Legislature(2005 - 2006)BUTROVICH 205

03/02/2006 03:30 PM RESOURCES

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03:35:24 PM Start
03:35:24 PM SB305
03:38:09 PM Department of Natural Resources – Mike Menge, Commissioner, and Bill Van Dyke, Director, Division of Oil and Gas
04:01:28 PM Question and Answer with the Department of Revenue – Robynn Wilson, Director, Tax Division, Department of Revenue – and Sharon Nienhuis, Petroleum Economist, Department of Revenue
05:21:05 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         March 2, 2006                                                                                          
                           3:35 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Senator Thomas Wagoner, Chair                                                                                                   
Senator Ralph Seekins, Vice Chair                                                                                               
Senator Ben Stevens                                                                                                             
Senator Fred Dyson                                                                                                              
Senator Bert Stedman                                                                                                            
Senator Kim Elton                                                                                                               
Senator Albert Kookesh                                                                                                          
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
OTHER MEMBERS PRESENT                                                                                                         
Senator Hollis French                                                                                                           
Senator Gretchen Guess                                                                                                          
Senator Gene Therriault                                                                                                         
COMMITTEE CALENDAR                                                                                                            
SENATE BILL NO. 305                                                                                                             
"An Act repealing  the oil production tax and  gas production tax                                                               
and providing  for a production tax  on the net value  of oil and                                                               
gas; relating to the relationship  of the production tax to other                                                               
taxes; relating to the dates  tax payments and surcharges are due                                                               
under AS  43.55; relating  to interest  on overpayments  under AS                                                               
43.55; relating  to the treatment  of oil and gas  production tax                                                               
in a  producer's settlement with  the royalty owner;  relating to                                                               
flared gas, and to  oil and gas used in the  operation of a lease                                                               
or property, under AS 43.55;  relating to the prevailing value of                                                               
oil or gas under AS 43.55;  providing for tax credits against the                                                               
tax  due under  AS 43.55  for certain  expenditures, losses,  and                                                               
surcharges; relating to statements  or other information required                                                               
to be filed  with or furnished to the Department  of Revenue, and                                                               
relating  to the  penalty for  failure to  file certain  reports,                                                               
under  AS 43.55;  relating to  the  powers of  the Department  of                                                               
Revenue, and  to the disclosure  of certain  information required                                                               
to be  furnished to  the Department of  Revenue, under  AS 43.55;                                                               
relating   to  criminal   penalties   for  violating   conditions                                                               
governing access to and use  of confidential information relating                                                               
to the  oil and gas  production tax;  relating to the  deposit of                                                               
money  collected by  the Department  of Revenue  under AS  43.55;                                                               
relating to  the calculation of the  gross value at the  point of                                                               
production of  oil or gas;  relating to the determination  of the                                                               
net value  of taxable oil  and gas  for purposes of  a production                                                               
tax on the net value of  oil and gas; relating to the definitions                                                               
of  'gas,' 'oil,'  and certain  other  terms for  purposes of  AS                                                               
43.55;  making  conforming  amendments;   and  providing  for  an                                                               
effective date."                                                                                                                
     HEARD AND HELD                                                                                                             
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: SB 305                                                                                                                  
SHORT TITLE: OIL AND GAS PRODUCTION TAX                                                                                         
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
02/21/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/21/06       (S)       RES, FIN                                                                                               
02/22/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/22/06       (S)       Heard & Held                                                                                           
02/22/06       (S)       MINUTE(RES)                                                                                            
02/23/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/23/06       (S)       Heard & Held                                                                                           
02/23/06       (S)       MINUTE(RES)                                                                                            
02/24/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/24/06       (S)       Heard & Held                                                                                           
02/24/06       (S)       MINUTE(RES)                                                                                            
02/25/06       (S)       RES AT 9:00 AM BUTROVICH 205                                                                           
02/25/06       (S)       -- Reconvene from 02/24/06 --                                                                          
02/25/06       (H)       RES AT 10:00 AM SENATE FINANCE 532                                                                     
02/25/06       (S)       Heard & Held                                                                                           
02/25/06       (S)       MINUTE(RES)                                                                                            
02/27/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/27/06       (S)       Heard & Held                                                                                           
02/27/06       (S)       MINUTE(RES)                                                                                            
02/28/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/28/06       (S)       Heard & Held                                                                                           
02/28/06       (S)       MINUTE(RES)                                                                                            
03/01/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/01/06       (S)       Heard & Held                                                                                           
03/01/06       (S)       MINUTE(RES)                                                                                            
03/02/06       (S)       RES AT 1:30 PM BUTROVICH 205                                                                           
WITNESS REGISTER                                                                                                              
MIKE MENGE, Commissioner                                                                                                        
Department of Natural Resources                                                                                                 
400 Willoughby Ave.                                                                                                             
Juneau, AK  99801-1724                                                                                                          
POSITION STATEMENT: Commented on how the PPT would affect the                                                                 
Oooguruk field.                                                                                                                 
BILL VAN DYKE, Director                                                                                                         
Division of Oil and Gas                                                                                                         
Department of Natural Resources                                                                                                 
400 Willoughby Ave.                                                                                                             
Juneau, AK  99801-1724                                                                                                          
POSITION STATEMENT: Commented on PPT versus royalty reduction in                                                              
the Oooguruk field.                                                                                                             
TIMOTHY RYHERD, Commercial Analyst                                                                                              
Division of Oil and Gas                                                                                                         
Department of Natural Resources                                                                                                 
400 Willoughby Ave.                                                                                                             
Juneau, AK  99801-1724                                                                                                          
POSITION STATEMENT: Commented on PPT versus royalty reduction in                                                              
the Oooguruk field.                                                                                                             
ROBYNN WILSON, Director                                                                                                         
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT: Answered the Legislature's questions on the                                                               
PPT for the Administration.                                                                                                     
SHARON NIENHUIS, Petroleum Economist                                                                                            
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT: Compared various PPT ratios and prices.                                                                   
ACTION NARRATIVE                                                                                                              
CHAIR THOMAS WAGONER called the Senate Resources Standing                                                                     
Committee meeting to order at 3:35:24 PM. Present were Senators                                                               
Stedman, Dyson, Kookesh, Elton, Ben Stevens and Chair Wagoner.                                                                  
               SB 305-OIL AND GAS PRODUCTION TAX                                                                            
3:35:24 PM                                                                                                                    
CHAIR WAGONER  said first  they would  discuss the  Oooguruk unit                                                               
royalty modification versus  PPT comparison and then  take up the                                                               
Administration's answers  to the  questions that  the Legislature                                                               
asked on the PPT.                                                                                                               
^DEPARTMENT OF NATURAL RESOURCES  - Mike Menge, Commissioner, and                                                             
Bill Van Dyke, Director, Division of Oil and Gas                                                                              
MIKE  MENGE,  Commissioner, DNR  introduced  Bill  Van Dyke,  the                                                               
Director, Division of  Oil and Gas, and stated that  he would let                                                               
MR. VAN DYKE go through the comparison.                                                                                         
