Legislature(2005 - 2006)BUTROVICH 205

02/24/2006 03:30 PM RESOURCES


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03:39:19 PM Start
03:40:10 PM SB305
03:40:39 PM Department of Revenue – Robynn Wilson, Director, Tax Division
03:47:27 PM Dr. Chuck Logsdon, Consultant to the Governor on Gas Line Negotiations
04:18:50 PM Department of Revenue – Roger Marks, Economist
05:09:58 PM Department of Law – Robert Mintz, Assistant Attorney General and Dan Dickinson, Cpa, Consultant to the Governor
06:06:16 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to 9:00 am, February 25 --
+= SB 305 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
Presentation by Administration
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                       February 24, 2006                                                                                        
                           3:39 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                                                                                                               
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Albert Kookesh                                                                                                          
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 305                                                                                                             
"An Act repealing  the oil production tax and  gas production tax                                                               
and providing  for a production tax  on the net value  of oil and                                                               
gas; relating to the relationship  of the production tax to other                                                               
taxes; relating to the dates  tax payments and surcharges are due                                                               
under AS  43.55; relating  to interest  on overpayments  under AS                                                               
43.55; relating  to the treatment  of oil and gas  production tax                                                               
in a  producer's settlement with  the royalty owner;  relating to                                                               
flared gas, and to  oil and gas used in the  operation of a lease                                                               
or property, under AS 43.55;  relating to the prevailing value of                                                               
oil or gas under AS 43.55;  providing for tax credits against the                                                               
tax  due under  AS 43.55  for certain  expenditures, losses,  and                                                               
surcharges; relating to statements  or other information required                                                               
to be filed  with or furnished to the Department  of Revenue, and                                                               
relating  to the  penalty for  failure to  file certain  reports,                                                               
under  AS 43.55;  relating to  the  powers of  the Department  of                                                               
Revenue, and  to the disclosure  of certain  information required                                                               
to be  furnished to  the Department of  Revenue, under  AS 43.55;                                                               
relating   to  criminal   penalties   for  violating   conditions                                                               
governing access to and use  of confidential information relating                                                               
to the  oil and gas  production tax;  relating to the  deposit of                                                               
money  collected by  the Department  of Revenue  under AS  43.55;                                                               
relating to  the calculation of the  gross value at the  point of                                                               
production of  oil or gas;  relating to the determination  of the                                                               
net value  of taxable oil  and gas  for purposes of  a production                                                               
tax on the net value of  oil and gas; relating to the definitions                                                               
of  'gas,' 'oil,'  and certain  other  terms for  purposes of  AS                                                               
43.55; making conforming amendments; and providing for an                                                                       
effective date."                                                                                                                
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB 305                                                                                                                  
SHORT TITLE: OIL AND GAS PRODUCTION TAX                                                                                         
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
02/21/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/21/06       (S)       RES, FIN                                                                                               
02/22/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/22/06       (S)       Heard & Held                                                                                           
02/22/06       (S)       MINUTE(RES)                                                                                            
02/23/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/23/06       (S)       Heard & Held                                                                                           
02/23/06       (S)       MINUTE(RES)                                                                                            
02/24/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
Robynn Wilson, Director                                                                                                         
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT:  Introduced Dr. Logsdon to the committee                                                                  
                                                                                                                                
Dr. Chuck Logsdon, Economist                                                                                                    
Office of the Governor                                                                                                          
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:  Delivered a PowerPoint presentation on SB                                                                
305                                                                                                                             
                                                                                                                                
Roger Marks, Economist                                                                                                          
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT:  Delivered a PowerPoint presentation on SB                                                                
305                                                                                                                             
                                                                                                                                
Dan Dickinson, Certified Public Accountant                                                                                      
Consultant to Governor Frank Murkowski                                                                                          
POSITION STATEMENT:  Delivered a PowerPoint presentation on SB                                                                
305                                                                                                                             
Robert Mintz, Assistant Attorney General                                                                                        
Department of Law                                                                                                               
PO Box 110300                                                                                                                   
Juneau, AK  99811-0300                                                                                                          
POSITION STATEMENT:   Delivered  a PowerPoint presentation  on SB                                                             
305                                                                                                                             
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  THOMAS  WAGONER  called   the  Senate  Resources  Standing                                                             
Committee meeting to  order at 3:39:19 PM.  Present were Senators                                                             
Kim Elton,  Bert Stedman,  Ralph Seekins,  Ben Stevens  and Chair                                                               
Thomas Wagoner. Senator Fred Dyson attended via teleconference.                                                                 
                                                                                                                                
               SB 305-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
3:40:10 PM                                                                                                                    
CHAIR   THOMAS  WAGONER   announced   SB  305   to   be  up   for                                                               
consideration.                                                                                                                  
                                                                                                                                
