Legislature(2005 - 2006)BUTROVICH 205
03/02/2006 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Department of Natural Resources – Mike Menge, Commissioner, and Bill Van Dyke, Director, Division of Oil and Gas | |
| Question and Answer with the Department of Revenue – Robynn Wilson, Director, Tax Division, Department of Revenue – and Sharon Nienhuis, Petroleum Economist, Department of Revenue | |
| 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
March 2, 2006
3:35 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 Hollis French
Senator Gretchen Guess
Senator Gene Therriault
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) Heard & Held
02/24/06 (S) MINUTE(RES)
02/25/06 (S) RES AT 9:00 AM BUTROVICH 205
02/25/06 (S) -- Reconvene from 02/24/06 --
02/25/06 (H) RES AT 10:00 AM SENATE FINANCE 532
02/25/06 (S) Heard & Held
02/25/06 (S) MINUTE(RES)
02/27/06 (S) RES AT 3:30 PM BUTROVICH 205
02/27/06 (S) Heard & Held
02/27/06 (S) MINUTE(RES)
02/28/06 (S) RES AT 3:30 PM BUTROVICH 205
02/28/06 (S) Heard & Held
02/28/06 (S) MINUTE(RES)
03/01/06 (S) RES AT 3:30 PM BUTROVICH 205
03/01/06 (S) Heard & Held
03/01/06 (S) MINUTE(RES)
03/02/06 (S) RES AT 1:30 PM BUTROVICH 205
WITNESS REGISTER
MIKE MENGE, Commissioner
Department of Natural Resources
400 Willoughby Ave.
Juneau, AK 99801-1724
POSITION STATEMENT: Commented on how the PPT would affect the
Oooguruk field.
BILL VAN DYKE, Director
Division of Oil and Gas
Department of Natural Resources
400 Willoughby Ave.
Juneau, AK 99801-1724
POSITION STATEMENT: Commented on PPT versus royalty reduction in
the Oooguruk field.
TIMOTHY RYHERD, Commercial Analyst
Division of Oil and Gas
Department of Natural Resources
400 Willoughby Ave.
Juneau, AK 99801-1724
POSITION STATEMENT: Commented on PPT versus royalty reduction in
the Oooguruk field.
ROBYNN WILSON, Director
Tax Division
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Answered the Legislature's questions on the
PPT for the Administration.
SHARON NIENHUIS, Petroleum Economist
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Compared various PPT ratios and prices.
ACTION NARRATIVE
CHAIR THOMAS WAGONER called the Senate Resources Standing
Committee meeting to order at 3:35:24 PM. Present were Senators
Stedman, Dyson, Kookesh, Elton, Ben Stevens and Chair Wagoner.
SB 305-OIL AND GAS PRODUCTION TAX
3:35:24 PM
CHAIR WAGONER said first they would discuss the Oooguruk unit
royalty modification versus PPT comparison and then take up the
Administration's answers to the questions that the Legislature
asked on the PPT.
^DEPARTMENT OF NATURAL RESOURCES - Mike Menge, Commissioner, and
Bill Van Dyke, Director, Division of Oil and Gas
MIKE MENGE, Commissioner, DNR introduced Bill Van Dyke, the
Director, Division of Oil and Gas, and stated that he would let
MR. VAN DYKE go through the comparison.
3:38:09 PM
BILL VAN DYKE, Director, Division of Oil and Gas, DNR, said the
effect of PPT capital credits, the transitional credits and the
loss-carry forward provisions would be very powerful for a
project like Oooguruk that is a new capital-intensive project.
It would give Pioneer a positive instead of negative cash flow -
assuming that Pioneer would be able to sell the credits.
3:39:12 PM
SENATOR SEEKINS arrived.
MR. Van Dyke said under the PPT scenario, the state gets an
opportunity to collect some revenue from Oooguruk where under
the current ELF (economic limit factor) it does not collect a
production tax. He explained that the royalty was reduced to 5
percent until the net profit share leases pay out under the
current system.
He said the financial information for the project remains
confidential and correct inputs and assumptions make all the
difference when doing the modeling. The Division assumed a
project in the range of $500 million and a fee for sharing a
facility at Kuparuk and Pioneer's own operating costs that would
all be allowed for deductions. The estimated ultimate recovery
was in the range of 50 MB to 90 MB, depending on reservoir
performance and production rates were estimated to be 15,000
barrels to 20,000 barrels per day. He said the project is
offshore, so its costs are a bit more expensive.
He modeled a couple of different oil prices and discount rates
and assumed that the credits Pioneer earns could be used by them
or sold for 100 percent of face value (although, in reality,
they would probably have to be sold at a discount). He cautioned
that these figures would not work for Oooguruk, but not for any
other project.
MR. VAN DYKE said he assumed Pioneer had about $45 million in
transitional credits for this project, because it has been
spending a lot of money up there on engineering, fieldwork and
exploratory wells.
