Legislature(2005 - 2006)BUTROVICH 205
02/22/2006 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Department of Revenue – Bill Corbus, Commissioner | |
| Department of Natural Resources – Mike Menge, Commissioner | |
| Dan Dickinson, Cpa, Consultant to the Governor on Ppt | |
| Department of Revenue – Robynn Wilson, Director, Tax Division | |
| Rationale for $73 Million Allowance | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 305 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 22, 2006
3:34 p.m.
MEMBERS PRESENT
Senator Thomas Wagoner, Chair
Senator Ralph Seekins, Vice Chair
Senator Ben Stevens
Senator Fred Dyson
Senator Bert Stedman
Senator Kim Elton
Senator Albert Kookesh
MEMBERS ABSENT
All members present
OTHER MEMBERS PRESENT
Senator Gary Stevens
Senator Gene Therriault
Senator Hollis French
COMMITTEE CALENDAR
SENATE BILL NO. 305
"An Act repealing the oil production tax and gas production tax
and providing for a production tax on the net value of oil and
gas; relating to the relationship of the production tax to other
taxes; relating to the dates tax payments and surcharges are due
under AS 43.55; relating to interest on overpayments under AS
43.55; relating to the treatment of oil and gas production tax
in a producer's settlement with the royalty owner; relating to
flared gas, and to oil and gas used in the operation of a lease
or property, under AS 43.55; relating to the prevailing value of
oil or gas under AS 43.55; providing for tax credits against the
tax due under AS 43.55 for certain expenditures, losses, and
surcharges; relating to statements or other information required
to be filed with or furnished to the Department of Revenue, and
relating to the penalty for failure to file certain reports,
under AS 43.55; relating to the powers of the Department of
Revenue, and to the disclosure of certain information required
to be furnished to the Department of Revenue, under AS 43.55;
relating to criminal penalties for violating conditions
governing access to and use of confidential information relating
to the oil and gas production tax; relating to the deposit of
money collected by the Department of Revenue under AS 43.55;
relating to the calculation of the gross value at the point of
production of oil or gas; relating to the determination of the
net value of taxable oil and gas for purposes of a production
tax on the net value of oil and gas; relating to the definitions
of 'gas,' 'oil,' and certain other terms for purposes of AS
43.55; making conforming amendments; and providing for an
effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 305
SHORT TITLE: OIL AND GAS PRODUCTION TAX
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
02/21/06 (S) READ THE FIRST TIME - REFERRALS
02/21/06 (S) RES, FIN
02/22/06 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
BILL CORBUS, Commissioner
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Commented on SB 305.
MIKE MENGE, Commissioner
Department of Natural Resources
400 Willoughby Ave.
Juneau, AK 99801-1724
POSITION STATEMENT: Commented on SB 305.
ROBYNN WILSON, Director
Tax Division
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Commented on SB 305.
DAN DICKINSON, C.P.A.
Consultant to the Governor
PO Box 110001
Juneau AK 99811-0001
POSITION STATEMENT: Commented on SB 305.
ACTION NARRATIVE
CHAIR THOMAS WAGONER called the Senate Resources Standing
Committee meeting to order at 3:34:45 PM. Present were Senators
Seekins, Ben Stevens, Stedman, Elton, Fred Dyson and Chair
Thomas Wagoner.
3:35:39 PM at ease 3:40:40 PM
SB 305-OIL AND GAS PRODUCTION TAX
CHAIR THOMAS WAGONER announced that the administration would
present SB 305.
3:40:56 PM
SENATOR AL KOOKESH arrived.
3:41:08 PM
BILL CORBUS, Commissioner, Department of Revenue (DOR), said the
Profit-based Production Tax (PPT) embodied in SB 305 is the
first major oil and gas tax legislation considered by the
legislature since 1989. He stated:
The new statute will replace the broken ELF-based
production tax. The new PPT will encourage badly
needed investment in oil and gas exploration,
development and production. It will provide special
incentives for small companies proposing to explore
and develop oil and gas in Alaska. And finally, it
will enhance state revenues, particularly during
periods of high oil prices.
He said that the study originally started with the prior
administration when it retained Dr. Pedro Van Meurs in 1996. He
acknowledged the numerous people in the Department of Revenue
who had worked on this project.
3:45:55 PM
MIKE MENGE, Commissioner, Department of Natural Resources (DNR),
explained how this legislation fits into the larger context of
oil and gas development in Alaska. It should accurately reflect
the geologic circumstances that fit a particular basin for which
it was designed and this is a very good fit for Alaska. The
state is looking at a diminishing population of perspective
targets; they will also be smaller and more difficult to find
and, therefore, more costly to develop.
He said Cook Inlet is a very mature basin and the Interior has
highly speculative basins in Nenana, Copper River and the
emerging work in Bristol Bay. The tax is designed to create an
environment to encourage smaller and mid-sized companies to
explore. The administration's goal is to put more oil in the
pipeline and more gas down its pipeline once it gets
constructed. It wants to encourage an atmosphere of investment,
further exploration and discovery that would set the stage well
into the middle of this century.
