structure
right, ensuring conflict is minimized after that. If this is
done, legislators will have done their job.
9:35:19 AM
CHAIR FRENCH said 15 years strikes him as about the best one can
hope for. In his view, the last significant change was in 1989,
and around 2004 it was time to make a change. Better late than
never, he added.
CHAIR FRENCH welcomed Senator Wagoner.
SENATOR THERRIAULT remarked that the desire to achieve that 10
to 15 years - without being able to anticipate price,
production, whether it is heavy oil, and so on - has really
factored into his moving from gross towards the net. He
recalled testimony that a highly workable gross-based system can
be perfect for today's scenario with respect to price and
production and yet get out of balance in a year or five years.
Thus it seems the net mechanism is a large part of trying to
achieve 10 or 15 years' worth of stability, because the system
internally corrects for those little things and hopefully treats
both sides fairly so stability can be achieved. He asked
whether that is true.
9:37:00 AM
MR. PORTER answered that when he came up here, he was thinking
about progressivity, initially thinking perhaps it doesn't
matter whether it is a gross or net tax. The more he works with
the numbers, however, the more what Senator Therriault was
talking about occurs: The gross is more static, and the net
allows the tax itself to be more stable for a longer time period
before getting into a discontinuity - a lack of balance -
between what the state and the industry are receiving. Thus he
is now supportive of a net system from a progressivity
standpoint. It provides the most flexibility.
SENATOR HUGGINS offered an analogy to football posed by some of
his constituents, concluding that a net system allows some
dexterity and flexibility so the team isn't stuck with whatever
play was called in the huddle.
9:38:51 AM
SENATOR McGUIRE gave an analogy of individual property tax based
on how many improvements are made to ones' house, with a higher
rate unless improvements are made. The flat rate is like the
gross-based tax, paid no matter what. It is simple, but there
is no incentive to make improvements. She highlighted
incentivizing behavior with carrots and sticks, saying hyper-
progressivity is fine, since more is taken when companies make
more, but it ought to be based on net.
CHAIR FRENCH concurred, suggesting important "sticks" to
maintain are an aggressive auditing capability and aggressive
penalties. He cited the IRS as an entity that puts a little
fear into people's minds about taxes. He estimated that
worldwide Exxon makes $100 million in profits daily. Required
is a penalty commensurate with its financial standing. When
looking at the broad picture, therefore, the legislature should
keep everyone on the straight and narrow through auditing
capabilities and penalties.
SENATOR WIELECHOWSKI returned to direct costs. He referenced
AS 43.55.165(b)(1)(A), Section 57 of Version A of the bill,
which read in part:
(b) For purposes of (a) of this section,
(1) direct costs include
(A) an expenditure, when incurred, to
acquire an item if the acquisition cost is otherwise a
direct cost, notwithstanding that the expenditure may
be required to be capitalized rather than treated as
an expense for financial accounting or federal income
tax purposes;
He expressed concern that this language allows a capital item to
be treated as an operating expense.
MR. DICKINSON explained that when a dollar is spent, whether
capital or operating, it is allowed as a deduction. Under
current law, 22.5 cents of that comes out of the state's pocket.
The company immediately deducts both capital and operating
costs. For capital costs, then, there is an additional credit.
But in that first rank they're treated identically.
9:43:34 AM
SENATOR WIELECHOWSKI asked about tightening the language to
define operating expenses as defined by general accounting
practices, rather than as costs.
MR. DICKINSON opined that "we have a tighter standard." There
are generally accepted accounting principles and the "ordinary
and necessary" test used by the IRS. He said he believes
"ordinary and necessary" will be a tighter standard. But
there's always a question of whether to look at book or tax, and
there are different sets of rules for various things.
MR. DICKINSON explained, "What we opted for, in general - and I
think you'll see this in the regulations as well - is to look at
the tax rules and tax timing, when that was available." The
generally accepted accounting standards won't help in figuring
out what's an Alaskan cost and what isn't, for example, because
those deal with how a company reports its operations and its
balance sheet to the rest of the world.
SENATOR WIELECHOWSKI noted Section 56 of Version A of the bill,
page 46, talks about a reasonable allowance for the calendar
year as determined under regulations by the department.
AN UNIDENTIFIED SPEAKER said it's Section 19 of Version M, which
is CSSB 2001(RES); the language is on page 16. Lines 9-11 read:
(2) a reasonable allowance for that calendar
year, as determined under regulations adopted by the
department, for overhead expenses that are directly
related to exploring for, developing, or producing, as
applicable, the oil or gas deposits.
SENATOR WIELECHOWSKI interpreted this to be defining it in
regulation such that a reasonable allowance for directly related
overhead is 9 percent. But it doesn't say what a directly
related expenditure is when it comes to overhead. He asked
whether the committee might want to tighten it up.
9:46:08 AM
MR. DICKINSON asked whether he was referring to the 9 percent,
to the Department of Natural Resources (DNR) regulations.
SENATOR WIELECHOWSKI affirmed that.
MR. DICKINSON said most of the rest is saying, "Here are the
direct costs." He apologized that he didn't have it in front of
him. He said it is carefully defined, because otherwise it's
not allowed. When identifying what's allowable, usually one is
also defining what's direct. Typically, everything allowed gets
that 9 percent markup. There isn't really a third category of
things that are allowed but not considered direct.
9:47:03 AM
SENATOR McGUIRE asked whether joint or common costs are excluded
currently. She referred to page 4 of a memo from Spencer Hosie,
forwarded by Marcia Davis. Senator McGuire noted the discussion
was about potential complexities of administering a net tax,
including that, through time and evolution, a heavy audit will
probably ferret out a lot of these things. One concern would be
inappropriate joint or common costs that a company may pass on.
She asked whether there is a way to specify that a direct cost
excludes a percentage of those, or some other definition.
MR. DICKINSON agreed it's possible, but the problem would be
defining joint costs, figuring out how much is applicable and
how much isn't. With respect to PPT, he said he'd personally
spent a year and got to meet some of the world's experts on
joint costs because there was a central gas facility that was
making things for production as well as for sale. For this
billion-dollar facility, the largest of its kind in the world,
they'd had to figure out whether each bolt or nut was
deductible. This is one reason the legislature passed a law
that said there is a circle drawn around the North Slope and
that all the operations there are deductible.
MR. DICKINSON surmised an issue might occur if a company has a
strategic initiative to monetize heavy gas and has a bunch of
scientists that spend six months in Alaska working on the
project and have another demonstration plant in Calgary, for
instance. Somebody would have to figure out how much of their
time is Alaskan and how much isn't. He'd rather have an auditor
do that - with a general prescription that says it has to be a
direct cost of developing, finding, or producing - than to say
joint costs will be split 50-50.
9:50:11 AM
SENATOR McGUIRE asked about creating a rebuttable presumption
that joint or common costs are excluded and it is up to the
company to prove otherwise. The burden would be on the company.
MR. DICKINSON said that could be done, but the issue won't be to
exclude them. They won't come in unless they actually have some
relationship to Alaska; then the question would be what
percentage applies. He opined that it isn't desirable to say
that if a company decides to develop heavy oil and thus spends
half its time looking at Alaska and half looking at another
heavy oil deposit elsewhere, then Alaska would exclude
100 percent of those costs.
SENATOR McGUIRE agreed, saying that is a great analogy. Any
company's promotion of developing heavy oil, even worldwide, may
ultimately benefit Alaska. However, in the example where half
is in Calgary and half in Alaska, clearly the state wouldn't
want to allow for the deduction in Calgary. She again asked:
Given that the state doesn't have the resources - although it
will try to hire more expert auditors - what about shifting the
burden of proof to the company, with a rebuttable presumption
against joint or common costs?
9:51:59 AM
MR. DICKINSON reiterated that it could be done, but there'd be
separate fights about whether something was a joint and common
cost. There are lots of debates about the point at which some
common elements truly become common costs, rather than just
corporate overhead that the state excludes. While seeing
Senator McGuire's point, he expressed concern about the
applicability. However, the case just talked about is one where
it might work.
SENATOR WIELECHOWSKI referred to Section 20 of Version M,
page 17, lines 8-11, which reads in part:
(B) standards adopted by the Department of
Natural Resources that determine the costs, other than
items listed in (e) of this section, that a lessee is
allowed to deduct from revenue in calculating net
profits under a lease issued under AS
38.05.180(f)(3)(B), (D), or (E).
He asked how "net profits" is defined.
MR. DICKINSON replied most royalties on the North Slope are
under a DL-1 lease. In the 1980s, people responding precisely
to the concerns mentioned today had asked whether gross-based
royalties are best; they wanted to try net royalties. There'd
be a base rate paid, but also a development account into which
all costs would go. When a profit was finally made, the company
would pay the state some percentage. The bids on that went as
high as 80 percent of those net profits, to his recollection.
MR. DICKINSON said what this language refers to is the specific
regulations. Mentioning Endicott, a couple of leases at Milne
Point, and some left at Kuparuk, he said at the maximum he'd
guess 7-10 percent of oil production is from leases defined as
net profit share leases (NPSLs).
9:54:56 AM
SENATOR WIELECHOWSKI asked whether there is a definition of net
profits in the regulations.
MR. DICKINSON replied there is a definition of what the net
profit share applies against. These regulations say what costs
can be put into the development account. There is an important
reason why there are only specific things mentioned. For
example, the time value of money is recognized in the net profit
share. As money sits in the development account, it is
multiplied by an interest component; there is a carrying cost.
Under PPT, it's explicit that financing costs are not an
allowable deduction. Thus it's a little different.
MR. DICKINSON added that how one looks at the value of the oil
or gas is part of DNR's regulations; the amount of profit once
it reaches payout has to do with those things. This is very
different from the standards in the tax statute. The four
sections there focus on cost deductions.
9:56:17 AM
CHAIR FRENCH asked whether Mr. Porter and Mr. Dickinson had been
able to review the model presented yesterday afternoon by
Gaffney Cline.
MR. PORTER replied no.
MR. DICKINSON said they'd requested a copy and had heard they
may be able to get it soon. He offered to comment on the
details after seeing it, and said they could comment in general
now with respect to testimony yesterday.
CHAIR FRENCH noted this committee would be forwarding the bill
soon, but wanted to get at least a general view.
MR. DICKINSON reminded members about two conclusions drawn by
the presenters of the model. First, it perhaps make sense to
have steeper progressivity to capture more on the upside.
Second, it may make sense in this other arena to have a lower-
based tax rate. He said it is important to note that, under
current law, investments are made with what some call "30 cent
dollars." He went to the board to illustrate.
9:58:55 AM
MR. DICKINSON posed a scenario in which he is a company deciding
whether to invest a dollar, looking at the tax year in which the
investment would be made. He could deduct that dollar from his
PPT return filed that year, with the deduction at 22.5 percent.
CHAIR FRENCH suggested that the dollar be for steel pipe with
which to drill a well.
MR. DICKINSON explained that when he deducts it, he gets back
22.5 cents; his tax bill is lowered that amount. If there is
5 percent progressivity, the state pays another 5 cents. Steel
is a capital expense, so he gets a credit, another 20 cents off
his tax bill. In an extreme instance, if he has been making
investments before, there are transitional investment
expenditures (TIE) credits available; those must be matched
dollar for dollar by new incremental spending, and since he is
spending this new dollar he gets 10 percent additional credit.
This totals 57.5 cents. He'd spend 42.5 cents out of pocket and
the state would pick up 57.5 cents.
MR. DICKINSON continued with his illustration. If a 35 percent
federal tax rate is assumed, not taking into account the ability
to capitalize and take depreciation, the IRS takes 35 percent.
Before that, however, it allows deducting the 57.5 percent,
giving a 35 cent deduction for the out-of-pocket portion. Thus
the federal government picks up about 18 cents of that, and his
payment drops to roughly 23 cents.
MR. DICKINSON asked who is really spending that dollar. He
answered that it's the State of Alaska, because it's trying to
get investment by spending 57.5 cents; the federal government,
which through the deductions is spending about 18 cents; and the
company, spending about 23 cents. The company's out-of-pocket
expense would be fairly small.
MR. DICKINSON asked: Why wouldn't people want to invest under
this regime? He answered that in year two, there is no
depreciation and no effect beyond an operating piece. An extra
barrel of oil is generated, and of the profit from that, the
state takes 22.5 percent and the federal government takes
35 percent. So the company pays a smaller piece, but it isn't
as small a piece as was contributed for the initial investment.
MR. DICKINSON concluded that for dollars being invested, it's as
if the company is investing 23-cent dollars. Those get
recaptured over time. As that is discounted, when the
recapturing occurs, it's less heavily favored and so the IRR or
net present value (NPV) goes very high because of all this
upfront support from the state and the federal government.
10:04:31 AM
SENATOR THERRIAULT surmised that the immediate rebate of cash
from the state is what really pumps up the company's NPV
calculations. Those are hard, real dollars returned to the
company's pockets immediately. The state's benefit is the
additional "22.5 take" on the barrels that then get produced,
year after year, for a number of years.
MR. DICKINSON affirmed that, saying it's 22 or even the
additional 5 percent. As Mr. Ruggiero pointed out yesterday, if
the state has a lower discount rate than the companies, it's a
win-win situation. The immediate benefit to the company is up
front, where the discount rate matters most, and the benefit to
the state, to the company's detriment, is further out, "where
they sort of discount it away and we take full advantage of it."
10:05:43 AM
MR. PORTER added it's not so much that the company gets a return
to its pockets immediately, because this is all about
expenditures. He said NPV in a layman's world is how much less
someone has to spend today for the money that will be shared
tomorrow - the shared money being the state's 57.5 percent, the
federal government's 18 percent, and the company's 42.5 percent.
That all has to be put together. It's nice to have that upfront
benefit, which is the benefit of the net, but as the tax rises
the company gets fewer dollars per barrel in those out years.
That's the balance.
SENATOR THERRIAULT reported hearing that the State of Alaska
under PPT has picked up about 52 percent of the costs, but its
revenue share is only 39 percent; he has been asked where the
fairness is. Under ACES, however - the governor's plan called
Alaska's Clear and Equitable Share set forth in the original
SB 2001 - it was pitched to him that the rebalancing is this:
The state's share rises to 44 or 45 percent, to his belief,
while the state's share of costs comes down. Thus it's more of
a match. He asked if the testifiers could verify those rough
numbers.
MR. PORTER replied he couldn't testify directly as to the
percentages because he didn't know what model generated them.
In principle, though, one can go back to "a low price world and
a high price world," since the percentages change around the
world based on that due to progressivity. In a high oil-price
world, not a high cost world, the state definitely wants that
increased percentage because it doesn't hurt as badly and the
state wants a fair share. In a low price world, that
progressivity drops out and the state's percentage drops as
well. This is the desired balance. It actually works. He
added that in a high price world, the state wants to get a fair
percentage while not hurting more high-cost environments such as
West Sak where the desire is to help out; the net allows this.
10:08:28 AM
MR. DICKINSON added he'd have to look at the numbers, but the
effect Senator Therriault had mentioned would be happening
directionally. Under ACES, in this example, 20 percent would
drop out immediately; a little bit more would be picked up by
the federal government; the progressivity might be a little
different; and then, with respect to the terms of recovery later
on, the only increase would be 22.5, going up to 25.