3:38:09 PM                                                                                                                    
BILL VAN DYKE,  Director, Division of Oil and Gas,  DNR, said the                                                               
effect of PPT  capital credits, the transitional  credits and the                                                               
loss-carry  forward  provisions  would  be very  powerful  for  a                                                               
project like  Oooguruk that is  a new  capital-intensive project.                                                               
It would give Pioneer a positive  instead of negative cash flow -                                                               
assuming that Pioneer would be able to sell the credits.                                                                        
3:39:12 PM                                                                                                                    
SENATOR SEEKINS arrived.                                                                                                        
MR.  Van Dyke  said under  the PPT  scenario, the  state gets  an                                                               
opportunity  to collect  some revenue  from Oooguruk  where under                                                               
the current  ELF (economic  limit factor) it  does not  collect a                                                               
production tax.  He explained that  the royalty was reduced  to 5                                                               
percent  until the  net profit  share  leases pay  out under  the                                                               
current system.                                                                                                                 
He  said  the  financial  information  for  the  project  remains                                                               
confidential  and correct  inputs  and assumptions  make all  the                                                               
difference  when  doing  the modeling.  The  Division  assumed  a                                                               
project in  the range  of $500  million and a  fee for  sharing a                                                               
facility at Kuparuk and Pioneer's  own operating costs that would                                                               
all be  allowed for deductions.  The estimated  ultimate recovery                                                               
was  in the  range of  50  MB to  90 MB,  depending on  reservoir                                                               
performance  and production  rates  were estimated  to be  15,000                                                               
barrels  to  20,000 barrels  per  day.  He  said the  project  is                                                               
offshore, so its costs are a bit more expensive.                                                                                
He modeled  a couple of  different oil prices and  discount rates                                                               
and assumed that the credits Pioneer  earns could be used by them                                                               
or  sold for  100 percent  of face  value (although,  in reality,                                                               
they would probably have to be  sold at a discount). He cautioned                                                               
that these figures  would not work for Oooguruk, but  not for any                                                               
other project.                                                                                                                  
MR. VAN  DYKE said he  assumed Pioneer  had about $45  million in                                                               
transitional  credits  for  this  project, because  it  has  been                                                               
spending a  lot of money  up there on engineering,  fieldwork and                                                               
exploratory wells.                                                                                                              
He explained that the Oooguruk  project has four net profit share                                                               
leases and they  overlay a "sweet spot" in the  field, which will                                                               
be  where the  development takes  place. The  PPT doesn't  really                                                               
effect the net profit share  calculations in any way. There would                                                               
not be  a production  tax today  using the  ELF; likewise  he has                                                               
assumed that under  a PPT, if Pioneer pays any  tax, it would not                                                               
be a deduction under the net profit share accounting system.                                                                    
3:47:42 PM                                                                                                                    
MR.  Van  Dyke  explained  that  Oooguruk  was  given  a  royalty                                                               
reduction because Pioneer  would not have gone  ahead without it.                                                               
The state  gave up  $45 million  to get the  project on  line. He                                                               
said the  first of four  models was  a base case  without royalty                                                               
modification and with no PPT on  the project a year ago; case two                                                               
was the royalty  modification that was awarded; case  three was a                                                               
hypothetical  case  that  the chairman  requested  supposing  the                                                               
royalty modification  had not been  granted and just the  PPT was                                                               
in effect; and fourth, a  project with a royalty modification and                                                               
a PPT.                                                                                                                          
He  said  the  royalty  reduction,  which went  from  12.5  to  5                                                               
percent, sounded  like a lot,  but it  didn't affect the  rate of                                                               
return very  much (up about  1.3 percent). His  model comparisons                                                               
showed  that  the PPT  was  a  more  powerful tool  than  royalty                                                               
reduction. He advised:                                                                                                          
     They would not  reap a windfall by any  means, for this                                                                    
     project. This  is a really challenged  project. It's my                                                                    
     belief Pioneer  - they  want to get  their foot  in the                                                                    
     door. They  were willing  to come up  to Alaska  and at                                                                    
     least start a project  that wasn't the greatest project                                                                    
     in the  world, but  it got  them on  the Slope;  it got                                                                    
     them up there as an  operator. And they have bigger and                                                                    
     better plans elsewhere on the Slope.                                                                                       
3:54:04 PM                                                                                                                    
SENATOR  ELTON referenced  the case  1  versus case  4 model  and                                                               
asked if there  could be another line stating how  much the state                                                               
is  getting now  along  with how  much less  the  state would  be                                                               
MR. VAN DYKE  replied that with the royalty  reductions in place,                                                               
the state was still collecting  about $168 million from the field                                                               
in  income tax,  royalty and  property tax,  as well  as the  net                                                               
profit share payments.                                                                                                          
TIMOTHY  RYHERD, Commercial  Analyst,  Division of  Oil and  Gas,                                                               
DNR, commented  on the  chart comparison,  but his  comments were                                                               
MR. VAN DYKE clarified that Mr.  Ryherd said under the base case,                                                               
the  state  gets  $130  million   to  $500  million  and  royalty                                                               
reduction  takes a  little off  of that.  The PPT  would actually                                                               
take off of  the upfront credits. "But, there  certainly is still                                                               
a fair amount of revenue coming into the state."                                                                                
CHAIR WAGONER  thanked them for their  presentation and announced                                                               
that the  committee would go  on to the  Administration's answers                                                               
to the Legislature's questions.                                                                                                 
3:59:08 PM                                                                                                                    
^QUESTION  AND ANSWER  WITH THE  DEPARTMENT OF  REVENUE -  Robynn                                                             
Wilson,  Director,  Tax Division,  Department  of  Revenue -  and                                                             
Sharon Nienhuis, Petroleum Economist, Department of Revenue                                                                   
ROBYNN  WILSON, Director,  Tax  Division,  Department of  Revenue                                                               
(DOR), introduced Sharon Nienhuis,  Petroleum Economist, DOR, who                                                               
worked  on  the model  to  provide  information  on some  of  the                                                               
Legislature's questions.                                                                                                        
She  also provided  a letter  with  some specific  tax and  price                                                               
scenarios and  said she would  highlight some of  the information                                                               
that would  be provided and  answer questions and they  go along.                                                               
She then turned the presentation over to Ms. Nienhuis.                                                                          
MS.  NIENHUIS  said the  department  was  asked to  provide  some                                                               
additional  scenarios  with  different tax  rates  and  different                                                               
credit  rates and  to provide  a similar  analysis to  that which                                                               
Roger  Marks  presented on  February  23.  His analysis  included                                                               
annual revenues to  the state under three different  oil prices -                                                               
$20, $40  and $60.  He provided  that at  the 20/20  scenario and                                                               
under the status quo.                                                                                                           
4:01:28 PM                                                                                                                    
She presented graphs of three  scenarios - 25/20, 30/20 and 30/15                                                               
- and  the status quo  at $20, $40 and  $60 per barrel.  She used                                                               
the same cost  and volume assumptions that Mr. Marks  used in his                                                               
February  23 presentation,  but her  volume scenario  was without                                                               
the gasline  or future  oil finds. The  revenues were  in today's                                                               
dollars and not inflated.                                                                                                       
4:04:21 PM                                                                                                                    
SENATOR DYSON asked if her  estimate of investment credits in the                                                               
out years took  into account the increased  production because of                                                               
the addition of incentives.                                                                                                     
