Legislature(2005 - 2006)BUTROVICH 205
03/20/2006 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| 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 20, 2006
3:37 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 Gretchen Guess
Senate 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
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
03/17/06 (S) Heard & Held
03/17/06 (S) MINUTE(RES)
03/18/06 (H) RES AT 10:00 AM CAPITOL 124
03/18/06 (H) -- Meeting Canceled --
03/19/06 (S) RES AT 1:00 PM BUTROVICH 205
03/19/06 (S) Heard & Held
03/19/06 (S) MINUTE(RES)
WITNESS REGISTER
MARK SHARP
Fairbanks AK
POSITION STATEMENT: Opposed CSSB 305.
CHRIS JOHANSEN
Fairbanks Chapter
Alaska Support Industry Alliance
Fairbanks AK
POSITION STATEMENT: Opposed CSSB 305.
MARK AIMS
Fairbanks AK
POSITION STATEMENT: Opposed CSSB 305.
JUDY BRADY, Executive Director
Alaska Oil and Gas Association (AOGA)
Anchorage AK
POSITION STATEMENT: Opposed CSSB 305.
JIM WEEKS, Ultra Star Exploration
3111 C Street, STE 500
Anchorage AK
POSITION STATEMENT: Preferred option 2 for replacing the $73
million allowance.
MERRICK PIERCE
POSITION STATEMENT: Commented on CSSB 305
TADD OWENS, Executive Director
Resource Development Council (RDC)
Anchorage AK
POSITION STATEMENT: Opposed CSSB 305.
JIM GILBERT, President
Alaska Support Industry Alliance
Udelhoven Oilfield System Services Inc.,
Anchorage AK
POSITION STATEMENT: Opposed CSSB 305.
PAUL LAIRD, General Manager
Alaska Support Industry Alliance
Anchorage AK
POSITION STATEMENT: Opposed CSSB 305.
MARY SHIELDS, General Manager
Northwest Technical Services
Anchorage AK
POSITION STATEMENT: Expressed dismayed at the dramatic changes
considered in CSSB 305.
MAYNARD TAPP
Hot Construction Consultants
Anchorage AK
POSITION STATEMENT: Opposed CSSB 305.
CAROLINE HIGGINS
Alaska Support Industry Alliance
Anchorage AK
POSITION STATEMENT: Opposed CSSB 305.
DOUG REYNOLDS
University of Alaska Fairbanks
Fairbanks AK
POSITION STATEMENT: Commented on the tax structure related to
CSSB 305.
JIM SAMPSON, President
AFL-CIO
Fairbanks AK
POSITION STATEMENT: Thanked the committee for the work done on
CSSB 305.
MARK HYLEN, President
Kakivik Asset Management
Anchorage AK
POSITION STATEMENT: CSSB 305 makes absolutely no sense.
LYNN JOHNSON, President
Dowland-Bach Corporation
Anchorage AK
POSITION STATEMENT: CSSB 305 would damage the investment
climate in the state.
TOM WALSH, Co-owner
Petrotechnical Resources of Alaska
Anchorage AK
POSITION STATEMENT: Opposed changes made to SB 305.
MATTHEW FAGNANI
President of Worksafe
General Manager of NANA Oilfield Services
Anchorage AK
POSITION STATEMENT: Opposed CSSB 305 and supported SB 305.
FRANK WIESS, President
Alaska Anvil Inc.
Anchorage AK
POSITION STATEMENT: Opposed CSSB 305 and supported SB 305.
KEVIN RITCHIE
Alaska Municipal League
Juneau AK
POSITION STATEMENT: Read AMS policy statement.
WAYNE STEVENS, President CEO
Alaska State Chamber of Commerce
Juneau AK
POSITION STATEMENT: Expressed concern with CSSB 305.
DR. PEDRO VAN MEURS
Consultant to the Governor
Office of the Governor
PO Box 110001
Juneau, AK 00911-0001
POSITION STATEMENT: Provided information on the 2 for 1 system.