SENATOR THERRIAULT referred to the point that the federal
government would pick something up. He said if the state drops
off an expense, one would normally think it would shift to the
company side. But only a portion of it does.
AN UNIDENTIFIED SPEAKER affirmed that.
SENATOR THERRIAULT said a portion gets shifted to the federal
treasury. He surmised Alaskans would agree that if some
investment costs can be shared with the federal treasury, that's
a win-win situation in Alaska for a company and the state.
CHAIR FRENCH asked whether the testifiers agreed.
MR. DICKINSON said it was absolutely correct. It generally
would be 35 percent federal sharing.
10:09:50 AM
MR. PORTER said he wanted to reinforce a piece that
Mr. Dickinson had mentioned as well, in terms of not only what
the model suggested, but also in coming to the conclusion, from
a practical standpoint, of making sure to keep a low, stable
base tax as well as a higher progressivity that better matches
the economics of projects "on a broader statement than the other
way around." He emphasized capturing the progressivity piece,
but also having a stable tax base.
SENATOR WIELECHOWSKI noted he'd heard conflicting things about a
low base price. While understanding how higher progressivity
keeps more money in Alaska, he'd thought a somewhat higher base
rate would actually encourage investment with respect to some of
the more difficult fields because there is a higher deduction.
MR. PORTER replied he'd struggled with that after hearing it
yesterday. From a number-crunching standpoint, he understands
how one can get there. But if he were the taxpayer and the
state raised his tax so there was higher deductibility, it would
take a dollar out of his pocket and give it to the state. On an
individual, unique project basis, it's possible to make that
happen on paper. From a broad standpoint, however, he has a
hard time with those economics. He surmised that if it were
true on a broad basis, the industry would be here lobbying for
higher taxes.
10:12:18 AM
SENATOR WIELECHOWSKI agreed it doesn't make intuitive sense.
But when the net present values were shown, for instance, on a
35 percent tax rate with a higher progressivity than ACES, it
actually had a higher NPV than at a 22 percent tax rate.
MR. PORTER replied NPV isn't the only determination of project
economics. It's only one element that an oil company or any
other taxpayer would use.
SENATOR WIELECHOWSKI asked Mr. Dickinson what experience he had
with respect to working with oil companies in their boardrooms.
MR. DICKINSON answered none. He then said it is
counterintuitive, but he thinks the notion is that one can look
at an isolated benefit when the company makes the investment,
but the investment is going to "peel off barrels" and then it is
"a detriment to those barrels." Thus there is a need to sit
down and do the math. People have to look at those too. If
people just could invest with 23-cent dollars, they'd run to do
it. But the other shoe falls at some point. The desire is to
find that balance.
MR. DICKINSON surmised one lesson to be drawn from the model is
that for something like infill drilling - where the risks are as
low as they can be for any project in the oil industry - it
makes sense to add a lot of support at the front end and then
capture a larger piece on the outer end.
CHAIR FRENCH suggested Mr. Dickinson could make a case for a
two-tiered tax structure: one for Kuparuk and Prudhoe Bay
infill drilling, the center of the target, and another for new
exploration that is away from existing infrastructure and is
more risky because of uncertainty with respect to looking for
new oil.
MR. DICKINSON answered that one could make the case. However,
one could also make the case that judgments can be made about
things and how to do them. But one way is to just look at the
dollars spent. He noted that earlier he'd been going to say
that under the reviled economic limit factor (ELF) system, costs
were recognized. But there was a proxy created for them.
CHAIR FRENCH said it was a mathematical model.
MR. DICKINSON concurred, saying it was a mathematical model that
required looking at field size and well productivity, believing
that to be a good way to measure costs; barrels were excluded so
people could recover their costs. It worked in that people
didn't want to change it for many years. But prices quadrupled.
Whereas a few dollars a barrel had been excluded previously, it
became $50 or $60.
MR. DICKINSON added that a proxy for costs never works. It gets
away from the basic idea that spending - provided there are
controls to ensure it is real spending on production or
exploration - is the best way to figure out the tax rate and the
rate at which investments will be measured.
10:16:14 AM
SENATOR THERRIAULT suggested that relates to this idea of the
old severance tax being basically a gross tax with the ELF
modifier, which couldn't accommodate the higher price. When the
price spiked upward, the system became unstable because it
couldn't self-adjust.
MR. DICKINSON replied he thinks that is exactly right. It
couldn't accommodate changes in technology. He noted there was
an aggregation order that he signed in January 2005, recognizing
changes in the field that may not have been anticipated fully
when that structure was created, and how that affected costs.
He said all kinds of things can happen that make the proxies or
assumptions less valid over time. He opined that going to a net
system may not be perfect over all time, but goes a lot further
towards providing stability because it recognizes a whole range
of changes, so long as those changes are always reflected in the
costs and investments people are willing to make.
SENATOR THERRIAULT suggested part of it was evaluating whether
it was time to jump to the new system. As the price per barrel
rose, people realized it wasn't fair to the state. But then the
price would drop. Turning to the concept of a two-tiered tax
system, he surmised that further exploration in the legacy
fields is as close to low risk as can be seen worldwide with
respect to drilling and getting extra barrels.
MR. DICKINSON said he wouldn't even categorize it as
exploration. It's infill drilling.
SENATOR THERRIAULT asked: Because the expense of doing that is
lower, does the net system already have a bit of a differential
tax structure for legacy fields, since with lower costs there
are lower deductions and so the effective tax rate that a
company pays for that infill drilling is higher automatically?
10:18:43 AM
MR. PORTER replied that's exactly what the Gaffney Cline
presentation showed. He said it's not perfect, fine-tuned down
to the penny. Roughly speaking, however, with respect to taxing
cash flow generated from these legacy fields - which he
characterized as the sweet spot, with comparatively low overhead
on a per-barrel basis - they get taxed a lot higher because
their cash flow starts sooner. If it costs $20 a barrel for
expenses, they'll start getting taxed on the cash flow at that
point, whereas the West Saks of the world start at $40. Calling
the net an equalizer, he said Gaffney Cline did an excellent job
of presenting that ratio, which actually works in a net world.
SENATOR THERRIAULT asked the consultants to really look at the
different components, the mathematical cells in the model. He
asked whether, in general, there was any component from the
discussion yesterday that they felt was suspect or needed
proving up. He noted that even Chair French had said yesterday
that the numbers were fairly eye-popping.
MR. DICKINSON replied that he would repeat the cautions from
Gaffney Cline, the builders of the model, that this was taking
infill drilling from one project and someone else's projection
of the barrels, put together with some prices. He said it
wasn't meant to be a universal model. He then specified that
his biggest concern would be folks drawing broader conclusions
from the model than the data might support. If DNR is using the
data and doing things so these models can go for more projects,
he said that's a great analytical tool.
The committee took an at-ease from 10:20:57 AM to 10:37:28 AM.
CHAIR FRENCH welcomed Marilyn Crockett and Tom Williams of AOGA.
^Marilyn Crockett and Tom Williams, AOGA
MARILYN CROCKETT, Executive Director, Alaska Oil and Gas
Association, noted AOGA is a trade association for the oil
industry in Alaska. She introduced Tom Williams, who would
present AOGA's testimony today.
TOM WILLIAMS, Chair, Alaska Oil and Gas Association Tax
Committee, specified that he is senior royalty and tax counsel
for BP Exploration (Alaska) Inc. and a former tax administrator
with DOR, but was speaking as chair of the AOGA Tax Committee.
He began by addressing a question asked by Senator McGuire with
respect to a presumption. He read the first two sentences from
existing AS 43.05.245, relating to assessment and collection of
tax:
If a taxpayer fails to file a return or report
required by this title in the time required by law or
regulation, or makes an erroneous or fraudulent
return, the department shall proceed to assess the
license fees, tax, penalties, or interest and make a
return from information that it obtains. An assessment
or a return subscribed by the department in accordance
with this section is presumed sufficient for all legal
purposes.
MR. WILLIAMS said "erroneous" is the operative word in the first
sentence. If auditors went in and looked at something, unless
they were convinced the expenditure was appropriate, they could
disallow it and the disallowance would be presumed correct.
That's also why a jeopardy assessment that DOR can do is such a
powerful tool. Then there is a categorical disallowance, and
the taxpayer has the burden of showing everything, including
even the parts the taxpayer had satisfied the auditor about.
This is existing law. So there is a presumption of correctness
with the auditor.
10:39:51 AM
MR. WILLIAMS turned to his testimony. He explained that AOGA
takes "gross" as referring to a production tax levied on the
gross value at the point of production as defined in AS
43.55.900(12). The prior ELF-based tax was such a gross tax.
Furthermore, AOGA take "net" to refer to a production tax levied
on the value that remains after subtracting the operating and
capital costs of the oil and gas operation from the gross value
at the point of production.
MR. WILLIAMS said the present PPT is an example of a net tax,
with the lease expenditures, as defined in Section 165 of the
statutes, being the costs deducted from the gross value to get
this taxable production-tax value. Or the production-tax value
under PPT is equivalent to a value at the rock face, where the
oil flows into the well and is severed from the reservoir.
MR. WILLIAMS suggested the fundamental question with respect to
gross versus net isn't about which tax can generate more revenue
for the state. If one tax generates "x" dollars, it is always
possible to find a rate for the other tax that generates a like
amount. Instead, the question is how realistic the production
tax should to be in terms of its effects on the real world. Oil
and gas aren't renewable. No new oil or gas is created to
replace what's being taken out of the ground. Consequently, the
more that is removed from a reservoir and produced, the more
difficult and expensive it becomes to produce the next barrel of
oil or cubic foot of gas from what remains.
MR. WILLIAMS highlighted the huge resources of viscous and heavy
oil known to exist on the North Slope. Because of the physical
characteristics of the oil itself and the reservoirs where it's
found, the oil is physically difficult to produce, starting with
the first barrel. Viscous oil - which flows more slowly than
conventional oil but can still be pushed through the rock into
the wells by injecting water - is primarily found in the West
Sak formation. The West Sak rock is crumbly; a lot of fine
particles of rock are entrained in the oil as it flows into the
well and then turns into an oily sludge. This sludge has to be
removed from the oil at the surface. It must be handled and
disposed of with great care, since it is a hazardous material
for purposes of healthy, safety, and environmental laws.
MR. WILLIAMS described heavy oil as too thick to be pushed
through the reservoir rock by water injection. It is found in
the Ugnu formation not far below the permafrost. One promising
technology for producing this oil involves getting the reservoir
rock to flow like a stream of sand into the well, carrying the
oil with it, and then separating out the oil at the surface.
10:43:14 AM
MR. WILLIAMS pointed out that the same health, safety, and
environmental issues for hazardous materials apply to the
handling and disposal of this sand, which translates into high
production costs, even as production starts.
CHAIR FRENCH asked if West Sak oil is lighter than Ugnu oil.
MR. WILLIAMS affirmed that. Continuing, he said if the state
didn't want to take such factors into consideration, it might
levy a flat tax of "x" cents a barrel over a thousand cubic
feet. Simple to administer and forecast, it would resemble the
gross tax discussed. But the discussion here is about gross
versus net.
MR. WILLIAMS showed a graph illustrating production economics
for a hypothetical conventional oil field, with a tax on gross
value. Five bars depicted the economics of the field in five
stages of its life. Also depicted were the state's one-eighth
royalty on the gross value; a flat gross tax; and operating
costs for the field, which rise with time as the oil is
depleted. In the middle was an area representing what is left
for the producer - in this case, the net operating margin.
10:46:42 AM
CHAIR FRENCH said members recognize that expenses generally rise
over time. He asked, however, whether the tiny expenses shown
at the beginning of the illustration take into account the
enormous upfront capital costs of getting to this stage. He
then surmised it is from the first day of production forward.
MR. WILLIAMS affirmed the latter, saying the point is that it
starts off with those costs. This is shown in percentages
because it holds true no matter what price is assumed. It shows
that costs rise over time and consume increasingly more of the
value of the oil. A field will continue to produce until it
starts losing money on a cash-flow basis. This is barring some
catastrophic event such as what happened in 1933 when a refinery
next to the Katalla field, Alaska's first oil field, burned
down, eliminating the way to turn that oil into the kerosene
needed by miners; the field was never used again.
MR. WILLIAMS continued with the gross-tax graph, showing a
section that depicted a loss. Up to that point, wealth is
created by producing the oil and gas. Beyond that, wealth is
destroyed by continuing to operate. He said given the enormous
challenge that Alaska faces from the decline in North Slope oil
production, one great concern is the effect on investment as a
field's operating margin is increasingly squeezed by rising
production costs per barrel.
MR. WILLIAMS said while the actual operating margin for the rest
of the field isn't usually a significant factor in the economic
analysis for new investment, the graph can illustrate a general
deterioration in the quality of new investments available as a
field ages. For instance, drilling 100 or so infill wells last
year added about 70,000 barrels a day to North Slope production.
But drilling 100 such wells next year might only add 60,000 a
day; the year after that, it might be only 50,000.
10:50:09 AM
MR. WILLIAMS continued with the gross-tax graph. He said as
margins of incremental investments become squeezed, as that
quality deteriorates, fewer and fewer investment opportunities
remain that are economically viable. If all North Slope
investment opportunities in a company's portfolio resembled
Bar 1 in the graph, the company would likely go forward with all
the investments it could; it illustrates a situation not unlike
Prudhoe Bay when it first came into production and ramped up to
1.5 million barrels a day. As the opportunities look
increasingly like Bar 2, a company still would take most, but
not all, of the investments; the cash might not be available to
invest in them all.
MR. WILLIAMS said as the portfolio begins to resemble Bar 3, the
company clearly would start having fewer and fewer commercially
viable opportunities; the margin would start to be one-third to
one-quarter of the value that the barrel represents, and
although some still would pencil out - because of the time value
of money, for instance - there'd increasingly be numbers such
that this timing effect wouldn't be enough. If opportunities
look like Bar 4, with a thin margin, perhaps no investments
would be made. And certainly the company wouldn't be investing
if they look like Bar 5.
MR. WILLIAMS contrasted this with what happens when the tax is
on net value, like PPT. He showed a graph depicting the same
hypothetical field and five stages of rising production costs.
For this net tax, by design it starts out with Bar 1 equaling
the gross tax on the first graph. But as the field ages, each
bar on this new graph has a smaller tax segment.
MR. WILLIAMS noted even in Bar 5, a very late stage in a field's
life, there is a positive operating margin. All other things
being equal, a net tax allows production to continue longer than
it would under a gross tax. Furthermore, if investment
opportunities resemble Bar 1, a company would likely try to make
as many investments as it can. Each succeeding stage is better
than in the earlier graph because of the greater margins. If
there is a better portfolio of opportunities, a company is
likely to make more investments at each stage of a field's life
than under a gross tax, he concluded.
10:54:02 AM
CHAIR FRENCH asked whether the illustration holds the price and
volume the same across the years.
MR. WILLIAMS replied that because it's using percentages rather
than dollar amounts, the point holds true regardless of price.
