Legislature(2005 - 2006)BUTROVICH 205
02/25/2006 09:00 AM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Department of Law, Robert Mintz, Assistant Attorney General, Division of Oil, Gas and Mining | |
| Dan Dickinson, Cpa, Consultant to Governor Murkowski | |
| Department of Revenue, Bill Corbus, Commissioner | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| = | SB 305 | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 25, 2006
9:05 a.m.
MEMBERS PRESENT
Senator Thomas Wagoner, Chair
Senator Ralph Seekins, Vice Chair
Senator Ben Stevens
Senator Bert Stedman
Senator Kim Elton
MEMBERS ABSENT
Senator Fred Dyson
Senator Albert Kookesh
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
02/22/06 (S) Heard & Held
02/22/06 (S) MINUTE(RES)
02/23/06 (S) RES AT 3:30 PM BUTROVICH 205
02/23/06 (S) Heard & Held
02/23/06 (S) MINUTE(RES)
02/24/06 (S) RES AT 3:30 PM BUTROVICH 205
02/24/06 (S) Presentation by Administration
02/25/06 (H) RES AT 10:00 AM SENATE FINANCE 532
WITNESS REGISTER
Robert E. Mintz, Assistant Attorney General
Oil, Gas & Mining Section
Department of Law
th
1031 W 4 Ave, STE 200
Anchorage, AK 99501
POSITION STATEMENT: Delivered a PowerPoint Presentation on SB
305.
Dan E. Dickinson, CPA
Consultant to Governor Murkowski
PO Box 110001
Juneau AK 99811-0001
POSITION STATEMENT: Delivered a PowerPoint Presentation on SB
305.
Commissioner Bill Corbus
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Summarized SB 305 for the Governor.
ACTION NARRATIVE
CHAIR THOMAS WAGONER called the Senate Resources Standing
Committee meeting to order at 9:05:18 AM. Present were Senators
Kim Elton, Ralph Seekins, Bert Stedman, Ben Stevens, and Chair
Thomas Wagoner.
SB 305-OIL AND GAS PRODUCTION TAX
9:05:29 AM
CHAIR THOMAS WAGONER announced the committee would start where
they left off the previous day on SB 305.
^Department of Law, Robert Mintz, Assistant Attorney General,
Division of Oil, Gas and Mining
ROBERT E. MINTZ, Assistant Attorney General, Oil, Gas & Mining
Section, Department of Law (DOL), informed the committee that he
would go through the details of SB 305 that he didn't get to
earlier.
Section 1 expresses legislative intent with regard to Section
11. That section adds a few words to an existing provision of
the production tax act that has been there for a long time. It
deals with the concept of what is called "prevailing value." AS
43.55.020(f) says where there is a sale of oil and gas and the
price is below market value, the department can require tax to
be paid on the market value. The question is what if there is no
sale at all, for example, if the same company that produces it
refines the oil and gas. The department has always used the
concept of prevailing value to come up with the market value.
There was a challenge to this application a few years ago that
was upheld in a public hearing. While Mr. Mintz wasn't aware of
any continuing live controversy, if the Legislature does amend
the production tax, it would be a good idea to clarify that
point to avoid future challenges.
9:07:41 AM
When it comes to calculating gross value at the point of
production in section 152, the bill would allow simplified
formulas to be used. In that case, there probably wouldn't be
any issue about comparing prevailing value to something else
anyway. That is covered in Sections 1 and 11.
Sections 2 and 3 amend the income tax statute, AS 43.20, to
clarify that the production tax still remains deductible for
income tax purposes and is not added back to federal taxable
income for income tax purposes. This has always been the way
production taxes have been treated and because this production
tax changes from gross value to net value, it is important to
make sure the traditional treatment continues in the future.
The tax laws have strong confidentiality provisions to protect
taxpayer information. Some exceptions exist in connection with
an official investigation or proceeding of the department. There
are few instances when due process considerations for a taxpayer
would argue in favor of that taxpayer having access to some
particular information that may have been obtained from another
taxpayer. An example of that is prevailing value, which in some
cases is determined in part by transportation costs. If a
certain taxpayer is assessed a tax based on prevailing value and
the transportation cost element that went into that calculation
is based in part on transportation costs of other taxpayers, the
taxpayer whose tax is being determined may have to find out what
the basis of that was - in order to have an idea whether it's
correct or if it should be challenged. This part of the bill
confirms that where it's necessary to determine the taxpayer's
liability, he can have some access to information that is
obtained from others. The department may allow that without
violating confidentiality statutes.