^Department of Revenue - Robynn Wilson, Director, Tax Division                                                                
                                                                                                                                
ROBYNN  WILSON, Director,  Tax Division,  Department of  Revenue,                                                               
introduced Dr.  Chuck Logsdon,  former chief  petroleum economist                                                               
for the State of Alaska. He  has 25 years experience in petroleum                                                               
economics  and  is  currently a  consultant  for  the  governor's                                                               
office on the gas line negotiations.                                                                                            
                                                                                                                                
3:40:39 PM                                                                                                                    
^Dr.  Chuck  Logsdon, Consultant  to  the  Governor on  gas  line                                                             
negotiations                                                                                                                  
                                                                                                                                
DR. CHUCK  LOGSDON presented  a PowerPoint  presentation entitled                                                               
Alaska's  Production  Tax,  Theory  and Practice.  In  2005,  the                                                             
production tax  brought in approximately  24 percent  of Alaska's                                                               
oil revenue.  Royalties depicted in  the chart  on page 2  of the                                                               
presentation  include  the  Permanent   Fund.  The  property  tax                                                               
depicted includes  taxes shared by the  municipalities. Royalties                                                               
are 53 percent of the pie,  the property tax is seven percent and                                                               
the corporate income  tax is 14 percent. The production  tax is a                                                               
tax on  the severing of the  resource from the state  assessed as                                                               
either a percentage of value or  on a minimum cents per barrel or                                                               
mcf, whichever is pertinent.                                                                                                    
                                                                                                                                
Things really started taking off  when Prudhoe Bay was discovered                                                               
in  1968 and  the tax  has experienced  many modifications  since                                                               
that time, he stated. Alaska  added fields continually and peaked                                                               
with  Endicott  and Lisburne  in  1989,  which put  the  pipeline                                                               
output up to  two million barrels per day. Since  then the Alpine                                                               
and Northstar have been the most productive oil fields.                                                                         
                                                                                                                                
Governor  Murkowski's objective  is to  maximize government  take                                                               
and to  maximize the value of  the resource. However, it  must be                                                               
recognized that oil companies have  a different objective and the                                                               
two must meet to the benefit  of each. Norway is the country with                                                               
the tax  system closest to the  PPT and so the  presentation will                                                               
focus on the Norwegian Petroleum Directorate.                                                                                   
                                                                                                                                
3:47:27 PM                                                                                                                    
Slide 13 shows  the geological learning curve  from the beginning                                                               
of oil exploration in Alaska.  The cumulative production curve of                                                               
the North  Slope is close  to the  maturity part of  the learning                                                               
curve and  indicates a good  time to encourage incentives  and to                                                               
spend money.                                                                                                                    
                                                                                                                                
3:49:48 PM                                                                                                                    
The experts have  repeatedly advised that taxes based  on net are                                                               
more  economically  efficient  because they  allow  investors  to                                                               
recover their  investment and  a rate of  return. This  ensures a                                                               
competitive  area to  invest in.  Governments should  style their                                                               
fiscal  system around  their geology  because some  production is                                                               
much closer to the market than others.                                                                                          
                                                                                                                                
Studies show that  investors did well during the  period of 1992-                                                               
1994  because of  lucrative  oil fields  being  in a  high-priced                                                               
environment.  The bottom  line  on  international comparisons  is                                                               
that Alaska is  in the middle of the pack.  Dr. van Mures' latest                                                               
recommendation is  that Alaska could  take 25 percent of  the oil                                                               
revenue, make tax credits and  allowances, and encourage the kind                                                               
of exploration  that matches the  geology of the state.  That is,                                                               
the  smaller  fields  that have  not  experienced  much  drilling                                                               
should be scrutinized and perhaps explored.                                                                                     
                                                                                                                                
3:54:57 PM                                                                                                                    
DR. LOGSDON said  Alaska should think seriously  about making its                                                               
system work more like some  of the profit-oriented systems in the                                                               
world. The state  has been reluctant to change the  system in the                                                               
past due  to significant concern  about low oil  prices. Changing                                                               
oil  fiscal  regimes  is  not   taken  lightly  especially  in  a                                                               
declining production environment.                                                                                               
                                                                                                                                
DR. LOGSDON  concluded the presentation  by saying  Alaska should                                                               
change the  petroleum production tax.  The state would  still get                                                               
its royalty  share calculated before upstream  cost deduction and                                                               
would still have  a piece of world-wide corporate  income as long                                                               
as  the companies  produce in  Alaska. Alaska  would also  have a                                                               
property  tax. Alaska  would  generate more  revenue  as well  as                                                               
provide  a  significant  incentive   for  investors  to  continue                                                               
developing oil and gas.                                                                                                         
                                                                                                                                
3:59:46 PM                                                                                                                    
SENATOR BERT STEDMAN referred to slide  4 and a chart showing the                                                               
growth  curve and  asked  whether it  compared  to basic  company                                                               
growth charts  like one would  see in an economics  classroom. He                                                               
noted  that previous  testimony  suggested the  North Slope  area                                                               
might still be in the early stages of production.                                                                               
                                                                                                                                
