Legislature(2007 - 2008)BUTROVICH 205
10/19/2007 09:00 AM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB2001 | |
| Department of Revenue - Commissioner Galvin and Jonathan Iversen | |
| Gaffney, Cline & Associates Inc. - Bob George and Rich Ruggiero | |
| Kevin Banks, Dnr | |
| Jon Iversen and Marcia Davis, Dor; Kevin Banks, Dnr | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB2001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
October 19, 2007
9:02 a.m.
MEMBERS PRESENT
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Lyda Green
Senator Gary Stevens
Senator Bill Wielechowski
Senator Thomas Wagoner
Senator Lesil McGuire
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Senator Hollis French
Senator Kim Elton
Senator Lyman Hoffman
Senator Joe Thomas
Senator Bettye Davis
Senator Johnny Ellis
Representative Jay Ramras
COMMITTEE CALENDAR
SENATE BILL NO. 2001
"An Act relating to the production tax on oil and gas and to
conservation surcharges on oil; relating to the issuance of
advisory bulletins and the disclosure of certain information
relating to the production tax and the sharing between agencies
of certain information relating to the production tax and to oil
and gas or gas only leases; amending the State Personnel Act to
place in the exempt service certain state oil and gas auditors
and their immediate supervisors; establishing an oil and gas tax
credit fund and authorizing payment from that fund; providing
for retroactive application of certain statutory and regulatory
provisions relating to the production tax on oil and gas and
conservation surcharges on oil; making conforming amendments;
and providing for an effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 2001
SHORT TITLE: OIL & GAS TAX AMENDMENTS
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
10/18/07 (S) READ THE FIRST TIME - REFERRALS
10/18/07 (S) RES, JUD, FIN
10/19/07 (S) RES AT 9:00 AM BUTROVICH 205
WITNESS REGISTER
PATRICK GALVIN, Commissioner
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Gave presentation on SB 2001 and answered
questions.
JONATHAN IVERSEN, Director
Tax Division
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Assisted with presentation on SB 2001 and
answered questions.
BOB GEORGE
Gaffney, Cline & Associates Inc.
POSITION STATEMENT: Assisted with presentation on SB 2001 and
answered questions.
RICH RUGGIERO
Gaffney, Cline & Associates Inc.
POSITION STATEMENT: Assisted with presentation on SB 2001 and
answered questions.
KEVIN BANKS, Acting Director
Division of Oil & Gas
Department of Natural Resources
400 Willoughby Avenue
Juneau, AK 99801-1724
POSITION STATEMENT: Answered questions pertaining to SB 2001.
MARCIA DAVIS, Deputy Commissioner
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Assisted with presentation on SB 2001 and
answered questions.
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the Senate Resources Standing
Committee meeting to order at 9:02:23 AM. Present at the call
to order were Senators Bert Stedman, Lyda Green, Gary Stevens,
Bill Wielechowski, and Chair Huggins. Senator Thomas Wagoner
arrived shortly thereafter, and Senator Lesil McGuire arrived as
the meeting was in progress. Also in attendance were Senators
Hollis French, Kim Elton, Lyman Hoffman, Joe Thomas, Bettye
Davis, and Johnny Ellis, and Representative Jay Ramras.
SB 2001-OIL & GAS TAX AMENDMENTS
9:03:08 AM
CHAIR HUGGINS announced consideration of SB 2001.
SENATOR WAGONER joined the committee.
CHAIR HUGGINS reminded members that the previous day Dr. Pedro
van Meurs and Daniel Johnston had discussed PPT, known as both
the petroleum production tax and the petroleum profits tax.
Chair Huggins asked Commissioner Galvin how the position
recommended on behalf of Governor Palin had evolved. In
particular, he wanted to know what tipping points had convinced
the governor to recommend the net tax concept for the current
legislation, especially since she'd campaigned on the gross tax
concept. He also asked the commissioner to reflect on the
presentations by Dr. van Meurs and Mr. Johnston.
9:07:32 AM
^Department of Revenue - Commissioner Galvin and Jonathan
Iversen
PATRICK GALVIN, Commissioner, Department of Revenue (DOR), noted
those topics would be covered at the joint meeting Sunday,
October 21. Today he would give an overview that frames
Alaska's Clear and Equitable Share (ACES) and the oil tax policy
in general; the administration's slide presentation on ACES was
provided in hardcopy form, dated 10/18/07. He also would
describe sections of the bill. Noneconomic issues would be
addressed, since the following two days were for fiscal issues.
COMMISSIONER GALVIN began the slide presentation. He emphasized
that ACES is about investment, recognizing Alaska needs to
invest in oil development to maximize the opportunity for
companies to pursue new oil resources. In addition, ACES is
about investing today's opportunities for surpluses to cover
tomorrow's needs. When the State of Alaska moved to PPT there
was a fundamental shift in its oil tax policy, changing its
relationship with the oil and gas industry. With the
combination of deductions and credits, companies can reduce
their tax burden or may receive a payment from the state of 42
to 52.5 percent of their capital investment costs in oil
development. As a result, the state becomes the single largest
investor in new development on the Alaska North Slope (ANS),
which entails taking on the risks associated with whether such
investment decisions pan out.
COMMISSIONER GALVIN showed a graph labeled "ANS Production
Forecast (Spring 2007)" that depicts historical and forecasted
ANS production scenarios for FY 2000-2020. Slated to be revised
soon by DOR, it reflects the level of production expected with
no additional investment in the next 15-20 years. The area on
the graph labeled "under evaluation," where investment decisions
haven't yet been made, is critical to sustaining current
production levels. Thus the state is putting so much value in
the tax system, incentivizing this development.
CHAIR HUGGINS welcomed Senators French, Elton, and Hoffman.
9:11:57 AM
COMMISSIONER GALVIN showed slide 5, "Investing Today's Surplus
for Tomorrow." He said in addition to investing in oil
development, ACES provides a fair share of oil revenues to meet
today's fiscal needs; provides surpluses during times when oil
sells at a premium so this can be saved and invested to protect
the overall economy from the need for future sales or income
tax; and provides stability in the fiscal system to shelter and
foster economic diversification.
COMMISSIONER GALVIN turned to slide 6, "State Budget Forecast
(Spring 2007)," which depicts an example of revenue shifting.
He noted there currently are surplus revenues - more than the
state expected - because of high oil prices. If saved for the
future, these revenues can provide economic stability and foster
that investment opportunity.
9:13:31 AM
CHAIR HUGGINS asked whether the idea is to tailor the operating
budget and capital budget for a source of savings.
COMMISSIONER GALVIN replied yes. It is a combination of
bringing in revenue and having the fiscal discipline to not
spend it all in a current year. That's an important message of
the governor and this administration: recognizing this time of
premium revenue because of current high oil prices. In further
response, he affirmed that the administration is working on the
upcoming budget, but he hadn't been involved in discussion of
the target amount of reduction in the operating budget; rather,
he'd focused on oil tax issues. He suggested Karen Rehfeld of
the Office of Management & Budget (OMB) could answer.
SENATOR STEDMAN asked when they would get into the definition of
"fair share."
9:14:50 AM
COMMISSIONER GALVIN answered that it is reflected in the slide
being shown: striking the balance where the state gets the
additional revenues it can under today's fiscal opportunities,
while preserving investment opportunity for ANS developers in
order to get the revenues the state can - not leaving any money
on the table. He couldn't say what that number would be. Over
the next few days the administration would provide compelling
information not available to the legislature or the state
previously; this would assist in evaluating investment decisions
faced by companies today, along with the impact of moving that
share out, getting more for future investment for state revenues
while retaining the amount of investment expected otherwise.
SENATOR STEDMAN referenced the previous chart. He asked whether
the administration agrees with the legislature about trying to
move forward surplus moneys, as done last year to the tune of
more than $1 billion, to try to fill that gap. He suggested it
is a continuation of what the legislature has been doing, not a
new direction.
COMMISSIONER GALVIN concurred, emphasizing the importance of
recognizing today's opportunity to capture that surplus and use
it for the future.
9:17:20 AM
SENATOR WIELECHOWSKI highlighted figuring out the balance
between investment and getting the maximum benefit. He referred
to budget forecasts in the chart and to the $3 billion deficit
shown from 2014 or 2015 to 2020. He expressed concern that
while this budget forecast is using the current PPT - which was
supposed to encourage new investment and new revenue - it
doesn't appear to be happening in the forecast.
COMMISSIONER GALVIN responded that the budget numbers primarily
reflect two variables: production and price. Those large gaps
are because within the price model it goes out seven years and
then drops to an historical long-term expected price, a number
half of today's price. That is only changed every other year.
Although it's an anomaly with how price forecasts are modeled,
it also reflects that declining production curve. He agreed a
large part of the concern is from the expectation that ten years
from now there'll be two important parts of that investment
need: 1) there must be a lot of investment in order to just
have the expected revenue, and 2) there must be ways to
encourage it, if there is to be any chance of increasing that or
flattening it out more.
COMMISSIONER GALVIN noted production estimates haven't been
changed due to altered behavior because of the switch to PPT or
ACES. There is no data yet to indicate whether the changed
behavior is happening or will happen. However, they are hopeful
and confident that with this large amount of investment, Alaska
will be one of the most attractive places worldwide for new
entrants to invest, given the economic benefits up front in
these projects. But until that is seen and they actually find
oil - and there are many variables - it cannot be built in to
the production forecast. He expressed hope that through this
shift taking place in investing Alaska's resource into new
development, that change will begin to be seen. He agreed it's
an important part of the discussion.
SENATOR WIELECHOWSKI noted if the state does nothing and the oil
valuation is left as is, the state is looking at prolonged
deficits according to DOR estimates. He asked whether Alaskans
then could potentially be exposed to an income or sales tax or
lose their permanent fund dividends (PFDs).
COMMISSIONER GALVIN replied he believes the change from doing
nothing to going to ACES clearly increases that share and keeps
production opportunities neutral; that will bring in more money.
However, he doesn't think keeping things the same will
inevitably lead to the scenario Senator Wielechowski described.
There are unknowns. Prices might stay above $100 for a long
time, for example. Rather, the belief is that moving to ACES or
something similar would better reflect the opportunity for
bringing in more revenue to minimize that risk.
9:22:22 AM
CHAIR HUGGINS asked whether the number-one variable is
production, and if that isn't addressed it will be hard to get
at the challenge in the next ten years or so.
COMMISSIONER GALVIN clarified that production is probably the
one variable which the state has some ability to affect. In
further response, he agreed that the state wants to see
investment, but it's also the issue of targeting that
investment. Increasing production involves a number of factors,
but it boils down to attracting needed investment and the
factors that drive investment decisions. One part will be
economic attractiveness. Also playing a role will be making the
land available, having the permitting system work, and having
facilities available at reasonable prices.
CHAIR HUGGINS asked what two things Commissioner Galvin would
choose from SB 2001 if he had to make that choice, from his
perspective as commissioner of revenue.
COMMISSIONER GALVIN replied he hoped he wouldn't have to choose
only two. He then said ACES provides two primary advantages for
the state: 1) the tools to protect the state's interests with a
net tax and 2) what the administration considers a more fair
share of the revenues in that balance. Out of the discussion in
the next weeks, he'd like to have the necessary tools identified
and to end with a fair share. He declined to identify a primary
tool, saying they all work together; the absence of one would
make the others meaningless.
9:26:11 AM
SENATOR MCGUIRE arrived.
COMMISSIONER GALVIN elaborated on the presentation schedule for
the next three days. He concluded by saying Sunday's joint
session would include the nuts and bolts of the tax-system
analysis, and he indicated a sectional analysis of the bill
itself would be the final item in the schedule. If questions
arose today, he might ask members to wait until the experts on
that subject were available over the next three days.
9:33:16 AM
SENATOR WAGONER remarked that he looks at PPT as a work in
progress. As he hears from the consultants, he sees more things
wrong. He suggested this is the one chance to avoid bungling
it. He remarked that he'd read the "Our Fair Share" paper from
the commission working in Alberta, Canada, on its new tax
structure, which was guided by Dr. van Meurs in large part.
SENATOR WAGONER voiced concern about a lack of willingness to do
different tax rates for various parts of Prudhoe Bay.
Suggesting the need to look at legacy fields, regardless of
whether it takes multiple pieces of legislation, he said he
doesn't think there is anything magic about "one shoe size fits
all" under this bill. He asked if there is anything wrong with
having different tax rates in various parts of the state. For
example, legacy fields could be at a higher price, marginal
fields could be at "20/20," and for heavy oil there could be
incentives when it's under a certain value such as $40.
9:35:53 AM
COMMISSIONER GALVIN indicated those issues were looked at
closely during the administration's analysis over the last
several months. He recognized the need to explore opportunities
that relate to segregating and identifying that one particular
type of development is different economically from another type
and therefore could withstand a different tax system. Thus
there is a gross tax floor proposed to only apply to legacy
fields. And the distinction is recognized in terms of what
development is appropriate for what tax system.
COMMISSIONER GALVIN noted there are practical limitations in
trying to segregate production coming up through the same pipes
and facilities. This is particularly true for heavy oil or some
new development being encouraged within existing legacy fields.
Especially when costs are added into the mix, a question is
this: At what point is one barrel taxed under one system, but
another taxed under another system, with different deductions?
COMMISSIONER GALVIN highlighted the challenges for DNR to
identify new participating areas within an existing unit, and to
say one is a separate development - with separate geological and
engineering components - in order to segregate it for a
different tax system. He also proposed imagining the type of
behavior and decisions by companies that would result. He
opined such a system couldn't be administered in a way that
preserves the intent. The many limitations would be discussed
Sunday.
SENATOR WAGONER referred to talk of the legacy fields,
10 percent on the gross. He recalled he'd amended in the gross
floor at $25 a barrel, but now looks back and questions whether
it will ever return to $25 unless the bottom falls out of the
world economy. He added he isn't prepared to say that gross on
the legacy fields at $40 will ever kick in. It may be a stopgap
measure, but may never do anything for the state.
COMMISSIONER GALVIN clarified that he wasn't saying the gross-
tax floor is the only type of segregation possible. Rather, it
is one way of recognizing there is a distinction.
9:39:58 AM
SENATOR WIELECHOWSKI recalled yesterday's remarks from Dr. van
Meurs and Mr. Johnston that some countries' systems deal
differently with various types of oil such as heavy oil, even
within fields. Senator Wielechowski said that seems to make the
most sense. If the goal is to maximize profit and investment,
there could simply be one valuation rate for legacy fields that
were designed to make a profit at $10 to $12 dollars a barrel,
and then another system that encourages investment for heavy oil
and exploration fields. He said intuitively it doesn't seem
that complicated. He urged exploring that.