BILL CORBUS, Commissioner
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Governor Murkowski strongly supports the
20/20 system
ACTION NARRATIVE
CHAIR THOMAS WAGONER called the Senate Resources Standing
Committee meeting to order at 3:37:24 PM. Present were Senators
Kim Elton, Fred Dyson, Bert Stedman, Ralph Seekins, Ben Stevens
and Chair Thomas Wagoner. Senator Albert Kookesh arrived
momentarily.
SB 305-OIL AND GAS PRODUCTION TAX
CHAIR THOMAS WAGONER announced SB 305 to be up for
consideration. That day the agenda would include public
testimony, a continuing presentation from Dr. Van Muers, and a
summary from Commissioner Bill Corbus.
MARK SHARP, Fairbanks, said this is the first serious attempt in
over 20 years to modernize the oil tax structure and it's not
likely to be addressed again for many years. With this in mind,
he urged members to: 1) separate the gas line issues and make
the oil tax restructuring the priority of this legislative
session, 2) keep it simple because basing the tax structure on
purported net profits as proposed by Governor Murkowski and the
industry majors will result in revisiting past mistakes, 3) keep
existing court-tested taxes in place and establish a graduated
progressive excess market price tax based on the market price of
North Slope crude. He recommended three tax brackets. Bracket 1:
market values in excess of $30 up to $40 per barrel tax at 20
percent; Bracket 2: market values in excess of $40 up to $50 per
barrel tax at 25 percent; Bracket 3: market values in excess of
$50 per barrel tax at 30 percent.
MR. SHARP said that this taxing system is simple and takes away
the industry's ability to manipulate financial data and litigate
areas that are subject to interpretation or challenge. Most
important, it would ensure that Alaskans receive their fair
share of excess market price. Establishing short-term incentives
to spur exploration and increase production is good policy for
the state but six years of retroactive kickbacks isn't.
Promotion of independent operators ought to be a primary focus
of the negotiations and $73 million per year in tax credits to
the behemoth oil companies should not be a focus.
3:46:26 PM
CHRIS JOHANSEN, Fairbanks Chapter of the Alaska Support Industry
Alliance, said it's apparent that the current tax system is
dysfunctional, but changes ought to ensure that Alaska gets its
fair share. CSSB 305 doesn't do that; it would stifle needed
investment, slow production, and decrease good jobs for Alaska.
Furthermore, it would make the tax structure for the oil
industry the highest in the country but other resource
industries such as fishing, mining, timber and tourism wouldn't
share the burden. That simply isn't equitable.
MARK AMES, Fairbanks, asked the committee to stop the theft of
our providential land-based provisions and suggested that
legislators have allowed themselves to be influenced by
international moguls including Dr Van Meurs. He pointed out that
state resources are to be used for the maximum benefit of its
people so, for all the right reasons, consider the producership
of the state of our own resources for our own people. In
conclusion he asked members to examine the six published goals
of the Alaska State Historic Preservation Plan related to the
state's cultural and historical resources.
JUDY BRADY, Executive Director, Alaska Oil and Gas Association
(AOGA), gave background information on association members and
said she hopes the industry will be around in 40 years. AOGA
companies have a vested interest in exploring for oil and gas in
Alaska and Alaska has a vested interest in their success. The
half-empty oil pipeline is generating concern among AOGA members
and although it's unclear how many Alaskans realize how serious
this is for Alaska's future, legislators do realize the
significance. That's why the CS is such a surprise, she said.
Legislatures are asking the right questions to understand the
consequences of the tax increase, but somehow they are coming up
with answers that will have major consequences on future oil and
gas production.
The original version of SB 305 bill would increase the state's
production taxes by $1 billion, which is huge. The House
Resource Committee CS doubles that amount and it appears that
the Senate Resource Committee CS is even higher. AOGA members
have said they could reluctantly work within the original
legislation, but the current CS creates a gridlock that is
completely unacceptable. Consider the information provided by
the explorers and producers that will make the decision to
invest after this legislation is passed. Legislators will ensure
Alaska's future revenues by doing everything possible to make it
more competitive.