The state lands have the potential of small discoveries, but
federal lands have larger ones, particularly ANWR and offshore.
He stated that the state needs this legislation regardless of
what happens with the gas pipeline.
3:51:17 PM
CHAIR WAGONER asked Commissioner Menge to explain how the
Oooguruk royalty reduction that the state granted a couple of
weeks ago would be affected by the PPT.
COMMISSIONER MENGE replied that the authority granted to the
department to negotiate a lower royalty was very broad in scope.
It provided him with the flexibility of tailoring the royalty
picture to meet the very specific issues related to that very
geologically-challenged prospect. The PPT would take into
consideration all potential issues over time and would,
therefore, be more systematic. He would look at the cost of
drilling, production, transportation and the historical aspects
of the project that was not reflected in the current system. He
explained that investments in the Oooguruk field were made under
a very specific set of authorities and he would make sure that
those assumptions and costs would not be violated. This would
require a transition, particularly for Oooguruk. The PPT offers
that kind of an opportunity. The department wants to retain the
ability to change royalties site by site.
ROBYNN WILSON, Director, Tax Division, Department of Revenue
(DOR), said that Dan Dickinson would explain the current
production tax and its problems and she would give an overview
of SB 305 after that.
3:58:35 PM
DAN DICKINSON, C.P.A. and Consultant to the Governor, explained
what was wrong with the status quo. His presentation was titled
"Proposed Production Tax, Alaska State Legislature, Senate and
House of Representatives Resources Committees, Dan E. Dickinson,
CPA, February 22, 2006" and the minutes reference his slides.
He said that in FY 2005 the state took in $8.9 billion in
restricted and unrestricted revenue. The largest piece of that
was $3.4 billion from oil - $2.8 billion, or 88 percent, of that
made up the unrestricted general fund budget. Of the $3.4
billion, just over half were from royalties. About a quarter of
those (restricted) went into the Permanent Fund and the School
Fund. He said that the state received $863.2 million from
production taxes in 2005 and that his comments were focusing on
those.
His next slide indicated Alaska oil production from the years
1965 to 2020 and in 1988, the height of production, 2 million
barrels per day were produced and 1.6 million of those were from
Prudhoe Bay. He termed Prudhoe Bay an elephant.
4:02:43 PM
He said that the Kuparuk field is the second largest field in
the United States, but compared to Prudhoe Bay, it is small. He
cautioned that tax policy should not be set on the expectation
of finding another elephant.
4:03:16 PM
His next slide graphed the decline in oil production from 2
million barrels a day in 1988 to 850,000 barrels a day in 2006.
While this was going on, oil prices were marching in the other
direction. They started in the $15 range and are now in the $60
range. So while production was declining, the state did not
necessarily feel its effects because it was seeing basically the
same gross product. The volumes are leveling out a little, but
SB 305 seeks to make them go up again.
He began talking about why the current production tax doesn't
generate the kind of revenues the state should expect at the
current prices. He observed that, as the result of an analysis
the Department of Revenue conducted for a number of years, the
Governor issued an administrative order a year ago that
aggregated seven fields on the North Slope. He said the new
production tax is proposed to start on July 1, 2006. So, that
aggregation order would affect about 1.5 years of production,
just under $4 million. That DOR analysis led to the conclusion
that the tax had deeper problems and he hoped the PPT would
solve them.
4:07:00 PM
The first problem was investment. Over the last four years, not
including tankers or pipelines, upstream exploration and capital
facilities have cost the industry about $1 billion. This was not
sufficient to generate new amounts of production, but it kept
the aging fields open and did involve some new fields. The
question is if the lack of new production is due to the tax
system.
His next slide showed how in 2005, the net value of oil at point
of production was $10,694 million, which was arrived at by
subtracting the cost of tankering, pipelines and upstream costs
from $14,332 million. He explained that the current production
tax ignores upstream costs. Instead, the state uses the Economic
Limit Factor (ELF) as a proxy for them. It takes the same 2005
figures and starts with the gross value at point of production -
$12,843.60 million and figures the numbers this way:
· gross value at point of production - $12,843.60 million
· times royalty rate of $0.875 million
· equals the value net of royalty - $11,238.15 million
· multiply the tax rate of $0.15 million
· times the ELF rate of $0.55 million
· equals a 2005 tax of $927.15 million
4:13:19 PM
For the same year, 2005, the PPT tax would:
· start at the value net of royalty - $11,238.2 million
· deduct the upstream costs of $2,150 million, which equals a
taxable value at point of production of $9,088.2 million
· times the PPT of 20 percent, which equals $1,827.6 million
· subtract tax credits of $210 million
· results in a production tax of $1,607.6 million
4:17:49 PM
MR. DICKINSON said the second problem was that production is
falling on the North Slope and under that scenario the ELF also
falls, but much faster. The Kuparuk field is a perfect example
of how the ELF works. It went from producing a high of 300,000
barrels per day in 1990 to about half of that today. But in that
same time period, the ELF went from .8 percent down to zero. It
goes through the mid-range and reaches zero very quickly.