COMMISSIONER GALVIN noted it would be discussed Sunday.
CHAIR HUGGINS interpreted Dr. van Meurs' remarks to be that he'd
done such a "mosaic" elsewhere, but recommended against it for
Alaska. However, Chair Huggins recalled that Mr. Johnston had a
contrasting view.
SENATOR WAGONER cautioned that it would be a bad mistake if the
legislature didn't get advice from Dr. van Meurs, Mr. Johnston,
or someone of that quality. He asked for a request from the
Legislative Budget & Audit Committee chair that someone of that
level, with worldwide recognition as an oil and gas economist,
be placed on staff so the legislature can have access. He
suggested this should have been done weeks ago.
CHAIR HUGGINS said he respected that. Regardless of whether
someone likes them, they are experts with international
expertise, and people should at least listen to them and assess
their message, and then continue from there.
CHAIR HUGGINS welcomed Senator Davis.
9:43:30 AM
COMMISSIONER GALVIN turned to slides 11 and 12, "Tools to
Protect the State."
JONATHAN IVERSEN, Director, Tax Division, Department of Revenue,
highlighted four categories of administrative tools under ACES:
1) information, including data collection, usability of data,
and public disclosure; 2) ensuring there are enough of the right
sort of auditors to protect the state's interests; 3) lease
expenditures, including refining some definitions and exclusions
as well as adding some exclusions; and 4) credit adjustments.
MR. IVERSEN addressed slide 13, noting PPT provides for some
minimal recording of information, primarily on an annual basis.
There isn't express authority for monthly filings of
information, and there isn't a monthly tax return for PPT.
CHAIR HUGGINS asked if anything precludes DOR from having more
stringent requirements and reporting.
MR. IVERSEN acknowledged it is a good question. There is broad
authority to request information under the general powers of the
commissioner. What is requested here is specific clarity, to
avoid disagreements about what DOR has the power to require.
COMMISSIONER GALVIN added although it can be argued the
authority exists, it can lead to long, entangled discussions
with taxpayers as to whether they view that authority as
including a particular item. It makes for a highly inefficient
exchange of information. In a number of areas the legislature
needs to clarify that the authority specifically exists.
CHAIR HUGGINS asked if there'd been some industry foot dragging.
COMMISSIONER GALVIN replied yes. Aspects of the information
described here have been requested, with responses less than
enthusiastic. There is a sense that the taxpayers question
whether the state is in a position to request such information.
Statutory clarity is needed.
9:47:54 AM
SENATOR GREEN referred to slide 14, "PPT provides for minimal
reporting of information, primarily on an annual basis." The
first bullet read, "Reporting is not commensurate with other
world-wide net-tax jurisdictions." She asked what the typical
reporting would be.
COMMISSIONER GALVIN deferred to the Gaffney, Cline & Associates
Inc. ("Gaffney Cline") experts who would testify shortly.
9:48:23 AM
SENATOR McGUIRE referred to the first bullet on slide 16, "DOR
may require a producer, explorer or operator to file monthly
reports with information necessary to administer the tax." She
asked why it says "may," since she would want it to be uniform
and would be concerned that it would be administered
arbitrarily.
MR. IVERSEN replied that PPT currently doesn't have a monthly
reporting requirement. By regulation, DOR has implemented a
reporting requirement by virtue of its interpretation of that
for operators. Non-operators must submit identifying
information with their monthly payments.
COMMISSIONER GALVIN emphasized that the statutory language
generally reflects the legislature's granting of authority to a
department or commissioner in this way: Rather than requiring
the commissioner to require the taxpayer to make a monthly
report, it authorizes the commissioner to act within his or her
discretion. There may be questions of what type of reporting it
is, such as whether it is a broad or narrow report. The typical
drafting standard therefore is to say the commissioner may
require it. That puts the authority in the commissioner's hands
along with the discretion to decide how to implement it.
SENATOR WIELECHOWSKI asked how Alaska's current reporting
requirements compare with those worldwide for net profit
systems.
COMMISSIONER GALVIN deferred to the Gaffney Cline experts.
9:50:26 AM
MR. IVERSEN returned to slide 14, "PPT provides for minimal
reporting of information, primarily on an annual basis." He
noted this makes it difficult for the state to understand and
respond to dynamic industry needs, and also hampers DOR's
ability to make informed policy decisions and to administer and
regulate the tax. Furthermore, not having these provisions
clear in statute leads to delay and conflict with taxpayers.
MR. IVERSEN turned to slide 15, "ACES Requires Reporting." He
said currently annual statements are required to be filed with
the annual tax payment, but only for those paying the tax. By
contrast, ACES says this also is required for producers and
explorers, regardless of whether a tax payment is due. The
annual reporting requirements expand the list of required
information that will have to be delineated on returns. In
addition, explorers and producers that have lease expenditures
or credits but no production must still file with the department
their relevant expenditures, adjustments, and credits.
9:51:30 AM
CHAIR HUGGINS asked whether industry members are objecting to
providing more information.
MR. IVERSEN replied there are several sides to it. First, DOR
has requested forecast information, which it hasn't received,
and has requested information on a monthly basis, which it may
receive, depending upon the taxpayer. Monthly reports may be a
stack of papers a foot deep. While information may be there, it
isn't in a usable format and cannot be accessed in a timely
manner; it would have to be audited and dug into. Hence what is
sought here is monthly information, with authority to get the
needed information in a usable form so it can be input into the
database and used to formulate decisions.
SENATOR WIELECHOWSKI asked what forecast information has been
requested and why it is needed.
MR. IVERSEN answered it is budget documents reported between
working-interest owners and operators as part of the unit, or
similar documents if the operator is the same working-interest
owner or for an explorer. These discuss costs, operating
expenditures, and capital expenditures, but not a forecast of
oil prices. The purpose is to help DOR hone its forecasting.
As ACES is drafted for operators, DOR's forecasting information
would be limited to those pieces and exchanges of correspondence
and information currently being generated.
9:53:54 AM
SENATOR WIELECHOWSKI asked how the system works now. Do
producers send DOR a list of deductions they're taking?
MR. IVERSEN replied it varies, depending on the taxpayer. There
are described general categories of deductions, but not so DOR
can immediately see whether a certain amount has been deducted
specifically for something like a pipeline replacement. And
while some taxpayers may provide backup for individual nuts and
bolts, it isn't something DOR can just open up the return and
see; he cited corrosion issues as an example. Rather, DOR would
see a general summary. With some taxpayers, the most adequate
reporting will be at a summary level of operating or capital
expenditures by unit, and then talk about deductions and
credits. Sometimes it isn't that clear, though. Thus the
desire is to completely standardize this so the information can
be input and used in the tax system.
SENATOR GREEN asked whether the requirement that an annual
statement must be filed, regardless of whether a tax payment is
due, extends to any other group of taxpayers in Alaska that DOR
deals with.
MR. IVERSEN acknowledged it's a valid question, but said he
didn't know because DOR administers so many different tax types.
He surmised there may be some instance where annual statements
are provided regardless of whether a tax payment is due; for
instance, regular income taxes still have a filing requirement.
SENATOR GREEN asked if the extra reporting would seem intrusive.
MR. IVERSEN said that's a good point. Some annual filing is
already done by explorers and companies that don't owe tax,
because they want the credits. The beginning of the requirement
for filing credits is March 31. A lot of the information is
already being provided. He noted this is with an eye toward
being able to get all the information, have it be usable, and do
it the correct way right now.
9:57:01 AM
CHAIR HUGGINS asked why the state can't get a reporting system
from a company that makes software such as TurboTax.
MR. IVERSEN replied that although DOR has a template which was
drafted and put together, this has proven exceedingly complex
for taxpayers to use. And it hasn't addressed the database
issue. The department has done a scoping contract on the
database; DOR wants to ensure that what it prescribes will
interface and that there won't be battles to get the needed
information. The template is on the Tax Division's web site;
there are a number of interrelated Excel pages. It's not a
simple operation.
9:59:03 AM
CHAIR HUGGINS again suggested perhaps a professional
organization could do this for the state.
COMMISSIONER GALVIN clarified that DOR is in the midst of
developing the information system to backstop this whole
information requirement. It will be akin to TurboTax in that
the information will be input and the tax will be calculated; it
will be in a form that can be submitted to the Internal Revenue
Service (IRS). The state will tell companies how to structure
their information, organize it, and provide it to DOR so the
department can quickly integrate it into its system and ensure
it understands what is being provided. The part of TurboTax
where it gets into legal nuances of deductions, with a tutorial
for the taxpayer, probably won't happen. The goal is to
organize the information and get the companies to provide it in
a useful manner.
10:00:46 AM
MR. IVERSEN noted slide 16 clarifies DOR's authority, showing
points touched upon already. He said ACES also provides DOR
explicit authority to require producers, explorers, and
operators to file reports or records needed for forecasting.
Those are the budget documents he'd referred to before.
CHAIR HUGGINS surmised there is some staffing in the proposal.
He mentioned the producers who would be required to file and
asked whether feedback had been received from them.
MR. IVERSEN said feedback has been mixed in terms of the actual
information requirements. Looking at historical data, there has
been a measure of compliance with what has been requested, but
typically at a macro level; however, some have submitted the
information DOR would need on a monthly or annual basis, and are
continuing to do so. By contrast, the taxpayers have been very
reluctant to provide forecasting information.
10:02:18 AM
SENATOR GREEN asked if Mr. Iversen would be reluctant to provide
the information if he were in their shoes.
MR. IVERSEN answered that without express statutory authority,
yes.
SENATOR GREEN asked how he'd feel even with express statutory
authority.
MR. IVERSEN said he'd comply or else it would violate the law.
SENATOR GREEN clarified that she was asking whether there is a
practical standard to ensure cooperation, or whether DOR is
looking for information that companies might feel is their own
business, not the state's.
MR. IVERSEN acknowledged that as a valid question. He said
indeed, that has been some of the feedback. However, what DOR
is requesting isn't atypical in other jurisdictions operating
under a net tax worldwide. The Gaffney Cline testifiers would
address this.
COMMISSIONER GALVIN pointed out that the issue is whether or not
the state feels there is a legitimate state purpose in acquiring
that information. Thus the effort has been to tailor the
language of the request to focus on just what they think would
have some state purpose, rather than using it as a fishing
expedition for reasons not directly connected to something for
which the state needs information.
SENATOR GREEN asked whether there'd likely be a variety of
answers to that question if she asked a wider group of people.
COMMISSIONER GALVIN surmised industry folks would be skeptical
about what would be in the state's interest, and may even
downplay the importance of forecasting to the state. He
indicated the administration would assess how important it is to
have information about costs and to forecast future revenue,
weighed against the perception of getting too involved with
respect to individual taxpayers.
COMMISSIONER GALVIN noted the other factor is the perceived risk
from providing that information. When a company says it sees
the state would have some public interest but believes it is
outweighed by the risk of providing it, it reflects on the
security that the state will hold this information, as well as
whether or not there is a state interest that may conflict with
the company's and that may give the state some advantageous
position if it acquires the information. That needs to be
explored to ensure that if there is such a situation, the state
would create a safeguard, or else the state would recognize that
there really wasn't such a case. He indicated there would be
further discussion of this.
10:05:45 AM
SENATOR WIELECHOWSKI said it sounds like the argument for having
a gross system based on the wellhead price, with no deductions
but incentives for different types of exploration and behavior.
COMMISSIONER GALVIN agreed it would be preferable to identify a
gross-based system that provides the economic framework being
sought, with the balance of getting the investment but also
getting the revenue; it wouldn't entail deductions and auditing.
However, Sunday's analysis will show that this balance cannot be
found with a gross system. There are negative economic impacts.
If there is a net tax, they must ensure that the state is
covered in such a scenario.
COMMISSIONER GALVIN returned to forecasting. He reiterated that
the move to PPT fundamentally changed the relationship between
the state and the industry. Now the state is a tremendously
active investor in actual expenditures that companies will make.
Because the exposure is so significant, it is now almost
imperative to receive this information. The state is 40 to 50
percent invested in these new expenditures that will be made,
and needs to know how the companies plan to expend it. But
while it is a fundamental shift in the relationship, the
industry will react to it slowly.
10:09:03 AM
SENATOR WIELECHOWSKI highlighted talk about encouraging
investment. He recalled that Spencer Hosie, an expert hired by
the state, had said when companies take out a lease there is an
expectation of producing when it is reasonably profitable.
Noting Alaska has been an extremely profitable place to do
business, Senator Wielechowski asked why companies have to be
given more when they take out a lease and it is their legal
obligation to develop the oil. He acknowledged perhaps this
should be discussed in the Senate Judiciary Committee instead.
COMMISSIONER GALVIN responded that one factor driving investment
decisions will be the legal requirements or risk of losing a
lease if companies don't make that decision to go forward with
the development. That alone may not get them to make the
investment, though, because they may decide it won't make them
enough money. If there isn't an expectation of somebody else
waiting in the wings who would come in, grab that lease, and
invest that money, then there won't be the investment.
SENATOR WIELECHOWSKI suggested if a company takes out the lease,
holds it, and can make a reasonable profit, then it is legally
obligated to develop that resource. A leaseholder doesn't allow
someone else to develop that property.
COMMISSIONER GALVIN replied they are talking about two different
things. If a company is allowed to hold the lease and exclude
other companies from that opportunity, he agreed with the need
to ensure the issue is forced as to whether it will be
developed. That's a separate lease-related management issue.
Whether they'll actually go forward with that decision is based
upon more than whether they're legally obligated; it is also
based upon whether they'll make any money. And they must be
forced to make that choice. He agreed they need to look at the
economic question and make a decision.
COMMISSIONER GALVIN noted the tax policy, however, involves not
just the individual leaseholder and the need to have that
decision made. There is also a need to ensure the underlying
project is economic so somebody will invest. When DOR goes
through that seven-field analysis, it doesn't distinguish
whether it's one particular company or another and a lease
obligation for that particular field. Instead, DOR looks at
whether a prudent investor would make an investment of this
nature, given the economic factors that can be identified. The
role of the tax in this situation is to ensure that the tax
system doesn't provide a barrier or disincentive to that
opportunity. The state has other tools to try to force that
issue, and to try to force that decision from an individual
lessee's perspective.
COMMISSIONER GALVIN added that what's important when this is
addressed Sunday is to think about it across the board: Is our
tax system going to result in this project being one that
anybody - any company that is looking at it reasonably - would
go forward with? That's the question in this context.
CHAIR HUGGINS noted several committee members sit on the Senate
Judiciary Committee as well. He recalled that the economic
limit factor (ELF) system was a gross-based system. He remarked
that he didn't believe there were any silver bullets.
10:13:24 AM
CHAIR HUGGINS welcomed Representative Ramras.