MR.  LOGSDON said  economists and  engineers do  not have  a good                                                               
handle on  the technology aspect  of oil  production. Exploration                                                               
and  development   costs  were  lowered  dramatically   with  the                                                               
technology  boost  in  the 1980s,  using  computers  to  evaluate                                                               
geology.  There were  also advances  in well-drilling  technology                                                               
overall. The  reason for the  shape of  the growth chart  is that                                                               
companies  tend to  produce the  big easy  fields first  and then                                                               
they go  on to  the smaller challenging  fields. One  could argue                                                               
that the  North Slope is  at the late  growth phase or  the early                                                               
maturity phase.                                                                                                                 
                                                                                                                                
4:03:06 PM                                                                                                                    
When the  National Petrochemical and Refiners  Association (NPRA)                                                               
opened, Arco and ConocoPhillips drilled  a lot of wells and found                                                               
oil in small  accumulations but a far distance  from the existing                                                               
collection infrastructure.  There were  issues of  getting access                                                               
to  the area  and that  should be  considered for  incentive-type                                                               
thinking.                                                                                                                       
                                                                                                                                
4:05:07 PM                                                                                                                    
SENATOR BEN  STEVENS said the  ultimate goal was to  lengthen the                                                               
longevity of the  life of the North Slope so  that it would reach                                                               
maximum potential  of production  of petroleum products.  He said                                                               
Norway  has included  the incorporation  and exploitation  of the                                                               
gas  reserves,  which  Alaska doesn't  have.  He  suggested  that                                                               
developing  the   natural  gas  potential  would   lift  the  oil                                                               
production line in Dr. Logsdon's growth chart.                                                                                  
                                                                                                                                
DR. LOGSDON agreed  that was the ultimate goal.  The potential to                                                               
generate resources from  the gas preserves, once  the pipeline is                                                               
in, should  easily be  as much  as Alaska  has obtained  from oil                                                               
production.                                                                                                                     
                                                                                                                                
BEN  STEVENS maintained  that the  growth  chart was  not a  fair                                                               
comparison with Norway because it lacks the natural gas indices.                                                                
                                                                                                                                
4:09:36 PM                                                                                                                    
CHAIR WAGONER  asked the impact that  SB 305 would have  on prior                                                               
tax legislation.                                                                                                                
                                                                                                                                
4:10:13 PM                                                                                                                    
DR. LOGSDON said  the fundamental change would be in  the way the                                                               
PPT would  be imposed.  The critical element  being added  to the                                                               
tax base is to allow deduction of upstream costs.                                                                               
                                                                                                                                
4:11:16 PM                                                                                                                    
SENATOR  KIM  ELTON  asked  Dr.   Logsdon  whether  the  existing                                                               
incentives would still be needed.                                                                                               
                                                                                                                                
DR. LOGSDON  did not  know. He said  current incentives  have had                                                               
positive effects on developing Cook Inlet.                                                                                      
                                                                                                                                
SENATOR  ELTON  asked  whether  the  Department  of  Revenue  has                                                               
considered  looking at  the existing  incentives  to see  whether                                                               
they were still necessary.                                                                                                      
                                                                                                                                
DR. LOGSDON said  past legislation doesn't carry  the same impact                                                               
as SB 305.  The credits allowed under the PPT  are an alternative                                                               
to the current system.                                                                                                          
                                                                                                                                
MS.  WILSON  explained that  the  current  credit embodied  under                                                               
Alaska Statute Section 025 would  become an alternative credit to                                                               
the PPT. The company would have to choose between the two.                                                                      
                                                                                                                                
4:15:28 PM                                                                                                                    
^Department of Revenue - Roger Marks, Economist                                                                               
                                                                                                                                
ROGER  MARKS,  Economist, Department  of  Revenue  (DOR) said  he                                                               
wanted to  discuss specific provisions  in the bill  that address                                                               
the incentives for  small producers and new  investors both large                                                               
and small. Small  producers are very important in the  mix of oil                                                               
producers   and  add   diversity  and   additional  opinions   on                                                               
production  potential.   Small  producers  tend  to   drill  more                                                               
exploratory wells and are not afraid of risk.                                                                                   
                                                                                                                                
With NPRA  coming on  and ANWR  opening, there  are opportunities                                                               
for more  investors. Shell  has picked  up several  leases around                                                               
the  state and  Anadarko  is expanding  on  the western  northern                                                               
slope. SB 305 sets out to  assist small companies and attract new                                                               
investors.                                                                                                                      
                                                                                                                                
4:18:50 PM at ease 4:32:48 PM                                                                                               
                                                                                                                                
MR. MARKS  provided committee members  with an overview  chart of                                                               
the  Cook Inlet  producers,  the North  Slope  producers and  the                                                               
combined statewide oil production.                                                                                              
                                                                                                                                
4:34:44 PM                                                                                                                    
SB 305  would allow  a mechanism  for attracting  new large-scale                                                               
investors by  allowing them to  convert their losses to  a credit                                                               
by  taking the  tax rate  (.2) times  one million  dollars, which                                                               
would equal $200,000, and that could  be sold to someone else for                                                               
immediate use.  The credit would  be sold  at 90 percent  of face                                                               
value.                                                                                                                          
                                                                                                                                