He explained that the Oooguruk project has four net profit share
leases and they overlay a "sweet spot" in the field, which will
be where the development takes place. The PPT doesn't really
effect the net profit share calculations in any way. There would
not be a production tax today using the ELF; likewise he has
assumed that under a PPT, if Pioneer pays any tax, it would not
be a deduction under the net profit share accounting system.
3:47:42 PM
MR. Van Dyke explained that Oooguruk was given a royalty
reduction because Pioneer would not have gone ahead without it.
The state gave up $45 million to get the project on line. He
said the first of four models was a base case without royalty
modification and with no PPT on the project a year ago; case two
was the royalty modification that was awarded; case three was a
hypothetical case that the chairman requested supposing the
royalty modification had not been granted and just the PPT was
in effect; and fourth, a project with a royalty modification and
a PPT.
He said the royalty reduction, which went from 12.5 to 5
percent, sounded like a lot, but it didn't affect the rate of
return very much (up about 1.3 percent). His model comparisons
showed that the PPT was a more powerful tool than royalty
reduction. He advised:
They would not reap a windfall by any means, for this
project. This is a really challenged project. It's my
belief Pioneer - they want to get their foot in the
door. They were willing to come up to Alaska and at
least start a project that wasn't the greatest project
in the world, but it got them on the Slope; it got
them up there as an operator. And they have bigger and
better plans elsewhere on the Slope.
3:54:04 PM
SENATOR ELTON referenced the case 1 versus case 4 model and
asked if there could be another line stating how much the state
is getting now along with how much less the state would be
getting.
MR. VAN DYKE replied that with the royalty reductions in place,
the state was still collecting about $168 million from the field
in income tax, royalty and property tax, as well as the net
profit share payments.
TIMOTHY RYHERD, Commercial Analyst, Division of Oil and Gas,
DNR, commented on the chart comparison, but his comments were
indiscernible.
MR. VAN DYKE clarified that Mr. Ryherd said under the base case,
the state gets $130 million to $500 million and royalty
reduction takes a little off of that. The PPT would actually
take off of the upfront credits. "But, there certainly is still
a fair amount of revenue coming into the state."
CHAIR WAGONER thanked them for their presentation and announced
that the committee would go on to the Administration's answers
to the Legislature's questions.
3:59:08 PM
^QUESTION AND ANSWER WITH THE DEPARTMENT OF REVENUE - Robynn
Wilson, Director, Tax Division, Department of Revenue - and
Sharon Nienhuis, Petroleum Economist, Department of Revenue
ROBYNN WILSON, Director, Tax Division, Department of Revenue
(DOR), introduced Sharon Nienhuis, Petroleum Economist, DOR, who
worked on the model to provide information on some of the
Legislature's questions.
She also provided a letter with some specific tax and price
scenarios and said she would highlight some of the information
that would be provided and answer questions and they go along.
She then turned the presentation over to Ms. Nienhuis.
MS. NIENHUIS said the department was asked to provide some
additional scenarios with different tax rates and different
credit rates and to provide a similar analysis to that which
Roger Marks presented on February 23. His analysis included
annual revenues to the state under three different oil prices -
$20, $40 and $60. He provided that at the 20/20 scenario and
under the status quo.
4:01:28 PM
She presented graphs of three scenarios - 25/20, 30/20 and 30/15
- and the status quo at $20, $40 and $60 per barrel. She used
the same cost and volume assumptions that Mr. Marks used in his
February 23 presentation, but her volume scenario was without
the gasline or future oil finds. The revenues were in today's
dollars and not inflated.
4:04:21 PM
SENATOR DYSON asked if her estimate of investment credits in the
out years took into account the increased production because of
the addition of incentives.
MS. NIENHUIS replied no. She followed the department's fall 2005
revenue forecast. She tried to not model things that would lead
to modeling error. She reminded them that at $40 oil, the
transition provision (five years of credits taken over six
years) doesn't kick in.
4:08:40 PM
SENATOR STEDMAN said it was hard to get any information out of
the charts and asked how it could be best used to find the
balance point between the tax rate and the tax credit.
MS. NIENHUIS replied they would get to those models relatively
soon.
SENATOR STEDMAN said that it was easier for him to look at
percentages versus dollars.
MS. NIENHUIS agreed to provide percentages.
CHAIR WAGONER thanked her and said they would go on to the
written questions.
MS. WILSON explained that the House Resources Committee and
Chair Wagoner had submitted a list of 31 questions for the
Administration to answer and she would begin answering them now.
4:13:54 PM
1. Identify values/amounts for the "look-back" or transitional
section per year according to the actual, by type (exploration,
development, production), by company.
The Department of Revenue model uses $1 billion per year as
capital costs, so the transitional period would be about $5
billion. Of the $1 billion, about 10 percent is exploration
and about 90 percent is elements of production. These annual
costs are based on compilations of historical data. The
attached Excel files outlines public data regarding
investments.