Currently, North Star, Alpine and Prudhoe Bay have healthy ELFs
of .8 percent, but both Alpine's and North Star's ELF will fall
dramatically and hit zero in six or seven years as their
production starts to taper.
The second major criticism of the ELF is that it is way too
sensitive to the number of barrels and rate of production and as
a proxy, it does not represent the kinds of costs involved when
production falls. It does not encourage the investment necessary
to secure future production.
4:24:14 PM
SENATOR THERRIAULT asked if he charted both oil and gas liquids.
MR. DICKINSON replied that his production figures include both
oil and gas liquids, but Kuparuk has a very small amount of gas
liquids. This brought him to another important point - that ELF
works differently for gas than oil. One of the first things to
do in an ELF calculation is to divide up the well days between
oil and gas. Right now most of the gas that comes out at Prudhoe
Bay is simply put back down in the ground. It doesn't count in
calculating the ELF, because it is not sold. If half of the 8
BCF that were being moved that way were being exported, the gas
ELF would suddenly increase and so would the oil ELF. If the
gasline is put in place, one could ask if it makes sense to have
a system that looks at the interrelationship between gas and oil
differently than the current ELF does.
MR. DICKINSON said he was focusing on the oil ELF, but Mr. Marks
would talk about the gas ELF tomorrow. He emphasized again that
the ELF is outmoded because it focuses on well-productivity. New
wells in the ground have multiple completions with laterals that
go out, sometimes, for miles. So, while a well in Prudhoe Bay is
producing 600 to 700 barrels per day, other wells at Alpine and
Pt. Thompson will be producing 7,000 to 8,000 barrels per day.
SENATOR STEDMAN clarified that just because the ELF goes to zero
doesn't mean the state's revenues go to zero. They are talking
about 25 percent of the state's gross oil revenue and the ELF is
only a multiplier that is applied to the severance tax to reduce
it.
4:30:03 PM
SENATOR BEN STEVENS asked to go back to the current production
tax slide and asked if the ELF he used could be applied to the
entire North Slope.
MR. DICKINSON replied yes.
SENATOR BEN STEVENS clarified, then, that the applicable tax
rate was really 8.25 percent, not 15 percent.
MR. DICKINSON replied yes.
SENATOR BEN STEVENS continued to discuss figures on the slide.
He said the reality of the PPT is that the tax rate hasn't
changed on the affected barrels of oil, but investment is being
encouraged.
MR. DICKINSON replied:
As you observed, the rate is variable depending on the
amount of investment and that's what we're saying.
That's what's going to drive whether you are a high
end, high percentage taxpayer or a low percentage.
SENATOR BEN STEVENS said it would be helpful if he could show
that the change from status quo, which is 8.25 percent, to the
proposed rate on the effective rate with PPT is 14.3 percent, an
increase of approximately 6 percent on the severance tax.
MR. DICKINSON replied that was right for this particular
example.
4:34:56 PM
SENATOR RALPH SEEKINS asked if the $1.7 billion of additional
investment in the next slide rolls into upstream cost deductions
in the next year.
MR. DICKINSON replied that there would be no depreciation next
year, rather you would get instantaneous depreciation and,
"Clearly if you built new infrastructure, there would be
additional operating costs, but presumably there would also be
additional volumes to cover those."
SENATOR SEEKINS said it should be very clear that the
depreciation is taken in one year and can't be expanded over
multiple years, so there is no double-dipping.
4:36:10 PM
SENATOR KIM ELTON asked if investments that are eligible for
credits cover exploration, development and operation costs.
MR. DICKINSON replied that the credit doesn't cover operational
costs. It is about things that would have to be capitalized
under federal rules and that includes exploration and intangible
drilling and development costs.
4:36:54 PM
SENATOR BEN STEVENS asked if any of his presentations have an
indication of the probability of success for the different
investment scenarios.
MR. DICKINSON replied that he has run four basic scenarios at
different price levels, but it's very difficult to come up with
a figure to use for much the incentive will increase exploration
and production. He said that Mr. Marks would run a model of that
in a future meeting.
4:39:54 PM
SENATOR STEDMAN asked what the basis was for selecting the 20
percent tax.
MR. DICKINSON replied that Pedro Van Meurs would go into the
credits in more depth with his presentation.
4:42:25 PM
SENATOR ELTON asked if Alaska should expect a premium because of
its stability.
MR. DICKINSON replied that Mr. Van Meurs would observe in his
presentation that in places where the resource is more
challenged, the resource owner would do more to open it up. In
Alaska, a $7-premium for distance to market was used.
4:44:36 PM
SENATOR THERRIAULT asked if the administration had discussed
whether frontier exploration should get a separate extra credit
from low risk development.
MR. DICKINSON responded that was part of the discussion since
the easy oil has already been developed and it is more expensive
to develop heavy oil. The Governor did not want to pick out
which development to encourage and which not to encourage and
while the proposed tax would generate a very large credit, it
doesn't take into account the different set of risks involved
with each field. Looking at large known quantities of heavy oil
and other challenged reservoirs on the North Slope, he thought
that it was appropriate to have this credit apply to those
expenses, as well.