Buying credits  is risk-free  money and there  are at  least five                                                               
producers  in the  state  who  would be  in  the  market for  the                                                               
credits. Selling  a credit at  90 percent of face  value converts                                                               
to $180,000 for  the seller and that monetizes the  loss early on                                                               
a net present value basis.                                                                                                      
                                                                                                                                
4:36:50 PM                                                                                                                    
The ability to sell credits  is identical. A company that invests                                                               
$1 million dollars  realizes a $200,000 credit and  they can sell                                                               
that credit for 90 percent of  face value and monetize the credit                                                               
early.                                                                                                                          
                                                                                                                                
MR. MARKS posed  an example of an explorer with  no assets coming                                                               
to Alaska to explore. They spend  $10 million dollars and drill a                                                               
dry  hole. Under  the  current  system the  state  would chip  in                                                               
nothing but  under SB 305 that  company would be able  to convert                                                               
that loss to  a $2 million dollar credit. With  the PPT the state                                                               
would be risk sharing.                                                                                                          
                                                                                                                                
4:38:42 PM                                                                                                                    
SB 305  would allow a  mechanism to attract small  investors with                                                               
the $73 million dollar allowance.  Under the current system small                                                               
fields pay no tax and  this should continue because it encourages                                                               
development of small fields.                                                                                                    
                                                                                                                                
4:40:17 PM                                                                                                                    
SENATOR RALPH SEEKINS  referred to slides 4 and 5  and noted that                                                               
under  the proposition  none  of the  current  producers in  Cook                                                               
Inlet or North Slope would pay a tax.                                                                                           
                                                                                                                                
MR. MARKS  said it  is a consolidated  tax statewide  and Chevron                                                               
Unocal  and Exxon  would pay  tax but  the small  producers would                                                               
not.                                                                                                                            
                                                                                                                                
SENATOR SEEKINS referred  to slide 5 [North Slope]  and said that                                                               
ConocoPhillips, BP and  ExxonMobil would be the only  ones to pay                                                               
a tax.                                                                                                                          
                                                                                                                                
MR. MARKS responded that would depend on the price of oil.                                                                      
                                                                                                                                
SENATOR SEEKINS asked  Mr. Marks the companies they  expect to be                                                               
attracted to the Alaska market.                                                                                                 
                                                                                                                                
MR.  MARKS  said  the incentives  could  attract  targets  around                                                               
Fairbanks, Nenana  Basin and possibly Cook  Inlet. The allowance,                                                               
coupled with the  ability to sell credits and  sell losses should                                                               
bring  more  small producers  into  the  state. Larger  companies                                                               
don't have  the appetite for  the smaller targets, he  said. Most                                                               
of the North  Slope is leased up already and  besides, it is very                                                               
expensive  and  very difficult  for  small  producers to  operate                                                               
there. Basically the first 5,000 barrels  a day at $40 a wellhead                                                               
or $50 dollar market price would not pay any tax.                                                                               
                                                                                                                                
4:45:18 PM                                                                                                                    
SENATOR ELTON asked Mr. Marks to  clarify whether it would be the                                                               
first 5,000 barrels for all companies.                                                                                          
                                                                                                                                
MR.  MARKS said  the way  the bill  works is  that the  first $73                                                               
million dollars per year would go untaxed.                                                                                      
                                                                                                                                
SENATOR ELTON asked  the reason for proposing  this statewide and                                                               
not just for the frontier or heavy oil fields.                                                                                  
                                                                                                                                
MR. MARKS deferred the question  to later in the presentation. He                                                               
said the goal in designing the  allowance was a judgment of about                                                               
a $50  price; a 5,000  barrel-a-day field  should pay no  tax. At                                                               
lower  prices,  larger  fields  would   pay  no  tax.  At  higher                                                               
production there would be a lower price threshold.                                                                              
                                                                                                                                
With a  $73 million dollar  allowance and  a $53 dollar  a barrel                                                               
market price, the first 5,000 barrels  a day would pay no tax. At                                                               
$30  the first  $12,000 barrel  a  day would  pay no  tax and  at                                                               
higher  productions  such  as  20,000 barrels  a  day  the  price                                                               
threshold would be at $23 dollars a barrel to pay no tax.                                                                       
                                                                                                                                
4:49:20 PM                                                                                                                    
CHAIR  WAGONER asked  the reason  the entire  state was  included                                                               
instead of splitting off the  major oil producers and focusing on                                                               
the smaller producers.                                                                                                          
                                                                                                                                
MR. MARKS said when advantage is  given to some companies and not                                                               
others it creates a chance for monkey business.                                                                                 
                                                                                                                                