As fields are depleted, they reach these various stages in their
lives regardless of what the price is. It will only be a matter
of how long it takes. In further response, he said if there is
a long-term, sustained high level in the value of oil or gas, it
tends to reset the clock back with respect to the graph.
Conversely, a sustained period of low prices tends to accelerate
it forward.
CHAIR FRENCH asked if it could go from Bar 1 to Bar 5 in a year.
MR. WILLIAMS said hopefully not, but in theory, yes.
10:55:26 AM
SENATOR THERRIAULT surmised the change in price might move the
margin back one bar for a year or two, until the costs caught up
and squeezed the margin.
MR. WILLIAMS affirmed that, but didn't know whether it would be
a year or two or a longer period of time. It would depend on
the economics talked about by Mr. Dickinson. A sudden increase
in demand because of high oil prices might accelerate the rise
in the price of goods faster than normal. But it doesn't
necessarily happen; it depends on how fast the oil price changes
and so forth.
MR. WILLIAMS closed by indicating the decline of North Slope
production is the greatest challenge facing Alaskans. He said
the only way to slow the decline and soften its impacts is to
make investments to produce more oil. As shown, a net tax will
result in more investments than a gross tax will, other things
being equal. That's the reality Alaska faces. This isn't the
first legislature to grapple with this reality, and probably
won't be the last. All the industry can do in this process is
to explain what the real-world effects promise to be from tax
policies. The policy choices are up to the legislature.
MR. WILLIAMS said whatever is chosen, the industry will comply
and continue to do business in Alaska, striving to unlock the
great potential Alaska still has. But it is known that one
choice will allow the industry to do more than the other will,
between gross and net. He expressed hope that the legislature
will choose the better one.
10:57:50 AM
SENATOR THERRIAULT noted a net system self-corrects and so on.
He recalled yesterday's presentation by Gaffney Cline and the
modeling of this system, including the slowing of the decline,
acknowledging that the bulk of the known resource on the North
Slope is in those legacy fields, and modeling the numbers for
squeezing out the additional heavy and viscous oil. He asked
Mr. Williams whether he had any criticism of the numbers shown
yesterday with respect to such a net system.
MR. WILLIAMS replied AOGA hasn't yet reached a position to be
able to answer that. He offered to try to respond in a timely
manner for this committee. He noted members could ask him about
what was going on in the 1970s and 1980s, the time period
Mr. Dickinson had discussed; he'd had to work with that and
could provide some historical facts. As for testifying in
response to Gaffney Cline's presentation, however, he'd been
preparing his testimony at the time and thus wouldn't be able to
comment personally either.
10:59:42 AM
CHAIR FRENCH said he appreciated the late-breaking nature, but
it is the same for the legislature, which needs to produce a
bill within 30 days. The information shown yesterday was a
revelation for many. It was like peeling the skin off the
claims heard about relative risk and investment needs. For him
at least, it showed what the rate of return is, and it was
stunning. He suggested before too long it will be time for AOGA
and other industry representatives to tell legislators what, if
anything, was wrong with those numbers and why a higher tax rate
doesn't fairly compensate the state and still allow for enormous
rates of return for companies, at least in the center of the
target - the 70 percent range that is represented by infill
drilling in the legacy fields, Prudhoe Bay and Kuparuk.
MR. WILLIAMS replied that in terms of specific numbers, they're
as good as the assumptions that went in behind them. He had no
idea whether those assumptions were explicitly shared yesterday
or would become available. But AOGA's comments would be of a
qualitative nature, rather than quantitative.
CHAIR FRENCH responded that he has a disk with the model on it
and a disk has been given to BP to analyze. Furthermore, he'd
been encouraging the administration to put the model on the
Internet so every Alaskan can look at it and twirl the knobs.
If there is a profits-based tax, then the State of Alaska
becomes a partner, at some level paying the industry back for
the investments it's making. The price of that, to him, is
openness: "We see your numbers, you see ours." That way, it
will be known that the parties are being fair to one another.
SENATOR WIELECHOWSKI agreed as a policy maker, saying if there
is a criticism to that model, he wants to hear it. To him, that
model was extremely compelling - seeing that capital
expenditures (CAPEX) and operating expenditures (OPEX) could be
increased 200 percent at a 15 percent discount rate, there could
be a 30 percent tax rate and 0.5 progressivity, and still
there'd be rates of return in the 50 percent region. If the
model is wrong, he wants to know, because that model will factor
heavily in his decision about what to do with respect to the
valuation rate.
MS. CROCKETT replied AOGA would be happy to look at the model.
Although they'd not been present yesterday and didn't have the
benefit of the slides, there is a hard copy available. She
requested a disk as well, to ensure all AOGA members get a
chance to look at not only the numbers that can be tweaked with
the "knobs," but also the structure of the model itself, the
mathematical equations, evaluating whether the risk factor is
part of this consideration, how the heavy oil plays into it, and
so on, which she surmised were discussed yesterday.
11:03:24 AM
SENATOR HUGGINS announced the Senate Finance Committee would
like to hear AOGA's ongoing analysis or any critiques.
SENATOR THERRIAULT recalled that some numbers around which the
model was built came from part of AOGA's testimony. He said he
believes the state and the legislative consultants are pulling
information from all different sources. He agreed with Senator
Wielechowski that the information will shape people's opinions,
if not here, then certainly in the Senate Finance Committee.
Given that AOGA is a "consensus organization," legislators
certainly want to hear from them.
SENATOR THERRIAULT noted the model specifically talked about the
legacy fields. He recalled he'd asked questions yesterday
relating to the belief that those are where most of the value is
and the desire to ensure that whatever is set works both there
and for the satellite fields and those beyond the existing
infrastructure.
MR. WILLIAMS replied he doesn't know what the model said about
legacy fields, but there are different kinds of investment that
have been described, including the renewal investment, the
infill drilling investment, and the heavy oil investment. The
bulk of the heavy oil is under what are defined as legacy
fields. He surmised that was covered yesterday, but didn't know
whether it was "one size fits all," for example.
11:05:39 AM
SENATOR McGUIRE said she thinks AOGA ends up being the perfect
organization to put this into perspective for the legislature.
New entrants, heavy into exploration, have one position.
Operators of the legacy fields have a different perspective.
And AOGA houses all those opinions. Even if it occurs in the
Senate Finance Committee, she'll be highly interested in hearing
from AOGA.
SENATOR McGUIRE emphasized not wanting to put anything in place
that will impair development; it may not be "one size fits all,"
a concern that has been discussed. There also is the
perspective that it's too complicated to do two separate systems
of taxation. She suggested the need for more detail, since the
committee is looking more towards the net system and how it will
impact development for future generations and with each
individual type of industry. She opined that AOGA is the best
entity to do this, since it would be better than hearing from
individual companies that might be biased.
MS. CROCKETT said AOGA is happy to answer any questions they
can, within the constraints of a trade association organization
for which antitrust provisions prevent talking about costs, for
example. They don't talk about sales, price, or costs within
the confines of the association. But that doesn't mean AOGA
can't - at a higher level, without getting into that level of
detail - pass some judgment and provide some counsel based on
their perspective and on the industry's perspective regarding
the proposals before the committee today.
SENATOR THERRIAULT surmised AOGA, as a consensus organization,
has come to a consensus on the ads shown around the state.
Characterizing the legacy fields as the goose that lays the
golden egg for the state and industry in Alaska, he said the
claim is that what is being contemplated will kill that goose.
However, people who've worked in the industry have put together
models showing: 1) it isn't close to the tipping point with
regard to that production and 2) the rates of return, even with
what is anticipated and talked about, are such that any company
would decide to invest the next dollar to produce new barrels of
oil. Suggesting the claims in the ads therefore might not be
true or might not befall the state, Senator Therriault said
hearing some comment in reply would be useful.
11:09:31 AM
MS. CROCKETT replied that a number of ads are being run and so
there may be some confusion about which ones AOGA is running.
That aside, the focus of AOGA's advertising or educational
campaign has been to make folks aware that the top issue facing
Alaska today is a decline in production. Setting aside the
fiscal regime, Alaskans need to pay attention right now to
stemming that decline.
MS. CROCKETT again noted she hadn't seen the presentation
yesterday and couldn't respond. But with respect to the fields
just mentioned, she said for the easy barrels, clearly the bulk
of new production that will save the industry from a steep
decline is in those fields. The different kinds of new oil that
will come on are all critical. She cited exploration; heavy
oil; bringing new fields on line; and production from existing
fields, which will provide most of that production in the near
term. She said that's been the focus of AOGA's message.
11:10:50 AM
CHAIR FRENCH wrapped up by saying that, to him, that's the
beauty of the model. It was looking exactly at those legacy
fields and the infill drilling that will produce the biggest
bang for the buck over the foreseeable future. The committee
was very excited and interested in seeing what was revealed
yesterday. He agreed with Senator Huggins' earlier statement
that AOGA will be facing more questions about it in the future.
The committee took an at-ease from 11:11:25 AM to 11:24:54 AM.
CHAIR FRENCH welcomed Senator Green.
CHAIR FRENCH noted the committee would address two topics:
1) how litigation under a tax system differs from litigation
under a royalty system, and 2) information sharing. He invited
Mr. Iversen to give his presentation.
^Jonathan Iversen, Director, Tax Division, Department of Revenue
JONATHAN IVERSEN, Director, Tax Division, Department of Revenue,
began with some history, noting the state has operated under
varying parameters over time. Now it is entirely different in
terms of what the state knows and its standards, both in the
market and in statute and regulation; this contrasts with
standards in the late 1970s, when production started ramping up,
and the 1980s and then the 1990s, when some settlements of
really big cases happened.
MR. IVERSEN elaborated, saying it's a different world than in
the late 1970s and early 1980s, when the state was entering
entirely new royalty and tax territory. The state lacked a
substantial body of case law and regulations. Of primary
importance was that it lacked objective measures of value.
These were new issues, and it was a gray, murky area with
respect to production companies as well as the State of Alaska.
The lack of objective measures of value perhaps had the greatest
impact. There wasn't a defined market or price set for ANS oil.
11:27:23 AM
CHAIR FRENCH suggested this is hard for the public to grasp,
since people are used to seeing the price of a barrel of oil
published daily in the newspaper, for instance. He asked why
oil prices weren't as quantifiable previously.
MR. IVERSEN noted he isn't an oil markets expert. He surmised,
however, that because there wasn't an established market,
particularly for ANS oil, what caused much of the conflict
between taxpayers and the state was this: It required using an
established area such as West Texas intermediate oil or some
other regular market value; doing a regression analysis or some
other analysis or else using a "market basket" of different
types of crude oils with known markets from different parts of
the country or the world; and then imputing a value for ANS oil
based on that. There weren't a lot of sales of ANS oil. There
weren't established contracts. And there wasn't an established
pattern of how much the oil would go for.
MR. IVERSEN continued, saying when Platts came out with its
index in the mid-1980s, setting an ANS spot price, it changed
the world. In times of high production, with 2.2 million
barrels running down the pipeline annually, a variation of one
cent or five cents a barrel in the value of oil makes a
tremendous difference. This is a huge risk area for the state
and for those paying tax and royalty.
11:29:10 AM
SENATOR THERRIAULT referred to Mr. Iversen's remark that there
weren't a lot of sales at the time. He gave his understanding
that oil was being shipped and going to market, but companies
were selling the oil to themselves. There weren't many at-
arm's-length sales to determine the true market price. The
sales price couldn't be used because if a Sohio tanker was
taking it down for sale to a Sohio refinery, for example, people
questioned whether to trust that price as the true price.
MR. IVERSEN replied that was an astute clarification. There
weren't a lot of third-party contracts for setting market value.
Because of not having established values or an established
regulatory framework, there were aggressive assessments by
auditors who were protecting the state's interests. That is the
auditor's job. Where there was a lot of gray area, sometimes
the auditors pushed to the edges of that gray area to benefit
the state, to represent the state in those transactions.
MR. IVERSEN said, furthermore, the state was entering an era of
digging into taxpayer records. Taxpayers weren't accustomed to
that, and there was some reticence to provide needed
information. Thus there were aggressive, so-called blue sky
audits that resulted in an imputation of tax liability.
MR. IVERSEN elaborated, noting from there a process would begin.
Some cases involved tremendous dollar amounts; those would
linger for decades or a decade and a half and then settle at
some point. The litigation costs had to be considered,
particularly for the enormous cases. These gray areas
eventually reached "some sort of strong framework." In
addition, many times the strong issues for the state would be
settled first.
MR. IVERSEN added that historically, with respect to discussions
or rumors about low settlement values such as values below
50 percent, that might be just for issues that were weak for the
state to begin with. The auditors did their best to represent
the state's interests, and as they went through a learning curve
and pulled through the issues that are strong for the state,
those would be at higher settlement values.
MR. IVERSEN pointed out that royalty cases suffered some of
those same issues, but there was an additional impact because
royalty is based on a contract, a lease agreement. Thus there
have been contractual interpretation issues that are another
step away from regulations and statutes. He offered to address
that in a couple of minutes.
MR. IVERSEN reiterated that the world has changed since then.
In the mid-1980s Platts came out with its reporting for ANS oil,
and there were more defined regulations. The state also has
gained respect from pushing back all those years and being
aggressive in its audits. Furthermore, the state and the
taxpayers understand where they need to be, so there isn't as
much gray area between the two positions.
11:33:19 AM
SENATOR WIELECHOWSKI asked how much has been recovered through
the audits.
MR. IVERSEN said he didn't have that figure. This morning he'd
consulted with the Department of Law (DOL), which doesn't keep
statistics comparing the settlement amount with the original
claim. What ends up happening is that during these assessment
periods after an auditor makes an assessment, the taxpayer
submits additional documentary evidence substantiating the
claim. There is an allowance for corrections through that.
SENATOR WIELECHOWSKI explained that he'd asked because of a
statement made previously. The discussion had been about an
overall amount of billions of dollars and that by going to a net
system, perhaps there'll be arguments over millions of dollars.
He asked Mr. Iversen whether that's reasonable, judging by his
experience, or whether audit disputes may involve hundreds of
millions of dollars.
MR. IVERSEN said that is a good point. Compared with historical
numbers, risk in terms of dollars is substantially lower now.
When a dispute is based on the value of oil - the basis for all
the calculations in a gross tax system - and there are
transportation costs and other costs to get to that gross-value
point of production, it's a much bigger impact, particularly
when looking at millions of barrels being pushed through. By
comparison, for the downstream portion there'll always be areas
of disagreement.
MR. IVERSEN added that historically, the department has taken
one position and the taxpayers another; it's the nature of doing
business. But the major issues are defined. There is clarity
now with respect to the major downstream cost issues. The
upstream issues aren't as global or significant monetarily as
these enormous cases that began in the 1970s and 1980s. Now the
state will be looking at more discrete cost issues. Therefore,
dollar for dollar on the issues, it will be a smaller amount.
11:36:06 AM
MR. IVERSEN returned to his presentation, saying now there are
more objective market measures; there are credible markets for
ANS crude; the state knows what the third-party contracts are
saying; and there isn't a need to assert so aggressively in a
gray area, since the gray area is much smaller. This narrows
the room for dispute. Now most cases settle in DOR unless the
department is just wrong; if that happens, it acknowledges the
mistake. Unless there's an actual mistake, most cases settle at
80-100 percent, a much higher settlement number than previously.