4:47:40 PM
SENATOR THERRIAULT commented that there were still other levers
to pull and a company could ask for assistance on a particular
field if it had difficult circumstances.
MR. DICKINSON reflected that it seems entirely appropriate that
a royalty reduction could look at specific leases.
4:50:22 PM
SENATOR BEN STEVENS said he saw a flaw in ranking the Gulf of
Mexico as one of the most attractive regions in the world to
make investments because of the uncertainty caused by hurricanes
that happen there every year. It's an instability that is not
related to any human error or action and an economist can't
incorporate that into his analysis.
4:51:36 PM
SENATOR STEDMAN remarked that the ELF is not price sensitive and
the royalty and tax system are regressive. When prices go up,
the government take declines and the public becomes alarmed.
Removing the ELF from the severance tax and plugging in a
profit-sharing tax would make Alaska's take move up with rising
prices instead of down.
4:54:01 PM
ROBYNN WILSON, Director, Tax Division, Department of Revenue
(DOR), recapped that there is no incentive in the current tax
system to encourage oil companies to reinvest in Alaska, that
there is a low take at high prices and a high take at low prices
- what is commonly referred to as a regressive tax. Also, the
maturing of the North Slope leads to declines in tax revenues.
She presented a power point entitled, "Petroleum Profits Tax
(PPT), Overview, Alaska Department of Revenue, Before the Alaska
State Legislature, Robynn J. Wilson."
4:54:59 PM
She said SB 305 tries to embody five key ideas. The first is to
encourage investment, the second is competitive rates, the third
is to encourage small companies and the fourth is to streamline
some of the tax provisions.
The tax base under the current system is based on gross value
and the proposed system is based on net. SB 305 suggests a 20
percent tax rate as compared to the current 12.25/15 percent
scheme. Incentive credits are a third key component. The fourth
element is a base allowance that is the equivalent of a standard
deduction for individuals. The last component is a transition
provision that recognizes some of the recent investments on the
North Slope.
She started with a one-page comparison of the current tax
system, which is based on gross and allows no deductions versus
the proposed tax on net. The value at the wellhead is
essentially the same under the PPT. The current system takes the
wellhead value times the tax rate, which gives the tax before
the ELF. The PPT starts with the wellhead value and allows some
deductions, which establishes a net taxable amount. That is what
the proposed 20 percent is applied to. She said, "It follows
logically that the tax rate under a net plan is going to be
higher than the tax rate under a gross plan."
For the tax base, she said that operating costs and capital
expenditures are deductible under lease expenditures for one
year. The difference between operating costs and capital
expenditures is that operating costs are the normal expenses
that will benefit one year, but a capital item would be
something that would benefit a number of years like a piece of
equipment. She explained:
What is unique about this bill is that rather than
having the producer write if off over a period of
time, there's an immediate write off of the capital
expenditures. That's a key element to keep in mind.
So, everything is written off in year one.
Secondly, the operating costs must be direct, ordinary and
necessary. Ordinary and necessary is a common test from the IRS
code to make sure business expenses are necessary. The
department is directed to write regulations, but given direction
that substantial weight shall be given to industry practice and
standards adopted by the Department of Natural Resources. The
costs that are paid by producers that are billed by an operator
under the terms of a unit operating agreement can be treated as
a lease expenditure. This is a bit of streamlining looking at
common industry practice.
SB 305 has an allowance for overhead and the formula would be
established through regulation. It would include things directly
related to exploration, development and production. Any lease
expenditures would be reduced by any reimbursements a producer
might receive from another taxpayer or the government, for
instance.
5:04:04 PM
SENATOR THERRIAULT asked if SB 305 uses what the state now uses
for its net profit leases in terms of what gets subtracted out
to get to net profit.
MS. WILSON replied yes.
SENATOR THERRIAULT asked if any leases operating under net
profit are actually paying a percentage of profit to the state.
MR. DICKINSON replied yes.
SENATOR THERRIAULT asked for a list of those at a future
meeting. He asked if new language streamlines the current
process.
MR. DICKINSON replied that the way it is getting streamlined,
issues would only be fought once. Right now the DNR makes a
calculation about what it takes to get oil from the North Slope
to market and the DOR goes through a whole different process.
The bill proposed to use the DNR calculation.
SENATOR THERRIAULT asked if the administration considered using
a flat rate for the allowable overhead so that it's easy to
understand and apply.
MR. DICKINSON replied yes, but he tried to mirror current
industry practice. So if the rate is different in Kuparuk than
Prudhoe, he wanted to capture that difference.
5:07:00 PM
SENATOR SEEKINS asked what kind of overhead expenses would be
defined in regulation.
MR. DICKINSON replied that he would look at existing standards
for each field and would like to be able to deduct actual costs,
recognizing that they change every twenty years or so and should
have some flexibility.
SENATOR STEDMAN asked if the capital expenditures would be
capitalized in just one year, would a corporation still
depreciate those expenses on its federal taxes - so companies
would have two sets of books.
5:09:18 PM
MS. WILSON answered yes, but she noted that current state income
tax rules for oil and gas companies require companies to have an
Alaska-specific depreciation separate from the federal
depreciation system. This, in effect, would add a third layer.