2. How are mob, demob, and platform abandonment costs treated -
as tax credits or deductions?
Mobilization costs are capitalized for federal tax purposes as
Intangible Drilling Costs. As such, they are a capitalized
expenditure for PPT purposes, and therefore, are deductible
and creditable. We understand that demobilization and
abandonment expenditures are both expensed as incurred. This
would mean that these costs are deductible, but would not
generate a credit.
3. Is there a "rating" for political stability - or one that
reflects instability?
We do not have any information on a quantification of the risk
of political stability.
4. What loss of revenue is incurred by moving the effective
date from January 1, 2006 to July 1, 2006 on both 20/20 and on
25/20?
Using a combination of our spring forecast and YTD actuals,
the average ANS price between January 1, 2006 and July 1, 2006
was $58.62.
· The loss of revenue using the 20/20 system would be about
$480 million in additional tax.
· The loss of revenue using the 25/20 system would be about
$770 million in additional tax.
5. Section 9 - what amount is involved in this section?
A very small amount, probably no more than 1 percent of total
state revenue from oil and gas. It is limited to three areas:
[1] Alpine and its satellites; [2] the National Petroleum
Reserve Alaska; and [3] Cook Inlet.
6. Was there consideration of phasing out the $73 million
deduction over a certain period of time?
No, it was not considered.
4:18:18 PM
SENATOR STEDMAN asked if the 1 percent was looking forward or
backward.
MS. WILSON replied backward.
7. Of the current 14 producers in Alaska, which would pay a
severance tax after employing the proposed $73 million standard
deduction?
With the merger of Chevron and Unocal, there are now 13
producers in Alaska. Of the 13 producers, BP, ConocoPhillips
and ExxonMobil will pay severance tax at most price levels
after employing the $73 million standard deduction. At high
oil and gas prices, and given our cost assumptions, Anadarko
and ChevronUnocal will also pay severance tax after deducting
the $73 million dollar allowance, given the production
volumes reported publicly by those companies.
8. Which other tax regimes - worldwide - have a progressivity
structure?
TO BE PROVIDED
9. How many private royalty owners are there in Alaska - all
areas, not just the North Slope (i.e., Nenana Basin, Kenai
Peninsula, native corporation holdings, etc).
We do not have information on the number of private royalty
owners in Alaska, which would include private oil and gas
leases that are not in production. Homesteads staked under
certain (but not all) federal homestead laws included oil and
gas rights, and any of the owners of such parcels might enter
into an oil and gas lease.
10. Provide a graph showing the status quo, the PPT, and the
gas line contract terms.
This question appears to query the relationship between tax
under the status quo, the PPT, and the gas line contract
terms. At this time, gas line contract terms are not public
information.
11. Provide information on the effect of previous incentives -
the costs.
Claimed expenses under SB 185 (AS43.55.025) total $104.8
million and claimed credits total $33.6 million. A claim was
received by the Department of Revenue last week, thus the
totals were updated from the $95.5 million and $29.0 million
figures previously provided for claimed credits.
12. What is the rationale for offering the same amount of
credits for non-state lease lands where the state receives no
royalty tax benefit? Was there discussion of a reduction in the
credit to offset this?
The rationale is that the incentives have the potential to
result in higher severance taxes, taxes that are assessed on
any oil or gas production within Alaska's sovereign
territory. Given the overall economic benefit of increased
production of oil and gas (and particularly gas in the Cook
Inlet where significant private lands occur), an incentive for
exploration and development even in the event that a field
would pay no taxes after incentives makes sense.
13. Why should Point Thomson be incentivised?
We believe the development of Point Thomson may be critical
for the development of the gasline. Accordingly, incentivizing
Point Thomson may well incentivize the gasline.
Point Thomson is particularly problematic for two reasons.
First, it is a high cost field since it is a high-pressure gas
condensate reservoir; and second, we do need the gas reserves
to underpin the gas pipeline economics. By providing
incentives, the goal would be two-fold. First, any incentive
to encourage Point Thomson improves the economics of the gas
pipeline. Second, incentives may encourage early production
of the liquids, which requires expensive infrastructure to
handle the high-pressure production.
14. Can you provide better definitions for "point
of production" and "oil" and "gas" and has the State litigated
these terms?
We're not clear whether this question seeks more explanation
of the definitions in the bill or is requesting that we
consider modifying those definitions. Please clarify.
Regarding past litigation, in general the point of production
and the definitions of oil and gas have not been major
subjects of litigation under the production tax statute. In
contrast, there has been considerable litigation of related
concepts, though not necessarily the phrase "point of
production," in the royalty context.