SENATOR McGUIRE referred to Senator Wielechowski's remarks. She
suggested it would be helpful to legislators over the years to
do an economic analysis of whether new companies are coming in,
why, and whether or not the tax system is driving investment.
It goes beyond whether it's a fair share. Senator McGuire said
she doesn't feel legislators have ever gotten a clear answer as
to whether the state's policies are attracting investment.
CHAIR HUGGINS noted the committee had requested that DOR take
the elements of PPT being addressed in the proposed amendments
and describe the relationships and desired results.
COMMISSIONER GALVIN indicated DOR was close to completing that
side-by-side comparison.
SENATOR STEDMAN requested a brief overview of the normal life
cycle of production in the oil basins over the years. He
observed that this likely would be seen by a lot of people
around the state.
COMMISSIONER GALVIN responded that it would be included in
Sunday's discussion of economic field modeling.
10:16:45 AM
SENATOR STEVENS recalled that for the year 2012 it was predicted
that almost half the oil going through the pipeline is yet to be
discovered. He surmised it gets even worse in the future.
COMMISSIONER GALVIN returned attention to the ANS production
profile on slide 4, but surmised that what Senator Stevens was
recalling was described in the revenue source book put out by
DOR. Looking at 2012 on slide 4, Commissioner Galvin noted the
line on the bottom that says "low" is the estimated production
level if no other projects are brought online. For 2012, a
significant amount - perhaps 100,000 barrels a day - is expected
to come from projects not currently producing but moving towards
development. Another 100,000 barrels comes from projects not
currently being developed but waiting for that investment
decision; given the timeframe, these likely are discoveries -
the oil has been discovered but there hasn't been a decision on
whether to invest the money to develop it. Although it isn't
half the production in 2012, at least a quarter of the expected
development that year that will come from these two categories.
10:19:04 AM
SENATOR WIELECHOWSKI kept the focus on slide 4. He asked
whether the leases exist on the properties described as "under
development" and "under evaluation."
COMMISSIONER GALVIN noted they're both state and federal.
SENATOR WIELECHOWSKI asked whether the cost to the companies to
extract the oil is known for these properties.
COMMISSIONER GALVIN replied that this is part of the models
which will be shown Sunday.
SENATOR WIELECHOWSKI remarked that if the oil can be pulled from
these properties and a profit can be made at $60 a barrel - much
lower than today's $90 a barrel - clearly these are profitable
projects. He surmised the ones under evaluation aren't going to
cost a huge amount of money.
COMMISSIONER GALVIN suggested that's overstating the point of
the slide: The administration believes, given current
expectations of what will be deemed profitable or not, that
these projects should get the green light and go forward. The
companies are the ones that must make the investment decisions.
SENATOR WIELECHOWSKI disagreed on that point, saying the oil
belongs to Alaskans. If the companies take out a lease and
don't develop it, the state needs to tell them to develop the
property if it's profitable.
COMMISSIONER GALVIN added "or give up the lease."
SENATOR WIELECHOWSKI agreed.
COMMISSIONER GALVIN said the question for this chart isn't
whether the state can mandate that companies invest and
therefore risk the money. Rather, in the context of the leases,
the state can say to invest the money or get off. The
underlying question is whether the project is economic so that
there'd be somebody to substitute and make that investment
decision. If the result is that the company which has the lease
- and therefore has the data and understands the geology and
associated costs - decides it's not economic and gives up the
lease, will anybody come in and develop it? For that, the
leasing decision needs to be isolated. Hence the models to be
discussed Sunday try to isolate that investment decision.
CHAIR HUGGINS cited Cook Inlet as an example where it's
difficult to find someone who wants to develop it, because of
economic issues. He acknowledged the comparison is apples and
oranges.
10:22:57 AM
MR. IVERSEN turned to slide 18, "Information Management
Database." Noting electronic reporting would feed directly into
the database, he said this would accommodate the ELF-based data
and would be integrated with the division's accounting systems.
Data to be collected includes volumes; wells and production; and
profit-based data, including tracking of credits under ACES.
MR. IVERSEN turned to slide 10, "DOR-DNR Information Sharing."
He said there are current statutory limits, and this addresses
the difficulties DOR and DNR face in their respective regulatory
roles. There are some restrictions on what they can and cannot
share. The proposal is to remove those while maintaining
overall confidentiality of the information. What would pass
between the two departments would be taxpayer information from
DOR and information related to oil and gas leasing from DNR that
pertains to administration of the tax. This information would
still be confidential with respect to the public.
CHAIR HUGGINS asked why there is a confidentiality requirement
for departmental research and when it was put in place.
MR. IVERSEN replied it has been in place for a number of years.
As for why, ACES amends AS 43.05.230, DOR's confidentiality
requirements; part of it discusses what can and cannot be
disclosed.
COMMISSIONER GALVIN elaborated. He related his impression that
the rules on confidentiality were written primarily to separate
the public from state information. When the question of sharing
was eventually framed between the agencies, somebody from the
Department of Law (DOL) was asked whether it was allowed under
current statute; DOL said it is pretty broadly written
confidentiality and doesn't expressly provide for sharing
between the departments. The issue was dropped because of lack
of interest in pursuing the change. He surmised it wasn't
specifically put in place, but came about through the express
desire to have fairly stringent confidentiality, with the
subsequent interpretation being a limited ability to share
between the two departments.
10:26:41 AM
CHAIR HUGGINS observed that the IRS system tries to be
protective of taxpayer information. He mentioned safeguards and
asked whether "need to know" still applies.
COMMISSIONER GALVIN replied yes. One expectation within the two
departments is that it isn't a free current of flowing
information. Rather, it will be based upon a request. There
must be a particular need for it within the context of that
agency's responsibilities. The security of confidential
information is paramount to both departments. The one advantage
to making the move at this time is that both agencies have
incorporated the importance of confidentiality into their
protocols and procedures - and this is inherently within the
recognition of each employee.
COMMISSIONER GALVIN related his experience working at DNR's
Division of Oil & Gas. He said he knows the ends to which
confidentiality is protected with regard to geological and some
commercial information that comes through that division.
Individual employees recognize the sensitivity, and he similarly
sees vigilance at DOR with respect to keeping confidential the
taxpayer information. Thus he's comfortable that the two
departments will retain vigilance and respect for
confidentiality. He noted the flow between the two agencies
will need to be regulated as well, to ensure there isn't a
change in that respect.
10:29:00 AM
MR. IVERSEN referred to the last bullet on slide 19. He
indicated this information sharing allows each agency to be a
better and more informed regulator.
COMMISSIONER GALVIN pointed out DNR also has a management role
with respect to the state's ownership of the resource. It isn't
simply as a regulator that it would use this sharing of
information. It is a vital part of the state's ownership role.
10:29:55 AM
SENATOR GREEN recalled vigorous tension in the past between DOR
and DNR with respect to their roles and responsibilities. She
asked if this exchange of information would have been requested
four to ten years ago.
COMMISSIONER GALVIN replied he couldn't speculate. Having
watched the department's relationship over the past few years,
he said part of the tension sprang from not knowing what the
other had. There was a resistance to sharing information
because of what they perceived as their responsibilities to
ensure their own confidentiality. That breeds a certain amount
of distrust. As to which caused what, it is difficult to
identify. It isn't in the state's best interests to have two
departments that don't trust each other and share information.
He suggested the need to either remove the root of the problem,
if it's the sharing of the information, or to assuage the
potential conflict by allowing the information exchange.
10:31:51 AM
SENATOR GREEN asked if any shift in authority comes with the
information sharing.
COMMISSIONER GALVIN said absolutely not.
10:32:18 AM
MR. IVERSEN read from slide 20, "Guideline Interpretation." He
said another aspect of ACES is that DOR would like to be able to
issue advisory bulletins for information and guidance to
producers, explorers, and other interested people concerning
DOR's interpretation of production tax statutes and regulations.
He noted that now there arguably is a problem with doing that
because of the Administrative Procedure Act (APA). The
department wouldn't want to be in the position of issuing a
regulation without following the procedural course. This would
be an informative, advisory, nonbinding type of opinion.
CHAIR HUGGINS, recalling that Deputy Commissioner Davis had
mentioned this concept, remarked that it appears to be common
sense. He said he'd have thought this was done all along.
COMMISSIONER GALVIN pointed out that although something might
make sense, DOL might say there isn't authority to do it. If
the department tries to expand the interpretation, DOL says it
wouldn't advise it. It ends up in a situation where the agency
cannot do what it believes is in the interest of the taxpayer
and the state because the law doesn't provide that express
authority. Although it is a commonsense answer, there was
resistance when trying to pursuing it in the past.
10:34:00 AM
MR. IVERSEN addressed slide 21, "Statute of Limitations," which
read: "Period within which tax must be assessed is extended
from 3 to 6 years from date of filing tax return." He said
before it does the audits, DOR wants the information on how the
joint-interest billing audits between the part-working-interest
owners and the operators have proceeded. Those audits take
years to complete, and often issues remain. This would give
additional time to obtain the information. Also, the state is
dealing with upstream costs now. Being able to do this in three
years poses a problem because both upstream and downstream costs
must be dealt with. In order to be fully informed, DOR wants
six years as the statute of limitations for these returns. This
would only be for returns filed under AS 43.55, the oil and gas
production tax.
10:35:30 AM
CHAIR HUGGINS asked what "assessed" means in this context.
MR. IVERSEN noted he'd hesitated to use that word. He explained
that there would be an audit period, generally a year or more
for any given year of tax information filed, and then DOR would
do the assessment after that.
10:36:22 AM
CHAIR HUGGINS observed that this doubles the time. He asked how
the industry views this.
MR. IVERSEN predicted the industry reaction, based on past
experience, will depend on the individual taxpayer. Some
taxpayers have no problem granting waivers of additional time.
Many times it ends up being three to six years anyway because of
amended filings. Already the first filing starts in March, and
then joint partnership returns are filed with the federal
government the following autumn, so the state receives an
amended return already. Some taxpayers, when the state is in
the audit process and needs additional time to complete the
audit, have no problem waiving additional time. Some do.
SENATOR WIELECHOWSKI recalled Dr. van Meurs' testimony yesterday
that the PPT law weakened the interest for late payments in
AS 43.55.020(g); that ACES maintains it; and that it's an added
incentive to overdeclare costs. Senator Wielechowski asked
whether DOR agrees and would support increasing the penalties
for overdeclaring costs.
COMMISSIONER GALVIN replied this is something they're interested
in looking at. He indicated some language has increased
penalties for noncompliance with respect to reporting and other
things. But they'd be looking at ensuring that noncompliance is
seen as something with unfavorable consequences.
10:38:58 AM
MR. IVERSEN turned to public disclosure, slide 22. He related
that under general authority of the commissioner, DOR currently
can disclose information at a high statistical level. With
ACES, they seek to expressly allow publication of oil or gas
production, production taxes, effective tax rates, gross value
at the point of production, transportation costs for oil or gas,
qualified capital expenditures, production tax values, lease
expenditures and adjustments to them, and tax credits.
MR. IVERSEN explained that the proposal is to do this in a way
that still maintains a level of taxpayer confidentiality. They
would use an aggregate of three or more taxpayers. This
clarifies that some of the procedures DOR currently employs in
other tax areas are satisfactory to the legislature, and that
DOR can go ahead and use those procedures for the oil and gas
production taxes.
SENATOR GREEN asked whether the taxpayers are named in the
aggregated information.
MR. IVERSEN replied no. He turned the presentation over to the
Gaffney Cline experts.
10:40:21 AM
^Gaffney, Cline & Associates Inc. - Bob George and Rich Ruggiero
BOB GEORGE, Gaffney, Cline & Associates Inc., began by offering
background, saying he has a degree in geology but has mostly
been in the commercial and strategic arenas. Much of his
35 years of industry experience has been with Gaffney Cline, a
40-year-old international consultancy with about 150 people
around the world. Gaffney Cline has major offices in Houston,
the United Kingdom (UK), and Singapore, and offices in Buenos
Aires, Sydney, and Moscow. Offering a broad range of technical
strategic consultant services to most players in the industry,
it does work for governments and national oil companies as well
as international oil companies. Thus he feels there is a fairly
balanced perspective on what the industry looks for, requires,
does, says it likes to do, and so on.
MR. GEORGE noted that with respect to government and national
oil company activity, his firm has done a lot of work on policy,
licensing, and fiscal areas. It has advised governments in
Brazil, Venezuela, Colombia, Mexico, Kuwait, Saudi Arabia, and
Timor/Timor-Leste on a variety of issues, particularly resource
promotion; structuring of contracts, which sometimes includes
fiscal systems; and helping market those to the companies,
hopefully ending up with successful licensing.
10:43:36 AM
RICH RUGGIERO, Gaffney, Cline & Associates Inc., told members
he'd worked 20 years for "big oil" and thus could provide that
perspective on how decisions were made and how activities took
place. He'd been project general manager for Atlantic LNG,
completing the commercial and financial aspects of some Trinidad
projects, and could provide background. In 1990-96 he was a
commercial manager in the North Sea and thus could provide
perspective relating to the UK and Norway and how decisions were
made, based on changes or no changes in the tax codes in those
areas. In his six-plus years with Gaffney Cline he has worked
predominantly on the side of governments in their dealings and
commercial dealings with the international oil community.
10:45:23 AM
SENATOR WIELECHOWSKI asked what percentage of Gaffney Cline's
work is for governments or for the petroleum industry.
MR. GEORGE estimated today it is 30-40 percent in the
government/national oil company area, though some of that work
may be on a commercial transaction if a national company is
looking to move internationally and acquire properties. The
remainder is for oil companies or expert testimony for law
firms, service companies, or other players in the industry.
CHAIR HUGGINS asked if Gaffney Cline has conflict-of-interest
concerns.
MR. GEORGE replied no. During the next few days there'd be a
focus on issues of reporting by companies in selected countries
around the world and how some of that information is used, as
background to some issues discussed already by Commissioner
Galvin and Mr. Iversen.
MR. GEORGE referred to information in a memo from Gaffney Cline
dated October 19, 2007, and to a handout titled "Oil and Gas
Reporting and Disclosure In Selected Countries" that accompanied
the slide presentation. He pointed out that companies are very
used to reporting to fiscal and regulatory bodies just about
everywhere they operate around the world. This is nothing new
or unusual. The degrees of disclosure are generally detailed,
but vary among jurisdictions. They include historical
information of what actually took place, prospective activity
such as field-development plans, and ongoing activity including
budgeting activity. This goes down to individual well data and
production data information, which is common everywhere.
MR. GEORGE noted he hasn't focused on that type of technical
data here, perhaps because it is common and seems less
controversial. Rather, he has put more emphasis on the cost
side of information that is disclosed, which seems to raise more
questions about how prevalent it is worldwide.