Sections 4 and 16 amend AS 43.05.230 and 43.55.040 to clarify
rules for using one taxpayer's information to determine another
taxpayer's tax.
9:10:25 AM
The bill also says that the department would impose appropriate
limitations on the use of that information to make sure it is
only used for the purpose of determining the tax. The bill would
also subject recipients of that information to potential
criminal penalties, the same penalties that apply to state
employees who violate the confidentiality provisions.
9:11:10 AM
Section 5 is the core of the bill and was discussed at length
the previous day. Section 6 amends AS 43.55.017(a) to conform
language to the internal revenue code (IRC) to which it refers.
There is no substantive change here.
9:11:59 AM
SENATOR BEN STEVENS asked Mr. Mintz whether expiration expenses
were considered development costs.
^Dan Dickinson, CPA, Consultant to Governor Murkowski
DAN DICKINSON, CPA and Consultant to Governor Murkowski,
responded the IRC talks about tangible drilling costs. Even
though they propose to delete the word "exploration," it really
refers to using a rig to create tangible drilling costs and they
want to make sure it corresponds to the proper IRC code. The
short answer is, he said, yes it will still include exploration
drilling.
9:13:18 AM
Section 8 is a conforming change that gets the grammar and
syntax consistent with the changes. Section 9 deals with an
issue that only applies to small production. The overwhelming
bulk of oil and gas produced in Alaska comes from state oil and
gas leases and the royalty share of those leases belongs to the
state and is tax exempt. The issue that Section 9 deals with
only applies to a small minority of production, which does not
come from state oil and gas leases.
In case of leases on private land, such as Native Corporation
Land, the royalty share is taxable. The tax is accessed on the
producer but the producer can charge back that tax to the
royalty owner. The bill provides a default definition of what
the value is for tax purposes. If the royalty owner and the
lessee want to create an agreement for royalty tax share, they
can. The default definition basically takes the total statewide
tax of the producer divided by the non-royalty barrel, which
gives the tax-per-producer barrel and then multiply that tax
rate times the number of private royalty barrels.
9:16:09 AM
MR. DICKINSON explained the formula with two examples:
The scenario is a producer with two leases - one a state lease,
the other a private lease. Each lease produces 100 barrels and
both of the royalty shares are 12.5 percent. After all the
netback, the value of the wellhead is 10 dollars. To calculate
the taxes, take the private royalties where all the barrels are
taxable. In the state lease, only the non-royalty barrels are
taxable.
9:19:39 AM
MR. DICKINSON explained the problem with the formula is that the
private producer and the royalty owner need to work things out.
In the absence of that, Section 9 creates the rule.
SENATOR BEN STEVENS asked Mr. Mintz the amount of state
production that falls under Section 9.
MR. MINTZ said he did not know but speculated it was a small
percentage. The only significant private lease production is
Arctic Slope Corporation and Cook Inlet Region Incorporated.
MR. DICKINSON added there are additional federal royalties,
which are exempt just like the state. The private royalty share
is under one percent currently. As the exploration pushes west,
the percentage could increase.
SENATOR BEN STEVENS asked whether private royalty share includes
both private landowners and federal land.
MR. DICKINSON said they are different. Federal land is like
state land and is not taxable.
9:21:57 AM
MR. MINTZ said Section 10 repeals and reenacts AS 43.55.020(e)
to simplify the three-tiered system where flared gas was either
tax free, taxed, or subject to a penalty. The bill changes
flared gas to two categories; if the flaring is authorized it
would not be taxable, if it were not authorized, it would be
taxable and treated with the same formula as all the other oil
and gas to find the net value. There is already and would still
be a penalty on flared gas that is wastefully prepared.