CHAIR FRENCH asked whether that is for audits of tax matters
between DOR and the oil industry.
MR. IVERSEN affirmed that.
CHAIR FRENCH explained that a lot of folks come to him with
concerns about a net system, worried there'll be fights for
years and the state will end up settling for 10 cents on the
dollar. He gave his understanding that Mr. Iversen was saying
his experience over the last few years, however, is that the
settlements are between 80 cents and full value on the dollar.
MR. IVERSEN concurred.
SENATOR WIELECHOWSKI noted another concern he hears is that
arguments have been over one item, the tariff rate, whereas now
there'll be hundreds or thousands of items. Although there
might not be one large number, DOR potentially will get flooded
with various issues. He asked Mr. Iversen whether he'd
considered that and whether DOR has the auditors required, since
the number of auditors isn't increasing a tremendous amount
under this legislation.
11:38:08 AM
MR. IVERSEN answered they've thought about those pieces. There
certainly will be areas of dispute for upstream costs under PPT
and ACES. But what exists is a much more established realm of
authority, even for upstream costs. Internal Revenue Code
standards are referenced by statute; there are net profit share
regulations; joint billings and audits are already being done
between unit operators and working interest owners; and a lot of
what's happening upstream boils down to accounting, not
necessarily the vagaries of the market, where there's just
simply not an input they need to make the tax calculation in
term of how much a barrel goes for.
MR. IVERSEN further replied, with respect to auditors, that they
hadn't expressly asked for additional positions. He
acknowledged the need to have the crew fully manned in order to
administer this tax. Right now, they're down 6 positions out of
18, including the specialist position and audit supervisor.
That is the issue they're trying to hit with some of the
statutory requests for the exempt positions.
SENATOR WIELECHOWSKI recalled that from data he has seen,
recruitment was opened October 12, four applications were
received, and then recruitment was closed the day before the
special session started. He asked why. He also recalled
there'd been another area where there was a pending hire and
then recruitment was closed the day before the special session.
11:40:21 AM
MR. IVERSEN replied he didn't know which instance Senator
Wielechowski was referring to with respect to the pending hire,
but he was aware of some applications for the Auditor III or
flex positions. Recruitment closed because of the special
session, since those were positions the department had looked at
and was submitting for exempt treatment. Out of fairness to the
applicants, to the department, and to the state, they'd wanted
to ensure it was clear and aboveboard. They've recruited
rigorously, certainly for as long as he has been on board and
well before that, spending more than $100,000. It has been
spotty, however. There are very good-quality folks on board,
but there isn't a full crew. They're down one-third.
CHAIR FRENCH segued from the complexity of legal disputes to
their duration. He asked why legal disputes won't last for a
decade under a net tax system.
MR. IVERSEN replied that he had a couple of answers. First,
whereas the ANS royalty litigation spanned decades, in the tax
realm now the cases move fairly quickly. There is a well-
established administrative process. An audit is done, and a
taxpayer that doesn't like the audit can appeal and have an
informal conference in the department. If the taxpayer is still
dissatisfied after that step, having submitted evidence and
information for DOR to make a decision, the case moves out of
DOR to the Office of Administrative Hearings for presentation to
an administrative law judge. Then it can go to court.
MR. IVERSEN explained that although it still takes time to work
through the system, the state doesn't have to go through
numerous motions for summary judgment and huge, deep discovery
requests in gray, muddy areas for a typical case. Of course,
some cases have areas of dispute that need to be taken to
superior court and require time. But there has been a
fundamental change in the standards compared with the historical
situation of litigation spanning decades. The standards have
changed and the world has changed.
11:44:15 AM
MR. IVERSEN referred to a memorandum from Spencer Hosie that had
been provided to the committee.
CHAIR FRENCH requested a summary for the public. He opined that
Mr. Hosie has a fair amount of credibility in the area of
litigation and willingness to take on the industry. He said he
was heartened to see Mr. Hosie's estimate of how long litigation
would take, given that he believed Mr. Hosie had every reason to
push it to the high side.
MR. IVERSEN summarized that in his memorandum, Mr. Hosie
compares what happened with the ANS royalty litigation
Mr. Iversen had referenced earlier. It was filed by the state
in 1977. The oil phase was resolved in 1992, and the gas case
was resolved in 1995. That's a long case. There were some
reasons, as Mr. Hosie points out.
MR. IVERSEN said, first, the state wasn't acting as a sovereign
in that case. As a taxing authority, the state acts as a
sovereign. Then, however, the state was acting as a party to a
commercial contract; this put it into a realm of litigation, as
for any breach-of-contract claim where there isn't authority to
serve and enforce subpoenas. He told members, "We've got
express statutory authority to do that." He indicated now the
state's regulations are clear and can be relied upon in
expediting dispute resolution. In a civil lawsuit, by contrast,
ongoing discovery can take a lot of time and money.
MR. IVERSEN noted, second, the ANS royalty case involved a
number of matters of first impression, which he'd touched upon
before. Those were issues of valuation, transportation costs,
and so on. They relate to contract interpretation because the
royalty suit is based on contract.
MR. IVERSEN said, third, there was an issue of market value in
order to establish that. The state had to track every barrel of
ANS oil produced to its market destination, an incredibly
weighty undertaking. Fourth, rather than having a tax dispute
between a taxpayer and that state, the ANS royalty litigation
involved all the ANS producers. Thus there were multiple
opponents, different angles on the same issues, and different
issues. In such a case the difficulty, complexity, and length
of time multiply exponentially. During that litigation, the
state approached the industry as a whole. This was a matter of
first impression; the state was breaking new ground.
MR. IVERSEN turned to the tax. He noted Mr. Hosie writes -
which Mr. Iversen agreed with - that it isn't royalty and the
state is acting as a sovereign. The basic rules will be set
forth in statute. Mr. Iversen said this goes to Senator
Wielechowski's earlier question. The disputes will be on the
margin. They won't be based on the fundamental principles of
what's going on. For instance, it will be a question of whether
a cost is properly classified as a capital expense as opposed to
an operating expense, or that it isn't a direct cost but should
be overhead.
MR. IVERSEN said because a tax dispute is confidential and
taxpayer information is confidential, it also narrowly confines
this to a single-taxpayer dispute. This is unless, for some
reason, the taxpayers want to get together on an issue; however,
Mr. Iversen didn't know of such an issue, since they don't like
to share each other's confidential information.
11:48:30 AM
SENATOR McGUIRE asked why the state chose to waive its
sovereignty in the 1970s when it entered into those lease
agreements.
MR. IVERSEN replied he didn't know specifically. A royalty
dispute in the United States typically is a contractual matter;
the terms are negotiated. Historically, those royalties started
out at one-eighth, whereas now much higher royalty rates are
seen nationwide, depending on how hot the prospect is.
SENATOR THERRIAULT surmised it wasn't necessarily a decision to
waive sovereignty. Rather, a lease is a contractual document.
There isn't any sovereignty involved.
SENATOR McGUIRE said she gets the lease idea, but wants to know
what went into the decision making, since other nations choose
to exert their sovereignty.
CHAIR FRENCH remarked that it's fascinating as a matter of
historical perspective. His misperception, as he'd said
yesterday, was that a royalty is the most powerful taking. He
said it seems funny that it would be resolved as an equal
partner with the person from whom it's being taken, rather than
as a king reaching down to his subject.
SENATOR THERRIAULT suggested it isn't a reaching out. Rather,
that royalty share is agreed upon through a contractual
arrangement, not through the exercise of sovereign power.
11:50:51 AM
MR. IVERSEN added that the royalty contract is a negotiated
deal, more so with private landowners. There isn't a lot of
private royalty in Alaska, but in Texas, Oklahoma, and Wyoming
one sees a lot more negotiated deals. That's where the terms
start to vary. Although it is an "historic creature," he didn't
know when it was decided to take it as a landowner or royalty
owner, rather than a sovereign taxing entity.
MR. IVERSEN closed by saying while DOR is open to discussing
settlements with taxpayers on issues where there may be doubt as
to the state's position - for example, if DOR perhaps has been
too aggressive with respect to an item - it always considers
that litigation is time consuming and expensive. However, the
state never enters into settlement lightly.
11:52:32 AM
SENATOR THERRIAULT referred to CSSB 2001(RES), Version M of the
bill, page 15, which rewrites AS 43.55.165(a). He drew
attention to language beginning on line 30 that reads in part,
"allowed by the department by regulation", as well as lines 9-10
on the following page, which reads in part, "(2) a reasonable
allowance for that calendar year, as determined under
regulations adopted by the department".
SENATOR THERRIAULT asked: Since the beginning of AS 43 says
DOR, as most departments, has a general granting of power to
write regulations, why does this bill specifically include this
language twice? And why isn't the language at least consistent
between the two sections?
MR. IVERSEN replied that this is to completely clarify it.
Although DOR has general authority to draft regulations
implementing the tax and interpreting it, the desire is to make
it abundantly clear that for purposes of allowable lease
expenditures, DOR intends to affirmatively set forth - through
regulation - what costs are allowed, thus narrowing the room for
dispute and for gray areas. By contrast, PPT has a gray area of
allowable items but specific exclusions. The intent here is to
maintain the specific exclusions and then delineate
affirmatively, by regulation, what is included. To the extent
that the language may differ, he said this particular
affirmative regulation would be toward lease expenditures.
11:55:10 AM
SENATOR THERRIAULT again asked why the terminology differs
between the two pages.
MR. IVERSEN noted the two places are Section 43.55.165(a)(1)(B)
and (a)(2), which talks about overhead. Overhead is addressed
separately. It is a formatting change as well. In PPT,
overhead was allowed as sort of a separate category: "direct
costs shall include overhead." Typically, however, overhead
isn't considered a direct cost. So that has been moved. This
would be a separate regulation and has already been promulgated
for overhead itself. This is to clarify that.
MR. IVERSEN added that there are direct costs and lease
expenditures, and then, as seen here, the difference lies in
subsection (a)(1)(B)(iii), page 16, lines 7-8:
(iii) the costs must be direct costs of exploring
for, developing, or producing, as applicable, oil or
gas deposits; and
He said one qualification for lease expenditures is that costs
must be direct costs of exploring for, developing, or producing.
This gets into "direct cost land," and then it is recognized
that overhead isn't a direct cost. The overhead allowance is
discussed starting on line 9 of that same page.
11:57:17 AM
SENATOR THERRIAULT reiterated that having such language inserted
like this is a little unusual. He referred to subsections
(a)(1)(B)(i), (ii), and (iii) on page 16, which read:
(i) the costs must be incurred upstream of the
point of production of oil and gas;
(ii) the costs must be ordinary and necessary
costs of exploring for, developing, or producing, as
applicable, oil or gas
deposits; and
(iii) the costs must be direct costs of exploring
for, developing, or producing, as applicable, oil or
gas deposits; and
He asked whether inclusion of this language may empower a
commissioner sometime in the future to just change the
regulations and perhaps start dropping things off the list or
changing it so that it no longer matches up with the policy. He
noted this gives a policy direction, with DOR to work out the
details. This might be fine now, while there is an
understanding, but what about in the future? What power does
that language give to a future commissioner?
MR. IVERSEN replied that he anticipates over time DOR will
change regulations as the department learns about the process.
But under all circumstances DOR must obey the statutory
directives. These directives - with the exception of this
provision about "setting forth affirmatively by regulations" -
are the same as in PPT. In terms of having a dramatic change as
far as what is or isn't allowed, nothing like that is being
done. There still must be compliance with the statute.
MR. IVERSEN pointed out a further delineation in Section 20 of
CSSB 2001(RES) as to what direct costs include. This language
is in PPT, the current law, but has been moved as a conforming
change. Page 16, starting at line 30, talks about what the
department has to consider in determining whether costs are
allowable lease expenditures. Looked at are typical industry
practices and standards in the state that determine the costs,
other than the exclusions that will be allowed, and also the
standards adopted by DNR for its NPSL leases. These items shall
be considered among other factors.
MR. IVERSEN also noted that direct costs include some reference
to the Internal Revenue Code for what is being done for federal
income tax purposes; that is on page 16. And there is some
other guidance, that activity doesn't need to be physically
located on or near the actual premises of the lease or property
necessarily, as long as it still is a direct cost.
MR. IVERSEN concluded by saying there is substantial statutory
guidance as to what DOR can or cannot do. If at some point a
commissioner set forth regulations outside the statutory bounds,
the regulatory process would have to be approved by the Office
of the Attorney General and the lieutenant governor. If
something were out of line, it would be challenged and the
regulation would be declared illegal.
12:01:04 PM
SENATOR WIELECHOWSKI noted the law currently says costs of
arbitration, litigation, or other dispute resolution activities
are not lease expenditures. He asked whether that includes
auditing costs. For example, if DOR has audited a company and
the company then uses its own auditors, can those expenses be
written off?
MR. IVERSEN answered that to some extent, those sorts of costs
will be overhead. Overhead includes advertising, lobbying,
litigation at a corporate level, auditing at a corporate level,
and so on. Overhead is set in statute as an allowance related
to direct costs. By regulation, DOR sets forth what that
allowance is. So the actual amount spent on overhead doesn't
affect what the company is allowed to deduct as overhead. What
matters is what the company spends on direct costs, because
overhead is only a percentage of that.
SENATOR WIELECHOWSKI asked whether a company can write off the
ads being run on television right now, for instance, or lobbying
costs.
MR. IVERSEN replied no. He clarified that the overhead
allowance is a percentage of both direct and indirect costs. It
doesn't matter how much is spent for items like lobbying,
advertising, health club fees, and so on.
SENATOR WIELECHOWSKI asked whether those items he'd mentioned
could be included in a company's overhead.
MR. IVERSEN answered that what a company does for corporate
bookkeeping purposes has no bearing on what the state allows as
a deduction for overhead.
12:03:27 PM
CHAIR FRENCH requested a ballpark figure for the overhead
allowance.
MR. IVERSEN replied in the typical case it will be 3 percent of
direct costs for exploration, development, and operations in the
state, plus 9 percent of indirect costs for exploration,
development, and production in the state. For production of
hydrocarbons, it's narrow. Lobbying expenses and advertising
aren't costs associated with exploration, development, and
production of hydrocarbons. In response to Senator Therriault,
he provided a brief example.
SENATOR WIELECHOWSKI asked whether DOR audits direct and
indirect costs.
MR. IVERSEN affirmed that.
SENATOR WIELECHOWSKI surmised DOR hasn't seen advertising,
lobbying, or public relations costs included.
MR. IVERSEN replied he hasn't, but DOR hasn't done any audits
yet under PPT. The department would be looking for those sorts
of things certainly.
SENATOR WIELECHOWSKI surmised those would be disallowed.
MR. IVERSEN affirmed that, saying overhead is an area DOR is
always watching for.
The committee took an at-ease from 12:05:59 PM to 1:31:37 PM.
CHAIR FRENCH turned attention to information sharing.
MR. IVERSEN referred to CSSB 2001(RES), Version M, noting
information sharing appears in two separate sections. The first
covers information from DNR to DOR and the second from DOR to
DNR. These provisions clarify that DOR can share with DNR tax
returns, reports, and other documents filed under AS 43.55, the
production tax statutes. The first provision is found on
page 3, Section 1, new paragraph (12).