MS. NIENHUIS replied no. She  followed the department's fall 2005                                                               
revenue forecast. She  tried to not model things  that would lead                                                               
to  modeling  error. She  reminded  them  that  at $40  oil,  the                                                               
transition  provision  (five  years  of credits  taken  over  six                                                               
years) doesn't kick in.                                                                                                         
4:08:40 PM                                                                                                                    
SENATOR STEDMAN  said it was hard  to get any information  out of                                                               
the  charts and  asked how  it  could be  best used  to find  the                                                               
balance point between the tax rate and the tax credit.                                                                          
MS. NIENHUIS  replied they would  get to those  models relatively                                                               
SENATOR  STEDMAN said  that  it was  easier for  him  to look  at                                                               
percentages versus dollars.                                                                                                     
MS. NIENHUIS agreed to provide percentages.                                                                                     
CHAIR  WAGONER thanked  her  and said  they would  go  on to  the                                                               
written questions.                                                                                                              
MS.  WILSON  explained that  the  House  Resources Committee  and                                                               
Chair  Wagoner had  submitted  a  list of  31  questions for  the                                                               
Administration to answer and she would begin answering them now.                                                                
4:13:54 PM                                                                                                                    
1.   Identify values/amounts for the  "look-back" or transitional                                                               
section per year  according to the actual,  by type (exploration,                                                               
development, production), by company.                                                                                           
   The Department of  Revenue model uses  $1 billion per  year as                                                               
   capital costs, so  the transitional period  would be  about $5                                                               
   billion. Of the  $1 billion, about  10 percent  is exploration                                                               
   and about 90 percent  is elements of production.  These annual                                                               
   costs are  based  on  compilations  of  historical  data.  The                                                               
   attached  Excel   files   outlines   public   data   regarding                                                               
2.  How are mob, demob, and platform abandonment costs treated -                                                                
as tax credits or deductions?                                                                                                   
   Mobilization costs are capitalized for federal tax purposes as                                                               
   Intangible Drilling Costs.   As such,  they are  a capitalized                                                               
   expenditure for  PPT purposes,  and therefore,  are deductible                                                               
   and  creditable.   We  understand   that  demobilization   and                                                               
   abandonment expenditures are  both expensed as  incurred. This                                                               
   would mean  that these  costs  are deductible,  but would  not                                                               
   generate a credit.                                                                                                           
3.  Is there a "rating" for political stability - or one that                                                                   
reflects instability?                                                                                                           
   We do not have any information on a quantification of the risk                                                               
   of political stability.                                                                                                      
4.  What loss of revenue is incurred by moving the effective                                                                    
date from January 1, 2006 to July 1, 2006 on both 20/20 and on                                                                  
   Using a combination  of our spring  forecast and  YTD actuals,                                                               
   the average ANS price between January 1, 2006 and July 1, 2006                                                               
   was $58.62.                                                                                                                  
   · The loss  of revenue using  the 20/20 system would  be about                                                               
     $480 million in additional tax.                                                                                            
   · The loss  of revenue using  the 25/20 system would  be about                                                               
     $770 million in additional tax.                                                                                            
5.  Section 9 - what amount is involved in this section?                                                                        
   A very small amount, probably no more than  1 percent of total                                                               
   state revenue from oil and gas.  It is limited to three areas:                                                               
   [1] Alpine  and  its satellites;  [2]  the National  Petroleum                                                               
   Reserve Alaska; and [3] Cook Inlet.                                                                                          
6.  Was there consideration of phasing out the $73 million                                                                      
deduction over a certain period of time?                                                                                        
   No, it was not considered.                                                                                                   
4:18:18 PM                                                                                                                    
SENATOR STEDMAN asked if the 1 percent was looking forward or                                                                   
MS. WILSON replied backward.                                                                                                    
7.   Of the  current 14  producers in Alaska,  which would  pay a                                                               
severance tax  after employing the proposed  $73 million standard                                                               
   With  the merger  of  Chevron  and Unocal,  there  are now  13                                                               
   producers in Alaska.  Of the  13 producers, BP, ConocoPhillips                                                               
   and ExxonMobil  will pay  severance tax  at most  price levels                                                               
   after employing  the $73 million standard  deduction.  At high                                                               
   oil and gas  prices, and given our  cost assumptions, Anadarko                                                               
   and ChevronUnocal will also pay  severance tax after deducting                                                               
   the  $73  million  dollar   allowance,  given  the  production                                                               
   volumes reported publicly by those companies.                                                                                
8.   Which other tax regimes  - worldwide - have  a progressivity                                                               
TO BE PROVIDED                                                                                                                  
9.   How many private  royalty owners are  there in Alaska  - all                                                               
areas,  not  just the  North  Slope  (i.e., Nenana  Basin,  Kenai                                                               
Peninsula, native corporation holdings, etc).                                                                                   
   We do  not have information  on the number of  private royalty                                                               
   owners  in Alaska,  which would  include private  oil and  gas                                                               
   leases that  are not in  production.  Homesteads  staked under                                                               
   certain (but not all) federal  homestead laws included oil and                                                               
   gas rights, and any of the  owners of such parcels might enter                                                               
   into an oil and gas lease.                                                                                                   
10.   Provide a graph  showing the status  quo, the PPT,  and the                                                               
gas line contract terms.                                                                                                        
   This question appears  to query  the relationship  between tax                                                               
   under the  status quo,  the  PPT, and  the  gas line  contract                                                               
   terms.  At this time,  gas line contract terms  are not public                                                               
11.  Provide  information on the effect of  previous incentives -                                                               
the costs.                                                                                                                      
   Claimed expenses  under  SB  185  (AS43.55.025)  total  $104.8                                                               
   million and claimed credits  total $33.6 million. A  claim was                                                               
   received by  the Department  of  Revenue last  week, thus  the                                                               
   totals were updated from  the $95.5 million and  $29.0 million                                                               
   figures previously provided for claimed credits.                                                                             
12.   What  is  the rationale  for offering  the  same amount  of                                                               
credits for  non-state lease  lands where  the state  receives no                                                               
royalty tax benefit?  Was there discussion of a  reduction in the                                                               
credit to offset this?                                                                                                          
   The rationale  is that  the incentives  have the  potential to                                                               
   result in higher severance  taxes, taxes that are  assessed on                                                               
   any  oil   or  gas   production   within  Alaska's   sovereign                                                               
   territory.  Given  the overall  economic benefit  of increased                                                               
   production of oil  and gas (and  particularly gas in  the Cook                                                               
   Inlet where significant private lands occur), an incentive for                                                               
   exploration and  development even  in the  event that  a field                                                               
   would pay no taxes after incentives makes sense.                                                                             
13.  Why should Point Thomson be incentivised?                                                                                  
   We believe the  development of Point  Thomson may  be critical                                                               
   for the development of the gasline. Accordingly, incentivizing                                                               
   Point Thomson may well incentivize the gasline.                                                                              
   Point Thomson is particularly problematic for two reasons.                                                                   
   First, it is a high cost field since it is a high-pressure gas                                                               
   condensate reservoir; and second, we do  need the gas reserves                                                               
   to  underpin  the   gas  pipeline  economics.    By  providing                                                               
   incentives, the goal would be two-fold.   First, any incentive                                                               