5:10:18 PM
SENATOR STEDMAN asked if a company takes its capital deduction
in one year, would it be able to use the depreciation to
increase its benefit going forward.
MS. WILSON replied no; double-dipping is not allowed.
Depreciation is a non-deductible expense. But she pointed out
that a piece of equipment can be written off in year one as a
deduction, but the bill also provides for a credit of 20 percent
of that. There is both a deduction and a credit. The credit is
to incentivize investment.
5:12:10 PM
SENATOR ELTON remarked that companies get to pay significantly
less as part of the state's deal.
MS. WILSON replied yes, that is the intent.
SENATOR ELTON asked if the allowance for overhead would include
lobbying expenses or expenses for attorneys who may be disputing
a tax decision by the state.
MR. DICKINSON answered yes and that the allowance is not
specific, but should cover the costs of doing business.
SENATOR ELTON asked if the allowance could help pay for a
corporation's attorneys while the state is paying for its
attorneys on the other side in a tax dispute.
SENATOR BEN STEVENS brought up a point of order saying the
answer to that question was on page 14. It says that litigation
is not allowed as a deduction.
MS. WILSON referenced language on page 13 that said expenses had
to be directly related to business and lobbying would be a hard
sell.
MR. DICKINSON clarified that attorney fees would be allowed for
personal injury cases such as in a car crash, but not for tax
disputes.
5:16:19 PM
SENATOR SEEKINS asked if he took a $100,000 piece of equipment
and deducted 100 percent of it today and got a 20 percent bonus,
what would he really save in terms of taxes not paid.
MR. DICKINSON replied that basically the state is picking up 40
percent of the cost of the piece of equipment in one year. If
that piece of equipment gets sold the next year, it gets added
back in. "Basically, 20 plus 20 is 40 percent."
5:17:39 PM
SENATOR STEDMAN recapped that the bill is geared for
development. A company would cut its risk by sharing it with
the state and federal government. And the state is encouraging
them to go out and drill because the probability of success is
low. But the state would recoup its incentives by having more
wells drilled, having more oil found and receiving enhanced
revenues from those activities.
5:18:38 PM
MS. WILSON said the non-deductible expenses are covered in
section 21 of SB 305, on page 13. They are depreciation, royalty
payments (because it never gets in the base in the first place),
taxes based on net income, interest and financing charges
(administrative expenses that apply to all of their properties),
lease acquisition costs and other costs for things like
arbitration, donations and organizing partnerships.
5:20:22 PM
SENATOR SEEKINS asked if a company could deduct bids to acquire
leases.
MS. WILSON circled back to determining value under the current
system and emphasized this is one of the places the department
is trying to streamline. Currently, when oil is taken to the
West Coast and sold, the wellhead value has to be calculated to
impose the production tax. Now they work backwards by starting
with the sales price on the West Coast and take out the expenses
for marine and pipeline transportation up the coast arriving at
a wellhead value. Marine transportation particularly has been
the subject of a lot of audit and contention. "It's just not a
simple system."
SB 305 allows possible elections a producer can use to establish
gross value. The first one is the royalty value through either
DNR or federal royalties. This includes royalty settlement
agreements accepted by DNR. The other option would be a DOR
formula that estimates a value at a specific location - such as
point of delivery into a common carrier pipeline. The formula
may use other factors such as published prices, quality
differentials, applicable transportation costs and inflation
adjustments. In effect, the established body of law is
maintained, but some elections are being allowed to simplify it.
There would be some timing restrictions. She clarified that the
20 percent tax is on net profits.
5:23:44 PM
SENATOR THERRIAULT said Pedro Van Meurs suggested 25 percent and
asked why the Governor used 20 percent instead.
MR. DICKINSON replied that the Governor analyzed several
different scenarios and looked at a balance of encouraging
investment and state revenues. There is nothing magic about the
scenarios.
CHAIR WAGONER asked if the committee could see a comparison of
what 20 percent does in Alaska versus what happens in other
countries.
5:26:23 PM
SENATOR THERRIAULT said the state would pick up more on the tax
side, but it also credited more back on investments.
5:28:04 PM
SENATOR BEN STEVENS emphasized the need to focus on the
effective tax rate, which currently is 8.25 percent after the
ELF is computed. The proposed tax rate of 20 percent equates to
about 14 percent. Statutory tax rates are meaningless until they
have been applied in a formula.
5:29:45 PM
SENATOR THERRIAULT said they must be careful in comparing a new
system with a broken system. He wanted to compare it to what was
working.
SENATOR BEN STEVENS countered that the legislature doesn't know
the applicable rate in Trinidad. It can only compare it to what
the state has now.
5:32:19 PM
SENATOR STEDMAN said it's important to look at the international
oil companies around the world and see what the split is between
government and industry.
5:34:01 PM
MS. WILSON moved on to incentive credits that were found on page
4 in section 10. The credits are transferable and would mostly
help small producers.
5:36:12 PM
SENATOR ELTON said he was struggling with the transferable
credit.