CHAIR FRENCH asked what the situation has been between the
departments until now.
MR. IVERSEN replied that several statutes govern confidentiality
for each department. The agencies have been extremely guarded
because of that confidentiality and the severe criminal
penalties for disclosure of taxpayer information, in particular,
as well as a lot of concerns relating to DNR and proprietary
information. The lack of clarity has led to an artificial wall
between the agencies in terms of what can and cannot be
transmitted. When this bill was being developed, for instance,
it became apparent that this can pose some real problems in
terms of smart policy making.
MR. IVERSEN elaborated, saying when a certain amount of taxpayer
information cannot be shared with the resource-management
agency, and likewise a certain amount of resource-management
information cannot be shared with the taxing authority on a tax
related to resources, it creates some real problems. These are
seen through the modeling and some of the visual aids put forth.
There is a certain amount of information about the impacts on
certain fields, for example; the background and modeling for
that are driven by DNR because it involves resource-based
information. Certain confidentiality restrictions apply with
respect to taxes as well, and DNR folks cannot get that
information.
MR. IVERSEN explained that what is sought with this legislation
is to be able to share that information so both agencies -
pursuant to their respective functions - can be smart, can be up
to speed, and can be good regulators in their respective
capacities without being hamstrung by the inability to receive
information that is necessary for a regulatory call or to
fulfill statutory obligations.
CHAIR FRENCH returned to page 3, observing that paragraph (12)
appears to be a directive to the commissioner of DNR which says
the director shall, on request - which he surmised means a
request from DOR - furnish records, files, or other information
related to the administration of AS 35.05.180. He asked what
that statute refers to.
MR. IVERSEN replied that is oil and gas leasing. In that
context, it's leasing, unitization, and those issues.
CHAIR FRENCH continued reading from paragraph (12), provided
below:
(12) on request, furnish records, files, and
other information related to the administration of AS
38.05.180 to the Department of Revenue for use in
forecasting state revenue under or administering AS
43.55, whether or not those records, files, and other
information are required to be kept confidential under
(8) of this subsection; in the case of records, files,
or other information required to be kept confidential
under (8) of this subsection, the Department of
Revenue shall maintain the confidentiality that the
Department of Natural Resources is required to extend
to records, files, and other information under (8) of
this subsection
He noted AS 43.55 is the tax statute.
MR. IVERSEN specified that it's production tax.
CHAIR FRENCH summarized by saying if DNR is supposed to keep
something confidential, DOR also will. But it's allowed to be
transmitted from one to the other without restriction.
MR. IVERSEN concurred. He said this is based upon the premise
that both agencies have been dealing with confidential
information, have protocols, and are very concerned - each in
its respective realm - about confidential information. That
overall umbrella of confidentiality would still exist, but
between the two agencies there would be passage of information.
1:37:15 PM
SENATOR THERRIAULT recalled recent testimony about concern that
the two departments perform different functions for the state.
Whereas DOR collects revenue, DNR negotiates to get the land
into production. With respect to sharing of information, it was
alleged that DNR would go to DOR and get all kinds of
information on companies' future plans and thus DNR could tailor
or change the acreage leasing and so on, to take advantage. He
asked whether Mr. Iversen had heard this concern in other
committees and whether there is some protection against it.
MR. IVERSEN answered that he hadn't heard that particular
concern. But there has been concern that DOR would pass
information on oil pricing to DNR for use in royalty-in-kind
(RIK) sales and purchases. He said that's kind of a red herring
because DOR isn't asking for actual price information. Rather,
DOR is looking for cost information, including forecasted cost
information, in order to do more accurate forecasts and improve
its audit functions.
MR. IVERSEN highlighted another aspect: There's a competitive
market already for buying and selling oil. The companies are
sharing that same information with other working interest owners
who are, in turn, buying and selling oil on the market. Thus he
opined that the concern with respect to DNR, at least in terms
of RIK, is a non-issue. He added that DOR doesn't anticipate
abuse of the information. The goal here is for each department
to be educated to the extent necessary for performing its
duties. If some knowledge will help DNR make a decision on
unitization that is appropriate for the state, then this would
further that goal.
SENATOR THERRIAULT asked if there is language Mr. Iversen could
identify that limits the information DOR can request.
MR. IVERSEN replied that for the purposes of DNR providing
information to DOR, it has to be for use in forecasting state
revenue under AS 43.55 or administering AS 43.55. That, in and
of itself, is a restriction. It has to be for those legitimate
purposes, rather than rooting around for income tax information,
for example.
1:41:06 PM
SENATOR THERRIAULT explained that he wants to be sensitive to
the fact that the state needs information but not more than
necessary, such as bank records. He asked whether this changes
the dynamics of the negotiation.
MR. IVERSEN suggested it might help to jump to the second
section, which is Section 12 in CSSB 2001(RES), Version M.
CHAIR FRENCH noted this relates to DOR's reciprocal requirements
and abilities. He asked Mr. Iversen to describe those.
MR. IVERSEN read from Section 12, which states:
* Sec. 12. AS 43.05.230(h) is amended to read:
(h) The commissioner shall, upon request, furnish
to the Department of Natural Resources copies of tax
returns, reports, and other documents filed under
AS 43.55 or AS 43.65, and the Department of Revenue's
determinations and workpapers under those chapters.
The Department of Natural Resources shall maintain the
confidentiality that the Department of Revenue is
required to extend to the returns, reports, documents,
determinations, and workpapers furnished to the
Department of Natural Resources under this subsection.
MR. IVERSEN reiterated that AS 43.55 is the production tax.
Here it's being limited to matters filed under the production
tax statutes. That then links with DNR and its administration
of oil and gas properties in the state. Also, AS 43.65, the
mining license tax, currently is in statute.
MR. IVERSEN pointed out that the new language "under those
chapters" on line 10 was inserted in the committee substitute in
lieu of, to his belief, what was in the original ACES bill,
"AS 43.55 or AS 43.65". He surmised it doesn't make any
difference substantively, but is different language that
prevents having to cite the statutes again. He indicated the
reciprocal confidentiality requirement in the latter half of
Section 12 is what Chair French referenced a few minutes ago.
He summarized by saying there are limits.
1:43:15 PM
SENATOR HUGGINS recalled that one major limitation on exchanging
information seemed personality-driven, rather than statutory.
MR. IVERSEN replied it's a bit of both. The ultimate basis for
the confidentiality is statute-driven. Folks in DOR are very
wary of the penalties imposed by statute. But because there
isn't a bright line for information that can be shared, they
don't want to get into a gray area. That's where the
personalities come in. There may have been some issues with
that in the past, with the two agencies perhaps being at odds.
MR. IVERSEN said although DOR is trying to work cooperatively
now, the agencies' natural cautions that have developed over
time are part of the issue here. Without the clarity, it will
be difficult to get around. With penalties like those DOR has
to deal with, unless there is clarity it is a very, very, fine
line, and they don't like to get too close to it. In response
to Senator Huggins, he said there are no additional penalties
under ACES with regard to these particular provisions.
SENATOR asked him to review the penalties.
MR. IVERSEN noted several provisions in current law address
confidentiality; he would mention the main ones. There are
several DNR confidentiality provisions. Three in particular
are: AS 38.05.035(a)(9), with respect to maintaining records;
AS 38.05.036(b), regarding royalty, net profit share leasing,
and exploration-incentive credits; and AS 38.05.036(f), which
addresses auditing.
MR. IVERSEN said for DOR there are a couple of statutes. The
primary driver here is AS 43.05.230, which sets out penalties.
That section relates to disclosure of tax returns and reports.
Subsection (a) says in part that it is unlawful for a current or
former employee or agent of the state to divulge the amount of
income or the particulars set out or disclosed in a report or
return made under this title. He noted "title" means the DOR
statutes. Subsection (f) of that statute says a wilful
violation is punishable by a fine of not more than $5,000, or by
imprisonment for not more than two years, or both.
1:47:50 PM
CHAIR FRENCH requested confirmation that someone can be put in
jail for divulging this information without statutory authority.
MR. IVERSEN affirmed that for a wilful violation. He also said
there is an express exception to the Public Records Act for
confidential taxpayer information. Those are the main operative
statutes in terms of confidentiality.
CHAIR FRENCH asked whether there were further questions about
confidentiality or information sharing. He then turned
attention to seismic data. He specified that the discussion
would be about the original version of SB 2001, Version A,
rather than CSSB 2001(RES).
SENATOR THERRIAULT highlighted Sections 36-44 of Version A.
1:49:18 PM
^Julie Houle, Section Chief, Resource Evaluation, Division of
Oil & Gas, DNR
JULIE HOULE, Section Chief, Resource Evaluation, Division of
Oil & Gas, Department of Natural Resources, noted that Kurtis
Gibson, the division's deputy director, would try to join in but
had another commitment. Ms. Houle explained that she would talk
about the ACES bill with respect to Sections 36-44, which were
removed from the bill and relate to AS 43.55.025.
CHAIR FRENCH asked her to focus on information sharing rather
than financial aspects, which would be left to the Senate
Finance Committee.
MS. HOULE told members AS 43.55.025 is a program with DOR. The
Division of Oil & Gas gets involved because it collects the
confidential seismic or well data for DOR and makes the
determination for DOR under this program that, yes, the
companies have turned in the data. In general, DOR, which
administers this program, will ask questions of the division;
DOR determines whether or not the company gets the money.
Generally, DOR doesn't look at the data unless a question arises
as to whether something should be an allowable cost. Part of
the language in the ACES bill was just to shore up some of these
requirements that the division has found, in collecting data, to
be troublesome.
MS. HOULE noted it added two other things to the bill:
5 percent credits for all seismic surveys and an extended
timeline for drilling wells, from 150 to 540 days. As an
investor with all these exploration-incentive credits, the state
is one of the largest investors in Alaska for wells and
"seismic." With the 5 percent credit for a seismic survey shot
prior to 2003, there is value, not for whoever shot the data,
but for the explorer years from now who wants that data without
the restrictions of a licensing agreement.
MS. HOULE explained that with the 5 percent credit, the state
would be purchasing data that the commissioner deemed of value
to future explorers. The state would own the data and then hand
it out to companies interested in exploring. That was the
intent. She noted people in her group are petroleum geologists,
geophysicists, and engineers; they'd said if they were explorers
coming to Alaska they'd want access to data to get started and
then could decide where to then focus their exploration. Data
like this would be of huge value.
1:52:37 PM
CHAIR FRENCH asked to what extent this data has been
commercially abandoned. Why is it no longer the property of the
seismic crew or the company that employed the seismic crew?
MS. HOULE answered that the companies still have the data.
However, it is of little value to them at this point because
they have newer surveys. The older data is likely sitting in
their vaults. While it's not of much use to them, it can be of
great value to a new company coming in.
CHAIR FRENCH asked where this is in the process of leasing.
MS. HOULE answered that someone interested in an area in Alaska
would first want to acquire seismic data. This allows looking
at the big picture of what potentially exists underground,
looking for the older wells drilled in the area, and combining
those to come up with prospects. With respect to exploration,
most fields on the North Slope have been discovered looking for
something else; fortunately, the original objective was deeper.
She emphasized that much of it is happenstance in exploration.
1:53:59 PM
MS. HOULE referred to the extension of the time to drill wells
from 150 to 540 days. She noted Armstrong, which came in to
drill the Oooguruk area, was able to drill three exploration
wells in one season, all within three miles of each other. The
extension would give an incentive to an explorer who is actively
trying to explore an area.
MS. HOULE indicated another predictability process DNR wanted to
describe was to allow companies to come in for preapproval.
This is for two reasons. First, now some seismic data is
partially shot over state land and partially over private land.
The state only gets the data shot over state acreage and thus
the survey is of little value; credit is provided, but it isn't
as useful to a future explorer. So private owners need to be
made aware, up front, that if they want this credit, the whole
survey will be provided to the state and in ten years it will be
available to the public.
MS. HOULE explained that currently the only way seismic data can
be available publicly is through the exploration incentive
credit (EIC) process. In response to Chair French, she said the
EIC is an incentive for explorers to look for oil and gas
outside of the existing units. Now if someone comes in to apply
for a seismic permit from the State of Alaska and the permits
group, that data never becomes public. Through this EIC
process, the data becomes public in ten years.
1:56:10 PM
SENATOR THERRIAULT gave his understanding of the current EIC
process: The company decides to spend the money and then comes
to the state to request reimbursement after the fact. Part of
the effort with this set of statutory changes is to have a
process wherein the company comes to the state first for
preapproval for whatever the company will do for the credit.
MS. HOULE affirmed that, emphasizing predictability. She said
if the state is investing up front, it wants to be able to know
what is being invested in. And the company knows, up front,
that its credit will more than likely be given.
SENATOR THERRIAULT surmised if the company follows through on
the plan it has been presented and that has been preapproved,
then the company will qualify.
MS. HOULE affirmed that, adding that preapproval won't be an
onerous process. Her group has people who know the State of
Alaska well and can easily assist in the process in a fairly
short order. This reduces uncertainty, and the company knows it
will get the credit. With respect to data sharing, this way the
state acquires seismic data that can be provided to the public
in a timely manner: ten years for newly shot seismic data, and
within a month of getting a credit for the older seismic data
from before 2003.
SENATOR WIELECHOWSKI asked what an average seismic survey costs.
MS. HOULE indicated geophysicist Paul Anderson works for her
group and is familiar with it. She said on the North Slope it
is $25,000 to $35,000 a square mile, actually less than at Cook
Inlet, where it is $90,000 to $120,000 a square mile. In
further response, she said if the seismic survey is outside of a
unit and 25 miles away from infrastructure, the company receives
40 percent credit. If it's within 25 miles of existing units,
it is 20 percent. "Similar to the wells also, under that
program," she added.
The committee took a brief at-ease.
1:58:36 PM
CHAIR FRENCH welcomed Senator Ellis and Senator Wagoner to the
meeting, indicating they'd been present for some time.
MS. HOULE, in response to Senator Therriault, explained that
it's easier to shoot seismic data on the North Slope because in
the winter the geophones can be set out and it can be done
quickly. At Cook Inlet it can only be shot at slack tide, and
the terrain is much more difficult to shoot on land. Also,
there are a couple of other types of data that DNR is asking
for. One is fluid analyses, very important for heavy oil. The
other is core data, which the state would then provide to future
explorers. The reason to provide this data to the public is so
future explorers can have a good data set to start with.
CHAIR FRENCH asked: It isn't as if the state is selling
someone's proprietary information, is it?
MS. HOULE replied no, they're not looking at it that way.
Rather, they're viewing it as the state investing by giving
credits in a proper timeframe. Two years within drilling of a
well or ten years within shooting seismic data, the data becomes
public. The company that shot the data may no longer be
interested in the area, but someone else might be. It makes the
prospectivity better for new explorers coming to Alaska.
CHAIR FRENCH asked: What if whoever shot the data is still
interested and is perhaps just proceeding slowly?
