Legislature(2005 - 2006)BUTROVICH 205
03/17/2006 03:30 PM Senate RESOURCES
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| SB305 | |
| 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
March 17, 2006
3:38 p.m.
MEMBERS PRESENT
Senator Thomas Wagoner, Chair
Senator Ralph Seekins, Vice Chair
Senator Ben Stevens
Senator Bert Stedman
Senator Kim Elton
Senator Fred Dyson - via teleconference
MEMBERS ABSENT
Senator Albert Kookesh
OTHER MEMBERS PRESENT
Senator Gretchen Guess
Senator Gene Therriault
Senator Lyda Green
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
03/02/06 (S) Heard & Held
03/02/06 (S) MINUTE(RES)
03/02/06 (S) RES AT 3:30 PM BUTROVICH 205
03/02/06 (S) Heard & Held
03/02/06 (S) MINUTE(RES)
03/03/06 (S) RES AT 3:30 PM BUTROVICH 205
03/03/06 (S) -- Meeting Canceled --
03/04/06 (S) RES AT 10:00 AM SENATE FINANCE 532
03/04/06 (S) Presentation by Legislative Consultants
03/06/06 (S) RES AT 3:30 PM SENATE FINANCE 532
03/06/06 (S) Heard & Held
03/06/06 (S) MINUTE(RES)
03/07/06 (S) RES AT 3:30 PM BUTROVICH 205
03/07/06 (S) Heard & Held
03/07/06 (S) MINUTE(RES)
03/08/06 (S) RES AT 3:30 PM BUTROVICH 205
03/08/06 (S) -- Meeting Canceled --
03/09/06 (S) RES AT 3:30 PM BUTROVICH 205
03/09/06 (S) -- Meeting Canceled --
03/10/06 (S) RES AT 3:30 PM BUTROVICH 205
03/10/06 (S) -- Meeting Canceled --
03/11/06 (H) RES AT 10:00 AM CAPITOL 106
03/11/06 (H) -- Meeting Canceled --
03/13/06 (S) RES AT 3:30 PM BUTROVICH 205
03/13/06 (S) Heard & Held
03/13/06 (S) MINUTE(RES)
03/14/06 (S) RES AT 3:30 PM BUTROVICH 205
03/14/06 (S) Heard & Held
03/14/06 (S) MINUTE(RES)
03/15/06 (S) RES AT 3:30 PM BUTROVICH 205
03/15/06 (S) -- Testimony <Invitation Only> --
03/16/06 (S) RES AT 3:30 PM BUTROVICH 205
03/16/06 (S) -- Meeting Canceled --
03/17/06 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
MARY JACKSON
Staff to Senator Wagoner
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Presented CSSB 305(RES), version Y, for the
sponsor.
ACTION NARRATIVE
CHAIR THOMAS WAGONER called the Senate Resources Standing
Committee meeting to order at 3:38:59 PM. Present were Senators
Elton, Seekins, Stedman, Ben Stevens and Chair Wagoner.
SB 305-OIL AND GAS PRODUCTION TAX
CHAIR THOMAS WAGONER announced SB 305 to be up for
consideration.
SENATOR SEEKINS moved to adopt CSSB 305(RES), version Y, as the
working document.
CHAIR WAGONER objected for an explanation.
MARY JACKSON, Staff to Senator Wagoner, who introduced the CS
said it was worked on by the LB&A Committee, the legislative
consultants - Jim Eason and Bonnie Robson - Don Shepler and
Marvin Kirchner from Greenberg Traurig LLC (specializing in FERC
and tax law issues) - and Econ One. She said that Senator
Wagoner had asked the producers to suggest language for
definitions and they had conferred on that with Alaska Oil and
Gas Association (AOGA). He worked with Dan Dickinson, Consultant
to the Department of Revenue and Robynn Wilson, Director of the
Tax Division; Rob Mince, Assistant Attorney General; Roger
Marks, Economist, and Dr. Pedro Van Meurs, both consultants for
the Administration.
3:42:42 PM
MS. JACKSON started the review by saying the title had some
changes and the first was that "net value" was inserted at the
request of AOGA. Other changes reflected the new Cook Inlet
sections, the new surcharges in Sections 27 - 30, and the cross-
reference definition to the Stranded Gas Development Act in
Section 31.