4:51:33 PM                                                                                                                    
Cook Inlet  is 80 percent  gas and  20 percent oil.  The industry                                                               
there is evolving  as there is a decrease in  production and most                                                               
of  the  assets are  old,  depreciated,  and  paid for.  The  new                                                               
development is mainly  looking for gas and there  have been small                                                               
discoveries.  In addition,  the  prices are  getting much  higher                                                               
because the  RCA has granted UNOCAL  the right to sell  their gas                                                               
at higher prices. Marathon is  attempting to garner the same deal                                                               
and so if that evolves it would be much more profitable.                                                                        
                                                                                                                                
4:52:44 PM                                                                                                                    
The taxes on gas may increase  on existing fields as they realize                                                               
the credits and deductions and the ability to market losses.                                                                    
                                                                                                                                
4:53:43 PM                                                                                                                    
The gas  severance taxes in  Cook Inlet  and the North  Slope are                                                               
subject to a  gas ELF, which is also broken.  The formula, set up                                                               
in 1977 is much  simpler than the oil ELF and  is still in place.                                                               
[Mr. Marks  referred the committee  to slide  17 - a  snapshot of                                                               
the  Cook Inlet  gas ELF.]  He explained  the chart  and said  it                                                               
proved  that the  ELF  was antiquated  and  was giving  producers                                                               
seven times  more than  they should  be recovering  for operating                                                               
costs.                                                                                                                          
                                                                                                                                
4:58:22 PM                                                                                                                    
MR.  MARKS concluded  by  stating  the governor's  administration                                                               
promotes SB  305 and believes  it would attract new  investors to                                                               
Alaska.                                                                                                                         
                                                                                                                                
4:59:34 PM                                                                                                                    
CHAIR WAGONER posed  a hypothetical scenario of  a small producer                                                               
in Cook Inlet  with 35-year old platforms who  currently pays the                                                               
state a very  low severance tax due to the  reduction. The annual                                                               
revenue is $60 million. Production  expenses are $15 million, and                                                               
annual capital  costs are $10  million. He asked the  amount they                                                               
would pay in production taxes and royalties under SB 305.                                                                       
                                                                                                                                
MR.  MARKS did  the calculations  and replied  they would  pay $5                                                               
million in taxes. He said you  would subtract the $15 million and                                                               
the $10 million  from $60 million, which equals  $35 million. You                                                               
would subject  that to a 20  percent tax rate, which  would be $7                                                               
million. Then  you would subtract  20 percent of the  $10 million                                                               
capital, which would be $2 million  and that equals $5 million. A                                                               
rough estimate  shows their tax  would go  from $3 million  to $5                                                               
million.  Actually, he  said, there  is that  $73 million  dollar                                                               
allowance and so in this case their tax would be zero.                                                                          
                                                                                                                                
5:02:45 PM                                                                                                                    
SENATOR  ELTON  asked whether  he  said  the  tax rate  for  that                                                               
hypothetical company would go from $3 million down to zero.                                                                     
                                                                                                                                
MR. MARKS  said yes, if  that was  their entire operation  in the                                                               
state.                                                                                                                          
                                                                                                                                
MS. WILSON  noted they  would also pay  corporate income  tax and                                                               
property tax.                                                                                                                   
                                                                                                                                
MR. MARKS added that company could  sell their credit and get the                                                               
$2 million dollar credit as well.                                                                                               
                                                                                                                                
5:03:39 PM                                                                                                                    
SENATOR BEN STEVENS asked what exactly the PPT would apply to.                                                                  
                                                                                                                                
MR. MARKS  replied the  PPT would  apply to oil  and gas  in Cook                                                               
Inlet and the  North Slope. However, an  upstream production such                                                               
as capital costs  to develop Point Thompson would  be a deduction                                                               
on the PPT for development of gas as well.                                                                                      
                                                                                                                                
5:07:00 PM                                                                                                                    
^Department  of Law  - Robert  Mintz, Assistant  Attorney General                                                             
and Dan Dickinson, CPA, Consultant to the Governor                                                                            
                                                                                                                                
DAN  DICKINSON, Certified  Public  Accountant  and ROBERT  MINTZ,                                                               
Assistant Attorney  General, Department of Law  (DOL) presented a                                                               
sectional analysis of  the bill for the committee.  There are two                                                               
different provisions;  one that  would change the  production tax                                                               
and  the other  is  a miscellaneous  collection of  improvements,                                                               
corrections, and clarifications to the bill.                                                                                    
                                                                                                                                
5:09:58 PM                                                                                                                    
MR. MINTZ began  by answering a past question  of Senator Elton's                                                               
regarding a potential for a  producer to defer taking a deduction                                                               
until the  future. He said  it would be  hard to conceive  of any                                                               
advantage in  deferring a  deduction because  the value  would be                                                               
the same in any given year.                                                                                                     
                                                                                                                                
MR. MINTZ began the presentation  entitled Presentation on SB 305                                                             
& HB 488  before Senate and House Resources  Committees. The core                                                             
provision of  the bill is  AS 43.55.011(a).  The tax would  be on                                                               
oil and gas together and would  remain a monthly tax. It would be                                                               
equal to  20 percent  of the net  value of the  oil and  gas. The                                                               
definition of  "net value"  is under  AS 43.55.160(a)  and starts                                                               
with the gross value at the point of production.                                                                                
                                                                                                                                