MS. HOULE answered that if they had the leases all tied up, it
wouldn't be a problem. And if they wanted to keep the data
confidential, they wouldn't have to apply for the exploration
incentive credit. If they didn't want the money, they wouldn't
have to provide the data.
SENATOR WIELECHOWSKI asked: If a company wants to keep this
information confidential, it just doesn't take the credit?
MS. HOULE said yes. But under the rules of the Alaska Oil & Gas
Conservation Commission (AOGCC), which permits wells, within two
years of drilling a well, in general, the well "becomes public."
In further response, she said except for under this current
AS 43.55.025 program, there is no other way that seismic data
becomes publicly available. There is one caveat: The charter
data from the BP merger is available, but someone must sign a
licensing agreement, and someone who gets that data after
signing such an agreement cannot hand it to someone else.
2:02:05 PM
MS. HOULE concluded by saying the data sharing was to shore up
the language in the EIC program, which is working pretty well.
Most of the EICs applied for generally have been for seismic and
wells in the National Petroleum Reserve-Alaska (NPR-A) area.
SENATOR THERRIAULT said it seems this is one thing the state can
do to help new entrants. He referred to the modeling done by
Gaffney Cline yesterday on the legacy fields, noting this is
potentially very meaningful outside those fields.
MS. HOULE concurred, saying this is very important for new
entrants who want to get started in an area but don't have any
data to begin with. It is definitely outside the legacy fields.
In order to qualify for the credits, it must be greater than
three miles from an existing well, and more than 25 miles from
an existing unit to get the additional 20 percent.
SENATOR THERRIAULT gave his understanding that there was some
criticism of the 5 percent credit allowance that a commissioner
can use to get access to the old data. The commissioner now
would have power to issue these credits. He asked Ms. Houle to
touch on that.
MS. HOULE agreed there was an objection raised about that. She
said there is a process that her Resource Development group has
to go through to evaluate whether that data is indeed in the
best interest of the state. There would have to be a finding
and decision, and then it would be presented to the
commissioner. But the commissioner couldn't willy-nilly just
give credit for data if someone in her group deemed it not
usable to future explorers. She indicated her group had been
looking at this from the point of view of a potential explorer
and what type of data such an explorer would want.
MS. HOULE, in further response, said that would be available
within 30 days after purchase, because basically the state would
be purchasing it without a licensing agreement restriction, and
after 30 days the older data would then become publicly
available.
SENATOR THERRIAULT noted it would be a quick turnaround. He
again highlighted the change in the current system that would
give applicants preapproval instead of having to request a
credit after the fact.
MS. HOULE said the preapproval would be for new seismic shoots
and new wells. That data would be confidential for ten years.
In further response, she said currently who applies for an EIC,
whether it was granted or not, and when the data will become
available aren't in the public record. Language in this bill
would require that DOR put it on its website so companies know
certain data will be available. Now it's all confidential.
CHAIR FRENCH surmised if it can be listed publicly, then folks
can see what's available, make an informed choice, and actually
access the data in a meaningful way.
MS. HOULE agreed, noting it will help people know what areas
they might want to explore. Otherwise, they'd have to go to the
different companies to get data. If three companies had
participated in a seismic shoot, for example, two might be okay
with trading the data but the third might not; then it wouldn't
become available.
The committee took an at-ease from 2:07:06 PM to 6:06:42 PM.
^Public testimony
CHAIR FRENCH opened public testimony.
JACKIE STEWART, Juneau, informed members that she was speaking
as an individual but has been in business in Alaska over
20 years. The last 8.5 years she has been the business
counselor for the Small Business Development Center, which
serves all of Southeast Alaska. Because financial statements
are difficult, she spends a lot of time consulting with people
about them, including the difference between gross revenue and
net profit. She expressed amazement that the legislature would
consider taxing on net profit, which she characterized as
"whatever you want it to be." She invited members to attend a
class she was teaching November 28 on the subject and also
offered to consult with members individually; she clarified that
she didn't intend it to be demeaning.
MS. STEWART said companies always complain when taxed. Last
year they complained about the taxes they wound up getting; now
they seem to think it was a sweet deal and continue to complain.
She recalled a Chamber of Commerce meeting where a woman said
this is about jobs, not taxes, and the state is taxing oil
companies at 64 percent; Ms. Stewart had asked what percentage
of that is royalties, but the woman had said she didn't know.
MS. STEWART surmised legislators understand the difference
between royalties and taxes, though. Royalties pay for the
resource, which the companies don't own; it's their cost of
goods. To her understanding, the state has arranged to tax
partly on royalties and then have a tax that is basically a
sharing of the risk. At the Chamber of Commerce meeting the two
were confused, however, as if the 64 percent were all taxes.
MS. STEWART urged legislators to do what she believes should
have been done last year: tax based on gross revenue, not net
profit. The latter only leads to lots of work for attorneys.
She said any company can claim expenses that are legitimate; she
cited an example. She then asked: Do we really want to argue
with oil companies over what their expenses are and whether
they're legitimate?
MS. STEWART recalled Governor Palin said she wants this tax to
be transparent, be fair, and encourage resource development.
Ms. Stewart agreed, but emphasized keeping it simple and easy
for Alaskans to understand. If it is simple, it will be fair
and will eliminate having to spend time and money on litigation.
MS. STEWART also suggested if oil companies want the tax
percentage reduced, taxing the gross does that. She opined that
oil companies make 30-34 percent profit, but posed a scenario in
which a company makes 10 percent profit, average for a company.
If 100 percent is gross revenue and the company makes 10 percent
profit, then 1 percent of gross revenue is the same as
10 percent of profit. Taxing on gross reduces the percentage.
6:13:31 PM
TIM ARNOLD, Juneau, speaking on his own behalf, said he has been
employed in the mining industry 30 years and came to Alaska from
Nevada four years ago, thinking the state was pro-business and
pro-mining. Although he still feels that way, other factors
have him worried about doing business in Alaska. Asserting all
is not well in the private sector, he cited impacts to the
Southeast Alaska timber industry, mining, fishing, and tourism.
MR. ARNOLD expressed appreciation for legislators' concern with
ensuring the state is funded adequately and the growing needs of
its citizens are met. But he said the private sector actively
generates the bulk of the state's revenue. Thus it is critical
that Alaska have a healthy business climate, positioned to
compete on a global scale for the investment necessary to
develop small and big projects in Alaska's resource industries.
These projects will keep local and state government revenue
streams and will provide jobs for Alaskans.
MR. ARNOLD said there are plenty of hurdles for the private
sector. He hopes legislators are cautious about creating new
ones through new taxes, higher taxes, or any other measures. He
opined that the most learned body to make laws was designed to
be, and is, the state legislature. Legislators should craft a
proper message about how willing Alaska is to promote business.
Alaska fell to 47 out of 50 states in a recent Forbes magazine
ranking of business climates, he recalled. He said the
legislature's decisions in this historic session should be ones
that will preserve and attract a business climate, whittling
that number down a few notches.
6:16:56 PM
DONALD BENSON described himself as a 55-year lifelong Alaska
resident and third-generation descendant living in the Matanuska
Valley. He strongly encouraged members to add back key elements
of the ACES plan that were stripped out in the previous
committee: the .02 progressivity; the $30 trigger; the
25 percent tax rate; and the most important administrative tools
that expand the list of reporting, return, and expenditure
information, which the administrative accountants need badly.
MR. BENSON requested passage of ACES to restore public trust and
bring Alaska its fair share of oil and gas revenues. He said
the governor's plan will do this. He recalled polls in the past
weeks showing 72 percent or more of the public agree that Alaska
isn't getting its fair share and that PPT is broken in some
manner; the latest poll shows 83 percent approval for Governor
Palin and her administration. He said Alaskans are telling the
legislature their position; they are the voters. He asked
members to follow the will of the people by making ACES the new
tax system. It is an accounting system and must be intact in
order to work for Alaska and the administration. He said ACES
ensures Alaska will be treated as an equal partner.
CHAIR FRENCH noted Senator Thomas of Fairbanks was present.
6:20:04 PM
MARK SHARP told members he was representing the future of the
state: his children and grandchildren. A 52-year Fairbanks
resident, Mr. Sharp said he counts himself among the growing
number of Alaskans who've become disenchanted or disgusted with
the integrity and ineffectiveness of the legislature. He opined
that most Alaskans simply don't trust legislators; that many
representatives are ignoring the governor; that the legislature
has abdicated responsibility to police its own, and thus the
federal government has had to step in; and that the legislative
branch has become paralyzed. He indicated he'd provided
testimony and input about tax ideas several times but felt he
wasn't being listened to.
MR. SHARP said Alaskans face a staggering energy crisis, with
Cook Inlet gas drying up and Railbelt heating oil at $3 or $4 a
gallon, higher at Dutch Harbor. He mentioned rampant greed of
the "big three" oil companies, which have set another record for
profits while crying impoverishment. Referring to his previous
testimony, he said both resources committees have abdicated
responsibility to assess the value of the oil resources and to
develop a fiscal policy to maximize the benefit to Alaskans -
which he surmised is being interpreted as maximum benefit to the
oil industry.
MR. SHARP suggested legislators who aren't corrupt are complicit
for closing their eyes to the criminal activity. Worse, as they
sequester themselves in Juneau with scores of oil lobbyists,
Alaskans are frozen out of their own political process and thus
have lost control of their economic future. He asked what it
would have taken to schedule a committee meeting or two along
the highway system, rather than having legislators listen over a
crackly intercom; perhaps then they'd hear folks say to keep it
simple. Mentioning a point-of-production-based tax and
capturing Alaska's fair share, Mr. Sharp said allowing the oil
companies to "write the PPT legislation and then use it as a
starting and finishing point was, and is, insane."
6:25:52 PM
BUZZ OTIS, Great Northwest, noted Great Northwest is a
construction group; he indicated he has been in business in
Fairbanks 33 years. Unlike the previous speaker, he believes
most politicians in Juneau are there to do a good job for Alaska
and are honorable people; he thanked them for their service.
However, he believes Alaska is at an economic crossroads.
Federal funding is being challenged, which likely will continue.
He cited challenges to the mining and housing industries,
predicting the construction industry will follow soon.
MR. OTIS urged caution, asking members to come up with a formula
that is stable and will encourage long-term investment in the
oil fields, not only on the North Slope but also in Cook Inlet.
He noted Doyon and some of its partners are exploring in the
Nenana Basin, for instance. He also expressed the need to not
have to revisit this issue. A business person whose taxes are
revisited every year or 18 months would be nervous about making
an investment for the long term. It's all associated with risk.
6:28:24 PM
JERRY McCUTCHEON, Anchorage, representing himself, said the use
of ridiculous illustrative examples needs to stop because they
have a bad habit of later becoming facts. He asked: Why do you
think the oil companies are using DNR/DOR numbers rather than
their own? Referring to Exxon's testimony today, he said some
state employees put out an illustrative example that proves the
oil companies' case better than industry numbers do.
MR. McCUTCHEON referred to the Gaffney Cline examples and said
250,000 barrels a day as the oil-pipeline minimum flow and
shutdown point is nuts and stupid, even if it's only
illustrative. He suggested trying 50,000 barrels a day at $80
oil, for $1.5 billion a year; at $40, for $750 million; and at
$20, for $375 million. Mr. McCutcheon negated the idea that oil
companies would shut down the line if the throughput were only
50,000 barrels a day at $20 a barrel, abandoning billions of
dollars of North Slope infrastructure and then having to pay for
its removal.
MR. McCUTCHEON recalled today Exxon told the House Resources
Standing Committee there's another 53 billion barrels to be
discovered in Alaska, not counting 30 billion of viscous oil or
30 billion of heavy oil. He said a perfect example of "no
abandonment" is the Cook Inlet platforms, where not one of them
makes economic sense "the way you people have been calculating
things." He said it costs more to remove the platforms than to
keep them, which is why they're still there.
MR. McCUTCHEON opined that Prudhoe Bay has already produced
6.1 billion barrels, more oil than would have been produced if a
gas line had been constructed in the 1980s; at least another
9 billion barrels remain to be produced. It is a good time to
discuss the Cook Inlet platforms, he said, for those who persist
in demanding a gas line and expensive oil recovery. He added
that there is more "once-recoverable oil that is now
unrecoverable" under the platforms than was recovered, over a
billion barrels, worth at least $80 billion at today's prices.
He explained that the gas that came up with the oil had been
sold off. He cited the example of Swanson River, where the
percentage of oil recovery was three times that of the
platforms.
MR. McCUTCHEON suggested since Alaska will own Point Thomson if
Governor Palin doesn't sell Alaska out, Alaska should sue the
Prudhoe Bay owners for a realignment of Prudhoe Bay interests
with Point Thomson - just as Prudhoe Bay owners have sued one
another several times to sort out ownership, the last time being
a decade ago. He concluded by saying the injection of Point
Thomson gas into Prudhoe Bay would make the State of Alaska the
largest shareholder of Prudhoe Bay.
6:33:42 PM
STU GRENIER, Anchorage, recalled yesterday hearing on the radio
that Alberta, Canada, raised its royalties by 20 percent. He
said that is very simple. Everyone understands what it means.
By contrast, ACES has a lot of people scratching their heads.
He noted at a meeting at East High a few weeks ago there was
mention of raising royalties or something equivalent for the two
big producing fields, Kuparuk and Prudhoe Bay. That is simple.
People would understand and support it.
MR. GRENIER similarly proposed giving tax breaks on what hasn't
been produced yet and raising royalties, or something
equivalent, for those fields. He expressed concern that the
ship is going down economically because of the oil flow.
Legislators must start making hard decisions so Alaska doesn't
end up with infrastructure it cannot pay for. They also must do
something to help the state in the long run, 30 or 40 years from
now, such as taking the increased royalties from the big fields
and then developing hydro projects along the Railbelt. At least
then there'd be usable energy for future Alaskans.
MR. GRENIER pointed out that whatever doesn't get developed
because of raising taxes or royalties will still be in the
ground for future generations to develop. Nothing says this
generation has to develop everything now for its own benefit.
He expressed concern that the legislature isn't fiscally
conservative. Whatever comes from future taxes or increased
royalties should go into long-term productive projects that will
benefit future generations, rather than just having "a big
party" now. Saying the oil companies are smooth, getting their
tax breaks and producing propaganda, he asked for something
simple and clear, increasing royalties as he'd discussed, with
the hope of having something to show for all this money later.
6:38:37 PM
AVES THOMPSON, Executive Director, Alaska Trucking Association
(ATA), Anchorage, said ATA is a 50-year-old statewide
organization representing trucking interests from Barrow to
Ketchikan. Its more than 200 member companies represent all the
diverse trucking operations in the state, and many associate
members provide goods and services to this industry. In Alaska,
trucking employs over 20,000 people, 1 out of every 14 in the
workforce. Payrolls total over $900 million annually. Most of
the several thousand family-owned and corporate trucking
businesses have fewer than 10 employees.
MR. THOMPSON turned to PPT issues and SB 2001. He said while
the emphasis seemingly has been on raising taxes to increase
state revenue, ATA believes the better way to maximize benefits
to Alaska is to provide good-paying, long-term jobs for this and
future generations. The state needs to focus on slowing the
production decline. Investments need to 1) continue in existing
fields, 2) be made in heavy oil, and 3) be made to promote
development of new fields. Existing field development should be
the first priority, since most new production in recent years
has occurred in such fields. Without this base production,
heavy oil and other new field development will face major
additional challenges.