JIM WEEKS, Ultra Star Exploration, Anchorage, said he'd seen two
proposals to replace the $73 million allowance and his company
prefers the second, which eliminates the $40 per barrel oil
price ceiling. If the Legislature is willing to grant a $10
million/220,000 barrel for a new field exemption, it shouldn't
matter how fast the exemption is recovered and industry prefers
it to be sooner rather than later. He heard the committee might
increase from 4,000 barrels per day to 5,000 barrels, which is
more consistent with the administration's initial proposal and
is a change he would encourage He questioned the need for the
seven-year time limit for using exemptions because industry
would do everything feasible to use them quickly, but well
productivity and conservation issues might require more than
seven years to use the exemption.
He agreed that the AOGCC ought to be the referee to resolve
disputes regarding what constitutes an oil & gas field or unit,
but he asked that the Legislature clarify the intent regarding
the eligibility for the 4,000 barrels per day exemption.
MR. WEEKS suggested establishing a fence around existing
producing units when the PPT becomes effective. Current
production from these units wouldn't receive the 4,000 barrels
per day exemption. Peripherals outside the fence that confirm
commercial hydrocarbons and justify unit expansion should be
eligible for the tax exemption and exploration and development
credits. Deeper and shallower accumulations drilled within
existing units after July 1, 2006 ought to also be eligible. In
closing he stated support for Dr. Van Meurs' "2 for 1 system"
that he summarized on March 18.
4:03:18 PM
MERRICK PIERCE said the attempts to amend SB 305 to increase
revenue is encouraging, but the issue of losing revenue when oil
falls below $27 a barrel isn't being adequately addressed. He'd
like to see an effective date of January 1, 2006 and more work
on the effective rate. There have been a multitude of oil tax
disputes in the last decade, and he'd like to see a summary
accounting of what the state claimed was due, what it settled
for and the difference between the claim and the settlement.
Knowing how much overly complex oil tax legislation has cost
will clarify the importance of structuring the production taxes
to avoid such debacles in the future. Another issue associated
with overly complex tax policies is that it puts state auditors
in the position of making decisions that are worth billions of
dollars.
4:07:07 PM
TADD OWENS, Executive Director, Resource Development Council
(RDC), expressed concern with the changes contemplated in CSSB
305. It targets the one industry that is responsible for more
than 85 percent in general fund revenue and seeks to add
hundreds of millions of dollars to state coffers that already
have a surplus. The CS appears to concentrate on short-term
revenues at the potential expense of long-term investment, which
is needed to slow the decline of oil production. Unless
additional investments are made, the decline will continue and
state revenues will fall short of projections. The tax regime
that the Legislature approves will directly affect how
attractive Alaska looks to the industry, and the current CS will
place Alaska at a competitive disadvantage.
4:11:31 PM
JIM GILBERT, President, Alaska Support Industry Alliance, and
President, Udelhoven Oilfield System Services Inc., Anchorage,
said every change in CSSB 305 jeopardizes oil development in
Alaska and that jeopardizes every small business owner in the
state. Noting that CSSB 305 would leave Alaska with the highest
task rate and cost structure in the country, he urged the
committee to choose sustainable economic growth for new
investments over unsustainable higher tax methodology.
4:13:33 PM
PAUL LAIRD, General Manager, Alaska Support Industry Alliance,
Anchorage, said CSSB 305 discourages new investment and
virtually guarantees continuing North Slope production declines,
which over the long term will reduce state revenue from
royalties, income taxes, property taxes and severance taxes. He
urged the committee to rescind the increases in government take
seen in the CS and adopt the original bill that is projected to
increase revenue to the state by $1 billion annually and can
serve as a catalyst to a North Slope gas line project.
4:17:35 PM
MARY SHIELDS, General Manager, Northwest Technical Services,
expressed dismay at the dramatic changes being considered in
CSSB 305. She understands the purpose of the bill is twofold.