5:12:32 PM                                                                                                                    
CHAIR WAGONER  asked Mr. Mintz  whether any future change  to the                                                               
oil tax would affect taxes on the gas pipeline.                                                                                 
                                                                                                                                
MR.  MINTZ replied  the  bill  is written  as  a  law of  general                                                               
applicability  that would  apply  the  same to  all  oil and  gas                                                               
produced anywhere in  the state. Any other  distinctions would be                                                               
addressed in the contract.                                                                                                      
                                                                                                                                
5:13:53 PM                                                                                                                    
MR.  DICKINSON said  the discussion  is  still ongoing  regarding                                                               
exactly what  period each  aspect of  oil fiscal  stability would                                                               
have. As constructed,  if the Legislature were to  change the oil                                                               
tax in the  future there would be a need  for additional drafting                                                               
to address the gas tax.                                                                                                         
                                                                                                                                
SENATOR SEEKINS referred  to slide 4 and asked Mr.  Mintz what he                                                               
meant by the words, "as adjusted."                                                                                              
                                                                                                                                
MR. MINTZ  said it was intended  to net out receipts  that should                                                               
be credited against the expenditures.                                                                                           
                                                                                                                                
Slide  5: Gross  value at  the point  of production  is currently                                                               
defined but the bill would  amend the definition slightly so that                                                               
the point of  production is moved downstream of  a gas processing                                                               
plant, which  is different than  a gas treatment plant.  The bill                                                               
does not  change the  fundamental concept of  gross value  at the                                                               
point of production.                                                                                                            
                                                                                                                                
5:17:57 PM                                                                                                                    
Slide 6:  Gross value  at the point  of production  is calculated                                                               
using the reasonable costs of transportation.                                                                                   
                                                                                                                                
5:18:40 PM                                                                                                                    
SENATOR ELTON asked whether there  would be a different net value                                                               
for  Cook  Inlet  oil  than  for  North  Slope  oil  because  the                                                               
transportation costs would be different  since Cook Inlet doesn't                                                               
go through the trans-Alaska pipeline system (TAPS).                                                                             
                                                                                                                                
MR. DICKINSON  said that is  correct. Even  so, a company  on the                                                               
North  Slope that  just spent  a lot  of money  on transportation                                                               
costs  in  a  year  with  high TAPS  tariffs  would  see  a  very                                                               
different price  than someone with  a low TAPS tariff  using very                                                               
old and depreciated transportation.                                                                                             
                                                                                                                                
SENATOR ELTON asked  Mr. Dickinson whether they  back out profits                                                               
that an owner might get for transporting the oil.                                                                               
                                                                                                                                
MR. DICKINSON said they do not.                                                                                                 
                                                                                                                                
MR.  MINTZ added  for the  record  that they  were talking  about                                                               
gross value at the point of production.                                                                                         
                                                                                                                                
5:21:21 PM                                                                                                                    
Slide  7:  AS 43.55.150(d)  provides  for  simplification of  the                                                               
calculation and the Department of  Revenue (DOR) would be allowed                                                               
to authorize a taxpayer to  use a simplified formula to calculate                                                               
gross value at the point  of production. The most notable example                                                               
would be if the taxpayer  has a royalty settlement agreement with                                                               
the Department  of Natural  Resources (DNR)  that provides  for a                                                               
way to calculate value for royalty purposes.                                                                                    
                                                                                                                                
MR. DICKINSON added over time the  DOR and the DNR have developed                                                               
different rules  for different reasons but  fundamentally they do                                                               
the same  calculation, which  starts with the  value it  sold for                                                               
and then deducts the cost to get to the wellhead.                                                                               
                                                                                                                                
5:22:55 PM                                                                                                                    
Slide 8:  For net value  start with  gross value and  then deduct                                                               
lease expenditures,  which are  the total  costs upstream  of the                                                               
point of  production. They have  to be direct costs  of exploring                                                               
for developing or producing oil or gas in Alaska.                                                                               
                                                                                                                                
5:24:19 PM                                                                                                                    
CHAIR WAGONER  interrupted to  say the  reason for  revamping the                                                               
tax structure is  because ELF wasn't working in all  cases on the                                                               
North Slope.                                                                                                                    
                                                                                                                                
5:25:21 PM                                                                                                                    
SENATOR SEEKINS  asked Mr. Dickinson  whether he  had information                                                               
that identified the companies that  have made substantial capital                                                               
investments in the oil fields.                                                                                                  
                                                                                                                                
MR.  DICKINSON  responded  half  of  the  production  comes  from                                                               
Prudhoe Bay.  ConocoPhillips and ExxonMobil each  own 36 percent,                                                               
BP owns  18 percent  and then there  are smaller  owners. Further                                                               
west ConocoPhillips owns 78 percent  and Anadarko owns 22 percent                                                               
so there are significant investments there.                                                                                     
                                                                                                                                