MR. THOMPSON said the oil and gas business is capital-intensive;
it takes many years for a return on investments. Increases to
taxes lengthen that recovery time and can negatively impact
project economics and investment decisions. While tax policy
should produce state revenues, it is more important to encourage
future investment to develop Alaska's abundant resources. He
urged keeping the tax rate low and using incentives to increase
such investment, thereby providing good, long-term jobs for this
and future generations.
6:41:33 PM
JASON BRUNE, Executive Director, Resource Development Council
(RDC), Anchorage, noted his wife works for Alyeska Pipeline. He
described RDC as a business association with a diverse
membership including companies and individuals from all the
state's natural resource industries, as well as Native regional
corporations, local governments, organized labor, and more.
MR. BRUNE emphasized sending a positive message that Alaska is
open for business. He said Alaska was allowed to become a state
because of its rich natural resource wealth, but it appears its
industries are under attack; he gave examples. Turning to the
oil and gas industry, he expressed concern that yet another tax
increase would send a bad message. Ballot Measure 2 last year
sent a message that Alaska may in the future tax reserves that
are in place; although it failed, it could come forward again.
MR. BRUNE said Alaska lacks the infrastructure and has high
costs of doing business. Total government take presently is
around 64 percent. Under Governor Palin's bill it could
approach 68-70 percent, even higher with progressivity. He
urged committee members to reject any amendments that would
increase it further.
MR. BRUNE noted this morning former Governor Knowles spoke to
RDC. Mr. Brune encouraged reading comments at akrdc.org. He
said former Governor Knowles stressed the importance of the
partnership between the state and the oil and gas industry, and
also emphasized - as RDC has done for years - the importance of
putting a long-term fiscal plan in place. He mentioned
incredible oil revenues of the past two years, matched by the
two largest budgets ever.
MR. BRUNE acknowledged the state's sovereign right to raise
taxes, but said this doesn't mean it should. As for Alaska's
fair share, he asked what a fair share is and what legislators
pay, for instance, as a fair share to help run state government.
He said Alaska is the only state in the US without either a
state income tax or a state sales tax, and Alaskans also receive
permanent fund dividends (PFDs), $1,654 each this year.
MR. BRUNE said RDC believes a fiscal plan must include not only
industry taxes, but also a broad-based tax, some use of the
permanent fund, and spending restraints. "Industry tax after
industry tax" does not a fiscal plan make. Nor does it send a
positive message to those contemplating investing in Alaska,
bringing future jobs. He urged legislators to put all this
together as part of a fiscal plan. He also urged them to let
PPT, put in place last year, work.
6:46:51 PM
JEFFREY KNAUF, Girdwood, said he really likes the ACES bill as
it was presented, believing it provides for the fair and
equitable taxation Alaskans are looking for. He views the oil
industry as looking a hundred years ahead, and he finds it
exceptionally hard to believe the reserves aren't there, for
instance.
MR. KNAUF predicted any amendments to the original ACES bill
would likely result in a petition process, which he'd strongly
support. He said he knows what it is like to be impacted
dramatically by the Exxon Valdez incident and how it was
handled. He doesn't feel adequately represented. Exxon is a
substantial part of an industry that he doesn't believe can be
trusted.
MR. KNAUF said he believes ACES more than adequately addresses
that, and in the long term it provides good revenue to the
state. Because oil companies cannot regulate themselves, he
counts on the state to present something such as ACES and follow
through; otherwise, he believes there will be an aggressive
petition process to put it on the ballot.
6:51:57 PM
EMILY FORD, Government and External Affairs Manager, Anchorage
Chamber of Commerce, said her member-driven, nonprofit
organization has more than 1,200 members representing 75,000
employees. She read a condensed version of a letter recently
approved by the board of directors and sent to the governor and
the legislature. Ms. Ford said while appreciating the desire to
ensure that the most vital component of Alaska's petroleum tax
regimen was the result of sound public policy, they have
significant concerns regarding the review.
MS. FORD therefore requested the following actions: 1) review
PPT to ensure it is sound public policy, but don't discard it
simply because of circumstances involving dishonest lawmakers
surrounding its passage; 2) if there are legitimate doubts
concerning the effects of PPT, don't be afraid to allow it to
exist for a sufficient time to allow reliable data to be
generated, consistent with the original legislation, which
provided for review after five years; 3) take all appropriate
caution to protect Alaska's reputation as a stable tax
environment that encourages and promotes business opportunities
and investment; and 4) consider any revenue enhancements only in
conjunction with developing a fiscal plan, a spending-and-
savings plan for the State of Alaska.
6:55:17 PM
JIM SYKES, Palmer, representing himself, said he was former
executive director of Oil Watch Alaska, formed in the mid-1990s
to ensure the state gets its fair share and oil companies are
treated fairly as well. He referenced a report released
December 9, 1998, by Richard Feinberg of Fairbanks, "How Much Is
Enough," which said the state wasn't getting enough oil revenue.
On that day, oil hit $10 a barrel. Mr. Sykes said the industry,
while still making a profit at $10 a barrel, denied it was
making money. However, it was learned from oil company insiders
and government officials that the report - which was based on
publicly available information - was close to the mark. Even at
extremely low prices, oil is extremely profitable.
MR. SYKES surmised oil companies have the ability to move less-
profitable heavy oil, especially at today's sky-high prices.
Had the report's six recommendations been followed, there'd be
no need to be here today. It centered on a "windfall equal-
sharing tax" under which "x" amount is taken out of the full
price of oil. If the state is an equal partner, its share
should rise and fall along with the oil industry, resulting in a
fair share no matter what the price of oil is. The report
called for a surcharge to kick in at about $18.50 a barrel. The
current discussion is about adding a surcharge after $40, $50,
or $60 a barrel. He opined it should be closer to $25 a barrel.
MR. SYKES highlighted problems. Long term, the aging oil fields
and infrastructure are increasingly expensive and thus a net-
profits tax will assuredly result in greater write-offs against
profits. Short term, Exxon, BP, and ConocoPhillips could rig
the system and take advantage of profits they make on behalf of
their shareholders. With respect to information not provided
from the companies, he said if the state doesn't have the tools
to monitor a net-profits tax, those should be enacted; it may
require a commission.
MR. SYKES agreed with Mr. Benson that the portions stripped out
of ACES should be put back. Mr. Sykes said deductions on newer
and smaller fields should only be allowed for verifiable, cash-
only field expenses. There should be more public disclosure of
information. And write-offs for lobbying, media campaigns, and
so on should be prohibited. The cost of cheating and delay must
be greater than the cost of proper reporting and the payment.
Also, access to North Slope facilities by new explorers must be
guaranteed.
MR. SYKES asked legislators to look at actual transportation
costs related to TAPS; for companies that both produce oil and
ship it through the pipeline, there must be a real cost
attached, not just what they say costs are. At the same time,
those costs must protect independent companies, which are aced
out of the pipeline because they're not owners.
MR. SYKES disagreed with the contention that taxes prevent
investing and further exploration on the North Slope and that
the oil producers may leave. He said they won't leave at $80 or
$40 a barrel. Mentioning former Governor Walter Hickel, he said
a partnership with the oil companies must be equal. He asked
legislators to reexamine the situation thoroughly.
7:02:54 PM
DAWN MENDIAS, Chugiak, a retired teacher, said the profit motive
is strong and the state shouldn't underestimate its resources.
As long as any profit exists, the oil companies will stay.
Alaska is a known and stable location, unlike many other places
where these companies still operate. Ms. Mendias also cautioned
against thinking of this as a partnership. Rather, it's a
business relationship. The state owns the resources, which
constitutionally are for the benefit of Alaska's people.
MS. MENDIAS said PPT is flawed, passed in haste and
choreographed by the oil companies. Corporations have one goal:
profit for their shareholders. Fairness isn't included.
Because legislators are dealing with agents of the oil
companies, however, they tend to personalize it and be fair.
Instead, legislators should get as much as possible for Alaska,
especially since the oil is declining. As for giving PPT time,
time is money. The state cannot afford to lose billions of
dollars waiting.
MS. MENDIAS said these companies have slick public relations,
accounts that can play with net profits, and some Alaska
legislators who are weak, stupid, pliant, or corrupt to help
achieve their goals. She asked how it can be that while
companies rake in record profits - which they won't even reveal
upon questioning - Alaska's schools, swimming pools, social
programs, village health programs, and infrastructure scramble
for funding.
MS. MENDIAS encouraged legislators to raise taxes and take back
what belongs to Alaskans, now and for the future. A 25 percent
tax might not be enough. She said ACES is okay unless something
even more beneficial for Alaska's bottom line can be brokered.
Whatever it is, choose something simple. Tax the gross.
7:06:50 PM
SIG RUTTER, a 30-year Alaska resident, said after construction
of TAPS was completed in 1976, he went to work on the pipeline
in 1977. The construction camps were full of people and yet
little was being done. They were flown to remote hilltops by
helicopter and then sat around campfires telling stories all
day; at night they returned to camp, where a big spread awaited.
MR. RUTTER said the workers knew something extraordinary was
going on, but didn't know what. Later, lawsuits claimed that by
wasting money, the industry majors were able to drive the tariff
up so high that only they could afford to bid on future leases.
Independent drillers from Texas, Oklahoma, and Wyoming were
unable to compete because only the pipeline owners could afford
to ship their oil profitably through TAPS. The state and its
people, because of the royalty, paid for all the waste.
MR. RUTTER said he believes all this talk about providing a
fertile investment climate is poppycock, whether it's coming
from the Chamber of Commerce or others. Expressing disgust with
the legislature, he discredited the idea of a partnership with
industry; opined that a profits-based tax will result in a lot
of nonsense, crime, and corruption; and said it is about time
the oil companies start paying their own way.
MR. RUTTER recalled when TAPS was built, workers expected it to
last 20 years; he surmised that figure came about because the
legislature provided a 20-year depreciation schedule. Now TAPS
has gone 10 years beyond its projected life. The oil companies
have basically received a free ride, because they were allowed
to subtract costs from the state's royalties. Strongly blaming
the Republicans, he asked: How many times do we have to pay for
this pipeline? He said once the depreciation ran out, the
companies started talking about new incentives and whatnot, and
he believes some fields pay no royalties at all.
7:11:01 PM
MARY AND JIM ODDEN, Nelchina, testified via a joint statement
read by Mary Odden. They've lived in Alaska since the mid-
1970s, working in the public and private sectors. They
currently own and operate a community newspaper serving the
Copper River Valley; their business is tied to the local economy
and to some intangible qualities of life in Alaska. They
consider themselves fiscal conservatives who also recognize that
state government bears responsibility for maintaining public
education, safety, resource management, transportation
infrastructure, and care for the weakest citizens.
MS. AND MR. ODDEN, through Mary Odden, said they support a
careful design of a fiscal design for Alaska. The best long-
term interests of Alaskans aren't necessarily those of the oil
producers; legislators should determine where those diverge.
They support the governor's ACES plan, which they don't believe
will hurt the oil and gas industry. If the ACES tax percentage
is lowered, a progressivity component should balance it. They
request a price or cost protection for legacy fields such as
Prudhoe Bay. They also ask that reporting requirements for
companies be preserved. Transparency is critical. Alaska needs
the tools. Finally, legislators should adopt some form of
Senator Dyson's amendment which asks that a future percentage of
the progressivity component be dedicated to repaying the
constitutional budget reserve (CBR) account.
7:15:06 PM
MALCOLM RAY, Eagle River area, described himself as an oil and
gas owner with properties in 14 states in the Lower 48. He pays
from 3 percent production tax in some states up to 7 percent in
Oklahoma. He considers a tax over 10 percent to stifle his
company's ability to explore for oil and gas, or even to conduct
lower-risk oil and gas projects. He would never bring his
company to Alaska under the current circumstances and fiscal
situation, Mr. Ray told members. He has lived in Alaska three
times; this time, he's been here 10 years.
MR. RAY said there is an initiative in Alaska currently being
championed by a self-righteous governor with no knowledge of
private industry. Changing the tax rate for a single industry
three times in as many years is an atrocity against the state
and its future well-being, and is a direct attack on people in
the Lower 48 who must pay even higher prices for natural gas to
heat their homes. He predicted Alaska will be like a Third
World country if this continues.
MR. RAY said he has personal knowledge of the waste and
corruption in this government, beyond what has made the news in
the last few years. He opined that the real corruption is in
the governor's office, not the few legislators who may have
worked with their buddies for a few thousand dollars.
MR. RAY referred to a five-page report dated August 3 from
Governor Palin's administration, surmising it's a hoax and
cannot be substantiated; Mr. Ray said he is very professional
when requesting information and has had a request in for over a
week, but DOR won't send data supporting how this report was
arrived at. Also, while a net-profits tax is in line with how
individuals pay federal income tax, and while other states have
net-based income tax, the report says the State of Alaska
doesn't know how to administer this tax. He closed by saying
other states aren't nearly so greedy with respect to this
particular industry.
7:19:42 PM
DANIEL B. WINN noted he has lived in Alaska 38 years, mostly
around Homer. A commercial fisherman, he also is a retired
laborer out of Local 341. He believes a gross-based tax is
best. A net-based tax pits the state against some of the best
lawyers and accountants in the US; he questioned whether the
State of Alaska has the resources to deal with that. He wants a
tax to be straightforward, based only on the gross.
MR. WINN said there are shortcomings with respect to state
oversight of the oil industry. The pipeline is 10 years beyond
its expected life, he indicated. He'd worked in Valdez several
years ago, and the place isn't well kept. Citing the settling
ponds as an example, he expressed concern that there will be
massive expenses for Valdez and all along the pipeline. He
suggested considering that while figuring the tax out, and
putting money away for further inspections and so on.
MR. WINN also said the system is a little flawed because each
year the legislature decides how much money goes towards
oversight. That makes it difficult to hire outside consultants
or engineering companies that could actually do the work and
inspect it. He agreed with former Governor Jay Hammond, saying
industry should pay its own way, including commercial fishing.
MR. WINN opined that Alaska hasn't been getting its fair share
from the oil industry because of their accounting procedures.
He hopes legislators will pass something based only on the
gross, even for new fields. If they want to specify certain
areas where deductions can be made, that is fine, but it should
be really clear and simple. He added that he can't believe some
people think the oil industry is being overtaxed by the state.
7:23:56 PM
KELLY WALTERS spoke in favor of a tax on the gross. He said
when PPT passed last year, originally there weren't enough
votes. Before that, under then-Governor Murkowski, the deal was
negotiated in secret with the oil companies; at the last minute
a special session was called and it was revealed to be tied to a
proposed gas pipeline. It wasn't really covered in the
newspaper that this was a net-profits tax, he said, or that
85 percent of the state's revenue would be tied to the
efficiencies of the oil producers. He indicated it provided a
disincentive to efficiency, since the higher the costs they can
write off, the lower their taxes - and hence the lower the
state's revenue - will be.