In the tax context, there was at least one dispute decided at
the internal DOR appeal stage relating to point of
production, but most of the controversy in this area played
out in the development of regulations defining "gas
processing plant" rather than litigation. The use of the
term "gas processing" in the bill is consistent with existing
department regulations, but under current law, gas processing
generally is considered an activity occurring downstream of
the point of production, while under the bill it is
considered an activity occurring upstream of the point of
production.
15. What steps must be taken to make the tax credits refundable
rather than transferable?
This would require a language change to Section 12 at Sec.
43.55.024(d) and (e). We are available to work with drafters
on the exact wording.
16. On Page 13, line 24 of the bill, what does "payment in lieu
of" tie into for oil?
Section 21 [Sec. 43.55.160(d)(1)(B)] clarifies that payments
in lieu of property taxes are deductible. Sec. 43.55.160(c)
presents the general rule that lease expenditures are
deductible. Lease expenditures would include property taxes.
Sub-section (d) provides clarification for items that are not
clear, such as "payments made in lieu of property taxes."
17. Does the limit on transferable tax credits in section 12,
(subsection (e) limit the amount of tax credits that a single
taxpayer can take against their own production tax in a single
year?
Section 12 (Sec. 43.55.024(e)) limits the amount of tax that
can be reduced through purchased credits. There is no limit on
credits utilized by a taxpayer that were generated by that
same taxpayer.
4:28:14 PM
SENATOR BEN STEVENS said he thought there was a limit stating
the taxpayer couldn't take his liabilities down to zero.
MS. WILSON replied that was correct. The limit is on purchased
credits. She explained more that if a taxpayer has its own
credits and reduces its tax down to some number, then this limit
applied at that level. The order of credits was not specified in
the bill, but that is how she would expect it to be applied.
SENATOR BEN STEVENS asked if that could be clarified in
regulation.
MS. WILSON replied yes.
CHAIR WAGONER directed, "Let's make it easy to get there in
language."
MS. WILSON responded that she would be happy to work with the
committee on drafting language.
4:29:46 PM
18. The State of Alaska has relied on the services and
expertise of multiple outside law firms to handle disputes over
oil and gas issues. Have you conferred with such counsel in the
drafting or review of this legislation? If so, have they
assessed the impacts of the legislation on the State's legal
position in past agreements, current disputes, or future
disputes?
Yes, such counsel (not all of them) has been consulted and
such assessments have been discussed but have not generally
been generated in formal written form.
SENATOR ELTON asked if the discussion resulted in changes to the
bill.
MS. WILSON responded that she would add clarification about
that.
19. Have you asked the Department of Law to review this
th
legislation in light of the 6 Circuit Court of Appeals'
decision in Cuno v DaimlerChrysler that is now pending before
the United States Supreme Court?
The Department of Law has examined this question. As a Sixth
Circuit decision, it has no direct precedence for Alaska. It
is currently before the U.S. Supreme Court and many analysts
believe that it will not be sustained in its current form.
20. Please provide information regarding the expenditures that
will qualify for the transition credits - including the
depreciation method chosen under the federal and state income
tax systems.
It appears that this question relates to the transition
provision in Section 21 [Sec. 43.55.160(g)], which allows a
deduction for capital expenditures made over the last five
years, deductible over the next six years. The capital
expenditures that qualify for transitional treatment are the
same type of expenditures that qualify for ongoing credits.
These are defined in Section 12 [Sec. 43.55.024(h)]. These
expenditures include exploration expenses and those
expenditures that are capitalized for federal tax purposes.
Exploration expenses include geological and geophysical
exploration. Expenditures capitalized for federal tax purposes
include intangible drilling costs. The capitalized
expenditures are subject to a variety of useful lives under
federal and state income rules. See Question 59 below.
4:33:28 PM
SENATOR STEDMAN asked if she had the actual dollars amounts they
were dealing with.
MS. WILSON replied that she had totals, but not depreciation
schedules for all of that equipment by specific company doing
business up here.
4:35:37 PM
SENATOR DYSON said it looks like a consistent pattern of the
state giving longer depreciation schedules than the feds. He
asked if that works to the state's advantage or to the
companies' working in Alaska.
MS. WILSON replied that it is to the state's benefit, because
under the federal rules, companies can write off an asset
quicker and on an accelerated basis.
SENATOR DYSON asked if the state has considered reducing the
depreciation period in order to encourage more investment in the
kinds of equipment that would increase production.
MS. WILSON replied no.
4:37:48 PM
SENATOR STEDMAN asked if there had been discussions about
accelerating the tax rate to stimulate exploration and
development.
MS. WILSON replied that those tools were at their disposal. The
state uses a worldwide combined method for income tax purposes.
This means that all of the income worldwide for oil and gas
companies is combined in a pie and the state gets a piece of it.
When addressing depreciation methods, they are addressing not
just what would happen with the particular production company
doing business in Alaska, but depreciation methods for the whole
corporate groups in every other state and for our country -
potentially.