5:37:42 PM
SENATOR THERRIAULT asked if the credit couldn't be used or the
company didn't have income to offset it in one year, did the
purchaser have to use it that same year.
MS. WILSON replied that the originator of the credit could carry
it forward to next year. There is no limit on the carry forward;
the credits do not expire.
5:38:58 PM
SENATOR BEN STEVENS asked if a credit is transferable only one
time.
MS. WILSON replied that there is no limit on the number of times
a credit can be transferred.
5:39:30 PM
She said that net operating losses (NOL) can be turned into
credits, dollar for dollar, and be handled the same way. This
language is on page 5, section 12.
SENATOR ELTON said that almost seemed like double-dipping.
MS WILSON clarified that the bill specifically allows for
immediate write off of equipment and a credit. One way of
looking at that is a double-dip, but the reason it was written
that way was to provide incentive for investment.
MR. DICKINSON observed that the net operating loss works by
giving the credit whether there is a loss or not. The notion is
that the effect of buying a $100,000 piece of machinery should
generate a $40,000 credit whether a company is drilling dry
holes or producing tons of barrels.
5:45:15 PM
SENATOR ELTON asked if that means companies can have a net
operating loss, but still gets a 40 percent plus credit that it
can sell.
MS. WILSON replied no; that the 40 percent comes from the 20
percent deduction and the 20 percent credit. She likened the
base allowance to the standard deduction on a personal income
tax return. After the net taxable income is calculated, the
producer is allowed a $73 million deduction per year that is
taken month by month. This cannot be turned into a net operating
loss.
CHAIR WAGONER asked for the rationale behind the $73 million.
MS. WILSON answered that the rationale was $200,000 per day
translated into a yearly amount.
5:48:07 PM
SENATOR BEN STEVENS asked how many oil and gas companies
operating in Alaska are currently earning less than $73 million.
MR. DICKINSON replied that some mediums-sized companies have
small leases that generate above $200,000 a day at today's
prices, but at lower prices, some of them might slip below that
level.
5:49:26 PM
SENATOR BEN STEVENS asked how many oil and gas companies operate
in Alaska now.
MS. WILSON replied 14.
SENATOR BEN STEVENS remarked that the state could easily see $80
to $100 per barrel oil on the immediate horizon and if all 14 of
those entities are eligible for that deduction, you're talking
about $1 billion per year in income that is not going to be
subject to a tax rate.
MR. DICKINSON responded that quite a few folks come nowhere near
the $73 million.
SENATOR BEN STEVENS rounded the number down to eight companies
and $500 million. If today's severance tax would be applied to
that, it would equal $40 million. "So, that's a $40 million
give-away to the industry."
5:52:05 PM
SENATOR STEDMAN said he interpreted the $73 million to be a
floor for everybody and when production was above that amount,
the PPT would kick in.
MS. WILSON referred them to page 16 (i) that said, "Any month a
producer that is qualified may deduct an allowance". So it is
referring to company by company.
SENATOR STEDMAN asked what would happen to someone who was at
$74 million. Would just the $1 million be taxed?
MS. WILSON replied that was correct.
5:53:59 PM
SENATOR BEN STEVENS asked if the $73 million is a base allowance
that applies equally to all taxpayers, why was it set at that
number and why was it applicable to each ratepayer regardless of
their liability.
MR. DICKINSON replied that the notion was to focus on
profitability and $200,000 per day was established as a base
rate. Using number of barrels at extraordinarily high prices,
you'd have a small company escaping any tax. "By putting it in
dollars you basically avoided one of the errors of the ELF and
you've made it more susceptible to high prices."
5:55:41 PM
SENATOR ELTON asked if Exxon would get $73 million off its net
profit.
MS. WILSON replied that a big company would get $73 million off
and a small company would get $73 million off, but no more.
SENATOR ELTON said he thought that applying the allowance to
everybody was a regressive element.
It seems like we're giving the major players a break,
too; and that's taxable income that doesn't return to
the state despite the fact that they may be some of
the most profitable corporations in the world.
5:57:49 PM
CHAIR WAGONER said he thought they were trying to make the
allowance a major incentive for small independents to operate in
Alaska, but he thought it should have been thought through a
little further to where it would apply to just them versus the
majors.
MR. DICKINSON responded that if you're talking about the $500
million, $300 million of that would go to someone other than the
big three. "The smaller the company, the larger the effect."
SENATOR BEN STEVENS commented, "It's a marginal rate with
different marginal rates applied to each company individually.
It's not an applicable tax equal across the board."
5:59:29 PM
SENATOR DYSON said the tail end of it is to keep production
going on wells that might otherwise become shut in.
CHAIR WAGONER pointed out that that dynamic is taken care of
with royalty reductions, such as those in Cook Inlet.
SENATOR STEDMAN reminded the committee that as the basin gets
older, more, smaller producers would come in and this issue
might encourage more companies to go forward.
6:02:03 PM
MS. WILSON said that current tax law requires monthly filing and
that continues under the proposal. But the PPT has a safe harbor
where if a producer pays 90 percent of his taxes each month and
has a true-up on March 31, there is no penalty and no interest.