She continued explaining that Sections 1, 2 (old Section 4), 3
(old Section 2), and 4 (old Section 3) had no changes. Sections
5 and 6 were new and had language that provided for the Cook
Inlet Basin. Section 7 had several sections of new language
requested by AOGA and ASRC [Arctic Slope Regional Corporation].
The term "gas" was inserted on page 5, line 7. Also page 5, line
27, had revisions to reflect that there is a tax on the royalty.
Section 8 had language that maintained the status quo in Cook
Inlet. Section 9 changed "upon" to "on". Section 10 (old Section
7) had a 95 percent "true up" per quarter that was originally 90
percent annually. Section 11 (old Section 8) had no changes.
Section 12 (old Section 9) had changes requested by AOGA.
Section 13 (old Section 10) had no changes. Section 14 had a new
phrase to replace "produce, but" with "produced, but either not
sold or if gas is sold". Section 15 had references for the Cook
Inlet Basin. Section 16 (old Section 12) was lumped together
with Section 17 to replace the $73 million standard deduction
language. On page 10, line 11, percentage language was
underlined that the committee needed to consider.
On page 12, line 11 (and throughout the bill), the effective
date of "July 1, 2006" was changed to "April 1, 2006". On page
12, line 21, 3(a) and 3(b) were new and was a clarification as
to what would be the ownership interest, a concern of the
administration's.
3:49:52 PM
SENATOR BEN STEVENS asked if Section (f) on page 11, line 14,
was new.
MS. JACKSON replied yes.
3:51:37 PM
SENATOR STEDMAN wondered if language starting on page 11, line
24 (g), about the commissioner repurchasing the transferable tax
credits was new.
MS. JACKSON responded that she didn't have that language in any
of her revisions and suggested that it might have been picked up
from the House version by the drafter.
SENATOR STEDMAN noted that language on page 10, line 18, talked
about a "person's" tax liability and he thought it should refer
to "corporate" tax liability.
SENATOR SEEKINS responded that "person" covers all entities.
3:53:13 PM
SENATOR BEN STEVENS noticed that language on page 12, starting
on line 16, dealing with abandonment, was new also.
3:57:41 PM
SENATOR STEDMAN asked for a more complete explanation of the CS
so people at home could follow what the committee was talking
about.
MS. JACKSON said she could do that and she also noted that the
PDF files were available on the Internet. She said the committee
would not take action on this bill until next Tuesday to give
people ample time to review it.
She said that the abandonment section was under the subsection
where the producer or explorer may not take a tax credit
[starting on page 12, line 7] and read [starting on page 12,
line 22]:
(A) a pipeline facility, other assets or service
regulated as to tariffs, fees, or charges by the
Federal Energy Regulatory Commission, Regulatory
Commission of Alaska, or a similar regulatory
body; (Ms. Jackson said concern had been raised
that the term "similar regulatory body" needed to
be more specific and she was working with the
administration on that now.)
(B) an asset in which the state, directly or
indirectly, holds an ownership interest equal to
or greater than 5 percent; for the purpose of
making a determination of ownership interest
under this subparagraph, the state's ownership of
an interest in the land on which the asset is
located shall be excluded.
SENATOR STEDMAN asked if section (B) would be discussed further.
CHAIR WAGONER responded that the bill was just being introduced
today and the administration would address it tomorrow.
SENATOR BEN STEVENS asked if they could hear who originated the
changes.
MS. JACKSON noted she would do that. She continued explaining
the CS saying language on page 13 in Section 17 replaced the
proposed $73 million allowance. It deleted "testing,
stimulation, or completion" from the old statute that authorized
exploration tax credits. The new $73 million allowance provided
for a lot more credits for exploration and these were not
allowed in the CS. However, she said, "If the new proposal on
$73 million goes forward, this section will come out."
4:01:14 PM
SENATOR DYSON joined the committee via teleconference.
MS. JACKSON continued explaining on pages 14 - 15, Sections 18,
19, and 20 were old Sections 13, 14 and 15 and had no changes.
Section 21 was old Section 16 and it had some changes in (ii).
She didn't remember the source, but would get that for them.
Sections 22, 23, 24 were old Sections 17, 18, 19. One word,
"or", was added in Section 24 (page 16, line 26) and some
concerns were raised by the administration about whether it was
needed since it referenced Subsection (a) and (b) of the same
statute had a slightly different set of constrictions.