MR. GEORGE explained that data is provided both to the resource
managers such as DNR and the fiscal or taxation authorities such
as DOR. Depending on the locale, different setups may or may
not include a national oil company that may act in some or both
of those realms. Generally, there is flow among the multiple
organs of the state that may be involved in this. Where there
is a fiscal authority, perhaps the flow on an individual
taxpayer basis tends to be held reasonably confidential, with
generally tighter limitations on disclosure. But a lot of
field-level operating information, which may include cost
information, is also disclosed to the resource manager.
MR. GEORGE noted Gaffney Cline would talk about what companies
report as well as what companies disclose, but as two separate
issues despite the obvious linkage, since the information must
be received in order to report it. Public reporting for
transparency issues, as well as marketing issues, is fairly
prevalent in a lot of countries, and aggregation is fairly
common where that's done. But in some places and situations,
additional information is provided in greater detail. That is
roughly what would be covered, with some illustrations.
10:50:01 AM
MR. RUGGIERO added that a general, overall principle is that
other governments aren't asking the oil companies, in their
generosity, to provide this information. Rather, generally
states are saying these are their resources. The right to
exploit a resource is leased to the company under terms of a
contract or concession, but it is still the state's resource.
It is quid pro quo, giving the right to develop and exploit
those resources if the company continues to keep the state
updated with all the relevant information. Rather than the
company being asked by the state to do something, it is expected
in these other countries that this type of data flow will occur.
SENATOR McGUIRE pointed out that Alaska has only three main
producers. Referring to the slide shown by DOR that discussed
using an aggregate of three to maintain confidentiality or
generality, she suggested it would be hard to disguise which
company was being discussed in Alaska. She asked whether other
countries have that situation.
10:51:54 AM
MR. RUGGIERO answered that one of the best examples, shown in a
memo from his firm, talks about Timor-Leste, the world's newest
country. Gaffney Cline was a primary author of its legislation
on licensing and petroleum activity in proprietary areas. Its
prime minister had encouraged Gaffney Cline to sign on to the
World Bank's transparency initiative. In terms of Timor, the
oil companies had characterized the degree of transparency there
as providing a sunburn. The law there requires the publication
of contracts and leases, as well as the total taxes paid by a
company. Thus aggregation won't occur in Timor.
MR. RUGGIERO said although some companies might say that hasn't
been tested yet, since it's still in its initial development,
there is production in which it has 90 percent equity, in a
joint treaty area between Timor-Leste and Australia; one of
ConocoPhillips' crown jewels, it is the Bayu-Undan to Darwin LNG
development. The data from that, as it flows to the Timor
government - which gets 90 percent of the government value there
- is published under Timor law. He surmised there is a growing
move to get as much information to the state and to make that as
transparent as possible, to ensure everything is aboveboard.
10:54:09 AM
MR. GEORGE added that most countries probably have more than
three players. He highlighted an example from Nova Scotia,
where they have more players but there are far fewer players in
the producing area. There is an illustration of required
disclosure for the development plan and an update.
MR. RUGGIERO suggested this gets to a question asked by Senator
McGuire about disclosure of data. If developing a field a
couple of decades ago, he generally had only one market to sell
into or one set of infrastructure to put his production down.
If he publicly disclosed specifics about his capital
expenditures (CAPEX) or operating expenditures (OPEX), then the
other side he was dealing with, such as a state-run gas company,
would offer him a price based on what they knew those to be, so
he'd just make a profit above his threshold to invest. Today,
however, with world markets and market pricing based on open
competition, oil companies don't run into that and aren't as
exposed to having their price pushed down, because there isn't
just a single monopoly buyer or outlet for the product. Thus a
lot of fears that a couple of decades ago were real commercial
fears may exist to a much lesser extent today, if at all.
10:56:41 AM
MR. GEORGE addressed slide 3 of the Gaffney Cline presentation,
"Why Does Alaska Need to Receive Data?" Saying this relates to
data from the oil companies, Mr. George emphasized stewardship
of the state's resources. He noted he'd modified a quotation
from the Alberta Royalty Review Panel that says the energy
resources of the state belong to the people of Alaska, and those
organs of the state responsible for managing that resource have
to have a certain amount of information in order to manage it
properly. It's always a judgment call as to what amount is
needed. Mr. George suggested looking at how other places do it
and what a company routinely supplies, for instance. This is
the sort of information being discussed now for field, cost,
geological, and other information.
MR. GEORGE advised members that the state must have a full
understanding of the technical and commercial issues surrounding
the operation of the business. Thus it is looking for the
information. It needs the ability to plan and control the
exploitation policy, and it has budget and financial issues in
order to encourage the activity which goes along with that. He
summarized by saying these are fairly universal principles in
countries with petroleum around the world. It wouldn't be
unique to Alaska in any way.
10:58:51 AM
CHAIR HUGGINS surmised that societal norms differ in various
countries with respect to what is divulged. He cited examples,
asking whether there are factors with respect to the norms in
Alaska or the United States that may tailor this a bit or even
make it simpler.
MR. GEORGE answered that he couldn't comment on what legal
strictures may apply, but nothing proposed here is particularly
outrageous, unusual, or groundbreaking. He'd accept that there
are differences in the ways countries do things in all sorts of
areas. Energy - petroleum in particular - has a lot of focus
around the world, and the issues of disclosure around that are
important.
MR. GEORGE referred to Mr. Ruggiero's mention of the World Bank
initiative, saying it is aimed particularly at Third World
countries where there is a lot of tax revenue going in and then
sort of a black hole as to where it all goes. There generally
is a trend, regardless of that, towards issues of transparency,
proper responsibility, and stewardship, so people can see how
things are taking place. From commercial and marketing
standpoints there are some issues related to that as well.
11:01:22 AM
MR. RUGGIERO conveyed an anecdote revolving around an energy
minister who decided to be the first to try something after
research revealed it isn't done elsewhere. Mr. Ruggiero said
although there are norms, changes continue to redefine the
industry and how it works. While norms don't corral something,
they become they basis upon which to build.
SENATOR WIELECHOWSKI asked if he thought Alaska was getting the
data it needs to properly manage its resource.
MR. RUGGIERO related that in their first visit here and in their
discussion with the group, in general he was surprised at the
lack of data at the disposal of DNR or DOR to run their business
and steward the asset.
SENATOR WIELECHOWSKI asked if they would make recommendations or
whether such suggestions had been incorporated into ACES.
MR. GEORGE replied they hadn't written any clauses, but had
talked broadly about the issues of data capture and what might
be reasonable and rational in order to do that. He noted there
was some discussion of how much is specified in statute versus
what is left to the regulating agencies.
11:03:49 AM
SENATOR WIELECHOWSKI asked how Alaska fits with net-tax
governments in terms of the information required or received.
MR. RUGGIERO suggested holding that question until they'd gone
through some examples.
SENATOR STEDMAN indicated his own question about comparisons
with other states also could wait.
COMMISSIONER GALVIN pointed out that the experts can discuss the
range worldwide for transparency and information required. The
state then has to decide how it wants to fit within that. The
Gaffney Cline expertise is used to provide that sort of safe
harbor, to decide where to comfortably place Alaska so the
industry isn't being asked to do anything outside what it
normally would be expected to do in other jurisdictions.
11:05:38 AM
MR. GEORGE turned to slide 4 of the Gaffney Cline presentation,
"Forms Of Reporting and Sharing." He said production and well
data are routine reporting everywhere. Typically it is monthly
information. In many jurisdictions it can be pulled off the
Internet, or it may be found in an annual publication. More
germane to discussions here is the annual or semi-annual field-
level reporting.
CHAIR HUGGINS asked what elements go into well data.
MR. GEORGE explained that most if not all countries have
statutory requirements to submit information to the governmental
regulatory body on drilling of the well, logs, perhaps drawings
of the wells, and core data. Usually there are confidentially
provisions for two to five years, sometimes less. Better
organized countries have organizations where that information is
collected and collated; this becomes a resource for everyone
once the confidentiality period has passed. Countries generally
see this as an important aspect of how they get companies to
come in there, because there is information available and new
ideas can be shared.
11:08:00 AM
COMMISSIONER GALVIN pointed out that some of this information is
already collected by DNR and, to some extent, the Alaska Oil &
Gas Conservation Commission (AOGCC). No changes are being
suggested to the current well data and other requirements here,
which appear to be operating fine.
SENATOR WAGONER asked: If the State of Alaska has the core
data, would that become valuable when leases are reoffered after
a company has decided not to proceed?
MR. GEORGE answered generally yes. Every regime he could think
of would see it as good because it would help with the
understanding. Usually when there is a relinquishment, even
within the statutory period, that becomes available in the
public domain. He noted slide 4 doesn't show seismic data, but
this typically would go into the public domain after a period of
time, depending on how it was acquired; this isn't universal,
though, since there are places where it is held confidential.
11:09:59 AM
COMMISSIONER GALVIN emphasized that most of the authority the
State of Alaska will use to get well data and core samples, for
example, comes from its ownership of the resource. If a lease
was on federal land, however, the state wouldn't have the same
access to information, since the federal government keeps it
private within its own system. The Gaffney Cline example looks
at it as if it were a single government across the board.
SENATOR WIELECHOWSKI asked if it is fair to assume most
governments that own the resource get the information and it
isn't confidential. He also asked what the rationale would be
for a government to keep such information confidential.
MR. RUGGIERO replied that most governments around the world
collect extensive amounts of data. Each has slightly different
but fairly similar rules with respect to the confidentiality.
For example, many times seismic data, core data, and early well
data on exploratory wells may be kept confidential for two to
five to ten years, depending on what has been negotiated or is
in the legislation. The confidentiality is to allow the company
that has spent money acquiring that data the time to analyze it
and attempt to create a commercial operation on the properties
for which there is a lease. After the leases are returned and
relinquished, that data becomes valuable to the state for
encouraging new players to try to develop that acreage.
MR. RUGGIERO, answering as to what time period he would
recommend that the state set for confidentiality, explained that
if land is currently under lease, generally the confidentiality
time period corresponds to the period for the lease. A lot of
the "two to five to ten" is in the production sharing
agreements, and generally this coincides with the fact that they
either have to develop it or must relinquish it within those
time periods. But if there is a lease in perpetuity, for as
long as there is production, then there is no benefit
necessarily for the state to make the data public, because no
one else can do anything with that data so long as the property
is under a legal lease.
SENATOR WIELECHOWSKI asked if there is any disadvantage in
making it public at that point. He noted the public could see
that a development is economic, for example, and ask why it
isn't being developed.
11:13:52 AM
MR. RUGGIERO cited his experience in the North Sea, where data
was held confidential by the DNR equivalent there. If what he
found on his section was very near the lease boundary, there may
have been discussions and some release of that information to
the adjoining lessee in order that there could be a combined
development of that resource, since it was in the state's best
interest that it be developed as a single entity or unit, rather
than having different developments with various timeframes on
each side of that lease line.
11:14:34 AM
SENATOR GREEN asked about an advantage gained by a competing
bidder on an adjoining lease.
MR. GEORGE replied this goes to the question of how long the
information is held confidential. It's a period of time to
protect the reasonable commercial interest. He reminded members
that the companies themselves engage in extensive scouting
activities and may swap information, sometimes explicitly.
There is a smorgasbord of things that result in the transfer of
knowledge and so forth, including the movement of people among
companies. In that case, the people don't take the information,
but would have an understanding that cannot be erased.
11:15:46 AM
COMMISSIONER GALVIN clarified that these questions relate to
well data and aren't relevant to the tax legislation. It hasn't
gotten to that aspect. As for having information remain
confidential from other lessees and so forth, there is a fairly
complex statutory and regulatory framework related to keeping
confidentiality and the ability of the DNR commissioner to
decide whether to extend it, depending on whether there is
unleased acreage in the area for which the data may provide some
competitive advantage to the company which acquired it. The
state wants that opportunity to be maintained so the company has
an incentive to make the investment. When it gets to the tax
returns, he anticipated focusing on what the proprietary value
is that is being weighed against public disclosure.
11:17:01 AM
SENATOR McGUIRE highlighted the different philosophical system
in the United States, with its emphasis on capitalism. She also
asked what the federal government and the State of Texas
require, for example.
MR. GEORGE replied that ownership and management can differ.
The state can own it and yet it can be exploited entirely by
commercial enterprises, which happens in many countries. As
owner, the state has a responsibility to see that the resources
are managed and exploited in a fashion that people judge to be
optimum, given the social and political values. He cited the
differences between the UK and Norway, which have generally
similar resource bases. In the UK it isn't the dominating
economic force, whereas Norway has far fewer people and the
industry dominates the economy. They look at it very
differently, in a manner deemed appropriate by the stewards and,
ultimately, the people.
MR. GEORGE turned to whether Alaska and the U.S. are different.
He agreed sometimes even the domestic divisions of oil companies
seem to consider it un-American to ask for information or to
provide it, even though they're happy to do so elsewhere in the
world. He added that very few areas outside of the U.S. have
private land holdings.
11:20:04 AM
SENATOR McGUIRE asked what the federal government requires, for
example, in the National Petroleum Reserve-Alaska (NPR-A), as
far as transparency and disclosure.
COMMISSIONER GALVIN replied there isn't an analogous production
tax on the federal side, although there is an income tax.
SENATOR McGUIRE asked about well data.
COMMISSIONER GALVIN said he could find out. He added that for
well data there is much more public release than for taxpayer
information, which currently is kept confidential always. For
well data, both on the state and federal sides, there is
eventual release; it is a matter of what the timeframe is when
it becomes public. He noted that seismic data, not under
consideration here, has a different confidentiality restriction
and generally could be held confidential by the state
indefinitely; that is a policy call that may need revisited at
some point in order to encourage investment. Rather, the focus
is on the taxpayer and how to balance that interest with respect
to public disclosure.
CHAIR HUGGINS relayed his understanding that the contract for a
lease is many pages thick.
COMMISSIONER GALVIN clarified that the lease agreements are just
six to eight pages.
CHAIR HUGGINS suggested this would add another half a page to
require the data. He asked whether that is being done.
COMMISSIONER GALVIN said yes, it is part of it.
CHAIR HUGGINS surmised the new lease part is taken care of
through the leasing process.
COMMISSIONER GALVIN explained that beyond the leases, the
primary vehicle for public release of the data being discussed
is AOGCC; DNR doesn't provide that service. Through statutory
authority, AOGCC has the means to determine whether something
has become eligible or ripe for being made available publicly;
it then goes up on its web site.
COMMISSIONER GALVIN noted the only caveat is this: If someone
requests extended confidentiality through AOGCC and DNR, the
commissioner of DNR currently has authority to grant that in
certain circumstances when there is a proprietary, commercial
interest for the company to keep that confidential in order to
exploit an opportunity, usually related to a future lease sale.