The bill also contains options to use annualized amounts, but
there is a tax filing on March 31 where the amounts are trued
up. She viewed this as a streamlining feature.
6:04:36 PM
MS. WILSON went on to the transition provision. She explained:
Think back, then, to a basic business, the basic
business invests in a piece of equipment or building
or whatever. There's a recognition that that asset
generates profitability for several years - the life
of the asset. And so normally in accounting, how
that's handled is that it's not written off in the
first year, but there's a depreciation deduction
that's taken year after year to offset the income - so
that there's a matching of the income that's generated
with the expenses that generated that income including
the asset. However, in this bill, as I've noted
before, there's an immediate write-off in year one of
investments.
So, then the next question is well, what happens to
the investments that a company has made recently, say
within the last five years. Those are generating
profits going forward. So, what you have then is -
you've got income being generated with really no
representation in the profit calculation that there
was this investment. And so, what this basically
allows, then is, in effect, a depreciation deduction
for those assets that were invested in, say, last year
and the year before - to have them represented in the
profit calculation. So, the way the bill is written,
it allows the cost recovery of assets placed in
service for the last 60 months. Those, then, are
written off over the next six years. There is a price
floor so that when the price of oil falls below $40,
and that's average per month, then, they can't take
the deduction.
CHAIR WAGONER asked if they lose the deduction. "It's just
delayed? There's no loss?"
MS. WILSON replied that was correct.
6:06:58 PM
CHAIR WAGONER said that seemed like a sweetheart deal.
6:07:08 PM
SENATOR THERRIAULT asked what if the price of oil was over $40
for the full six years. "Are they not allowed any of this
rebate?"
MR. DICKINSON replied that if the price never went over $40, the
companies would never recover. If it stayed under $40 for six
years and then went above $40 for six years, they would recover.
Essentially, mechanically the way we described it is,
you actually recover on a monthly basis. It's the
first 72 months in which the price is over $40 - you
get to recover 1/72 each of those months.
SENATOR THERRIAULT remarked that they are not looking at a six-
month period and that this could go forward forever.
MR. DICKINSON replied that was correct.
6:08:12 PM
SENATOR ELTON went back to Senator Seekins' $100,000-asset
example and asked if the credit that rolls forward on a 2002
purchase is based on the $100,000 or if that asset has been
depreciated to $50,000, is the credit $50,000.
MS. WILSON replied that the total amount is written off over six
years.
It's not set up such that, let's say, a 2002 asset
gets the full six years, but a 1999 asset gets five
years. It's just very simply anything purchased in the
last five years will get a six-year recovery period.
It's not set up as a credit; it is a deduction and it
recognizes, in effect, depreciation deduction. So,
they would get the benefit of 20 percent to that in
total.
SENATOR SEEKINS asked if a total of $20,000 could be written off
on a $100,000 piece of equipment in terms of the credit if the
price of oil is above $40 a barrel for one sixth and why was it
not for one-fifth.
MR. DICKINSON replied that typical transition rules contain a
fair element of arbitrariness. The companies asked the Governor
for some aggressive transition rules and this is what was agreed
upon as fair.
6:10:57 PM
SENATOR STEDMAN said he didn't have a lot of comfort with this
section of the bill saying, "This is kind of a one-sided deal.
And the effective date of July 1 of '07 is a little bit cleaner
than starting to back up."
CHAIR WAGONER noted that oil companies have been receiving the
benefit of ELF for the last five years. "To me this looks like
more double dipping than everything else we've looked at!"
SENATOR BEN STEVENS said it would be interesting to compare the
transition look back to the $73 million floor on an annual
basis.
6:15:27 PM
SENATOR ELTON said the look back provision helps the producers
and not the explorers.
MR. DICKINSON said the administration hadn't addressed what
would happen if a company were to totally go out of business and
he would have to give that some thought.
6:16:49 PM
SENATOR DYSON said that he was worried that the net result of
the credits and the floor would mean very little more revenue
coming to the state, because a significant analysis shows that
the state has not been getting a competitive share of oil
revenues in the past. "All we will have gained in the
intervening years is the increased investment that we hope
produces more production. "
6:18:13 PM
SENATOR SEEKINS asked if oil companies had been able to take a
depreciation credit on assets over the last five years.
MS. WILSON replied not against the production tax.
SENATOR SEEKINS remarked, "So, they have not been able to
depreciate any of those assets against taxes owed to the state?"
MS. WILSON replied, "The depreciation deduction would apply and
be factored in in the income tax."
SENATOR SEEKINS said, "So, in effect we're now going to give
them credit for 100 percent of the asset that they've already
written off a portion of against income tax."
6:20:30 PM
MS. WILSON replied that was correct.
MR. DICKINSON added that they are getting a 20 percent benefit.
"So, it will be 100 percent of their depreciation, but in a 20
percent tax rate."
SENATOR SEEKINS countered:
We're giving them a 100 percent of the value five
years back versus we're giving them 20 percent on a
newly purchased piece of equipment. At least in my
industry, I would have depreciated that piece of
equipment down to a certain level already in terms of
my tax liability and I don't know where they left -
five years straight line? How are they allowed in the
terms of their taxes?