   to encourage Point Thomson  improves the economics of  the gas                                                               
   pipeline.  Second, incentives  may encourage  early production                                                               
   of the  liquids, which  requires  expensive infrastructure  to                                                               
   handle the high-pressure production.                                                                                         
14.  Can you provide better definitions for "point                                                                              
of production" and "oil" and "gas" and has the State litigated                                                                  
these terms?                                                                                                                    
   We're not  clear whether this question  seeks more explanation                                                               
   of  the definitions  in  the  bill or  is  requesting that  we                                                               
   consider   modifying   those  definitions.   Please   clarify.                                                               
   Regarding past litigation, in general  the point of production                                                               
   and  the  definitions of  oil  and  gas  have not  been  major                                                               
   subjects of  litigation under the  production tax  statute. In                                                               
   contrast, there  has been  considerable litigation  of related                                                               
   concepts,  though   not  necessarily  the  phrase   "point  of                                                               
   production," in the royalty context.                                                                                         
   In the tax context, there was  at least one dispute decided at                                                               
   the   internal  DOR   appeal  stage   relating  to   point  of                                                               
   production, but  most of the  controversy in this  area played                                                               
   out   in  the   development  of   regulations  defining   "gas                                                               
   processing  plant" rather  than litigation.   The  use of  the                                                               
   term "gas processing" in the  bill is consistent with existing                                                               
   department regulations, but under  current law, gas processing                                                               
   generally is  considered an  activity occurring  downstream of                                                               
   the  point  of   production,  while  under  the   bill  it  is                                                               
   considered  an activity  occurring  upstream of  the point  of                                                               
15.  What steps must be  taken to make the tax credits refundable                                                               
rather than transferable?                                                                                                       
   This would require  a language  change to  Section 12  at Sec.                                                               
   43.55.024(d) and (e).  We are available  to work with drafters                                                               
   on the exact wording.                                                                                                        
16.  On Page 13, line 24 of  the bill, what does "payment in lieu                                                               
of" tie into for oil?                                                                                                           
   Section 21 [Sec.  43.55.160(d)(1)(B)] clarifies  that payments                                                               
   in lieu of  property taxes  are deductible.  Sec. 43.55.160(c)                                                               
   presents  the  general   rule  that  lease   expenditures  are                                                               
   deductible. Lease expenditures  would include  property taxes.                                                               
   Sub-section (d) provides clarification for items  that are not                                                               
   clear, such as "payments made in lieu of property taxes."                                                                    
17.   Does the limit on  transferable tax credits in  section 12,                                                               
(subsection (e)  limit the  amount of tax  credits that  a single                                                               
taxpayer can  take against their  own production tax in  a single                                                               
   Section 12 (Sec. 43.55.024(e))  limits the amount of  tax that                                                               
   can be reduced through purchased credits. There is no limit on                                                             
   credits utilized  by a  taxpayer that  were generated  by that                                                               
   same taxpayer.                                                                                                               
4:28:14 PM                                                                                                                    
SENATOR BEN  STEVENS said  he thought there  was a  limit stating                                                               
the taxpayer couldn't take his liabilities down to zero.                                                                        
MS. WILSON  replied that was  correct. The limit is  on purchased                                                               
credits.  She explained  more  that  if a  taxpayer  has its  own                                                               
credits and reduces its tax down  to some number, then this limit                                                               
applied at that level. The order  of credits was not specified in                                                               
the bill, but that is how she would expect it to be applied.                                                                    
SENATOR  BEN  STEVENS  asked  if   that  could  be  clarified  in                                                               
MS. WILSON replied yes.                                                                                                         
CHAIR  WAGONER directed,  "Let's make  it  easy to  get there  in                                                               
MS. WILSON  responded that she  would be  happy to work  with the                                                               
committee on drafting language.                                                                                                 
4:29:46 PM                                                                                                                    
18.    The  State  of  Alaska has  relied  on  the  services  and                                                               
expertise of multiple  outside law firms to  handle disputes over                                                               
oil and gas  issues. Have you conferred with such  counsel in the                                                               
drafting  or  review  of  this  legislation?  If  so,  have  they                                                               
assessed  the impacts  of the  legislation on  the State's  legal                                                               
position  in   past  agreements,  current  disputes,   or  future                                                               
   Yes, such counsel  (not all  of them)  has been  consulted and                                                               
   such assessments have  been discussed  but have  not generally                                                               
   been generated in formal written form.                                                                                       
SENATOR ELTON asked if the  discussion resulted in changes to the                                                               
MS.  WILSON  responded that  she  would  add clarification  about                                                               
19.    Have you  asked  the  Department  of  Law to  review  this                                                               
legislation  in  light  of  the  6   Circuit  Court  of  Appeals'                                                               
decision in  Cuno v  DaimlerChrysler that  is now  pending before                                                             
the United States Supreme Court?                                                                                                
   The Department of Law has examined this question.   As a Sixth                                                               
   Circuit decision, it has no direct precedence  for Alaska.  It                                                               
   is currently before the  U.S. Supreme Court and  many analysts                                                               
   believe that it will not be sustained in its current form.                                                                   
20.   Please provide information regarding  the expenditures that                                                               
will  qualify   for  the  transition  credits   -  including  the                                                               
depreciation  method chosen  under the  federal and  state income                                                               
tax systems.                                                                                                                    
   It appears  that  this  question  relates  to  the  transition                                                               
   provision in Section  21 [Sec.  43.55.160(g)], which  allows a                                                               
   deduction for  capital expenditures  made over  the last  five                                                               
   years,  deductible  over  the  next  six  years.  The  capital                                                               
   expenditures that qualify  for transitional treatment  are the                                                               
   same type of  expenditures that  qualify for  ongoing credits.                                                               
   These are  defined in  Section 12  [Sec. 43.55.024(h)].  These                                                               
   expenditures   include   exploration   expenses    and   those                                                               
   expenditures that  are capitalized  for federal  tax purposes.                                                               
   Exploration  expenses   include  geological   and  geophysical                                                               
   exploration. Expenditures capitalized for federal tax purposes                                                               
   include   intangible    drilling   costs.    The   capitalized                                                               
   expenditures are subject  to a variety  of useful  lives under                                                               
   federal and state income rules.  See Question 59 below.                                                                      
4:33:28 PM                                                                                                                    
SENATOR STEDMAN asked if she  had the actual dollars amounts they                                                               
were dealing with.                                                                                                              
MS.  WILSON replied  that she  had totals,  but not  depreciation                                                               
schedules for  all of  that equipment  by specific  company doing                                                               
business up here.                                                                                                               
4:35:37 PM                                                                                                                    
SENATOR  DYSON said  it looks  like a  consistent pattern  of the                                                               
state  giving longer  depreciation  schedules than  the feds.  He                                                               
asked  if  that  works  to   the  state's  advantage  or  to  the                                                               
companies' working in Alaska.                                                                                                   
MS. WILSON  replied that  it is to  the state's  benefit, because                                                               
under  the  federal  rules,  companies can  write  off  an  asset                                                               
quicker and on an accelerated basis.                                                                                            
SENATOR  DYSON asked  if the  state has  considered reducing  the                                                               
depreciation period in order to  encourage more investment in the                                                               
kinds of equipment that would increase production.                                                                              