21. Have any of the definitions in sections 30-33 been the
subject of disputes with tax and/or royalty payers in the past?
To the extent they have, please provide the definitions the
state asserted in those disputes.
See question 18 above.
22. Please provide an identification of the point of production
at each unit in the state under existing statutes, regulations,
agreements, and court decisions. Provide the same under the
definition as proposed.
TO BE PROVIDED
23. Please provide an identification of 'gas treatment' and 'gas
processing' facilities in the state under the existing statutes,
regulations, agreements, and court decisions. Provide the same
under the definition as proposed.
TO BE PROVIDED
4:40:28 PM
SENATOR ELTON wanted to know if the definitions should be in
statute or regulation.
24. What standard will be used to determine whether oil or gas
is of 'pipeline quality' under the definition of 'gross value at
the point of production?'
This term only appears in the definition of "oil." It was
not in the old definition, nor the new definition of "gas."
The standard for "pipeline quality" has not changed under the
bill. The standard is based on a series of court cases.
25. Provide a historical analysis of the results of valuation
methodologies adopted by the Department of Revenue, Department
of Natural Resources (under all agreements), and the Department
of the Interior.
TO BE PROVIDED
26. Will abandonment costs be eligible for deductions or
credits under the legislation? If so, what estimates of the
timing and costs of those activities does the Department
project?
See Question 2 for deductibility of abandonment costs. With
regard to costs, we are aware of no field having ever been
abandoned in Alaska, and so we do not have any empirical data
on costs.
27. How will AS 43.55.160(j) protect the State from a
proliferation of corporate entities and/or companies claiming
the tax-free allowance?
TO BE PROVIDED
28. Provide the number of exploration and delineation wells
estimated to be drilled over the first ten years of your
economic models. Include the technical and economic success
rates projected in the modeling.
Five exploration wells per year are included in the model.
The Department of Revenue assumes $100 million is spent on
exploration per year. With average costs of $20 million
dollars per well, this comes out to five wells per year.
Delineation wells are separate and included under development
expenditures. The model assumes there are four finds of large
oil accumulations - reserves in place that would be on the
order of 500 million barrels. There are four relatively small
fields that are characterized as being "heavy" oil. These
fields would pay no production tax under the current system
because their Economic Limit Factor [ELF] would be zero. We
did not include a "success rate" in our model.
29. Provide estimates for undiscovered resources in Alaska.
Include the breakdown between technically recoverable and
economically recoverable resources to the extent possible.
TO BE PROVIDED
30. Provide a historical analysis of the effective tax rate on
each field in production on the North Slope over the past twenty
years.
See Attachments A1 and A2. These tables contain effective
tax rates since 1986 for all Alaskan fields on gross value
at the point of production. The effective tax rate shown
on these tables is the ELF x 12.25 percent for the first
five years of production, and ELF x 15 percent thereafter.
We note the effective rate varies between 15.0 percent, for
Prudhoe Bay through 1987 (when the so-called "rounding
rule" rounded the ELF up to 1), and 0.0 percent for a
number of fields for a number of years.
31. How will Net Profit Share Leases be affected by this
legislation? Will the gross costs of exploration and development
go into the Development Account-or those costs net of the
credits and deductions?
TO BE PROVIDED
4:45:37 PM
32. It's been reported that the gas line contract will propose
the state take its gas production tax share in the form of gas.
How does that work in this bill?
In the gasline contract the state has indeed proposed taking
deliveries of gas in place of a production tax; this is not
reflected in the PPT bill which will stand on its own,
gasline or no. Under the PPT, if the producers sell gas,
those revenues would be part of the net profit calculation.
Under the gasline, they would not. Instead the state would
receive a percentage of the gas, which it would monetize
thought marketing. Note that the costs of developing (for
example - Point Thomson) or running (for example - Prudhoe
Bay) a field that produces both oil and gas would go into
calculating the oil profits for the PPT.
4:46:58 PM
SENATOR ELTON asked if she made an adjustment for what it costs
the state to monetize its gas that it's taking in lieu of cash.
MS. WILSON responded that she would have someone get in touch
with him about that question.
33. Of the pre-PPT credit provisions (or claw back), what is
the cost to the state for legacy fields and what is the cost to
the state for frontier regimes?
See question 20.
SENATOR ELTON asked how much of the $5 billion that the look
back costs the state would be accrued on the legacy fields and
versus the frontier regions.
MS. WILSON responded that she didn't have that information, but
she would research it.
34. Of the pre-PPT credit provisions (the claw back), how many
investment credits were sold under SB 185 and how do we ensure
the person who holds the credit, not the original recipient,
gets the credit?
Sale of credits under SB185 do not effect the ability of
the seller to claim those credits as Transitional
Investment Expenditures (that is to qualify for the claw
back.)