MS. WILSON replied: "It would depend on the type of equipment."
CHAIR WAGONER asked what the maximum number of years allowable
to take depreciation in the oil field was.
MS. WILSON answered that she didn't know the exact life at this
point. The Alaska income tax structure has a different set of
depreciation rules.
SENATOR SEEKINS remarked that he could understand the oil
companies wanting some credit for what they had already spent,
but he didn't think it would take 100 percent of the last five
years investment to be able to do that.
CHAIR WAGONER wondered how much depreciation had been taken off
of the federal taxes.
SENATOR SEEKINS said he wanted to know what the dollar amounts
were.
6:22:25 PM
SENATOR DYSON asked if the major benefit to the state was going
to be investment in new equipment that increases production, why
would it pay for investments that were just replacing old
depreciated plants that were only maintaining current
production.
MR. DICKINSON replied that was one of the areas that had
restrictions. It is important to say for a very old field,
especially where technology has been fairly innovative, that
discouraging replacement by drawing a line about an upgrade
versus a replacement could get the state into disputes that it
didn't want to get into.
One of the lines we did draw is, it has to be an asset
newly placed in service in the state. So, it doesn't
have to be new; you can buy a second-hand asset, but
we can't have everybody cross-selling to each other
every year and say look at the credits we're
generating.
CHAIR WAGONER asked if a piece of equipment gets a one-time
credit.
MR. DICKINSON replied yes.
CHAIR WAGONER asked if company A buys a Solar Centaur generator
and puts it at well 33 and at a later date takes it out of
service - it gets rebuilt and company B buys it and transfers it
to a different site, can company B take a credit, too.
MS. WILSON replied no and referenced page 7 where qualified
capital expenditure was defined as "newly placed in service in
the state". Cross-selling would not be allowed.
MR. DICKINSON added no, they would not get a credit because
language also states, "that has been previously placed in
service in the state".
6:25:42 PM
SENATOR ELTON asked for the dollar amount that accrues to this
particular provision and how it was divvied up between explorers
and producers.
MR. DICKINSON estimated that at $1 billion per year, the
exploration piece would account for $100 million to $150 million
or roughly 15 percent.
SENATOR ELTON said he thought this allowed for cost recovery of
assets placed in prior service and he assumed that an explorer
would be investing far less in assets than a producer would.
MR. DICKINSON replied that intangible drilling costs is a great
misnomer. When you go out and drill a well, you're paying a day
rate on the rig. You don't acquire that. That's why so-called
intangible drilling costs are being capitalized. The price of
renting the rig becomes the cost of drilling the hole.
SENATOR ELTON continued then that would count as an asset that
is applicable under the look back provision.
MR. DICKINSON replied that was correct. Under federal rules,
that intangible drilling cost goes through the process of being
capitalized.
6:28:00 PM
SENATOR THERRIAULT said it was portrayed to him that the
administration ultimately split the difference on this provision
and asked if it totaled $10 million per year.
MR. DICKINSON responded that the discussion revolved around
whether there should be a credit as well as depreciation. The
credit is meant to incent things and it's hard to incent dollars
that have already been spent.
SENATOR THERRIAULT asked him to go back five years and what the
economics were when the investment was made. The price went up
and oil companies were getting very favorable treatment under
the ELF. It seems like they made a very good return on their
investment.
MS. WILSON replied that from an accountant's point of view, one
way of looking at it is to ask if the cost has economically been
recovered. But she looked at it by asking how long the asset was
generating profits. In a regular business, a piece of equipment
generates income for a given number of years. Any business may
have a banner year where economically an argument can be made
they have recouped that investment. From an accounting
standpoint, that asset is still generating income.
SENATOR STEDMAN said he was becoming more uncomfortable about
this provision the more they talked about it. Clearly the last
three years had been fairly robust and unprecedented for the
industry.
6:31:05 PM
MS. WILSON pointed out that additional revenue from the PPT
would depend primarily on two factors, the price of oil and the
amount gas producer investment in the state. She then presented
the DOR forecast prices in graph form that the fiscal note
projected.
6:35:09 PM
SENATOR BEN STEVENS asked for incremental graphs on different
prices scenarios.
CHAIR WAGONER asked if the credits had been factored into her
charts.
MS. WILSON replied yes.
SENATOR BEN STEVENS remarked, "Even with the credits applied in
a transition provision, we're still looking at a 75 percent
increase from the existing severance tax system at current
prices."
MS. WILSON replied yes.
6:35:53 PM
SENATOR THERRIAULT referenced the $40 projection and pointed out
that no credit was being taken for the five-year look back and
that the state would lose $200 million if the price of oil was
$40.01.
MS. WILSON replied that was also correct.
SENATOR STEDMAN said he wanted to see where Alaska was compared
to the rest of its competitors.
MR. DICKINSON replied that Dr. Van Meurs' graphs would do that
in a future meeting.
CHAIR WAGONER thanked everyone for their comments and adjourned
the meeting at 6:40:31 PM.
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