Section 25 on page 16 was old Section 20 and eliminated royalty
settlement agreements as a method of valuation. That came from
Ms. Robson and Mr. Eason, both legislative consultants. Section
26 on page 17 was old Section 21 and its Subsection (a) had some
slight formatting changes done by the drafter.
4:04:01 PM
MS. JACKSON continued explaining that language on page 18, lines
2 and 20, now states "one-forty-eighth" and previously it stated
"one-seventy-second". This referenced the claw back provisions
that extended back six years; now it is four years. Line 26 on
page 18 had the new effective date of April 1, 2006. Page 19,
line 4, had a typo. Page 19, lines 16 - 17, said "including the
operator or a working-interest owner" and AOGA asked for it to
be revised to say: "include a producer that is the operator". On
line 29, the administration recommended better definitions for
capital assets and those were forthcoming. The administration
also recommended deleting "capital assets" on page 20, line 6.
MS. JACKSON explained that AOGA requested "for oil and gas" to
be inserted before "royalty payments" on page 20, line 7. It
also asked for new indemnification language starting on line 22
that says:
(K) amounts paid to indemnify the state: the exclusion
provided by this paragraph does not apply to the costs
of obtaining insurance or a surety bond from a third-
party insurer or surety;
This language was under the definition of "direct costs" which
does not include amounts paid to indemnify the state.
4:06:50 PM
SENATOR STEDMAN said he remembered earlier conversations about
large producers who are self-insured and some smaller companies
that write a check and the guy that writes the check would like
that recognized as a legitimate expense of doing business.
CHAIR WAGONER remembered that the amount of one check was
$370,000 and it came up in testimony from smaller independents.
He thought this was a large amount of money to be put up front
to not have any value given to it.
SENATOR STEDMAN agreed and asked where that language came from.
MS. JACKSON replied that suggestion came from AOGA and was
supported by the administration. She thought there was another
answer to his question, but she wanted to make sure before she
said anything.
CHAIR WAGONER suggested considering other options like giving
credits or setting up a state pool where 50 percent could be
reimbursable, for instance.
4:08:33 PM
MS. JACKSON continued on to page 20, line 22, where new language
said:
(L) surcharges levied under AS 48.55.201 or 43.55.300;
Those sections referenced the surcharges for the 470 Funds,
which were not direct costs. Language on line 26 also indicated
that costs of abandonment were not direct costs. The source of
(L) and (N) were from Chair Wagoner working with Mr. Eason and
Ms. Robson.
4:10:39 PM
Page 21, line 8, (N) and (O) had new language clarifying what
costs are and that came from the tax consultant, Marvin Kirchner
of Greenberg and Traurig LLC. It said:
(N) in a transaction that is not an arm's length
transaction, amounts that have not been paid to the
extent that those amounts exceed fair market value;
the provisions of (l) of this section apply to a
determination under this subparagraph.
4:11:18 PM
Language on page 21, lines 16 - 25, had slight formatting
revisions. Line 20 had a new subsection (B) and she didn't
remember its source. It now said:
(e) A producer's lease expenditures must be adjusted
by subtracting any payment or credit the producers
receives for
(1) the use by another person or a production
facility
(A) in which the producer has an ownership
interest; or
(B) that is subject to a management
agreement that provides for the
producer to receive a management fee
determined in whole or in part on the
income or gross revenue earned by the
production facility;
4:13:03 PM
Line 1 on page 22 had the new date, April 1, 2006. Line 11
contained the new section on transition expenditures, which were
limited to a look back of three years instead of six years that
were laid out in the following way: a 75 percent credit for
expenditures incurred on or after January 1, 2005 and before
April 1, 2006; a 50 percent for expenses incurred from January
1, 2004 to January 1, 2005; and a 25 percent for expenses
incurred after January 1, 2003 through January 1, 2004 - payable
in four-year terms. Subsection (2) still had the $40-a barrel
limitation, which was in the original bill.
4:14:26 PM
SENATOR STEDMAN asked the Chair if he wanted to bring up the
other concept on this issue.
CHAIR WAGONER replied that he had talked to Dr. Van Meurs about
his concept that rewards current producers for continued
investment in production based on a formula that allows credits
in a look-back format. It would stem the current decline in
production.