MS. WILSON replied no.                                                                                                          
4:37:48 PM                                                                                                                    
SENATOR  STEDMAN  asked  if  there  had  been  discussions  about                                                               
accelerating   the  tax   rate  to   stimulate  exploration   and                                                               
MS. WILSON replied  that those tools were at  their disposal. The                                                               
state uses a  worldwide combined method for  income tax purposes.                                                               
This  means that  all of  the income  worldwide for  oil and  gas                                                               
companies is combined in a pie and  the state gets a piece of it.                                                               
When  addressing depreciation  methods, they  are addressing  not                                                               
just  what would  happen with  the particular  production company                                                               
doing business in Alaska, but  depreciation methods for the whole                                                               
corporate  groups in  every other  state  and for  our country  -                                                               
21.   Have  any of  the definitions  in sections  30-33 been  the                                                               
subject of disputes  with tax and/or royalty payers  in the past?                                                               
To  the extent  they  have, please  provide  the definitions  the                                                               
state asserted in those disputes.                                                                                               
   See question 18 above.                                                                                                       
22.  Please provide an  identification of the point of production                                                               
at each unit  in the state under  existing statutes, regulations,                                                               
agreements,  and court  decisions.   Provide the  same under  the                                                               
definition as proposed.                                                                                                         
TO BE PROVIDED                                                                                                                  
23. Please provide an identification  of 'gas treatment' and 'gas                                                               
processing' facilities in the state  under the existing statutes,                                                               
regulations, agreements,  and court decisions.   Provide the same                                                               
under the definition as proposed.                                                                                               
TO BE PROVIDED                                                                                                                  
4:40:28 PM                                                                                                                    
SENATOR  ELTON wanted  to know  if the  definitions should  be in                                                               
statute or regulation.                                                                                                          
24.  What  standard will be used to determine  whether oil or gas                                                               
is of 'pipeline quality' under  the definition of 'gross value at                                                               
the point of production?'                                                                                                       
   This term  only appears in  the definition  of "oil."   It was                                                               
   not in  the old definition,  nor the new definition  of "gas."                                                               
   The standard for "pipeline quality"  has not changed under the                                                               
   bill.  The standard is based on a series of court cases.                                                                     
25.   Provide a historical  analysis of the results  of valuation                                                               
methodologies adopted  by the  Department of  Revenue, Department                                                               
of Natural  Resources (under all agreements),  and the Department                                                               
of the Interior.                                                                                                                
TO BE PROVIDED                                                                                                                  
26.    Will  abandonment  costs be  eligible  for  deductions  or                                                               
credits  under the  legislation?   If so,  what estimates  of the                                                               
timing  and  costs  of  those   activities  does  the  Department                                                               
   See Question 2 for  deductibility of abandonment costs.   With                                                               
   regard to costs,  we are  aware of no  field having  ever been                                                               
   abandoned in Alaska, and so we do not  have any empirical data                                                               
   on costs.                                                                                                                    
27.    How  will  AS   43.55.160(j)  protect  the  State  from  a                                                               
proliferation  of corporate  entities  and/or companies  claiming                                                               
the tax-free allowance?                                                                                                         
TO BE PROVIDED                                                                                                                  
28.   Provide  the number  of exploration  and delineation  wells                                                               
estimated  to  be  drilled  over  the first  ten  years  of  your                                                               
economic  models.   Include the  technical  and economic  success                                                               
rates projected in the modeling.                                                                                                
   Five exploration  wells per  year are  included in  the model.                                                               
   The Department  of Revenue  assumes $100  million is  spent on                                                               
   exploration per  year.  With  average  costs  of  $20  million                                                               
   dollars per  well, this  comes  out to  five  wells per  year.                                                               
   Delineation wells are separate and  included under development                                                               
   expenditures. The model assumes there are  four finds of large                                                               
   oil accumulations -  reserves in  place that  would be  on the                                                               
   order of 500 million barrels. There  are four relatively small                                                               
   fields that  are  characterized as  being  "heavy" oil.  These                                                               
   fields would pay  no production tax  under the  current system                                                               
   because their Economic  Limit Factor [ELF]  would be  zero. We                                                               
   did not include a "success rate" in our model.                                                                               
29.   Provide  estimates  for undiscovered  resources in  Alaska.                                                               
Include  the   breakdown  between  technically   recoverable  and                                                               
economically recoverable resources to the extent possible.                                                                      
TO BE PROVIDED                                                                                                                  
30.  Provide  a historical analysis of the effective  tax rate on                                                               
each field in production on the  North Slope over the past twenty                                                               
     See Attachments A1  and A2.  These  tables contain effective                                                               
     tax rates since  1986 for all Alaskan fields  on gross value                                                               
     at the  point of production.   The effective tax  rate shown                                                               
     on these  tables is the  ELF x  12.25 percent for  the first                                                               
     five years of  production, and ELF x  15 percent thereafter.                                                               
     We note the effective rate  varies between 15.0 percent, for                                                               
     Prudhoe  Bay  through  1987 (when  the  so-called  "rounding                                                               
     rule"  rounded the  ELF  up to  1), and  0.0  percent for  a                                                               
     number of fields for a number of years.                                                                                    
31.   How  will  Net  Profit Share  Leases  be  affected by  this                                                               
legislation? Will the gross costs  of exploration and development                                                               
go  into  the  Development  Account-or those  costs  net  of  the                                                               
credits and deductions?                                                                                                         
TO BE PROVIDED                                                                                                                  
4:45:37 PM                                                                                                                    
32.  It's  been reported that the gas line  contract will propose                                                               
the state take  its gas production tax share in  the form of gas.                                                               
How does that work in this bill?                                                                                                
   In the gasline  contract the state has  indeed proposed taking                                                               
   deliveries of  gas in place of  a production tax; this  is not                                                               
   reflected  in  the PPT  bill  which  will  stand on  its  own,                                                               
   gasline or  no.   Under the  PPT, if  the producers  sell gas,                                                               
   those revenues  would be part  of the net  profit calculation.                                                               
   Under the  gasline, they would  not.  Instead the  state would                                                               
   receive  a percentage  of  the gas,  which  it would  monetize                                                               
   thought marketing.   Note  that the  costs of  developing (for                                                               
   example -  Point Thomson)  or running  (for example  - Prudhoe                                                               
   Bay) a  field that  produces both  oil and  gas would  go into                                                               
   calculating the oil profits for the PPT.                                                                                     
4:46:58 PM                                                                                                                    
SENATOR ELTON asked  if she made an adjustment for  what it costs                                                               
the state to monetize its gas that it's taking in lieu of cash.                                                                 
MS. WILSON  responded that  she would have  someone get  in touch                                                               
with him about that question.                                                                                                   
33.   Of the pre-PPT  credit provisions  (or claw back),  what is                                                               
the cost to the  state for legacy fields and what  is the cost to                                                               
the state for frontier regimes?                                                                                                 
   See question 20.                                                                                                             
SENATOR ELTON  asked how  much of  the $5  billion that  the look                                                               