First it's to obtain a reasonable increase in oil production
taxes for the state, particularly when prices are high. Second
it is to promote and provide incentive for new investment.
However, in its current form the bill is at odds with both
purposes. It is the Legislature's responsibility to foster a
business climate that attracts new investment in the state and
assures that current investors can remain engaged in the
business of developing the state. In its current form new
investors will be discouraged and current investors will
reconsider future plans. She asked the committee to step back
and reconsider the Draconian changes that are proposed.
4:20:44 PM
MAYNARD TAPP, Hot Construction Consultants, Anchorage, said
although SB 305 should be viewed as a resource development bill,
CSSB 305 looks like a revenue bill. He urged the committee to
reframe the bill to make Alaska more competitive.
4:24:15 PM
CAROLINE HIGGINS, Alaska Support Industry Alliance, Anchorage,
said she is concerned about sustainable business opportunities
in the oil and gas industry. Although it's generally agreed that
additional investments in the oil industry are necessary, the
proposed changes to SB 305 jeopardize any such investment. If
CSSB 305 passes, Alaska would have the highest tax rate and cost
structure in the country, which sends a clear message that
Alaska prefers to collect taxes than to attract investment.
Reasonable Alaskans recognize the need for oil and gas tax
reform, but it must also provide the appropriate level of tax
structure to maintain a healthy industry.
4:26:36 PM
DOUG REYNOLDS, University of Alaska, Fairbanks, said at over
$100 per barrel you've got to have a high marginal tax rate and
that won't cause the oil companies to leave the state. Second,
don't use the consumer price index on the switch. The correct
index is a GDP price deflator so that you don't lose value.
4:30:55 PM
JIM SAMPSON, President of the AFL-CIO, Fairbanks, thanked
members for their good work and reminded them that Alaskans are
relying on them to do the right thing for the long term.
4:32:13 PM
MARK HYLEN, President, Kakivik Asset Management, Anchorage,
stated opposition to new taxes on the industry because they will
affect jobs in the future. SB 305 was hard enough to swallow and
CSSB 305 makes absolutely no sense. Production is already
declining and the proposed changes won't encourage the
investment that's necessary to promote new exploration.
Regardless of how much we tax industry, it won't change the
state's inability to have a fiscal plan. The governor's bill was
a first step to a gas pipeline and the recommended changes
jeopardize the gas line, jobs and the future of the state.
LYNN JOHNSON, President, Dowland-Bach Corporation, Anchorage,
said CSSB 305 would do a great deal of damage to the investment
climate in the state. CSSB 305 raises the tax on industry more
than $2 billion and appears to be about a 29 percent delta from
existing taxes. The short-term take will increase but in the
long term, investment in Alaska will decrease as companies move
to more lucrative areas around the world. Production declines
will continue and project and maintenance dollars will continue
to decrease; thus the downward spiral for investment will
continue.
TOM WALSH, Co-Owner, Petrotechnical Resources of Alaska,
Anchorage, applauded the committee on its hard work on the
legislation, but he opposed the changes made to the governor's
original bill. He said this is a complex issue and we ought to
be guided by two simple principles. First, tax to fund
government services; they ought to be levied to fund the public
purpose rather than to create a surplus. Second, create the most
competitive business environment possible to attract new
investment.
4:41:03 PM
SENATOR BERT STEDMAN pointed out that the state is selling its
natural resources and using a tax system to collect.
4:41:39 PM
MATTHEW FAGNANI, President of Worksafe and General Manager for
NANA Oilfield Services, Anchorage, said CSSB 305 increases taxes
too much and overtaxing an industry can have an adverse effect.
In the future capital spending may be limited to operation and
maintenance and not exploration and development of new
technology. He asked the committee to focus attention on
increasing production levels of North Slope oil because it's in
Alaska's best interest that the oil industry remains healthy. If
it isn't healthy, it's doubtful that there can be a healthy gas
economy. Let's keep the state moving forward and not kill the
golden goose. He said he supports the governor's original bill.