MR. DICKINSON added Section 10 attempts to bring administrative
simplicity to the tax. Much time is spent cross tracing records
and tracking down the tax and this makes it cleaner and simpler.
9:24:38 AM
MR. MINTZ continued Section 12 is the tax credit section that
was discussed previously. He asked Mr. Dickinson to comment.
MR. DICKINSON gave a brief explanation of Section 12. Subsection
(a) allows the annualizing as well as looking at monthly
actuals. Subsection (b) deals with loss carry-forwards.
Subsection (c) talks about non-refundable credits. He said they
tried to create a situation where the market could be developed
and credits could be traded but the state would not be in the
position of refunding or paying out for the use of the credits.
CHAIR WAGONER asked whether there was danger of creating a
market flood of credits. He asked at what point the credits
cease to be sold.
MR. DICKINSON responded at high and moderate prices, the market
would not be flooded. At low prices, there would be a danger of
falling demand.
CHAIR WAGONER asked what would happen to all of the credits if
production were to stop. He asked whether the state would become
liable to fund the credits.
9:28:53 AM
MR. DICKINSON responded the credits would not be refundable. In
fifty years, there may well be an overhang of unused credits.
CHAIR WAGONER asked whether that would then result in a bonus to
the state.
MR. DICKINSON said perhaps.
9:29:22 AM
SENATOR KIM ELTON asked whether a discussion was held regarding
time limits for the credits.
MR. DICKINSON said yes. They wanted to limit the number of
restrictions on the credits so as to allow them to monetize
close to the value with an eye on protecting the state's
revenue. A limit on the use of credits was imposed but not a
limit on time.
SENATOR ELTON said it has been noted that it would be an
unstable situation if the state reimbursed for the credits at
100 percent. He asked whether that was a larger problem than
having the state not collect revenues at some point.
MR. DICKINSON said yes and no: financially dollar for dollar,
no. Paying out a dollar or not receiving a dollar has the exact
same effect on the state treasury. If the Department of Revenue
falls short of its projections, and it were paid out, there
would have to be a specific authorization. In the event of a
price crash and huge pressures on the budget, the Legislature
would be approached with a supplemental bill asking to
supplement the credits, which would probably not be the best
scenario. One scenario would require an appropriation and the
other would not.
SENATOR ELTON said he assumed that scenario would be less
beneficial to the smaller companies and more beneficial to the
larger ones since the major companies will be buying tax credits
that the smaller producers accumulate.
9:32:51 AM
MR. DICKINSON said that was correct with some exceptions.
CHAIR WAGONER commented it would still be very beneficial to the
smaller producers and explorers.
MR. DICKINSON agreed. He said what Senator Elton was saying was
the restrictions on them would harm the sellers more than the
purchasers.
SENATOR ELTON said the smaller companies would be getting 90
cents on the dollar instead of 100 cents on the dollar and so it
could be more beneficial to the smaller producers to get 100
cents on the dollar.
CHAIR WAGONER said that is not going to happen.
SENATOR STEDMAN said it was more about cash flow and protecting
the state's interest. Allowing the smaller and larger companies
to trade the credits allows the market to set the value. He said
the state should move in the direction of a free-flowing market
that would allow them to trade the credits back and forth.
9:35:09 AM
MR. DICKINSON summarized subsection (e) referred to the eighty
percent limit on uses of credit certificates. Subsection (f)
refers to the ability of the department to investigate or audit
a tax credit claim after the drilling season. The audit
adjustment goes to the seller of the credit. Subsection (h) is
very important and defines "qualified capital expenditure."
9:37:51 AM
MR. MINTZ turned the committee's attention to Sections 13, 14
and 15 and said they mainly conform the tax return requirements
to the changes in the production tax. The $25 a day filing
penalty is repealed. There was at least one case where a
producer with a very small interest in a field whose tax
payments were supposedly being taken care of by the operator but
weren't. Over time the penalties added up to several million
dollars, so there is a limited discretion to waive the penalty.
9:40:07 AM
Section 17 amends AS 43.55.080 to conform the statute to the
Alaska State Constitution. Sections 18 and 19 conform and update
language for AS 43.55.135 and .150(a). Section 20 regards the
change in calculating the gross value of oil and gas at the
point of production.