back costs  the state would be  accrued on the legacy  fields and                                                               
versus the frontier regions.                                                                                                    
MS. WILSON responded  that she didn't have  that information, but                                                               
she would research it.                                                                                                          
34.  Of  the pre-PPT credit provisions (the claw  back), how many                                                               
investment credits  were sold under SB  185 and how do  we ensure                                                               
the  person who  holds the  credit, not  the original  recipient,                                                               
gets the credit?                                                                                                                
     Sale of  credits under  SB185 do not  effect the  ability of                                                               
     the   seller  to   claim  those   credits  as   Transitional                                                               
     Investment  Expenditures (that  is to  qualify for  the claw                                                               
35.   If we have a  gas pipeline in  2015, what will the  ELF tax                                                               
"take" be  on North Slope gas  and what will the  "take" be under                                                               
the PPT?   What will the  "take" be under  PPT if we take  gas in                                                               
lieu of the production tax (the  take would, I assume be the day-                                                               
to-day value of  the gas less the state's cut  in selling the gas                                                               
on the marketplace)?                                                                                                            
   Without  getting   into  price  sensitive  forecast,   or  the                                                               
   confidential  draft gas  contract, we  can make  the following                                                               
   observations  about the  comparison:   The upstream  costs are                                                               
  covered in the PPT, so the difference could be as simple as:                                                                  
     (a)    Under the PPT, a taxpayer would pay 20 percent of                                                                   
            the gross  value at the point of  production, that is                                                               
            sales  revenues less  the tariff  charged by  the Gas                                                               
            Treatment  Plant  and the  tariff  between the  North                                                               
            Slope  and the  point of  sale would  be paid  to the                                                               
            state (without taking into  account the effect of the                                                               
            $73 million dollar allowance).                                                                                      
     (b)    Under the gas contract, the state will receive some                                                                 
            percentage  of  the  gas  and  then  pay  the  tariff                                                               
            charged  by the  Gas Treatment  Plant and  the tariff                                                               
            between  the North Slope  and the  point of  sale. If                                                               
            the state  owns part of the pipeline,  then the state                                                               
            will also  receive that portion of  the tariff, which                                                               
            is profit accruing to the owner.                                                                                    
4:50:34 PM                                                                                                                    
36.   Is current  production tax  deductible from  corporate tax?                                                               
If  no,   is  this  impact   in  the  models  presented   by  the                                                               
   Yes, current production is deductible from corporate tax.                                                                    
37.  Referring to Section five, what oil and gas is exempt from                                                                 
taxation - just what is discussed in Section 10?                                                                                
   The oil and gas royalty amounts  paid to the state and federal                                                               
   government  are  exempt. (AS  43.55.900    (13) "ownership  or                                                               
   right to  which is exempt  from taxation" means  any ownership                                                               
   interest of the federal government or the state.")                                                                           
   Section 10  simplifies treatment of flared  gas. Under current                                                               
   law  there  are  three  categories   of  gas  -  gas  used  in                                                               
   production operations  which is exempt from  tax, gas produced                                                               
   in  excess  of  that  needed  for  safety  purposes  which  is                                                               
   taxable,  and  gas flared  beyond  the  amount authorized  for                                                               
   safety  which is  taxed and  subject to  a penalty.  Currently                                                               
   there is no 'free use of  oil' to produce more oil in statute.                                                               
   The bill  exempts from tax any  oil or gas used  in production                                                               
   operations,  unless  the  Alaska   Oil  and  Gas  Conservation                                                               
   Commission determines  that it was  waste (instead of  used to                                                               
   produce salable hydrocarbons), in which case it is taxed.                                                                    
38.  Referring to Section 6, will there be any impact to current                                                                
state taxes or municipality taxes from this change?                                                                             
   No, there  should be no  impact to current state  or municipal                                                               
   taxes.  This  language change simply makes  the description of                                                               
   Intangible  Drilling Costs  consistent  with Internal  Revenue                                                               
   Code  language,   which  is  how  this   item  is  interpreted                                                               
4:53:24 PM                                                                                                                    
39.  Why was the payment for taxes and surcharges changed from                                                                  
the 20 day to the last day of the month?  What is the economic                                                                  
impact of this change?                                                                                                          
   There is  no economic impact  and this just clears  up current                                                               
   language. Under AS 43.55.020, payment  for the tax is "due" on                                                               
   the 20.   However, the tax is not  "delinquent" until the last                                                               
   day of the  month. The significance of this  is that according                                                               
   to  AS  43.05.225,  interest  is  assessed  only  when  a  tax                                                               
   "becomes delinquent."   Thus this bill makes the  due date the                                                               
   end of the month and in  Section 7 establishes that "an unpaid                                                               
   amount of  tax that is  not paid  when due in  accordance with                                                               
   this subsection becomes delinquent."                                                                                         
4:54:07 PM                                                                                                                    
SENATOR ELTON asked if the tax would still be delinquent from                                                                   
the last day of the month.                                                                                                      
MS. WILSON replied yes.                                                                                                         
40.   Do  other nations  with  a net  profit system  have the  90                                                               
percent  payment   of  taxes  with  the   sure-up  provision  the                                                               
following year?  What is the economic impact of this change?                                                                    
TO BE PROVIDED                                                                                                                  
41.   What are  the penalties for  under-payment when  sure-up is                                                               
more than 10 percent of the taxes owed?                                                                                         
   If the  taxpayer does not  pay 90 percent, then  interest will                                                               
   be  due on  the difference  between the  tax paid  and the  90                                                               
   percent amount.                                                                                                              
4:55:14 PM                                                                                                                    
CHAIR WAGONER asked how many lawsuits  the state had been in over                                                               
interest accrued  on the tax  penalties. The dispute he  was most                                                               
familiar with was pretty drawn out.                                                                                             
MS. WILSON replied  that she was aware of some  in the income tax                                                               
safe harbor  area, but she didn't  know if any of  those had been                                                               
CHAIR  WAGONER said  he wasn't  referring  to those,  but to  the                                                               
true-up and whether  they had to pay the full  90 percent on time                                                               
to  the state.  The  state assesses  a  penalty that  accumulates                                                               
pretty fast and that caused some litigation at one point.                                                                       
MS. WILSON responded  that under current law,  production tax has                                                               
no safe  harbor clause  to the  90 percent  rule. She  offered to                                                               
research this issue further.                                                                                                    
42.   Referring to Section  10, why does  the Alaska Oil  and Gas                                                               
Conservation Commission's  (AOGCC) role  change from  focusing on                                                               
excess needed  for safety reasons  to whatever they  determine to                                                               
be waste?   Does this provision  provide more power to  the AOGCC                                                               
on what is included/excluded for taxation?                                                                                      
   Under  current   law,  as  applied  by   DOR  regulation,  the                                                               
   categories  of  flared gas  recognized  by  DOR are  different                                                               
   from,  although  related  to,  the  categories  recognized  by                                                               
   AOGCC.  The   bill  will   simplify  the   categorization  and                                                               
   harmonize it completely with AOGCC's.  This simply creates one                                                               
   standard  administered  by AOGCC  in  place  of two  standards                                                               
   administered by two agencies.                                                                                                
43.    Why  does  it  seem the  credits  and  incentives  are  on                                                               
production  along with  exploration if  our focus  is to  provide                                                               