That is an exception to the rule that it becomes public after a
certain amount of time. It's already in place and is statutory,
not part of the lease.
11:24:22 AM
CHAIR HUGGINS asked: If we didn't do anything being discussed
here, for new leases can DNR take care of it, given its
authority?
^Kevin Banks, DNR
KEVIN BANKS, Acting Director, Division of Oil & Gas, Department
of Natural Resources (DNR), answered that it only applies to
state land. He said he thinks DNR has access under arrangements
with AOGCC for onshore well data. Lauding Commissioner Galvin's
earlier replies, with respect to state land Mr. Banks said AOGCC
collects well data for any wells in the state's jurisdiction,
and DNR has access - with some variation - to all that data for
state land and some for private and federal land also. As for
confidentiality and extended confidentiality that applies,
generally wells are kept secret for two years plus 30 days'
notice, or 25 months.
MR. BANKS said the DNR commissioner has the right under
AS 31.05.035 to extend confidentiality where unleased acreage is
nearby. Basically, a property right is afforded to the person
drilling the well, who has the economic incentive then to drill,
knowing there will be an opportunity to have some advantage in
leasing the acreage around the exploration prospect, should that
time come. Generally, he believes - at least for North Slope
state land where much of the acreage has already churned through
the process - that extended confidentiality will be granted
under perhaps more limited conditions. He opined that it is
good for more information to be in the public domain.
CHAIR HUGGINS suggested the question now isn't whether the state
has the information. Rather, it is about confidentiality.
MR. BANKS agreed, noting seismic information is generally kept
secret for ten years. There are two aspects to it. It is more
of a commodity and is more easily traded among companies. And
it requires more process to be very useful, and thus there is a
cost after it is acquired.
11:28:26 AM
COMMISSIONER GALVIN added that AOGCC, the regulator of public
disclosure of this information, has jurisdiction encompassing
all land within the state. So the well data that will be
acquired and provided includes federal, private, and state land.
What DNR is managing is simply the state land portion of that.
Through the leases, they have the right to acquire the data
outside of the AOGCC portion as it relates to state land. But
when it gets to the confidentiality portion of the picture, what
is being looked at is AOGCC's public disclosure rules, as
opposed to DNR's acquisition rules.
CHAIR HUGGINS asked if offtake as it applies to gas will be
public information.
MR. BANKS replied that the capacity of an oil field to produce
gas sometime in the future involves AOGCC's management. For
state lands, DNR's responsibilities as well to know what that
tradeoff will be is generated from information acquired by the
producers; this has a different order of confidentiality
associated with it because of how the data and the kinds of
reservoir characteristics and so forth are proprietary - not
necessarily well data specifically or information specifically
related to taxpayer information. Mr. Banks said AOGCC will
govern its role in that and will model it independently of the
companies or will review the models that the companies have; DNR
will do the same. Although there is an opportunity to share,
this is only to the extent there is cooperation from the
producers collecting that kind of information.
CHAIR HUGGINS took that answer to be no, such offtake
information wouldn't be public information.
11:31:18 AM
COMMISSIONER GALVIN responded that there are two different
aspects. When AOGCC determines what it will allow the offtake
to be in a particular field, that is part of a very public
process. What Mr. Banks was referring to is that information
which will be used by AOGCC to evaluate and make this
determination may include some confidential information which it
will keep out of the public record for proprietary reasons, and
that ultimately the decision on what offtake is allowed will be
part of the public record.
The committee took an at-ease from 11:31:59 AM to 12:32:26 PM.
MR. GEORGE turned to cost information, field-related information
provided to a regulatory body in many countries. He said
typically this reporting is annual or semi-annual, perhaps more
frequently in some jurisdictions, particularly if there are
quarterly returns and so forth. Depending on the nature of the
information, it goes to the resource administrator such as DNR
or to the fiscal authority such as DOR. It depends a bit on
local circumstances. There is sharing between those parties,
with confidentiality issues. The degree of sharing varies by
country. The flow is perhaps greater into the taxation/fiscal
authority than back out of it. Taxpayer information generally
isn't shared, while field-level information usually is. There
generally is a distinction between those two, especially
relating to the resource assets themselves.
12:34:09 PM
MR. GEORGE said in terms of how this information is distributed
beyond the government entities - the public reporting - it is
mostly in aggregate or summary form. Occasionally it goes into
detail; he would show examples. Some countries provide field-
level summaries of reserve information and CAPEX, more often as
a total, looking at the asset as a whole; he would show an
illustration. In his experience, OPEX usually aren't disclosed
much at a field level; they are a harder level of costs to see
in the public domain and therefore tend to be held confidential.
MR. GEORGE explained that there are subscription services where
one can get a good idea about this information; he would touch
on that later because it relates to transparency and marketing
issues that arise in conjunction with fiscal and resource-
management policy in countries. The data quality varies,
sometimes being accurate and sometimes indicative. The oil
companies themselves engage in guidance to these subscription
services as to the level of information. While they might not
want to put the information out, they also are recipients and
consumers of it. Thus it is a gray area.
MR. GEORGE said sometimes that information may come out in
statutory disclosures for market listings, particularly where
smaller companies are involved. Those reports frequently have
detailed information on the properties they hold. Where they
may be a partner with a bigger company there may be some
detailed disclosure. Over time, the system combines to provide
fairly reasonable ideas of what is going on; he would provide an
example later. He noted the rest of the presentation was to
present examples of the disclosure requirements themselves and
how this plays back in the public reporting.
12:37:09 PM
CHAIR HUGGINS welcomed Senator Ellis.
MR. GEORGE highlighted the examples done for the UK, Norway,
Denmark, and Nova Scotia. He said the UK has a requirement to
disclose data, particularly at a field level. Typical
information that is disclosed includes detailed development
plans that have economic information, as well as collated annual
or semi-annual data that companies are required to report on.
There also are tax returns for PRT - the petroleum revenue tax -
for the equivalent of legacy fields, the older fields. In reply
to Chair Huggins, he said PRT is somewhat analogous to Alaska's
PPT, but is a "mosaic" done on a field-by-field or project-by-
project basis. Companies have to disclose that in order to make
estimates for returns on the fields at that level.
CHAIR HUGGINS inquired about "growing pains" and conflicts over
this sort of process in the UK.
MR. GEORGE replied it has evolved over 35 years, with cat-and-
mouse issues between regulatory bodies and companies on exactly
how things are disclosed or pricing, particularly for valuation
or royalties at various points in time, although royalty is gone
now. Systems have built up, evolving to where both parties find
it workable; this is amended from time to time. As a side issue
relating to fiscal stability, he noted the UK has probably had
more tax changes than any other country; some are major tweaks,
every so often, and some are smaller. Usually there has been a
reasonable basis of expectation and balancing. While not
everything has been successful, largely it has been, looking at
activity levels and so on. He commented that change doesn't
always cause problems.
CHAIR HUGGINS asked whether what Alaska is considering is
evolutionary, revolutionary, or in between.
MR. GEORGE answered he doesn't think it's revolutionary at all.
The system of information collection reflected how the fiscal
system operated. That has changed and requirements have
changed. In the UK he thinks there is a fair amount of
discretion passed down to the administrative levels in order to
make it work. If it's administered in a confrontational way,
the industry suffers, causing everything to suffer with it. The
way to know whether something is workable for both sides is to
look at whether activity takes place.
12:43:13 PM
MR. RUGGIERO expanded on the disclosure of cost data. Relating
his experience in the 1990s, he said the regulator had ultimate
approval over whether to allow development to go forward. In
the UK that essentially had become a rubber-stamp process
because the application for development wasn't made until it was
known it would be approved. There was a review every four to
six months about issues relating to operations, corrosion,
expected facilities upgrades, and so forth, all the way to
discussing work on potential developments such as what geologic
or geoscience work had been completed; what this revealed about
the prospect's possible size; and, if preliminary engineering
work had been done, what type of development it would be, what
the rough cost would be, and what production levels were being
designed for and why. At each meeting with the ultimate
regulatory body there'd be a frank discussion of exactly what
the understanding of the numbers was. Thus the regulator was
treated much as a joint-interest partner would be as far as
projected costs for bringing that development to market.
SENATOR WIELECHOWSKI opined that the UK had perhaps 15 oil tax
changes in the last ten years.
MR. GEORGE said he hadn't counted, but illustratively this was
correct. They were changes or tweaks.
SENATOR WIELECHOWSKI asked whether he'd understood correctly
that this didn't discourage investment.
MR. GEORGE answered that he could think of one or perhaps two
instances where it slowed investment. For the majority,
however, no. Even the more recent upward changes probably
haven't slowed investment. Drilling activity still seems to be
there.
SENATOR WIELECHOWSKI recalled Dr. van Meurs' testimony yesterday
that this is the third time in three years that Alaska is
changing things, which will negatively impact how investors look
at Alaska. He asked whether the current testifiers agree with
that as well as Dr. van Meurs' statement that oil companies look
negatively at Alaska as far as investment.
COMMISSIONER GALVIN proposed holding that topic until tomorrow,
when it would be discussed at length.
SENATOR GREEN asked: Is there a difference in the UK and Norway
as far as ownership by the government of the development and
exploration companies? And is investment done differently?
MR. GEORGE answered that the resources in the ground are owned
by the state, as in Alaska, where the state or federal
government owns the resources. As for ownership of companies,
the UK had that starting in 1975 on the oil side, though it was
privatized in 1981 or 1982; for gas, it was privatized in the
1980s. Norway has a more mixed situation. Its state oil
company, Statoil, was partially privatized in 2001 and continues
to operate as a global company. It is perhaps 70 percent state-
owned, and although it has state members on its board it
operates fairly much as an independent company. The ministry
awards licenses and decides who gets them. They may make a
partner a successor or might not put anyone in there; it's an
open issue.
SENATOR STEDMAN asked whether the crown or the government of
Great Britain has any equity interest in BP.
MR. GEORGE answered it is a fraction of a percent, if any. The
main interest they had - about 30 percent - was sold off in
1987, immediately following the market crash.
12:49:42 PM
CHAIR HUGGINS asked when net versus gross would be discussed.
MR. GEORGE replied it would be tomorrow. Concluding with
slide 7, he said some of this information would be published in
an aggregated form. Showing slide 8, "United Kingdom," he noted
this spreadsheet form is what companies must submit on field-
level information; to his belief it is done annually, but may be
more frequent. On the form he'd highlighted production, sales
volume, CAPEX, OPEX, and tariffs. It provides an annual time
series, a best estimate at a point in time, although in this
case it isn't something a company is necessarily held to under
threat of penalty. Rather, it is the expectation of how the
exploitation on a particular field will go, what will be
invested, and so forth. If there are major changes, then
changes are made on the form. He gave details. In response to
Chair Huggins, he said Alaska's form might be a bit different as
to the levels of detail provided.
MR. GEORGE showed slide 9, "Annual UKCS Income and Expenditure
summarized on an annual basis," related to 1970-2005. He said
it shows oil and gas produced in the UK continental shelf; what
expenditures were made each year, including decommissioning
costs, which are starting to become a bigger issue as fields
begin to be decommissioned; and average prices. This is
published on the web site and put out yearly in hardcopy form.
CHAIR HUGGINS asked whether this information is confidential for
a period of time.
MR. GEORGE replied no, it is straight off the web site.
Continuing with the UK, slide 10, "Medium-term forecasts derived
from annual returns," he said this shows that some forecast
information put into the public domain, indicating the expected
level of expenditures. Since it is from 2003-2010, it shows
both a forecast and some history, split among the amounts of
exploration expenditure, development expenditure, and operating
expenditure. This is based upon companies' returns.
MR. GEORGE addressed slide 11, "Cost trends." He noted one
publication has an analysis of how cost trends have run in
recent years, showing actual 2005 and 2006 amounts, as well as
survey results and anticipated costs for fields that are
expected to start up over the next two or three years. This
information is aggregated, relating to the UK continental shelf
as a whole.
12:55:58 PM
MR. GEORGE turned attention to Norway, slide 12. He said there
is a similar set of inputs to the government. Companies have to
make applications for development and provide a lot of
information there. Annually or semi-annually they also provide
highly detailed breakouts to the Norwegian petroleum directorate
as to how they see exploitation going, not just for field
reserves but also for resources. This is done to update state
forecasts of revenue for management and planning purposes and
for determining trends. The graphic illustrates something
published yearly, in this case by the Norwegian petroleum
directorate, with a lot of background information summarized so
people can get a good handle on what is going on; where money is
being spent; and issues related to health, safety, and the
environment, for example.
12:57:31 PM
MR. GEORGE continued with Norway, slide 13, "Field / discovery
listing of resource volumes." He said this is just one
illustration of field-level information that is published. It
shows the amount of oil and gas in place. Many places publish
this information fairly readily, so he surmised there isn't
anything too controversial here.
MR. GEORGE showed slide 14, "Detail on field-by-field basis,"
saying it's part of the 2007 book he'd been talking about. It
depicts the projected production forecast and history, how much
oil is expected to be, how much is being produced, how much is
expected to be recovered, and how much capital has been spent
and is anticipated to be spent going forward. It has geological
and operational-type summaries about the field, including how it
will be produced and where it fits into the big picture.
12:58:32 PM
MR. RUGGIERO related his experience in the UK and Norway that
there is active participation by various government agencies to
look at these production forecasts and then make decisions with
respect to the development and timing that will ensure maximum
utilization of existing infrastructure.
MR. GEORGE added that Norway has been keen at looking at this
aspect, making sure that costs are kept in check as much as
possible and that facilities and infrastructure are utilized in
an optimum fashion, rather than building new infrastructure or
hauling it too far in one direction or another as a result of
ownership issues.
MR. GEORGE continued with Norway, slides 15 and 16, "Medium-term
forecasts derived from annual returns." He noted the bar graphs
show the degree of expected investment. This comes from the
fact that companies have submitted detailed information. It is
a year-by-year, field-by-field or resource-by-resource forecast
shown in an aggregated form. This is continually updated.
Slide 17, "Source of Investment," shows where the investments
come from in terms of the type of company involved, split
between large Norwegian companies and other large companies, and
then smaller and new companies. This gives some sense of
whether new players are being attracted and so forth. In this
case, there was an influx of new players after 2000, which
resulted after Norway decided to open things up a little more
and encourage new companies to come in.
1:01:11 PM
MR. GEORGE turned to Denmark, slides 18-21, noting he'd provided
examples. Although the disclosures are generally the same as in
the UK and Norway, Denmark has only five major players, to his
belief. In this case, they are putting out an annual time
series showing money invested in individual fields; thus what a
particular company is doing could readily be worked out. The
ownership interests are well published anyway, so it isn't an
issue. They also put a forecast of expenditures out there. He
pointed out that this is a level of detail beyond what exists in
most places.