SENATOR STEDMAN helped him explain saying the issue was aimed at
doubling expenditures by the industry on the North Slope over
the next five years from $1 billion to $2 billion.
4:16:54 PM
MS. JACKSON continued explaining that language on page 22, line
27, was the same as in the original bill. Language on page 23,
line 4 had "the" instead of "such". The previous Subsection (i),
which was the old $73 million standard deduction, was deleted.
The new (i) was the old (k); the new (j) was the old (l); the
new (k) was the old (m); and page 23, line 29, had new sections
(l), (m), and (n).
SENATOR BEN STEVENS asked to discuss the removal of Section (i).
4:18:39 PM
CHAIR WAGONER explained that the replacement for the $73 million
allowance allowed a holiday season for the first 4,000 barrels
of oil produced each day for seven years to be exempted from
taxes.
4:20:16 PM
SENATOR BEN STEVENS noted that it applied only to new fields
brought into production after the effective date and had a
seven-year sunset.
4:21:15 PM
MS. JACKSON continued on saying the new subsections inserted
beginning on page 23 came from the tax consultants and dealt
with Internal Revenue Code. New Section (o) was the old (n) and
it had some revisions that were requested by AOGA and concurred
with by the administration. Sections 27 through 30 on page 25
were requested by the Chairman and dealt with the surcharge.
4:24:20 PM
CHAIR WAGONER said that someone from DEC requested this language
and before this bill goes to the Finance Committee, he wanted a
report on how those funds had been used. People have told him
they were being expended for items it wasn't intended for.
SENATOR BEN STEVENS asked if Sections (l), (m), and (n) on page
23 came from the tax consultants.
MS. JACKSON replied yes.
SENATOR BEN STEVENS asked if all the sections they referenced in
terms of the arms length transactions and direct costs under
(d)(2)(M) and (d)(2)(L) were inserted by Mr. Eason and Ms.
Robson.
4:27:07 PM
MS. JACKSON replied that she would double-check that and
identify the source of each change for him. She went to pages 25
and 26 where Sections 27 through 30 contained the new surcharge
rates. She explained that the current surcharge rate is 3 cents
and 2 cents. This bill drops the 2 cents to 1 cent and increases
the 3 cents to 5 cents. The result is that instead of a nickel,
it becomes 6 cents.
SENATOR STEDMAN asked what was the intended use of the 6 cents.
MS. JACKSON replied that it was intend for each of the 470
Funds.
4:28:16 PM
SENATOR SEEKINS said he wanted to investigate using some of
those funds to reduce the cost for small companies by not having
tremendous up-front insurance fees as "sort of a defacto bonding
fund."
CHAIR WAGONER continued on and said that last year he asked why
oil and gas exploration couldn't be separated and he was told
that it was because companies didn't know which they were going
to get when they were exploring.
4:29:21 PM
MS. JACKSON went back to surcharges and pointed out that the
original bill allowed for the 470 surcharge to be taken as an
expense and this CS does not allow that. She noted that old
Section 29 was deleted. Section 31 on page 26 was old Section 30
and Section 32 on page 27 was old Section 31 and had no changes.
On page 28, Section 33 was old Section 32 and Section 34 was old
Section 33 and had no changes. Section 35 was old Section 34 and
had several changes because the repealer statutes had changed as
a result of the CS. Section 36 was old Section 35 and changed
the date to April 1, 2006. The rest was conforming language with
new section numbers. Section 37 contained the transitional
provisions and had the April 1, 2006 date change on lines 6 and
7. Another date change was on line 17 and line 19 was changed to
nine months of the calendar year from six months. She thought
this related to the change in the true up.
4:32:37 PM
SENATOR ELTON mentioned a correction on page 29, line 17, to
April 1, 2006 instead of April, 2006.
MS. JACKSON thanked him for that and continued on to page 29,
line 21, that had another date change. Line 25 had the nine-
month instead of six-month time frame and (d) had the April 1
time change again. Section 38 on page 29 was old Section 37 and
had no changes. Section 39 contained the revisor instructions,
which reflected the CS changes. On the last page, Section 40 was
old Section 39 with the effective dates of all the sections.
Sections 41 and 42 were the effective dates.
4:34:55 PM
SENATOR ELTON expressed his appreciation for the summary sheet.
There being no further business to come before the committee,
Chair Wagoner adjourned the meeting at 4:36:59 PM.
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