incentives for exploration?                                                                                                     
   The bill  is based  on the  expectation that  investment, both                                                               
   exploration and in existing fields, will increase production.                                                                
5:00:11 PM                                                                                                                    
44.  Can  the carry-forward amount be used for  a credit for more                                                               
than the first year after the loss?                                                                                             
   Yes,  the  credit  carry-forwards can  be  used  indefinitely.                                                               
   There is no time limit on the credit carry-forwards.                                                                         
5:00:14 PM                                                                                                                    
45.    Is  it  the  case that  any  allowable  expenses  for  the                                                               
exploration, development,  or production  of gas can  be deducted                                                               
from oil  revenues in determining  net value?   If so,  could the                                                               
expenses of a gas line be included in these deductible expenses?                                                                
   Expenses are allowable  only if they are "upstream"  costs.  A                                                               
   gas  line is  "downstream" and  so would  not be  a deductible                                                               
5:02:11 PM                                                                                                                    
46.  Why not use  generally accepted accounting principles (GAAP)                                                               
versus  setting  up  our  own system  of  defining  revenues  and                                                               
   GAAP   are  useful   for  determining   whether  an   item  of                                                               
   expenditure can be classified as  an "expense."  GAAP does not                                                               
   differentiate between  expenses incurred  specific to  a lease                                                               
   and those expenses that are  indirect to a lease. For example,                                                               
   GAAP does not distinguish between  wages paid to a lease-based                                                               
   worker, and an employee in the home office.                                                                                  
5:02:58 PM                                                                                                                    
47.  Which credits can be applied to multiple years?                                                                            
   There is  no time  limit for  credit carry-forwards  under the                                                               
   bill  or for  the optional  credit codified  in AS  43.55.025.                                                               
   However,  any  dollar  of investment  can  only  generate  one                                                               
   credit, and that credit can only be used once.                                                                               
5:03:29 PM                                                                                                                    
48.  Can a tax credit be sold in any year or just the year after                                                                
it was accrued?                                                                                                                 
   Once the credit has been  turned into a Credit Certificate, it                                                               
   can be  sold at  any time.   A person can  apply for  a Credit                                                               
   Certificate  at any  time, but  the bill  allows the  Dept. of                                                               
   Revenue  a  period  of  time  in which  to  issue  the  Credit                                                               
   Certificate. [See Section 12, Sec. 43.55.024(g)]                                                                             
49.  What is the estimated economic impact to the state of the                                                                  
ability to sell tax credits?                                                                                                    
TO BE PROVIDED                                                                                                                  
50.  Referring to Section 16, what is the current system and why                                                                
do we need this change in confidentiality?                                                                                      
   The bill codifies current practice  embodied in regulations in                                                               
   our treatment  of taxpayer information.  The only  change here                                                               
   is  that  the  bill  makes clear  that  any  person  receiving                                                               
   information  released under  current department  practices, is                                                               
   subject to the  same criminal penalties that apply  to a state                                                               
   The  current  confidentiality  law  is  very  general  in  its                                                               
   exception  language -  information must  be kept  confidential                                                               
   "except   in  connection   with  official   investigations  or                                                               
   proceedings...."  The  Department  believes that  current  law                                                               
   does  allow disclosure  under the  circumstances specified  in                                                               
   the bill, but there has been  some question about that, and it                                                               
   would be desirable  to clarify the meaning of the  law, as the                                                               
   bill  does.  In  addition,  there  is  the  new  provision  on                                                               
   penalties, referred to above.                                                                                                
51.  In what circumstances would oil and gas taxes go straight                                                                  
into the Constitutional Budget Reserve Fund (CBRF).                                                                             
   Additions to  the Constitutional Budget Reserve  Fund are made                                                               
   for  any  oil and  gas  taxes  collected  in resolution  of  a                                                               
   dispute.  That  means that  amounts  collected  because of  an                                                               
   audit assessment,  or subsequent settlement, are  additions to                                                               
   the CBRF.                                                                                                                    
52.  Referring to Section 18 and 19, why change from "shall" to                                                                 
   This  change  is  made  in accordance  with  the  state  style                                                               
5:07:08 PM                                                                                                                    
53.  Why does the bill  offer multiple methods to determine gross                                                               
value?  Who will choose a methodology?                                                                                          
   The  bill  does  not  directly   allow  a  taxpayer  to  elect                                                               
   alternative  methods;   it  just  allows  the   Department  to                                                               
   authorize use of an alternative  method. The election referred                                                               
   to would  be an election  between using an  alternative method                                                               
   or just calculating  gross value according to  the usual rules                                                               
   -  NOT   an  election  among  several   different  alternative                                                               
   methods. In  implementing this provision, the  Department will                                                               
   no doubt  develop criteria for  when a  particular alternative                                                               
   method would be appropriate. I  don't think we can predict now                                                               
   whether  there might  be circumstances  under which  more than                                                               
   one alternative  method might be  appropriate and  under which                                                               
   the  Department  would authorize  a  taxpayer  to elect  among                                                               
   several alternative methods.                                                                                                 
SENATOR  ELTON assumed  it authorizes  the  department to  select                                                               
among alternatives that could be negotiated with the taxpayer.                                                                  
MS. WILSON  that was not  the intention,  but it was  to simplify                                                               
methods of coming up with value.                                                                                                
5:09:07 PM                                                                                                                    
54.  Section 21, page 1, line  8 - Why is this clause constrained                                                               
to Dec. 1, 2005?                                                                                                                
TO BE PROVIDED                                                                                                                  
55.    Section   21,  provision  (h),  which  US   CPI  does  the                                                               
Administration plan on using?                                                                                                   
   This would be  established by regulation.   The Department has                                                               
   not evaluated the various CPI's at this time.                                                                                
56.  Are the current  oil conservation surcharges deductible from                                                               
any other  taxation?  If  no, what is  the policy reason  to make                                                               
them a credit in SB 305 and what is the economic impact?                                                                        
   Yes, current  oil conservation surcharges are  deductible from                                                               
   corporate income tax.                                                                                                        
Other Questions                                                                                                               
57.  Do any other state taxes have a "standard deduction"?                                                                      
   a.   Seafood Marketing Assessment  (ASMI) tax is  imposed only                                                               
   on  processors/exporters  that  process  or  export  fisheries                                                               
   resources with a  value of $50,000 or more in  a calendar year                                                               
   [AS 16.51.120(g)].                                                                                                           
   b.  Mining License Tax is  not imposed when net income is less                                                               
   than $40,000 in a fiscal year [AS 43.65.010(c)].                                                                             
   c.   Gaming tax  exempts gross receipts  of less  than $20,000                                                               
   from paying the additional fee under AS 05.15.020(b).                                                                        
   d.   Alaska's Estate Tax  follows federal rules, but  the most                                                               
   recent exemption (FY05) included  estates valued at under $1.5                                                               
5:11:49 PM                                                                                                                    
58.  How many Net Profit Share Leases (NPSL) are in the state                                                                   
and how much are they paying in royalties?                                                                                      