1:02:18 PM
CHAIR HUGGINS referred to the field listing of annual capital
investments shown in the slides for Denmark. He asked whether
that data is available retrospectively for Alaska.
COMMISSIONER GALVIN said no. He pointed out that cost
information would be discussed Sunday, including the nature of
cost data acquired by the state over the years. The bottom line
is this: There isn't any other cost data for the fields.
CHAIR HUGGINS asked whether this is because it has never been
requested or considered.
COMMISSIONER GALVIN answered that clearly it is the former. In
his experience with DNR, there was great interest in getting
cost data, which would have been highly useful in some decision
making within the department. But there was concern about
facing the question of what the public need is for the
information and whether the state's involvement might push
decisions. There was tremendous resistance to using it in the
active management of the resource. Now that the tax system
requires receiving this information in order to even understand
the tax system, however, it spotlights the fact that the state
doesn't have it, has never gotten it, and needs it.
1:04:39 PM
MR. GEORGE continued with Denmark, slide 21, "Detail on field-
by-field basis," noting it is the same type of publication put
out in Norway. The government puts out detailed information
that anyone can see, relating to individual fields, how they're
performing, and how they fit into the bigger picture.
MR. GEORGE turned to Nova Scotia, slides 22-25, saying there is
a requirement for public review and there is a detailed
disclosure available on a web site. There are several parts of
a big publication describing the fields, including development,
impact, environment, and so on. He highlighted one for the Deep
Panuke field operated by EnCana, which has been running 12 to 18
months and was approved a couple of weeks ago. It shows a lot
of detailed information that he'd pulled off the web site;
available to anyone, it shows sales forecasts under different
assumptions, a fair amount of cost forecast information, and an
indication of expected annual operating expenses. He provided
details.
MR. GEORGE addressed slide 25, pointing out that when this was
approved a couple of weeks ago there was a condition put on it
relating to economic data. It states that the proponent -
EnCana and its partners - shall inform the board of any material
changes to the cost information and production profiles that
were submitted with the development plan; to be submitted with
the annual production report, it should include details of
operating and capital expenditures for the previous two years
and the current year, and projections for the next two years.
Thus it is fairly explicit in terms of requirements, including
keeping this information up to date.
MR. GEORGE turned to the final slide, slide 26, "Publicly
Available Sources," which had a subheading that read: "Example
detailed field cash flow available from Deloitte's subscription
service." Noting it's a different issue, not related to a
mandate by any government body for information sources, he said
this is what is readily available to anyone who wants to pay
money to a subscription service. Whereas this example is from
Deloitte's, there are others.
MR. GEORGE explained that slide 26 shows one page out of 15-20
for a particular field, in this instance, the Manus field in the
UK North Sea operated by BP. Those pages contain detailed
information on geology; individual wells; the reservoir,
including how it has performed and the way they've gone about
developing it; and associated costs. A summary page shows a
highly detailed cash flow outlook. In this instance it uses
Deloitte's price assumptions, but it is readily available for
others to strip that out and put in their own price assumptions.
MR. GEORGE said this is a year-by-year forecast of production,
capital and operating costs, and so on. Is this information
exactly what BP and its operating partners believe? It may not
be exactly. But these subscription services have existed for 30
years. This is done for every field in the UK, perhaps a couple
of hundred, as well as those in Norway and other countries. The
source is government publications and information put out in
press releases or company publications from time to time.
Significantly, the companies also give guidance with respect to
whether these look reasonable. While they probably aren't
perfect representations, they are generally held to be a pretty
good guide to what that individual field looks like or what a
collection of fields and interests looks like.
MR. GEORGE continued, noting these are used heavily by the
companies themselves when looking for opportunities or trying to
decide what would happen if several were combined or if a
company were to be acquired, for example. This type of
publication has driven quite a lot of activity in the area
because companies can get a fairly good assessment of what is
going on and what opportunities exist. He described it as part
of a matrix of information that sits there in North Sea
countries and a number of others as well, driving the overall
activity level within a country.
1:11:07 PM
MR. RUGGIERO summarized by saying they'd tried to find a number
of regimes analogous to Alaska. He referred to comments
yesterday, emphasizing that in those regimes with production-
sharing agreements, most agreements require work plans and
budgets that are submitted and approved annually throughout the
operation. For example, a development plan will be not only
what a company plans to spend that year, but also likely what is
planned to be spent for investment in that development over a
series of years.
MR. GEORGE added it would be over the life, in fact.
MR. RUGGIERO said there'd be limits. Even within an approved
plan, any expenditure above a certain level would require the
preapproval of a regulatory body. As stated yesterday, there is
much more control from a state perspective in a lot of the
production sharing contract (PSC) environments. Whatever was
seen here, there'd actually be a much higher level of submission
and control in PSC environments.
CHAIR HUGGINS recalled discussion that the most important
variable was production. He also recalled that yesterday Mr.
van Meurs recommended not making any changes to the PPT and had
said with respect to auditors that "you don't know what you
don't know because you haven't audited." Chair Huggins asked
whether that was correct.
COMMISSIONER GALVIN asked whether Chair Huggins was talking
about the current situation.
CHAIR HUGGINS said yes. He gave his understanding that Alaska
is a little more blind than it could be if there were a system
like those just described in other countries. He asked for the
commissioner's opinion.
COMMISSIONER GALVIN answered that the oil industry is conducted
the same way around the world, incurring the same types of costs
and having mostly the same types of operations in an analogous
environment. Thus the type of information generated by these
companies and provided elsewhere is known, which is why Gaffney
Cline was asked to provide this information. Also known is the
type of information the State of Alaska wants to receive.
COMMISSIONER GALVIN pointed out, however, that the fine-tuning
and inner workings aren't known by the state for each field with
respect to how the ANS fields operate and the economics that
drive them. Clearly lacking are an historic reference and a
more recent snapshot. Now the information is just based upon
one year, which the state was able to use to provide a picture
going forward; that has helped tremendously over the last 12
months to recast the state's expectations.
COMMISSIONER GALVIN continued. As to whether the state will be
better off in two or three years reconsidering the decisions,
based upon better information, he said this is a legitimate line
of inquiry. There will be more known in terms of economic
models in two or three years. But the balance is this: Do we
recognize that there's a need to make a change, based upon what
we know now? And what is the cost associated with waiting?
Suggesting this can be further explored another day, he gave the
administration's perspective of recognizing significant costs
associated with waiting one to three years and then making a
dramatic change, versus doing what it can now, knowing what it
does now, which is more than was known a year ago.
1:16:38 PM
MR. RUGGIERO added that this is an evolutionary process, but
must start somewhere and sometime. He cited the handling of
corporate overhead as an example where he has seen evolution
when they started getting this cost information. For instance,
the Timor accounting rules have a cap of 2 percent of qualified
CAPEX and OPEX to be charged as corporate overhead. He recalled
working in venues where the corporate overhead charged was
anywhere from plus or minus 2 percent to as high as 15 percent
of actual in-state, direct capital and operating expenditures.
MR. RUGGIERO asked: What is a fair allocation of corporate
overhead for a number of these large, major oil companies
against their tax liability in Alaska? And are they allocating
to Alaska the same percentage they allocate under the same rules
that they allocate to all their other operations around the
world? By getting this basic data, he said, he wouldn't go to
where Dr. van Meurs did, that the oil companies have included
items that shouldn't be there. By contrast, what he saw was
that as profit-minded companies, they pushed it to what they
believed to be the fence line of the law, staying just inside
that. As DOR gathers data, it will be able to make better-
informed decisions as to what is fair and reasonable with
respect to those types of deductions, Mr. Ruggiero predicted.
CHAIR HUGGINS gave an analogy, suggesting the question is at
what point people have the necessary information to make a good
decision.
1:19:02 PM
SENATOR WAGONER surmised two important questions to companies
will be as follows: How much did you deduct against your
liability with the State of Alaska for corporate overhead? And
what percentage of your corporate income came from Alaska
deductions? He asked if that is a way to figure out whether
they're taking a fair share or more than their fair share of
corporate costs off of the Alaska tax bill.
COMMISSIONER GALVIN clarified that the example used for
corporate overhead doesn't reflect Alaska's current tax law.
Under PPT, they aren't allowed to deduct for overhead. Rather,
they can take a percentage allowance, up to 3 percent. He
suggested there is a sense that in moving to a net-based tax,
calls will be made based upon the perceived public interest of
allowing certain deductions but not others. The end result will
be a system that is different from what it was thought it would
be initially, because mutually everyone will learn more about
the acceptance level for certain costs.
SENATOR WAGONER said his question wasn't about PPT, but was an
analogy, asking whether it would be a fair way to arrive at a
point to say that something is a fair amount to deduct from the
corporate overhead, versus the corporate income from the
production in Alaska.
MR. RUGGIERO opined that there are a number of ways to determine
what is fair. Another way he has seen it done is this when
gathering such information: Company A says it's X percent,
Company B say Y, and Company C says Z. They're all listened to
as to why they believe their numbers are right. The decision
makers start to educate themselves, take that data in, and then
make an assessment from the State of Alaska's position as to
what is believed fair and correct.
CHAIR HUGGINS thanked Mr. George and Mr. Ruggiero for their
presentation.
1:24:11 PM
^Jon Iversen and Marcia Davis, DOR; Kevin Banks, DNR
MR. IVERSEN returned to the administration's presentation on
ACES, slides 24-28, "Auditors." He explained that DOR has 18
auditor positions with 5 vacant, and DNR has 7 royalty auditor
positions with 2 vacant. Lately there has been difficulty in
recruiting auditors. One problem is below-market-level
salaries, and the employee classification system doesn't allow
for a targeted increase. Demand in the oil and gas arena has
raised salary levels, and the state isn't as competitive as it
should be.
MR. BANKS agreed, saying he and Mr. Iversen have practically
traded auditors in recent months. They've tried different
remedies: DNR now has its own authority to audit royalty and
net profit shares, and a classification review a few years ago
resulted in all auditors getting a pay raise. However, he still
views the pay as inadequate to attract the kinds of employees
needed to fill these positions. The attempt is to come up with
creative solutions to fill gaps and complete a backlog of
audits.
CHAIR HUGGINS reported he'd talked to Marcia Davis about this.
He suggested the need to look at inflation.
MARCIA DAVIS, Deputy Commissioner, Department of Revenue,
indicated DOR is mindful of the challenge of balancing the need
to hire individuals with a high level of experience and
credentials in order to position the state to be efficient at
this high-value function; this relates to both the production
tax side, which delivers almost half the state's revenue, and
the royalty side. This small group of auditors must defend and
protect the line on probably 80 percent of the revenues that
come in. At the same time, DOR appreciates the talent and hard
work of its other auditor staff on the corporate income side who
do valuations for property tax and so forth.
MS. DAVIS explained that DOR has been forced to hire junior
people with little or no experience on the industry side, and to
"grow them" internally. While they gain exposure to the other
auditors, they lack the depth to be efficient. She emphasized
the state's pay scale for others elsewhere in the system who are
tasked with such enormous responsibility. She said it is a
challenge and the department will hold the line as far as other
staff. There is an issue in all departments as to whether state
employment has kept pace with the private sector and so forth.
There will be an overall review and solution to the broader
issue, but this is seen as a separate issue. She indicated DOR
is highly concerned about holding that line as well, because
otherwise this effort cannot move forward.
MR. BANKS added with respect to inflation that clearly - as
reflected in the department's fiscal note - there is a time
during this transition when a lot of effort will be needed.
There will be in-house people, but also contractors brought in
to assist. While the department will avoid bringing on a lot of
people who require future employment, a balance must be struck
in bringing in outside help so that they don't immediately walk
away with the intellectual property that the department wants to
keep in-house.
CHAIR HUGGINS explained that he'd asked because of earlier
comments about saving money for a rainy day.
SENATOR WIELECHOWSKI agreed with the concept of raising benefits
and salaries to attract more auditors. However, he cautioned
against moving them into the exempt classification. Citing his
experience as a hearing officer for the state, he recalled that
when he wrote a decision that a party didn't like there'd be a
call to his boss. An auditor shouldn't serve at the will of the
governor, with an unpopular decision perhaps resulting in being
fired. He said maybe it can be structured so these auditors
aren't exempt and have some protection.
MS. DAVIS replied that she appreciated that concern, which she'd
heard expressed from others. However, she noted that auditors
are certified public accountants (CPAs) and have explicit
professional standards to comply with in performing audits. She
related her sense that auditors have two gears: right and
wrong, with nothing in between. She acknowledged the
differences among administrations, though, and suggested perhaps
mechanisms could be put in place to ensure that those
professional standards are never compromised.
MR. IVERSEN lauded the ethics and dedication of DOR's auditors
in trying to do the right thing and reach the correct result.
SENATOR WIELECHOWSKI clarified that he wasn't implying that
wasn't the case. Rather, the system is working well, and he was
cautioning against changing it, jeopardizing it by having the
fear that if an audit isn't done as a higher authority would
like, the person's job would be on the line.
CHAIR HUGGINS asked whether there are other mechanisms to
accomplish this without exempt status.
MS. DAVIS highlighted the constraint: The job classifications
have been set up, the Department of Administration (DOA) has a
fairly rigid system, and she didn't know how to get around
trying to force a reclassification.
1:36:30 PM
MR. IVERSEN elaborated. He said the state's classification and
pay plan applies to job class families. So in order to raise
wages for oil and gas auditors, the state would have to raise
wages for all auditors in all jobs that generally fall within
that same category. For instance, people who serve a quasi-
auditing function would arguably be part of that, including the
chief of operations and deputy director. The oil and gas
auditors are sort of a special case right now because of market
demand. It has created a niche market for that type of
experience. They can't be kept in the classified service and
still retain internal alignment. Thus the issue would involve a
highly detailed classification study that also looks at all
those other positions, which would essentially water down the
validity of what they're trying to get at here.
CHAIR HUGGINS countered that by looking three years into the
future, when there are new administrators who want new auditors
because they work for someone they're trying to get rid of. He
expressed concern that the potential is there, but there is a
need for continuity in the workforce and for the employee.
SENATOR WAGONER said he finds it shocking that the legislature
and DOR can't create another classification of auditors within
the existing system with good enough pay to attract corporate
auditors into the system. Citing the University of Alaska as an
example, he suggested there is always a way without going
through a total salary study if there is a need to hire specific
people for a specific task. He asked why this is different.