4:45:42 PM
FRANK WIESS, President, Alaska Anvil Inc., Anchorage, expressed
concern with CSSB 305 because it's out of line with the common
desire of Alaskans to be successful and take advantage of the
opportunities that Alaska offers to those who work hard and take
reasonable risks. He stated support for the governor's original
bill.
4:49:36 PM
KEVIN RITCHIE, Alaska Municipal League (AML), Juneau, read the
AML policy statement. It supports efforts to equitably increase
revenue from changes to ELF and thanks legislators for their
efforts in doing the best thing for everyone in the state.
4:50:52 PM
WAYNE STEVENS, President & CEO, Alaska State Chamber of
Commerce, stated support for the revision of the current
production tax to a net profit tax with tax incentives for oil
and gas exploration and reinvestment. However, the state chamber
is concerned about the impact on exploration and other
investment as a result of the higher tax proposed in CSSB 305.
The long-term future for Alaskans may be jeopardized in favor of
a short term, unsustainable revenue gain. The state chamber
suggests that while the Legislature considers increasing oil
taxes, it should also consider developing a long-term fiscal
plan.
CHAIR WAGONER closed public testimony.
4:53:40 PM
DR. PEDRO VAN MEURS, Consultant to the Governor, said he'd been
asked to give additional information about the 2 for 1 system.
The idea is that companies could recoup investments from the
last five years over a seven-year period. It would be a normal
deduction with recovery taking place only when the price is
above the established floor. The table on slide 2 has a $40
floor. It shows an actual price that is higher than the floor
for 5 years and lower than the floor, which demonstrates that
for 2 years there would be no investment recovery. In this
example Company A has past investment of $1.8 billion over the
last five years. It shows increased investment in the state
amounting to $5.4 billion over seven years. Under the $2
investment on a $1 recovery ratio the company would recover its
entire investment.
Company B invested $.5 billion in the past and under the new tax
it invests $3.7 billion in the next seven years. In this example
the company would recover 100 percent of the $.5 billion past
investment in the first three years.
Company C invested $1.5 billion in the past and $1.5 billion
over the next seven years. In this scenario the company would
only recoup $550 million or 36.7 percent. It would be able to
get the full benefit of the recovery of its investment on the 2
for 1 ratio, but it would recover nothing in the years when the
actual price is below the $40 floor.
The final column in the chart shows the average tax credit. None
of the companies achieve the 50 percent ideal. Company A
achieves 46.7 percent, Company B achieves 42.7 percent and
Company C achieves 47.3 percent.
4:58:17 PM
He suggested establishing a firm cutoff date so that at the end
of seven years the opportunity to recover the investment is no
longer available. The idea behind this is 1) to reward companies
that have been strong investors and 2) if companies really
intend to double their investment, this feature would click in
and they would have the benefit of the recovery. That is a way
to recover the claw back in a way that benefits Alaska. He said
he agreed with Senator Therriault's statement that companies
make decisions on the cash flow going forward and not on costs.
5:00:28 PM
DR. VAN MUERS said he was also asked to provide a $46 per barrel
rating. There wasn't time to prepare the information, but the
chart comparing $26 and $36 per barrel oil on slide 3 indicates
the trend. Moving from $26 to $36 and comparing the 20/20 system
to the Alaska Current system you see that the regressive Alaska
Current system improves significantly. If the price goes up the
profits increase rapidly, which is what makes the Alaska Current
system more attractive under high rather than low prices.
Increase the price to $46 and the system stays regressive and
the profits expand rapidly.
The PPT is designed to be a neutral system in that it combines a
regressive royalty with a progressive PPT. Systems found in
Norway or Russia normally deteriorate if the price increases
because of the progressivity - the state takes progressively
more. From this you can conclude that at $46 the proposal for
the 20/20 is less attractive than the Alaska Current system. The
same scenario would apply under the 25/20 system.
He recapped that the higher the price the less attractive the
PPT is relative to the Alaska Current system and the lower the
price the more attractive the PPT is relative to the Alaska
Current system. If prices are higher investment becomes less
attractive, which is a concern except for the fact that the long
term forecast for oil is in the $30 to $40 range. He noted that
he used $36 per barrel for the main conclusion about investment
attractiveness for that reason.