35. If we have a gas pipeline in 2015, what will the ELF tax
"take" be on North Slope gas and what will the "take" be under
the PPT? What will the "take" be under PPT if we take gas in
lieu of the production tax (the take would, I assume be the day-
to-day value of the gas less the state's cut in selling the gas
on the marketplace)?
Without getting into price sensitive forecast, or the
confidential draft gas contract, we can make the following
observations about the comparison: The upstream costs are
covered in the PPT, so the difference could be as simple as:
(a) Under the PPT, a taxpayer would pay 20 percent of
the gross value at the point of production, that is
sales revenues less the tariff charged by the Gas
Treatment Plant and the tariff between the North
Slope and the point of sale would be paid to the
state (without taking into account the effect of the
$73 million dollar allowance).
(b) Under the gas contract, the state will receive some
percentage of the gas and then pay the tariff
charged by the Gas Treatment Plant and the tariff
between the North Slope and the point of sale. If
the state owns part of the pipeline, then the state
will also receive that portion of the tariff, which
is profit accruing to the owner.
4:50:34 PM
36. Is current production tax deductible from corporate tax?
If no, is this impact in the models presented by the
Administration?
Yes, current production is deductible from corporate tax.
37. Referring to Section five, what oil and gas is exempt from
taxation - just what is discussed in Section 10?
The oil and gas royalty amounts paid to the state and federal
government are exempt. (AS 43.55.900 (13) "ownership or
right to which is exempt from taxation" means any ownership
interest of the federal government or the state.")
Section 10 simplifies treatment of flared gas. Under current
law there are three categories of gas - gas used in
production operations which is exempt from tax, gas produced
in excess of that needed for safety purposes which is
taxable, and gas flared beyond the amount authorized for
safety which is taxed and subject to a penalty. Currently
there is no 'free use of oil' to produce more oil in statute.
The bill exempts from tax any oil or gas used in production
operations, unless the Alaska Oil and Gas Conservation
Commission determines that it was waste (instead of used to
produce salable hydrocarbons), in which case it is taxed.
38. Referring to Section 6, will there be any impact to current
state taxes or municipality taxes from this change?
No, there should be no impact to current state or municipal
taxes. This language change simply makes the description of
Intangible Drilling Costs consistent with Internal Revenue
Code language, which is how this item is interpreted
currently.
4:53:24 PM
39. Why was the payment for taxes and surcharges changed from
th
the 20 day to the last day of the month? What is the economic
impact of this change?
There is no economic impact and this just clears up current
language. Under AS 43.55.020, payment for the tax is "due" on
th
the 20. However, the tax is not "delinquent" until the last
day of the month. The significance of this is that according
to AS 43.05.225, interest is assessed only when a tax
"becomes delinquent." Thus this bill makes the due date the
end of the month and in Section 7 establishes that "an unpaid
amount of tax that is not paid when due in accordance with
this subsection becomes delinquent."
4:54:07 PM
SENATOR ELTON asked if the tax would still be delinquent from
the last day of the month.
MS. WILSON replied yes.
40. Do other nations with a net profit system have the 90
percent payment of taxes with the sure-up provision the
following year? What is the economic impact of this change?
TO BE PROVIDED
41. What are the penalties for under-payment when sure-up is
more than 10 percent of the taxes owed?
If the taxpayer does not pay 90 percent, then interest will
be due on the difference between the tax paid and the 90
percent amount.
4:55:14 PM
CHAIR WAGONER asked how many lawsuits the state had been in over
interest accrued on the tax penalties. The dispute he was most
familiar with was pretty drawn out.
MS. WILSON replied that she was aware of some in the income tax
safe harbor area, but she didn't know if any of those had been
litigated.
CHAIR WAGONER said he wasn't referring to those, but to the
true-up and whether they had to pay the full 90 percent on time
to the state. The state assesses a penalty that accumulates
pretty fast and that caused some litigation at one point.
MS. WILSON responded that under current law, production tax has
no safe harbor clause to the 90 percent rule. She offered to
research this issue further.
42. Referring to Section 10, why does the Alaska Oil and Gas
Conservation Commission's (AOGCC) role change from focusing on
excess needed for safety reasons to whatever they determine to
be waste? Does this provision provide more power to the AOGCC
on what is included/excluded for taxation?
Under current law, as applied by DOR regulation, the
categories of flared gas recognized by DOR are different
from, although related to, the categories recognized by
AOGCC. The bill will simplify the categorization and
harmonize it completely with AOGCC's. This simply creates one
standard administered by AOGCC in place of two standards
administered by two agencies.
43. Why does it seem the credits and incentives are on
production along with exploration if our focus is to provide
incentives for exploration?
The bill is based on the expectation that investment, both
exploration and in existing fields, will increase production.
5:00:11 PM
44. Can the carry-forward amount be used for a credit for more
than the first year after the loss?
Yes, the credit carry-forwards can be used indefinitely.
There is no time limit on the credit carry-forwards.