MS. DAVIS gave her initial reaction that this is a complex area
because of all DOA's pay classifications and the various union
agreements in place. The state has entered into contractual
arrangements with the unions as to how, when, and where they'll
deal with job classifications and any modifications to those,
for instance. There may be constraints within current
contracts. However, she proposed coming back to the legislature
with a written statement from one of the department's experts on
administration and either describing an alternative means to
change the pay within that narrow band, if there is one related
to legislation, or else identifying constraints within the
contracts.
CHAIR HUGGINS requested that DOA be brought to the table along
with DOR in order to continue this conversation.
1:41:33 PM
MR. IVERSEN returned to the presentation, slide 27, "ACES
creates exempt class of Oil and Gas Tax and Royalty auditors."
He explained that current auditors would have the option of
moving to exempt status or staying with the union. Showing
slide 28, "Contract Auditors," he said ACES provides funding for
contract auditors over the next four years to assist and/or lead
in auditing and also to bring department folks up to speed with
respect to training and actual field training and field audits,
working hand-in-hand.
CHAIR HUGGINS asked whether this may be a mechanism to make the
transition work if that concept is expanded and the "personnel
lag factor" gets up to a speed such that folks could be hired
appropriately for the welfare of all.
MR. IVERSEN replied this raises a good point. He mentioned the
possibility of having the committee hear from union
representatives. However, he noted there is an argument
relating to union contracts: The state cannot contract for
services when it would cost more for those services, if the
state can do those services itself. It would drive the exempt-
status issue, because an exempt salary would mean not paying
more than for in-house folks.
1:43:45 PM
MR. IVERSEN addressed lease expenditures, beginning with
slide 29. He explained that PPT uses general categories of
allowable lease expenditures, with a set of exclusions. Under
ACES, those exclusions would be retained and added to. The
department would have statutory power to delineate allowable
lease expenditures via regulations. This allows operating in
world where there are inclusions, rather than exclusions, in
order to have clarity and reduce conflicts with taxpayers once
audits begin.
CHAIR HUGGINS asked whether the following take on the PPT debate
the previous year was correct: The legislature's expectation
was that it was creating those general categories and that DOR's
task was to create regulations and implementing instructions to
provide clarity and make this enforceable.
MS. DAVIS answered that was the underlying premise. However,
PPT was written to be self-implementing because of the need to
move quickly. Even without regulations, it defined the scope of
what was permissible: it had to be directly related and
reasonably related to the upstream expenditures. Although
further delineated by the department's regulations, it didn't
require such regulations to get it going. By contrast, ACES
would require the department regulations to affirmatively
describe that deduction as well. It is no longer self-
implementing as a statute, but places the burden on the
department to further enumerate and flesh out those authorities
for a deduction.
MS. DAVIS, in further reply, said whereas PPT set out the broad
scope of the type of deductions allowed, ACES tries to address
the following concern: An administration that doesn't
aggressively manage those deductions essentially allows industry
to come in and deduct anything and everything that fits within
the broad statutory definitions. Thus the desire is to be clear
as to the allowable deductions. There will be an opportunity
for public comment, by industry and concerned citizens as to
whether what is or isn't a deduction has been clarified. It's a
minor word change but may have a big effect, depending on
whether or not the job is being done properly.
CHAIR HUGGINS commented it's a little more proscriptive than
he'd envisioned; he suggested visiting about it later.
MR. IVERSEN added although the authority is arguably there
already, this makes it crystal clear so that when they describe
something there won't be an argument as to whether the authority
exists.
1:49:50 PM
MR. IVERSEN continued with lease expenditures, slide 31,
"Repeals," which read:
Provisions allowing the department to substitute cost
billings under unit operating agreements in place of
general standards for allowing lease expenditures
- 43.55.165(c) and (d).
He explained that subsections (c) and (d) are proposed for
repeal from AS 43.55.165, lease expenditures. These allow the
department to substitute cost billings under unit operating
agreements in place of general standards for allowable lease
expenditures. Under (c), if DOR finds that parts of an
operating agreement are substantially consistent with general
standards for allowing lease expenditures, then DOR may
authorize a producer to treat as lease expenditures the costs
that are billable under the operating agreement.
MR. IVERSEN noted that (d) takes that same principle a step
further. If the department makes that same finding of
substantial consistency with the general standards for
deductible lease expenditures, and also makes a further finding
that one of the working-interest owners other than the operator
has the incentive and ability to effectively audit, then the
department accepts as allowable lease expenditures the costs
that are billed and not disputed by the working-interest owners
under the agreements.
MR. IVERSEN went on to say these provisions essentially sidestep
the state's ability to audit. They also add a subjective
finding, potentially forcing the state to accept a joint-
interest audit, findings that may not be in the state's best
interests, given that resolutions to disputes under these
operating agreements aren't made with the state's interests in
mind. The concern, as a policy matter, is too much control by
the taxpayers and too little control by the department once
these findings are made - especially under (d), where the
auditing power would be restricted to looking at the specific
exclusions in the statute and restricted to confirming what is
actually billed under the agreement.
CHAIR HUGGINS remarked that what Mr. Iversen was saying seemed a
bit greedy. He then asked whether this is a revolutionary
change or an evolutionary process being entered into here.
MR. IVERSEN answered that the department has not accepted any
of the joint operating agreements under these provisions; that
bridge hasn't been crossed. But these two provisions shift
responsibility from DOR to the taxpayer as to the final
determination of what costs are billable and allowable as
deductions for purposes of lease expenditures. In drafting its
second set of regulations - yet to be completed - DOR has had
tremendous difficulty interpreting what these provisions mean
and what its duties will be under them.
MR. IVERSEN elaborated, saying this puts DOR in a strange and
difficult position: To ensure there is proper auditing
undertaken between the working-interest owners and the operator,
DOR must check, keep control of, and have continuous working
knowledge of the operating agreements. The accounting
procedures under those are evolving or in flux, and DOR
essentially has to audit the auditing. And the determination of
"substantial consistency" isn't exact compliance with the
general terms of the statute, so it could lead to disparate
treatment among taxpayers. Mr. Iversen highlighted the gap
between general allowables under the statute and what is
actually intended to be disallowed under it.
MS. DAVIS added that DOR has tried to find ways to not make more
work for itself, with the goal of setting good standards and
having more certainty for taxpayers and DOR. In looking at
these two provisions under PPT, it found a disconnect with how
they relate to operating agreements, and there was no basis for
making a particular call. One unit agreement would beget
another, and these have a bit of a life of their own. For DOR
to sit and cast judgment was too cumbersome. Thus language is
inserted that captures the ability to look at these operating
agreements, but on a cost basis, to say DOR shall consider,
among other factors, typical industry practices, which include
the operating agreements in place in Alaska, as well as
standards done before under the net profit share lease (NPSL).
The department has made it an obligation to look to those, as
guides, and can efficiently reach in, target a cost, see how
it's handled under the operating agreement, and decide that
indeed it is in step. It keeps DOR from being dragged into a
process that doesn't yield as much benefit as what is proposed.
CHAIR HUGGINS summarized that this reduces ambiguity on both
sides.
MS. DAVIS agreed.
MR. IVERSEN concurred, noting it isn't a huge change as to what
is or isn't allowed. In further reply, he surmised the
taxpayers would resist having these provisions repealed because
they allow taxpayers more control over what costs are allowable.
MS. DAVIS added that it says DOR "may" choose to do this, if
convinced by all these various proofs and standards. She
suggested industry members might ask how long they'd have to
make their case to try to have DOR sanction the operating
agreement as the definitive statement of what is or isn't
allowed. And if the agreement is modified, that battle would
have to be waged again. Thus while it may be nice in a utopian
government-industry relationship, pragmatically it probably
doesn't have any long-term value.
2:00:46 PM
MR. IVERSEN turned to exclusions for lease expenditures,
slide 32, indicating this relates to AS 43.55.165(e). It
disallows deductions of costs incurred for repair, replacement,
or deferred maintenance of facilities and equipment, other than
a well, that results in or is undertaken in response to an event
that results in an unscheduled interruption in production or a
release of oil and gas. Mr. Iversen noted this takes a policy
tack similar to Senator Wagoner's SB 80 in terms of addressing
some maintenance costs that have caused problems. This
particular provision would trigger based on an unscheduled
shutdown, reduction in production, or spill.
MR. IVERSEN predicted this would encourage proactive
maintenance. Furthermore, there is an exclusion in the statute
for Acts of God: inevitable or catastrophic occurrences that
couldn't be prevented through proper maintenance and reasonable
behavior on the part of the operator.
SENATOR WIELECHOWSKI recalled yesterday Dr. van Meurs had said
this was already taken into account when PPT was constructed
last year. There was 30 cents a barrel taken in order to deal
with it. Senator Wielechowski asked whether the testifiers
agreed.
MS. DAVIS recalled that Commissioner Galvin testified on that
point, likely during hearings on SB 80, and that the information
from Dr. van Meurs in the record showed that the 30 cents was
intended to cover the routine and ordinary - not extraordinary
and excessive costs. With respect to Dr. van Meurs' testimony
yesterday, she opined that he'd misunderstood the scope of the
current bill and had been stating concern that a 24-year-old
auditor would have to determine what is or isn't good
maintenance. Ms. Davis said that's why ACES was written as it
was: They don't want that kind of judgment call made.
MS. DAVIS noted while it would be simple to strike "gross" in
front of "negligence" and then to battle about whether something
was negligently maintained, this would lead to a long, costly
legal battle, pitting DOR against the industry on important
issues as to what the standards should be. Rather, the desire
is to have a bright-line test for the following impacts to the
state: 1) disrupted production and 2) spills and environmental
contamination.
MS. DAVIS explained that the state isn't an expert on field
operations. It is up to the industry to figure out how to get
there. If either impact happens, there will be an economic
consequence, since immediate repair and replacement costs cannot
be deducted. Industry will have to decide the level of
proactive maintenance to avoid those. Some maintenance issues
don't impact production or create spills. The state wouldn't
get into the industry's business to that degree. Instead, the
line would be drawn where it hurts the state deeply: in its
pocketbook because of production or in contamination of the
environment.
SENATOR WAGONER related how the 30 cents came about. He said it
had nothing specifically to do with BP's North Slope oil spill.
In his office one Saturday, Senators Wagoner, Dyson, and Wilken
had discussed with Dr. van Meurs how to get closer to a gross
system with the PPT. One scenario was using an amount, and
Dr. van Meurs later came up with 30 cents after studying
information. The amendment they discussed was a deduction in
the overall cost of maintenance, period. The following Monday
BP announced the oil spill. Dr. van Meurs then sent a memo to
Senator Wagoner that mentioned the spill and indicated the
30 cents would take care of it. Senator Wagoner said there was
no intention for the 30 cents to take care of the BP spill due
to lack of maintenance. But this would handle SB 80 and all
other occurrence in the future of that nature. Senator Wagoner
said he'd be happy with this if it passes.
2:08:41 PM
CHAIR HUGGINS responded that he didn't disagree, but had heard
Dr. van Meurs say it was a mechanism that potentially could
address such things. He asked Ms. Davis about her use of the
term "extraordinary" with respect to costs, since the language
doesn't specify that.
MS. DAVIS apologized for using that term, but said it is clearly
what would catch the state's intention. A disruption or
cessation of production usually won't be a tiny cost item.
CHAIR HUGGINS asked whether there is any risk that having more
scheduled maintenance might interrupt production.
MS. DAVIS noted this is a good question. Clearly, DOR will need
to implement this through regulation, and there are threshold
questions of what is considered unplanned. For example, someone
could "plan" a production shutdown if there were a perceived
problem. Thus DOR is considering what the standards should be
for the reactive phase, for example, within 24 hours of an event
or two days, looking at the zone of typical events and how they
play out. The state wants to reward proactive and not reactive
behavior. If someone experiences a problem, steps in, and must
shut down and react, that cost itself won't be deductible. If
the company then decides this could happen elsewhere and
proactively takes measures, however, the state is comfortable
sharing those costs because at least the company is managing the
production shutdown. Oil companies are intelligent in how they
reroute or otherwise mitigate production impacts when they have
time to do so. Thus the state encourages such behavior. As for
the reactive phase, it needs further delineation.
MS. DAVIS expressed confidence that the industry is as profit-
motivated and as interested in not having disrupted production
as the state is. Therefore, rational business minds will
prevail and intelligent choices will be made as to how and when
shutdowns occur and how spills are avoided. She opined that the
industry is doing a decent job of it now.
SENATOR McGUIRE remarked that because Prudhoe Bay is a 30-plus-
year-old field, she is concerned there'll be a reaction the
other way, shutting the entire thing down and then doing the
scheduling; she trusts that the state will work through that.
She then asked whether this completely supplants the gross-
negligence concept.
MS. DAVIS answered no. This would be apart from that standard,
which might apply to a broader range of things. This just
targets the specific repair/replacement deferred maintenance
costs that people have concerns about.
SENATOR WIELECHOWSKI recalled that the SB 80 debate was over
negligence. He asked whether the same standard is in here.
MS. DAVIS replied it's strict liability. Whether the disruption
is caused by an intentional act, a negligent act, or a
reasonable, responsible act isn't germane. If there is a
disruption to production or a spill, the cost isn't deducted.
SENATOR WIELECHOWSKI recalled that the previous discussion
included encouraging companies to act proactively; he suggested
that having more of a negligence standard is a little more
proactive. Also recalling discussion of language that said a
responsible operator should act, he said it seems a little more
fair.
MS. DAVIS responded that it may cut it too close to the bone.
This was looked at when analyzing SB 80; the discussion was to
take the existing PPT law, which has a gross-negligence
standard, and establish a negligence standard. Referring to the
"reasonable operator" standard on the North Slope, she pointed
out that there aren't a lot of standards, and those which exist
are ones they've established. Thus DOR found a bit of a legal
morass in this challenging area that probably won't be clarified
until there've been many years of litigation and debate.
MS. DAVIS reported it was felt that this needed to be addressed
quickly, and this alternative to the approach described by
Senator Wielechowski will get a quicker response for the
behavior the state is looking for. She observed that financial
incentives usually drive behavior more strongly than legal
nuances and threats of being sued for negligence.
SENATOR WIELECHOWSKI asked what happens if someone shoots a hole
in the pipeline.
MS. DAVIS indicated the Acts of God standards were adopted from
the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA) laws, the Superfund requirements.
What this does is say a third-party act won't be considered
unless it could have been anticipated or prevented. There is a
fairly good body of law around these Acts of God standards, with
a requirement to mitigate and prevent such acts if they are
predictable or reasonably foreseeable.
2:16:56 PM
CHAIR HUGGINS recalled a trip last summer to the North Slope,
where an operator mentioned scheduled maintenance for a holding
tank. He surmised if he himself were an operator, he'd perhaps
double the size of the holding tank and deduct the cost because
it is part of maintaining the flow so there is no disruption.