SENATOR SEEKINS expressed interest in  seeing a comparison of the                                                               
companies that  have invested  heavily over  the last  five years                                                               
and those  that have not and  whether the companies that  did not                                                               
invest would profit more than those that did invest.                                                                            
                                                                                                                                
MR.  DICKINSON  said that  was  right.  That  is the  reason  for                                                               
creating the process to recover investment costs.                                                                               
                                                                                                                                
SENATOR STEDMAN noted an  undoubtable correlation between capital                                                               
expenditures and a majority market share.                                                                                       
                                                                                                                                
MR. DICKINSON agreed.                                                                                                           
                                                                                                                                
5:30:34 PM                                                                                                                    
SENATOR ELTON asked Mr. Dickinson for  an estimate of the cost to                                                               
the state  for the provision and  also to compare that  to a cost                                                               
if applied to the depreciated value.                                                                                            
                                                                                                                                
MR. DICKINSON said he would get the information together.                                                                       
                                                                                                                                
5:31:54 PM                                                                                                                    
Slide 10:  In determining direct, ordinary,  and necessary costs,                                                               
the department shall give substantial  weight to typical industry                                                               
practices  and standards  that are  reflected in  joint operating                                                               
agreements.                                                                                                                     
                                                                                                                                
In particular situations  the department may allow  a producer to                                                               
rely  on  the  billings  as  equal  to  the  lease  expenditures.                                                               
Subsection  (d)  gives a  list  of  certain  items that  are  not                                                               
eligible to be deducted.                                                                                                        
                                                                                                                                
5:35:03 PM                                                                                                                    
Slide 12: AS 43.55.160(e) provides the  concept to get to the net                                                               
costs.                                                                                                                          
                                                                                                                                
MR. DICKINSON  clarified that the  royalty owner would  not share                                                               
in any lease costs. Field  cost deductions are for the lease-type                                                               
operations and they allow for  20 percent of eight-eighths as the                                                               
appropriate deduction.                                                                                                          
                                                                                                                                
5:37:26 PM                                                                                                                    
SENATOR BEN  STEVENS said on  the corporate side they  would only                                                               
be allowed to deduct 20 percent of seven-eighths.                                                                               
                                                                                                                                
MR. DICKINSON replied it would be  roughly the same effect as the                                                               
income tax.                                                                                                                     
                                                                                                                                
MR.  MINTZ  said  the  third  category of  adjustments  is  if  a                                                               
producer purchased a capital asset  and that purchase price was a                                                               
deductible lease expenditure  and then later sold  the asset, the                                                               
sale  price   is  recaptured  to   get  the  net   deductible  of                                                               
expenditures.                                                                                                                   
                                                                                                                                
Slide  13:  Transitional   investment  expenditures  are  capital                                                               
expenditures from  the previous five years.  AS 43.55.160(a) also                                                               
refers to subsection  (i), which is where the  $73 million dollar                                                               
allowance comes  in and the producer  has to be qualified  to get                                                               
the allowance. The  purpose of the qualification is  to make sure                                                               
they don't multiply the number  of producer entities so that each                                                               
one gets the $73 million dollar allowance.                                                                                      
                                                                                                                                
5:40:40 PM                                                                                                                    
SENATOR  ELTON asked  whether the  smaller companies  would delay                                                               
making the  decision to  take the $73  million dollars  until the                                                               
last  minute when  they knew  how much  money they  would end  up                                                               
making for the year.                                                                                                            
                                                                                                                                
MR. DICKINSON  said a company  that knew they would  make between                                                               
$70-80 million  would estimate 20  percent of the $2  million and                                                               
spread  it over  the 12  months.  The alternative  is they  would                                                               
assume  that  the  first  six  months was  covered  and  so  they                                                               
wouldn't pay anything until the final months.                                                                                   
                                                                                                                                
5:41:37 PM                                                                                                                    
Slide  17  looks  at qualified  capital  expenditures,  which  is                                                               
defined in  AS 43.55.024(a). It  has to be lease  expenditure and                                                               
there  are three  established categories.  It is  limited to  the                                                               
purchase of  new assets. The tax  is a monthly tax  but there are                                                               
some annual  aspects of it,  namely within a calendar  year lease                                                               
expenditures that  cannot be used within  a month can be  used in                                                               
another month.                                                                                                                  
                                                                                                                                
5:46:34 PM                                                                                                                    
CHAIR WAGONER  asked whether platform  demolition costs  would be                                                               
allowed for a credit.                                                                                                           
                                                                                                                                
MR. DICKINSON suspected they were considered intangible costs.                                                                  
                                                                                                                                
SENATOR ELTON  assumed that  would be covered  as a  deduction to                                                               
get back to net value rather than credit.                                                                                       
                                                                                                                                
MR. DICKINSON  said it would  definitely qualify as  an operating                                                               
cost.                                                                                                                           
                                                                                                                                