5:00:14 PM
45. Is it the case that any allowable expenses for the
exploration, development, or production of gas can be deducted
from oil revenues in determining net value? If so, could the
expenses of a gas line be included in these deductible expenses?
Expenses are allowable only if they are "upstream" costs. A
gas line is "downstream" and so would not be a deductible
expense.
5:02:11 PM
46. Why not use generally accepted accounting principles (GAAP)
versus setting up our own system of defining revenues and
expenses?
GAAP are useful for determining whether an item of
expenditure can be classified as an "expense." GAAP does not
differentiate between expenses incurred specific to a lease
and those expenses that are indirect to a lease. For example,
GAAP does not distinguish between wages paid to a lease-based
worker, and an employee in the home office.
5:02:58 PM
47. Which credits can be applied to multiple years?
There is no time limit for credit carry-forwards under the
bill or for the optional credit codified in AS 43.55.025.
However, any dollar of investment can only generate one
credit, and that credit can only be used once.
5:03:29 PM
48. Can a tax credit be sold in any year or just the year after
it was accrued?
Once the credit has been turned into a Credit Certificate, it
can be sold at any time. A person can apply for a Credit
Certificate at any time, but the bill allows the Dept. of
Revenue a period of time in which to issue the Credit
Certificate. [See Section 12, Sec. 43.55.024(g)]
49. What is the estimated economic impact to the state of the
ability to sell tax credits?
TO BE PROVIDED
50. Referring to Section 16, what is the current system and why
do we need this change in confidentiality?
The bill codifies current practice embodied in regulations in
our treatment of taxpayer information. The only change here
is that the bill makes clear that any person receiving
information released under current department practices, is
subject to the same criminal penalties that apply to a state
employee.
The current confidentiality law is very general in its
exception language - information must be kept confidential
"except in connection with official investigations or
proceedings...." The Department believes that current law
does allow disclosure under the circumstances specified in
the bill, but there has been some question about that, and it
would be desirable to clarify the meaning of the law, as the
bill does. In addition, there is the new provision on
penalties, referred to above.
51. In what circumstances would oil and gas taxes go straight
into the Constitutional Budget Reserve Fund (CBRF).
Additions to the Constitutional Budget Reserve Fund are made
for any oil and gas taxes collected in resolution of a
dispute. That means that amounts collected because of an
audit assessment, or subsequent settlement, are additions to
the CBRF.
52. Referring to Section 18 and 19, why change from "shall" to
"is"?
This change is made in accordance with the state style
manual.
5:07:08 PM
53. Why does the bill offer multiple methods to determine gross
value? Who will choose a methodology?
The bill does not directly allow a taxpayer to elect
alternative methods; it just allows the Department to
authorize use of an alternative method. The election referred
to would be an election between using an alternative method
or just calculating gross value according to the usual rules
- NOT an election among several different alternative
methods. In implementing this provision, the Department will
no doubt develop criteria for when a particular alternative
method would be appropriate. I don't think we can predict now
whether there might be circumstances under which more than
one alternative method might be appropriate and under which
the Department would authorize a taxpayer to elect among
several alternative methods.
SENATOR ELTON assumed it authorizes the department to select
among alternatives that could be negotiated with the taxpayer.
MS. WILSON that was not the intention, but it was to simplify
methods of coming up with value.
5:09:07 PM
54. Section 21, page 1, line 8 - Why is this clause constrained
to Dec. 1, 2005?
TO BE PROVIDED
55. Section 21, provision (h), which US CPI does the
Administration plan on using?
This would be established by regulation. The Department has
not evaluated the various CPI's at this time.
56. Are the current oil conservation surcharges deductible from
any other taxation? If no, what is the policy reason to make
them a credit in SB 305 and what is the economic impact?
Yes, current oil conservation surcharges are deductible from
corporate income tax.
Other Questions
57. Do any other state taxes have a "standard deduction"?
a. Seafood Marketing Assessment (ASMI) tax is imposed only
on processors/exporters that process or export fisheries
resources with a value of $50,000 or more in a calendar year
[AS 16.51.120(g)].
b. Mining License Tax is not imposed when net income is less
than $40,000 in a fiscal year [AS 43.65.010(c)].
c. Gaming tax exempts gross receipts of less than $20,000
from paying the additional fee under AS 05.15.020(b).
d. Alaska's Estate Tax follows federal rules, but the most
recent exemption (FY05) included estates valued at under $1.5
million.
5:11:49 PM
58. How many Net Profit Share Leases (NPSL) are in the state
and how much are they paying in royalties?
Out of 19 NPSLs, seven are paying royalties. These seven
include five in the Milne Point Unit, and two in the Duck
Island Unit, and they began paying in 2001. The total of
NPSL payments received in calendar year 2005 was $81 million.
Total receipts from NPSLs from 2001-2005 were $254 million.