   Out  of 19  NPSLs, seven  are paying  royalties.   These seven                                                               
   include five  in the  Milne Point  Unit, and  two in  the Duck                                                               
   Island Unit,  and they  began paying  in 2001.   The  total of                                                               
   NPSL payments received in calendar  year 2005 was $81 million.                                                               
  Total receipts from NPSLs from 2001-2005 were $254 million.                                                                   
   Out of  19 NPSLs, seven  are paying net profit  share payments                                                               
   (in addition  to royalties and production  taxes). These seven                                                               
   include five  in the  Milne Point  Unit, and  two in  the Duck                                                               
   Island Unit, and they began paying  in 2001. The total of NPSL                                                               
   payments  received  in calendar  year  2005  was $81  million.                                                               
   Total  NPS  receipts  from NPSL's  from  2001-2005  were  $254                                                               
   million. Net profit share payments  are not deductible for PPT                                                               
   purposes  or for  the current  production  tax. Royalties  and                                                               
   production taxes are deductible for NPS purposes.                                                                            
   Royalties,  however,  are  paid  on net  profit  share  leases                                                               
   according to each individual lease  contract. For example, one                                                               
   NPS  lease  in Duck  Island  Unit  has  a twenty  percent  (20                                                               
   percent) royalty rate. Other NPS  leases may have the standard                                                               
   royalty  rate of  12.5 percent  or another  negotiated royalty                                                               
   rate.  Royalties  and production  taxes  are  due from  a  net                                                               
   profit share lease  as long as there is  production, even when                                                               
   there is no net profit share payment from the property.                                                                      
   Attached is an Excel table of producing and non-producing NPS                                                                
   leases showing the lease number, the net profit share rate                                                                   
   and the royalty rate for each lease. (See Attachment B)                                                                      
59. What are the depreciable lives for O & G equipment for                                                                      
federal and state income tax purposes?                                                                                          
   Equipment for exploration and production                                                                                     
   including drilling, gathering pipelines, pumping                                                                             
   equipment,        separation         equipment,        certain                                                               
   platforms                                  7        11                                                                       
  Offshore drilling                              5           6                                                                  
   Pipelines, excluding gathering and                                                                                           
   transmission lines                             15        17.5                                                                
   Vessels, barges, other water                                                                                                 
   transportation equipment                       10        14.5                                                                
60.  Please provide the tax calculation under the bill, with the                                                                
following assumptions:                                                                                                          
     --Gross value       $60M                                                                                                   
     --Opex                15M                                                                                                  
     --Capex          10M                                                                                                       
          Gross value                                  $60M                                                                     
          Less:  Opex                                   (15)                                                                    
          Tentative net profit                                                                                                  
              Before standard deduction                     $35M                                                                
          Less:  standard deduction*                        (35)                                                              
          Net Taxable income                           $ 0                                                                    
          Tax                                     $ 0                                                                           
          Capital investment credit available for carry forward                                                                 
               (20% of $10M)                      $5M                                                                           
* this  calculation assumes  that taxpayer  has not  reached $73M                                                               
limit for the standard deduction.                                                                                               
SENATOR STEDMAN  asked if the  capital carry-forward would  be 20                                                               
percent of $10 million.                                                                                                         
MS. WILSON replied yes.                                                                                                         
5:15:48 PM                                                                                                                    
61.   Are net  profit lease  payments included  as a  direct cost                                                               
under 43.55.160?                                                                                                                
   Net profit share payments under  NPSLs would not be deductible                                                               
   lease expenditures  because they  are in  the nature  of lease                                                               
   acquisition costs. Lease acquisition  costs are not deductible                                                               
   per Section 21 [Sec. 43.55.160(d)(2)(E)].                                                                                    
62.  Are  lease bonus payments eligible for  capital credit under                                                               
43.55.024  and/or  are  they  included as  a  direct  cost  under                                                               
   Lease bonus  payments are neither deductible  nor eligible for                                                               
   capital credits.   Lease bonus  payments are in the  nature of                                                               
   lease acquisition costs which  are specifically not deductible                                                               
   per Section 21 (Sec. 43.55.160(d)(2)(E)).                                                                                    
63.   How are payments  for "spec  3D" handled?  Are  they credit                                                               
eligible  under 43.55.024  or only  allowed  as deductions  under                                                               
   We  understand "spec  3D" to  be  certain seismic  exploration                                                               
   costs.   Exploration  costs are  allowed  as deductions  under                                                               
   Section 21  of the  bill [Sec.  43.55.160(c)]. Such  costs are                                                               
   also eligible  for credits under  Section 12  (Sec. 43.55.024)                                                               
   by reference to definition  of "qualified capital expenditure"                                                               
   at Sec. 43.55.024(h).                                                                                                        
64.  Please explain the taxation or exemption of royalties.                                                                     
   Public  royalties (paid  to  federal  or state  jurisdictions)                                                               
   never enter into the base of  gross value.  This is so because                                                               
   AS 43.55.011(a)  levies the tax  on oil except  the "ownership                                                               
   or right  to which  is exempt from  taxation." This  phrase is                                                               
   then defined in AS 43.55.900(13) as follows:                                                                                 
     "any ownership interest of the federal government or the                                                                   
   These sections are not changed in the bill.                                                                                  
   Because the bill  changes the tax to a tax  on net profits, it                                                               
   is   necessary   to    specify   deductions.   Royalties   are                                                               
   specifically disallowed as a deduction  under Section 21 [Sec.                                                               
   43.55.160(d)(2)(B)].  Royalties  paid  to  state  and  federal                                                               
   jurisdictions  cannot   be  deducted  because  they   are  not                                                               
   included  in the  starting  "gross  value." Private  royalties                                                               
   cannot be  deducted because the related  production is subject                                                               
   to tax.                                                                                                                      
65.  Under  Section  21  [Sec.  43.55.160(d)],  "direct  costs...                                                               
include…."   Does the word  "include" serve to restrict  the list                                                               
of allowable expenses to only  those items included below in (A)-                                                               
    No, Sec.  43.55.160(d) provides additional  clarification for                                                               
   the general rule  stated at sub-section (c).   Sub-section (c)                                                               
   provides  the general  rule that  lease costs  are deductible.                                                               
   Sub-section (d) addresses only those  items that may have been                                                               
   questionable under  the general  rule.  Additionally,  we note                                                               
   that under AS 01.10.040(b):                                                                                                  
     "When the words 'includes' or 'including' are used in a                                                                    
     law, they shall be construed as though followed by the                                                                     
     phrase 'but not limited to.'"                                                                                              
5:18:48 PM                                                                                                                    
MS. WILSON said  that the rest of answers would  be provided next                                                               
5:19:29 PM                                                                                                                    
SENATOR STEDMAN  asked to  go back  to question  24 and  asked if                                                               
those  court cases  were  settled  by a  judge  or  if they  were                                                               
negotiated settlements between the department and the industry.                                                                 
MS.  WILSON replied  that they  were actual  court cases  and she                                                               
offered to get more information on that issue.                                                                                  
CHAIR  WAGONER   noted  there  were  no   further  questions  and                                                               
adjourned the meeting at 5:21:05 PM.                                                                                          

Document Name Date/Time Subjects