5:05:58 PM
DR. VAN MUERS said slide 4 indicates the capital costs subject
to a 20 percent tax credit. They include: geophysical surveys;
exploration wells; development wells (including intangible
costs); field facilities (tanks, separators, etc.); and gas
processing plants. The purpose of including gas processing
plants is to ensure that if there is a future gas line, smaller
companies would be in a better bargaining position to get access
to the large company facilities or to build plants themselves.
5:07:57 PM
Slide 5 addresses a Cook Inlet feature, which provides a tax-
free allowance for each company based on barrels of oil
equivalent per day. In order to ensure that it would only apply
to small companies, the amount of the allowance could be
determined on the basis of the following formula:
BOEPD = 5000 - (Prod - 5000) X 0.1
The amount cannot be more than 5000 or less than 0.
The formula provides a sliding scale so that the incentive is
reduced gradually as companies become successful. A company at
55,000 barrels per day wouldn't have the benefit, but a company
at 10,000 or 15,000 would have a significant benefit. Companies
like Anadarko or Chevron would still see a benefit to their
operations while trying to establish in Alaska. This feature
solves the concern expressed about the Cook Inlet region in a
way that would be equitable to all producers in Alaska. This
would apply to oil and to gas so there would have to be a gas
oil conversion factor, which is typically 6 mcf per barrel of
oil. He suggested that it be drafted in a way that the allowance
doesn't create an automatic loss carry forward feature.
5:12:50 PM
CHAIR WAGONER suggested adding that any company that has been
currently producing oil or gas in the state would qualify for
the 2 for 1 on prior investments.
DR. VAN MEURS replied the idea of the 2 for 1 is that any
company that is willing to double its investment in Alaska ought
get the benefit.
5:13:35 PM
SENATOR FRED DYSON asked for a recap of the chart on slide 3.
DR. VAN MEUR said the lower the number, the higher the
competitiveness and the higher the number the lower the
competitiveness.
5:14:52 PM
SENATOR KIM ELTON asked if there is an advantage to the
companies that have been players in Alaska and receive a credit
as opposed to companies that might come and don't qualify for
the credit.
DR. VAN MEURS replied the idea is to reinvigorate and expand
activity in companies that have been in Alaska. For a new
company there isn't the same incentive, but it's believed that
new companies would be attracted by the governors $73 million
feature or the 5,000 barrel per day allowance in the Cook Inlet
feature.
5:17:24 PM
SENATOR RALPH SEEKINS referenced slide 4 and asked if a gas
processing plant is included as a capital cost under PPT, would
be included later in a cost used to determine a gas tariff in a
pipeline.
DR. VAN MEURS replied the gas processing plants are part of the
field operations because the idea is to process gas to a
marketable form. A gas treatment plant would not be part of a
gas processing plant. The distinction is that on the gas
treatment plant would likely be a FERC regulated tariff. That is
what causes problems for the small companies to get access to
the plants, which is why incentives are good. Companies are
given help on gas processing plants to get the needed
infrastructure on the North Slope to get access to the pipeline
and to also give other producers access to the pipeline.
5:21:43 PM
SENATOR SEEKINS strongly recommended including the two
aforementioned concepts in a future CS.
5:22:23 PM
SENATOR BERT STEDMAN stated the belief that the 2 for 1 credit
ought to be non-saleable.
CHAIR WAGONER said he believes that Dr. Van Muers has it written
that way.
MR. BILL CORBUS, Commissioner, Department of Revenue (DOR), said
the governor and his administration strongly support the
original 20/20 rate. He noted that incentives are badly needed
to encourage oil production and recommended the following:
1) don't emphasize short-term revenues, 2) maximize the wealth
of the state over the long run and 3) keep your eye on the prize
which is the gas pipeline.
There being no further business to come before the committee,
Chair Wagoner adjourned the meeting at 5:25:15 PM.
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