MR. MINTZ  said there was  a sort  of double-dip intended  in the                                                               
bill  regarding capital  expenditures because  lease expenditures                                                               
include  both operating  and capital  expenditures  and they  are                                                               
deductible  in coming  up with  net  value. The  subset of  lease                                                               
expenditures, which are qualified  capital expenditures, are also                                                               
eligible for  capital expenditure  credit and that  is deliberate                                                               
to give additional incentive for the investment.                                                                                
                                                                                                                                
5:49:29 PM                                                                                                                    
Slide  20:  Steps   in  calculation.  The  second   part  of  the                                                               
presentation  is a  flowchart that  explains the  fundamentals of                                                               
how  the  tax  is  calculated.  Slide 21  shows  how  to  get  to                                                               
statewide gross value  of producer's oil and gas.  Slide 22 shows                                                               
the flowchart of obtaining deductible lease expenditures.                                                                       
                                                                                                                                
Slide  23  shows the  flowchart  of  the transitional  investment                                                               
expenditures for  deduction. The  total is  divided by  72, which                                                               
represents six years multiplied by 12 months a year.                                                                            
                                                                                                                                
Slide 24  demonstrates the flowchart  for the $73  million dollar                                                               
allowance. Once a company demonstrates  their eligibility for the                                                               
allowance they  can take  up to  $73 million  dollars a  year and                                                               
transfer that into a monthly allowance for the given month.                                                                     
                                                                                                                                
Slide 25 demonstrates the flowchart  of how the total gross value                                                               
minus  adjusted lease  expenditures,  other  deductions, and  the                                                               
allowance get to the net value of the oil and gas.                                                                              
                                                                                                                                
5:54:20 PM                                                                                                                    
Slide 26  addresses tax credits.  One important point is  that AS                                                               
43.55.160(m) says  for purposes  of the  credits, an  explorer is                                                               
considered  a producer  because  the DNR  defines  a producer  as                                                               
someone who  owns a working  interest. Some forms  of exploration                                                               
are undertaken  before there  is a  lease or  a permit.  The bill                                                               
allows for  explorers that incur  exploration expenditures  to be                                                               
able to treat those as losses and as capital expenditures.                                                                      
                                                                                                                                
5:56:15 PM                                                                                                                    
Slide  27 details  a  schematic of  the  transferable tax  credit                                                               
certificate process.  The DNR holds  the application  process for                                                               
the  certificate and  the DOR  issues it.  In order  to have  the                                                               
process  take place  relatively quickly,  there is  a requirement                                                               
that  the  department act  within  60  days after  receiving  the                                                               
completed application. Once the  certificate is issued, the buyer                                                               
would be able to absolutely rely on that credit.                                                                                
                                                                                                                                
Slide 28  details the  actual tax  calculation. As  for purchased                                                               
credits  there is  a limitation  on that.  Each month  the credit                                                               
cannot  be  used  to  reduce  the producer's  tax  more  than  20                                                               
percent.                                                                                                                        
                                                                                                                                
5:59:12 PM                                                                                                                    
Slide 29 demonstrates  the tax payment scheme.  Currently the tax                                                               
on oil  and gas produced in  a given month  is due at the  end of                                                               
the next  month. That is  retained but with a  slight adjustment.                                                               
Upstream  costs  might  not  always  be  known  until  after  the                                                               
calendar  year and  so  the bill  makes only  90  percent of  the                                                               
actual tax  due at the end  of the month. The  remainder would be                                                               
             st                                                                                                                 
due March  31  of  the next calendar  year. If the  producer pays                                                               
less than  the 90  percent there  would be  interest owed  on the                                                               
deficiency until it is paid.  If there were an overpayment during                                                               
the  year, the  department would  not  pay interest  back to  the                                                               
producer.                                                                                                                       
                                                                                                                                
6:01:14 PM                                                                                                                    
CHAIR  WAGONER  asked  Mr.  Dickinson  whether  there  have  been                                                               
problems collecting on back interest in the past.                                                                               
                                                                                                                                
MR. DICKINSON  responded there  is an issue  with the  11 percent                                                               
compounding interest  rate, which is very  high. Companies should                                                               
be able to learn sooner that they owe that money.                                                                               
                                                                                                                                
CHAIR  WAGONER asked  whether a  true up  every six  months would                                                               
negate some of that.                                                                                                            
                                                                                                                                
                                                   st                                                                           
MR.  DICKINSON said  the reason  for  the March  31   true up  is                                                               
because  a lot  of the  credits  are going  to be  termed by  the                                                               
actual federal  income tax treatment. Companies  generally figure                                                               
their federal taxes once a year.                                                                                                
                                                                                                                                
6:03:52 PM                                                                                                                    
SENATOR BEN STEVENS  complimented Mr. Mintz and  Mr. Dickinson on                                                               
their presentation.                                                                                                             
                                                                                                                                
CHAIR  WAGONER recessed  the meeting  until 9:00  am on  Saturday                                                               
February 25, 2006 at 6:06:16 PM.                                                                                              
                                                                                                                                

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