Out of 19 NPSLs, seven are paying net profit share payments
(in addition to royalties and production taxes). These seven
include five in the Milne Point Unit, and two in the Duck
Island Unit, and they began paying in 2001. The total of NPSL
payments received in calendar year 2005 was $81 million.
Total NPS receipts from NPSL's from 2001-2005 were $254
million. Net profit share payments are not deductible for PPT
purposes or for the current production tax. Royalties and
production taxes are deductible for NPS purposes.
Royalties, however, are paid on net profit share leases
according to each individual lease contract. For example, one
NPS lease in Duck Island Unit has a twenty percent (20
percent) royalty rate. Other NPS leases may have the standard
royalty rate of 12.5 percent or another negotiated royalty
rate. Royalties and production taxes are due from a net
profit share lease as long as there is production, even when
there is no net profit share payment from the property.
Attached is an Excel table of producing and non-producing NPS
leases showing the lease number, the net profit share rate
and the royalty rate for each lease. (See Attachment B)
59. What are the depreciable lives for O & G equipment for
federal and state income tax purposes?
Federal
Alaska
Equipment for exploration and production
including drilling, gathering pipelines, pumping
equipment, separation equipment, certain
platforms 7 11
Offshore drilling 5 6
Pipelines, excluding gathering and
transmission lines 15 17.5
Vessels, barges, other water
transportation equipment 10 14.5
60. Please provide the tax calculation under the bill, with the
following assumptions:
--Gross value $60M
--Opex 15M
--Capex 10M
Gross value $60M
Less: Opex (15)
Capex
(10)
Tentative net profit
Before standard deduction $35M
Less: standard deduction* (35)
Net Taxable income $ 0
Tax $ 0
Capital investment credit available for carry forward
(20% of $10M) $5M
* this calculation assumes that taxpayer has not reached $73M
limit for the standard deduction.
SENATOR STEDMAN asked if the capital carry-forward would be 20
percent of $10 million.
MS. WILSON replied yes.
5:15:48 PM
61. Are net profit lease payments included as a direct cost
under 43.55.160?
Net profit share payments under NPSLs would not be deductible
lease expenditures because they are in the nature of lease
acquisition costs. Lease acquisition costs are not deductible
per Section 21 [Sec. 43.55.160(d)(2)(E)].
62. Are lease bonus payments eligible for capital credit under
43.55.024 and/or are they included as a direct cost under
43.55.160?
Lease bonus payments are neither deductible nor eligible for
capital credits. Lease bonus payments are in the nature of
lease acquisition costs which are specifically not deductible
per Section 21 (Sec. 43.55.160(d)(2)(E)).
63. How are payments for "spec 3D" handled? Are they credit
eligible under 43.55.024 or only allowed as deductions under
43.55.160?
We understand "spec 3D" to be certain seismic exploration
costs. Exploration costs are allowed as deductions under
Section 21 of the bill [Sec. 43.55.160(c)]. Such costs are
also eligible for credits under Section 12 (Sec. 43.55.024)
by reference to definition of "qualified capital expenditure"
at Sec. 43.55.024(h).
64. Please explain the taxation or exemption of royalties.
Public royalties (paid to federal or state jurisdictions)
never enter into the base of gross value. This is so because
AS 43.55.011(a) levies the tax on oil except the "ownership
or right to which is exempt from taxation." This phrase is
then defined in AS 43.55.900(13) as follows:
"any ownership interest of the federal government or the
state."
These sections are not changed in the bill.
Because the bill changes the tax to a tax on net profits, it
is necessary to specify deductions. Royalties are
specifically disallowed as a deduction under Section 21 [Sec.
43.55.160(d)(2)(B)]. Royalties paid to state and federal
jurisdictions cannot be deducted because they are not
included in the starting "gross value." Private royalties
cannot be deducted because the related production is subject
to tax.
65. Under Section 21 [Sec. 43.55.160(d)], "direct costs...
include…." Does the word "include" serve to restrict the list
of allowable expenses to only those items included below in (A)-
(C)?
No, Sec. 43.55.160(d) provides additional clarification for
the general rule stated at sub-section (c). Sub-section (c)
provides the general rule that lease costs are deductible.
Sub-section (d) addresses only those items that may have been
questionable under the general rule. Additionally, we note
that under AS 01.10.040(b):
"When the words 'includes' or 'including' are used in a
law, they shall be construed as though followed by the
phrase 'but not limited to.'"
5:18:48 PM
MS. WILSON said that the rest of answers would be provided next
week.
5:19:29 PM
SENATOR STEDMAN asked to go back to question 24 and asked if
those court cases were settled by a judge or if they were
negotiated settlements between the department and the industry.
MS. WILSON replied that they were actual court cases and she
offered to get more information on that issue.
CHAIR WAGONER noted there were no further questions and
adjourned the meeting at 5:21:05 PM.
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