9:41:25 AM
Section 21 is another core part of the bill and refers to
determination of net value on which the tax is based. Sections
22 through 29 amends AS 43.55.200 and 43.55.300 concerning
conservations surcharges. The two substantive changes are that
the conservation surcharges could be taken as credits against
the production tax only to the extent that there is a positive
tax. There wouldn't be any refunds. Second, for the production
tax purposes, gas is currently tax-free if it is used on a
leaser property and the bill would make oil tax-free if used on
a leaser property and it would also be free from the
conservation surcharge.
MR. DICKINSON explained because of the change in the definition
of oil and gas, the natural gas liquids that are currently
defined as gas would now be defined as oil.
9:43:48 AM
MR. MINTZ continued Section 30 and 32 provide for a new
definition of "gas." Section 31 redefines "gross value at the
point of production." The point of production is intended to be
downstream of gas processing and upstream of gas treatment and
so the two need to be defined.
Section 33 defines "gas processing" and "gas treatment." Gas
processing is the physical process of extracting liquid
hydrocarbons from a gaseous stream. Gas treatment is removing
non-hydrocarbon substances and conditioning gas for the sales
line.
MR. DICKINSON explained a diagram regarding well fluids and
mechanical separation.
9:48:24 AM
MR. MINTZ continued Section 34 repeals ELF. Sections 35 through
40 are complicated due to applicability and timing. The month of
production determines everything under the production tax
statute.
Transition provisions relate to several provisions that are
based on a full calendar year but SB 305 is designed to start on
July 1, 2006 so adjustments have to be made toward a half
calendar year.
9:51:08 AM
CHAIR WAGONER asked the reason the bill was so different when it
was previously presented by the governor's office. He expressed
concern over the gap in revenues during the change of start
dates.
MR. DICKINSON replied that changes should be made in a forward
manner so that companies can plan ahead for the change in taxes.
The changes reflect that Governor Murkowski was looking at the
bigger picture, he said.
9:54:37 AM
SENATOR ELTON observed that Mr. Dickinson's argument seemed
against the claw-back provision. He said, "We're forward looking
when we start the tax and we're backward looking when we apply
the credits."
MR. DICKINSON argued long-term investments generally take past
things into account.
9:55:27 AM
MR. MINTZ noted the provisions that have to do with the
production tax begin on July 1, 2006 and other provisions would
take effect immediately. As a transition item, the department
may develop and adopt PPT implementing regulations immediately.
The term "alternative credit" would begin to be used. He
concluded the presentation.
^Department of Revenue, Bill Corbus, Commissioner
9:56:56 AM
BILL CORBUS, Commissioner, Department of Revenue (DOR), wrapped
up the presentation and advised the committee that the
administration strongly encourages timely enactment of the bill.
He gave a list of reasons that Governor Murkowski supports the
move. It will replace a broken ELF based severance tax,
encourage badly needed oil and gas production investments,
provide special incentives for small explorers, and will provide
enhanced revenues for the state.
9:58:46 AM
COMMISSIONER CORBUS explained Governor Murkowski had two targets
for Dr. Pedro van Mures in preparing the PPT legislation,
increased state revenues based on what producers are paying in
similar oil producing regimes, and increased incentives to
explore and invest in the 50 to 150 million barrel range. His
final proposal was a 25 percent tax rate and a 20 percent tax
credit. The Governor wanted to tilt toward more exploration and
investment and so he reduced the tax rate to 20 percent.
Governor Murkowski feels that more exploration would mean more
money to the state over time than the 25 percent tax rate.
10:00:58 AM
MR. CORBUS reminded the committee that the Governor has
negotiated a good thing for the State of Alaska. The tax rate of
the producers will be increased 100 percent and the producers
have agreed to build the gas line.
10:01:41 AM
CHAIR WAGONER thanked Commissioner Corbus and asked Mr.
Dickinson for a report of investment dollars.
MR. DICKINSON responded he would get together with Ms. Jackson
to cover all of the requests they have received and get back to
the committee on Monday, February 27, 2006.
There being no further business to come before the committee,
Chair Wagoner adjourned the meeting at 10:03:27 AM.
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