MR. WALTERS said with a net-profits tax, the state absolutely
needs a legal and accounting infrastructure to ensure it's
getting a fair share. It is a bad idea. He recalled Governor
Palin had campaigned on taxing the gross; he'd seen a couple of
her presentations. In terms of the investment discussed by the
media, he opined that if there is profit to be made, the oil
companies will find a way to do so. However, it doesn't appear
there has been significant investment, even with incentives.
MR. WALTERS referred to the recent trials involving Alaskan
lawmakers, saying there has been a merger of the interests of
the government with those of the oil producers. Suggesting this
is fascist, Mr. Walters concluded by asking legislators to not
be fascist and to tax the gross.
7:27:07 PM
PAUL KENDALL began his teleconferenced testimony by protesting
the process.
CHAIR FRENCH acknowledged the frustration of not being able to
testify in person, but pointed out that no matter where the
committee met, most of the state wouldn't be there.
MR. KENDALL thanked Governor Palin, saying he thinks she is
well-intended, but specified that he supports a gross-based tax.
He disagrees with PPT's complexity. Today the pipeline is two-
thirds empty; it has taken several years to get there. One
would think oil companies would be knocking at the door, but
they haven't. Nor does he see the three major oil companies
having a lot of contractors looking for more oil. He asked
whether what goes in the pipeline is measured against what goes
out, for example. He also noted that the oil company
representatives aren't sworn in when testifying. He suggested
that should happen.
MR. KENDALL expressed concern about Commissioner Galvin's
testimony, since he represents the state's interests, does oil
forecasting, and also acts as an investment banker and so on.
Mr. Kendall said it seem every form of testimony is suspect,
including his own. The legislature has failed to make these
people stand up and be accountable. They should be sworn in and
should be asked to testify. He said he believes Alaska has a
bright future, but he's frustrated when looking at the totality
of events, such as not opening the Arctic National Wildlife
Refuge (Arctic National Wildlife Refuge (ANWR)) to development.
MR. KENDALL left his phone number, 222-7882, suggesting people
need to reach out to form their own means of dialogue, which is
what happens when leadership seems to fail to represent the
people because it has no vision and no foundation. He clarified
that he believes there is a bright, magnificent future close at
hand. He acknowledged that many are well-intended and do shine.
7:33:14 PM
TOM LAKOSH asked members to consider his written and oral
testimony as well as critical documents and comments attached to
an e-mail he'd sent.
CHAIR FRENCH noted his e-mails would become part of the record.
MR. LAKOSH said although there are many issues, he would correct
misrepresentations in material publicly disseminated by a
legislative consultant and DOR. Presented yesterday, this is
the representation that PPT and the amended ACES system of tax
deductions and credits are necessary and/or the preferred
mechanism to advance legacy oil field infill drilling that is
designed to stem oil-field production decline.
MR. LAKOSH told members the material omission is that the lease
provisions for the fields already require the lessee to "drill
those wells as a reasonable and prudent operators would drill,
having due regard for the interest of the state". That is from
the standard lease form, page 6. They also omitted that "the
commissioner will require amendments that the commissioner
determines necessary to protect the state's interests" in
consideration of lessee's plan of operations. That's from
page 4 of the standard lease, and the same language is found at
11 AAC 83.158(e).
MR. LAKOSH said a fair legislative investigation mandated by
Article I, Section 7, of Alaska's constitution would necessarily
require the following three actions: First is a full apology on
the committee floor and in all Alaskan publications of record.
Second is a presentation by Gaffney Cline depicting the
necessary infill drilling and heavy oil extraction required of
lessees pursuant to the diligence and prevention of waste
provisions in section 13 of the leases in question.
MR. LAKOSH told members the modeling should assume multiple
standards of "reasonable profit" as garnered by all other
Alaskan corporations and showing utilization of all windfall
profits above such reasonable rates of return already garnered
to date, and it should incorporate existing DOR oil price
projections and any necessary extrapolation into the future, to
show a projection of lifetime field-decline rates and projected
revenues comparable to the presentation in question.
MR. LAKOSH said the third action required is calling the DNR
commissioner and his knowledgeable Division of Oil & Gas staff
before the committee to explain: 1) the relevant lease
provisions; 2) his administration of these leases, both
consistent and inconsistent with constitutional, statutory,
regulatory, and contractual mandates to preserve the state's
interest; and 3) in cooperation with Gaffney Cline, what
specific operational plans he'll develop in administration of
lessees' duty to fully extract all hydrocarbons on their leases,
in conformance with the applicable leases.
MR. LAKOSH referred to discussion in the House Resources
Standing Committee today, where he said legislators finally
recognized leases are an important part of this discussion. He
also referenced a presentation by Pioneer that explained the
other side of the same coin; he said they have a net-profit
lease provision being impaired by a net-profits tax. Expressing
concern that leases which typically address drilling,
exploration, and production costs are being impaired by this net
tax/credit legislation, he opined that this is prohibited by
Article I, Section 15, of Alaska's constitution.
7:39:27 PM
MARSHALL BYRD, Anchorage, on behalf of his family's future,
expressed discouragement with the government's ability to lead
this great state and to lay a foundation for the future. He
said leadership has been overreacting and leading from emotions.
He cited examples involving Matanuska Maid; Point Thomson; and
the Alaska Gasline Inducement Act (AGIA), which he said
effectively shut out those companies with the resources to
deliver such a huge project. He suggested these send a clear
message, beyond just the oil industry, that Alaska isn't the
place to invest and do business. Now under consideration is
what he considers the knockout blow: raising taxes a third time
before the ink has dried on PPT.
MR. BYRD asked that the legislature lead with logic and vision,
securing his family's future by sending a message that Alaska is
a place to do business. He asked that PPT be left in place long
enough to see whether it works, and asked legislators to focus
instead on diversifying Alaska's economy. He asked: If the
current tax structure is creating a budget surplus, why take
more? And what will it be spent on? He requested that future
jobs for his three sons not be traded for a bloated government.
7:41:21 PM
GLORIA DESROCHERS, Fairbanks, an Alaska resident since 1960,
said it appears lawmakers have been sweet-talked by the oil
industry. They should put the interests of Alaskans ahead of
the oil companies and should act as the parent, not the child.
She lauded Frank DeLong, indicating he'd said Indonesia has
taken control of its own resources, for instance, with positive
results for Indonesia, and with "big oil" making enough profit
to stay.
MS. DESROCHERS said oil companies have no allegiance to anything
but profits. Alaskans should have at least as much desire and
duty to themselves with respect to their own profits. She urged
members to be open and listen to the wisdom of those like Frank
DeLong, whom she called a goldmine of experience and knowledge.
She also wanted to know the sources and reasoning behind
information on oil-resources issues that have controlled
legislative decisions thus far.
7:46:30 PM
JARED HAMLIN told members he was also representing his wife and
young daughter; all three were born in Alaska and want to see
Alaska "continue on with its resources." He said the oil tax is
being revisited because the last change occurred under a cloud
of corruption and bribery. When any industry makes accusations
about instability because of revisiting something, it should be
considered whether the industry itself is the reason behind it.
He asked for legislators to put something in place such that it
doesn't have to be revisited again.
MR. HAMLIN said the problem with PPT is it requires massive
amounts of accounting and so on, for which the state has to
attract workers to go up against lawyers and accountants for the
oil industry. Another flaw is the massive amounts of write-offs
the industry can do. As far as Governor Palin's tax plan, he
said he likes some portions, but others seem jumbled up and
technical. Alaskans need something simple, more like a gross
tax. However, he disagreed with even using the word "tax"
because it's more like a fee, since the state is paying the
industry to take the oil out.
MR. HAMLIN said Alaska is unique and utilizes those resources,
under the constitution, for Alaskans to live. It also has a
unique product to offer. The state needs to get the best value
for the long term. He agreed with earlier testimony that it
doesn't all have to be produced today. If the oil companies
don't want to play ball, they'll come back sooner or later. He
proposed having a higher tax than currently; getting a fair
share based on the world average; and having this happen sooner
rather than later - not waiting to see what PPT will do. He
surmised it costs a lot every day while people sit and wait for
a broken plan to try to fix itself.
MR. HAMLIN suggested moving forward. He agreed with wanting to
have businesses invest in Alaska; he emphasized sending a clear
message. He referred to ads from the oil industry, saying a lot
of people are scared the industry will leave. "We know that's
not true," he told members, surmising they all know the oil
industry won't leave Alaska if they institute a world average or
fair share, whatever those mean. Mr. Hamlin said he wants an
increased share to go to Alaska for its product and to still
keep a good, healthy relationship with the oil industry. He
expressed hope that this will help in the future with respect to
mining as well.
7:51:48 PM
BILL WARREN, Nikiski, said he came to Alaska in 1951 and was
representing his three-year-old son; he doesn't want the state's
resource to be dried up like a prune when his son reaches
Mr. Warren's age, as is the case in Cook Inlet. He opined that
that State of Alaska is in big trouble. The "big three" are in
Prudhoe Bay, which has led to a chain of events and a monopoly,
with little competition. There is no Railbelt energy policy.
Agrium has failed. Gas prices are rising. There is a failed
gas line contract. He mentioned shenanigans going on and so
forth, saying if Exxon doesn't like the risk, it should get out
of the business and manufacture shoes.
MR. WARREN highlighted public suspicion of the government,
saying all this corruption, indictments, and convictions give
reason for suspicion. He mentioned fear of ongoing tax
litigation by entities like Exxon. Recalling his own work on
the pipeline and doing maintenance work at Valdez, as well as
working from Ketchikan to Barrow, Mr. Warren predicted a
tremendous amount of write-offs for maintenance because of the
mature mechanical and electrical systems.
MR. WARREN highly recommended a gross tax with very nice credits
to those "who actually do things in the state of Alaska, and not
Oklahoma or Texas." The extra money from this tax increase
should be used wisely. There should be a plan developed for in-
state gas use immediately, appointing the Alaska Natural Gas
Development Authority (ANGDA) to be the vehicle; he alluded to
Harold Heinze of ANGDA.
MR. WARREN also mentioned training and true apprenticeships,
saying there won't be a need to compete later if everything is
prebuilt in Alaska, whether for a spur line or a stand-alone
line to Prudhoe Bay, which the tariffs have proven economical.
He concluded by saying the big three oil companies have an
increasingly smaller "grazing range" in the world.
SENATOR THERRIAULT agreed about the increasingly smaller grazing
range, saying there have been national articles about it. He
also agreed that with the trials of lawmakers, there is reason
for suspicion. Alluding to the debate on PPT last year,
however, he said there were people in the building asking
questions, trying to expose what they felt was going on; he said
Senator French was right there with him. He opined that going
through this new process will lift that cloud.
7:56:41 PM
JIM ADAMS, Nome, indicated this is the state's opportunity to
receive a portion of its due.
7:57:14 PM
RANDY SELMAN, Wasilla, gave some personal history, noting he now
has descendants working on the North Slope. He said he feels
PPT isn't tainted and that taxes do affect capital projects
because they're a liability and correspond directly to the net
present value and return on capital for any project.
MR. SELMAN said North Slope payrolls are probably in the top 5
or 10 percent in the US with respect to net income for
individuals; they're also more than 50 percent of the operating
cost of doing business there. North Slope construction and
drilling costs are some of the highest in the world, and
facilities are some of the most expense as well. This is due to
the extreme environment there.
MR. SELMAN recalled two weeks ago, two strong companies in the
oil business gave back 300,000 acres to the Bureau of Land
Management (BLM) because they'd decided those were uneconomical
to explore. He said the oil business is highly competitive and
companies are investing worldwide. He challenged members to
help Alaska stay competitive, which he believes means lowering
taxes, not raising them.
MR. SELMAN emphasized getting new oil into the pipeline and
keeping folks employed in Alaska until a gas pipeline can be
built, which will get Alaska to the next 50 years. If
legislators do anything with respect to ACES, he asked that they
pick up some of the important administrative portions that can
improve PPT. Please don't raise taxes, he concluded, saying
Alaska is headed in the wrong direction and will be
noncompetitive worldwide.
8:00:27 PM
SHANNYN MOORE, describing herself as a lifelong Alaskan and
concerned citizen, said she is tired of the "jellyfish approach"
to Alaskan politics, the lack of spine. "This is our state,"
she said. "This is our resource. And this is our future. We
are the shareholders - not the shareholders of Exxon, not the
shareholders of BP nor anywhere else." Indicating former
Representatives Tom Anderson and Pete Kott as well as
Representative Vic Kohring had been found guilty, she said this
legislature has been corrupted. This tax is being revisited
because of it. And it isn't known whether more indictments are
coming. She asked whether this tax, if it goes through, will be
revisited as well.
MS. MOORE suggested the Anchorage Chamber of Commerce should
talk to the Chambers of Commerce in Cordova, Valdez, Kodiak,
Homer, and so on to see how reliable oil companies are to them.
"Don't blink," she said. "Don't look away." She said the
testimony heard during the daytime hours came from oil companies
that lie, saying they'll have a hard time paying their bills and
won't be able to explore; she totally discounted this, surmising
$94 a barrel should be enough incentive.
MS. MOORE emphasized that legislators are there for Alaskans.
This is Alaska's oil. Just because the oil companies are taking
it doesn't mean they get to negotiate what part they'll give to
Alaska. She said the oil companies trying to manipulate the
legislature are the same ones that lie to Alaskans; she cited
almost 19 years of manipulation by Exxon, alluding to the Exxon
Valdez disaster, and said ConocoPhillips rallied the legislators
and won PPT; she questioned how anyone could want to keep it.
She concluded by saying legislators only owe Alaskans. They
don't owe the oil companies.
8:04:53 PM
JOHN RANDALL, Wasilla, noted he has called Alaska home since
1949 and was president of the first borough assembly on the
Kenai Peninsula. He recommended scrapping PPT and giving
consideration to a policy they'd used in those first few years:
payment in lieu of taxes. Under this, taxes on certain parts of
the facilities are excused for a period of time. In this way,
Alaska will be - at least in part - indemnified against
occurrences such as the Exxon Valdez oil spill or malfeasance in
maintenance of property. Whether the price of oil is high or
low won't matter. An agreement should be reached that they pay
in advance a sum that he reckons to be in the billions of
dollars, paid into both the permanent fund and the CBR.
MR. RANDALL said he'd talked about this with now-Governor Palin
when she first was running for office and passes it along to
legislators now. He offered to talk further with anyone about
this. He also noted that today a legislator from his district
is a convicted felon.
8:07:52 PM
STEVE MORAWITZ, Wasilla, a 49-year Alaska resident, said he
believes there needs to be a vote on PPT. The oil companies
used unethical means to influence the legislature, and he
surmised it's likely that more senators are on the payroll of
big oil. The voters of Alaska need to know where legislators
stand so they can be held accountable. He specified that he
favors the recommended 25 percent.
CHAIR FRENCH asked whether anyone else wished to testify. He
highlighted the lack of trust of the legislative process that
had been heard, acknowledging it's somewhat understandable.
Speaking for the committee, however, he said he didn't see any
dishonesty or misdeeds here. Rather, he sees a lot of hard
work. He thanked the testifiers and held SB 2001 in committee.
There being no further business to come before the committee,
Chair French adjourned meeting at 8:09:33 PM.
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