He asked whether that is a stretch.
MS. DAVIS indicated the operator would pay 60 percent of the
cost of doubling that holding tank, balancing it against the
possibility that the existing tank is adequate. She expressed
confidence that a company would correctly size the operation for
what it needs; oil companies are rational and intelligent in how
they approach their facilities and equipment needs. While they
might build in a 5-percent cushion in certain areas for a safety
margin, it's probably in the state's best interests. She opined
that the state is probably more affected by lost production than
a company is, because it is the state's revenue stream, whereas
the company has other operations to mitigate cash flow.
CHAIR HUGGINS requested confirmation that the administration has
discounted using "gross negligence" as an operative term.
MS. DAVIS explained that gross negligence is currently the
standard among working-interest owners, even in terms of their
ability to push back against an operator and refuse to pay a
bill because the operator was grossly negligent. To her
knowledge, there has never been an instance where that has been
established by a working-interest owner against an operator,
however. It is a very difficult standard in terms of
establishing what the norms are for an appropriate operator on
the North Slope.
SENATOR STEVENS noted his concern had been about excessive
maintenance. However, he interpreted Ms. Davis's testimony as
being that gold plating won't be an issue because the companies
will pay the lion's share of those repairs.
MS. DAVIS agreed gold plating isn't expected. As for a
5 percent or 10 percent margin to mitigate risk because of
concern about downtime on production, some may be seen. But it
would be in the state's best interests, for the reasons she'd
stated.
SENATOR STEVENS asked whether there is oversight for
maintenance.
MS. DAVIS answered that as a result of an important initiative
brought last year, DNR's Petroleum Systems Integrity Office
(PSIO) now works more closely in monitoring and being engaged in
the maintenance standards of the ANS industry. It is a growing
office and will be working out its relationship and how it
monitors and manages the industry.
MR. BANKS elaborated. He said PSIO will work with the industry
to find gaps in the state's regulatory process with respect to
oversight responsibilities for the equipment, oil spills, and so
forth on the North Slope, and to look for any gaps in companies'
internal systems. It will rely on industry standards for third-
party-type certification and internal mechanisms within the
companies to establish maintenance schedules and the management
of safety issues. It may participate and then validate whether
companies are meeting those standards. This may be at a high
level at first, but will drop down as needed. This is where
PSIO is headed; it isn't there yet, but will provide a view into
how the producers are taking care of their equipment.
MS. DAVIS added that as the department implements regulations to
manage this there'll be some areas of facilities or
infrastructure that the industry has specific concerns about.
It may give rise more frequently to issues about production
disruption or slowdown, and the department will be very
interested to engage with them. Great care will be taken to
design the rules so they are clear, make sense, and achieve the
intended purpose.
CHAIR HUGGINS requested confirmation that regardless of whether
a company has done the right thing, no deductions for costs
could be taken if there was a shutdown.
MS. DAVIS affirmed that. The goal is that if an impact to
production happens once, the company will become proactive as a
result and will figure out to prevent it elsewhere. In further
response, she opined that it's even more important with aging
infrastructure, which truly requires proactivity. Also, if
something has aged out in one part of the infrastructure, it
very likely exists in several other places. The state will
allow a deduction if a company learns from an event and tries to
get ahead of it. Even if there are production impacts, the
state probably wants to know it's managed and that these impacts
are coming, rather than being continually surprised.
2:25:39 PM
CHAIR HUGGINS welcomed Senator Thomas.
SENATOR WAGONER asked what happens, for example, if there is a
shutdown because of a faulty hose on a turbine, when the
maintenance program being used had been defined by the
manufacturer of the turbine.
MS. DAVIS answered it doesn't matter whether an operator had
behaved perfectly and bought a faulty hose. The standard is
whether there is a production impact, period. What it does
influence is whether the company has a spare hose on the shelf,
which would make the impact short-lived and easy to fix. The
beauty of having strict liability is that the state won't be
spending years in court and so forth, arguing about whether the
field management was reasonable.
SENATOR WIELECHOWSKI surmised there'd likely be a lawsuit
against the company that produced the faulty hose.
The committee took an at-ease from 2:27:24 PM to 3:12:53 PM.
MS. DAVIS noted Mr. Iversen had left to join Commissioner Galvin
on the House side. Continuing with lease expenditures and
repair/replacement issues, she turned to slide 33, "Exclusions,"
which said this clarifies that costs to construct, acquire, or
operate a refinery or crude oil topping plant are not
deductible, but that the cost of diesel used for production can
still be deducted as an operating expense.
MS. DAVIS explained that a refining process happens in place on
the North Slope, adjacent to fields where oil comes out of the
ground or is piped from a lease area; it is processed and turned
into diesel, which is then used at the lease site or by third
parties and so forth. Diesel gets used in the trucks and in
power plants to power some facilities there. There is a
significant crude oil topping plant at Prudhoe Bay and one at
Kuparuk; those supply the needs of the operators as well as
third parties. Before these plants existed, ANS operators used
to truck diesel up from Fairbanks.
MS. DAVIS said the challenge for these plants is due to concerns
about air emissions, containment issues, and sulfur. There is a
lot of sulfur in ANS oil. As it is refined and turned into
diesel it has fairly high emissions. Thus they are running into
limitations and being phased out because of air quality control
regulations. So the choice for the producers will be to build
new plants or upgrade plants to remove the sulfur - a very
expensive process - or else to truck fuel up from Fairbanks,
resulting in higher operating costs and potentially higher
environmental exposure because of the trucks. She recalled
hearing anecdotally that ConocoPhillips, if it doesn't modify
the Kuparuk plant, will be bringing up about ten trucks of
diesel a day.
3:16:02 PM
SENATOR GREEN asked why it wouldn't be deductible.
MS. DAVIS noted one challenge is that the existing PPT law
allows deduction of leasehold expenses if they are direct
expenses upstream of the point of production. However, oil that
comes out and then goes into a refinery process is really more
of a midstream process, an offline manufacturing process not
seen as part of the direct flow from the well to the point of
production, which is what was originally envisioned as a cost
that should be deducted. Clearly, however, the use of diesel
fuel is an expense of operation.
MS. DAVIS said by allowing it here, the state clearly is
allowing diesel costs as part of the OPEX; that is not being
excluded. But if a company has a crude oil topping plant and
decides it is in its economic interest to modify it or do
something with it - but not on the state's nickel - the company
can still deduct the cost of that fuel. The oil is essentially
free, since the company doesn't pay tax on it. Thus the
calculation of a deduction, if the company operates such a
topping plant, will be the fair market value of diesel on the
North Slope, calculated by figuring how much it costs to buy it
there, which includes the transportation cost and purchase
price, but not the fair market value of the barrel of oil that
is essentially passing through the system free, without tax.
The choice is this approach or, if the company doesn't run such
a plant, deducting the actual cost of the diesel and trucking.
MS. DAVIS further explained that the state doesn't see the net
tax as designed to handle these manufacturing or midstream types
of things. The hope is that producers will be thoughtful and
creative, as they always are when facing high costs. Some
technological solutions on the horizon may lower the cost of the
diesel plant, perhaps some gas-to-liquids ideas or transitioning
to powering with gas as well. The state wants to encourage
anything that improves air emissions and so on. If the full
cost is borne by the industry, the state hopes it will lead to
the most efficient long-term solution. If government steps in
and pays 50 percent, by contrast, it may perpetuate a solution
that might not be the most economically efficient.
3:19:04 PM
SENATOR WAGONER asked how many of these topping plants are on
the North Slope.
MS. DAVIS answered there are two primary ones; there may be
smaller ones as well. She reiterated the challenge of dealing
with sulfur and looking for ways to handle the fuel needs.
Observing that when the oil companies face a challenge they
usually come up with good solutions, she emphasized that the
state doesn't want to impede the process, but also doesn't want
to throw money into a system that leads to an inefficient
solution.
SENATOR STEDMAN asked whether Ms. Davis was talking about
excluding a credit or excluding a credit and also declining a
deduction.
MS. DAVIS answered it would be excluded as a leasehold
expenditure. So it would be the cost associated with operating
as well as building or modifying. Thus it would be the
operating expense and the capital expense associated with the
plant. With that said, the state would still allow as an
operating expense the value of the cost of the diesel itself.
The cost of the "outflow product" would be deductible.
CHAIR HUGGINS asked about trucking fuel to the North Slope as an
alternative. He recalled hearing about a larger number of
trucks than Ms. Davis had mentioned, and also recalled hearing
that some resource states aren't allowing trucks on roads
because of maintenance issues. He suggested that inviting more
trucks to drive the Dalton Highway is counterproductive both
environmentally and because the state's department of
transportation has to maintain it.
MS. DAVIS concurred, noting it is a tradeoff. The state would
incur higher costs on maintaining and repairing the haul road,
but it would be offset by the consideration that the legislature
would have to make in deciding whether the state should pick up
the approximately 50 percent cost associated with the
$300 million plant. The question is what would really drive the
correct policy choices in each instance.
MR. BANKS elaborated. He noted the federal Environmental
Protection Agency (EPA) will require ultra-low-sulfur diesel,
which truck engines being built now are designed to burn. In
some respects the choice is up to the company: modify the
topping plants to make ultra-low-sulfur diesel, truck it up, or
seek another alternative. The state will allow a deduction for
the cost of buying diesel to run in the trucks, because it is a
qualified lease expenditure, but the company provides the
solution. Although it would great to have some kind of low-
sulfur credit that takes into account what the trucks are
burning on the way up and down, it really isn't an option.
3:22:52 PM
MS. DAVIS turned to slide 34, which read in part, "Disallows
deduction of Dismantlement Removal and Restoration (DR&R)
expenses." She said this exclusion from leasehold expenditures
was substantially disallowed with PPT. It disallows abandonment
costs associated with the North Slope. The PPT disallowed costs
associated with the amount of production as of the effective
date of the PPT bill, so the lion's share will likely be
historical production, not that from April 1, 2006, forward.
MS. DAVIS explained the internal state government conflicts that
were discovered. It will be a big challenge if the state allows
a deduction for the remaining abandonment costs associated with
production from April 1, 2006, forward. The arbiter for looking
at the level of abandonment - the threshold of whether enough
has been done both under the lease and under the statutes - is
DNR; it will be looked at under that standard. However, the
state will be paying about half those costs, and thus there will
be an inclination to make decisions based on whether they affect
state revenue in that respect. Meanwhile, the Department of
Environmental Conservation (DEC) will be looking at its
standards.
MS. DAVIS further explained that the state will be either
dishonoring one policy or the other within its government, which
is untenable. Furthermore, when these investments were made
they fully were recognized to have the obligation of the
abandonment costs, and depreciation has been taken all along for
these costs. Thus the tax benefits have been received already.
Therefore, it was felt that the appropriate solution was to get
rid of the rest of the abandonment costs for this.
3:25:27 PM
SENATOR GREEN asked whether initial contracts or lease
agreements said abandonment costs are to be shared by the state.
MS. DAVIS answered no, it was actually the opposite. It was
fully their burden. She turned to slide 35, which read:
Disallows tax-exempt entities from obtaining
transferable credit certificates under AS 43.55.023,
and from transferring production tax credit
certificates under AS 43.55.025
She explained that this provision is a little archaic, not
affecting many entities. It stemmed from a municipal entity
that has gas leases and interests and is in a position to be
paying some costs in generating credits. However, it isn't
subject to the production tax law in the first place. It's not
in the game for the burden part, but potentially could be in the
game for benefits. Thus this would level the playing field,
saying that if there is no participation in paying tax, then
there is no ability to monetize credits.
CHAIR HUGGINS asked which municipality this applies to.
MS. DAVIS said the Municipality of Anchorage is the one entity
she knows of.
3:26:49 PM
MS. DAVIS jumped ahead to slide 38, relating to Cook Inlet,
noting it was put in the wrong place, as a credit adjustment,
but is actually a leasehold expenditure issue. The body of
slide 38 read:
Clarifies that deductions arising from Cook Inlet
operations must first be used up in Cook Inlet and may
not be shielded by tax ceilings
- Consistent with existing regulations
She explained that this issue was found when writing the
regulations. There is a right way to do it under the
regulations, and all parties involved in Cook Inlet understand
how it needs to be. But the statute wasn't clear. Thus this
clarifies that when there are leasehold expenditure deductions
relating to a Cook Inlet operation, those must be absorbed and
used up to the PPT tax level, even though the ceiling is under
ELF. It reduces the amount available as a "carry forward loss"
for future years. The goal is not to have the ceiling escalate
as to how much cost is available to carry forward; it needs to
still track what would be allowed under PPT, even though that
bill wouldn't be paid. So this is a cleanup, keeping it
consistent with the regulations.
SENATOR WIELECHOWSKI highlighted capital investment credits. He
recalled yesterday Dr. van Meurs had said that beyond the
20 percent capital investment credit there is, in his view, no
need for further exploration incentives; he'd provided examples
of the state paying 70, 80, or 90 percent of the cost of
exploration. Senator Wielechowski also recalled hearing talk
that if new gas wells are developed, the state gets nothing
because so many credits would apply. He asked whether ACES
corrects that in any way.
MS. DAVIS noted on Sunday Mr. Banks would address exploration
credits and how ACES makes changes to either enhance or level
the playing field for explorers. She turned to slides 36 and
37, "Credit Adjustments." Slide 37 read:
Eliminates Transitional Investment Expenditure (TIE)
Credits
- Credits are based on expenditures from as far back
as 2001 and are not transferable
- TIE credits are available only to incumbents and not
new entrants
She clarified that this is the TIE credit in PPT. This allows
producers who had leasehold expenditures - capital credits -
five years prior to the passage of PPT to capture those past
investments and to cast them forward as capital credits at a
rate of 20 percent of those each year, not to exceed 10 percent
of the total tax bill.
MS. DAVIS recalled that Dr. van Meurs and perhaps Mr. Johnston
had spoken about this yesterday. She said there are differing
views. However, economists largely ask why state funds would be
used that do not serve as an incentive. When these funds were
spent, there was no expectation of credits. The state is trying
to tighten it up and get more bang for its buck on things that
actually yield a future benefit. The recommendation is that TIE
credits be eliminated going forward.
3:30:37 PM
SENATOR STEDMAN recalled that the TIE credits were examined in
several committees and that the department had been supportive
of this and had worked through modeling exercises with the
legislature. He asked whether the expectations in the modeling
were fairly close to what has been claimed or whether there was
some huge discrepancy.
MS. DAVIS responded that she'd get back to him on this. She
opined that the state received about $45 million in credit
requests under this in the first year, but couldn't say whether
it matched the forecast. In further response, she said if they
get a breakdown for different areas, they'll provide it. But
they don't always have that level of detail.
3:31:41 PM
SENATOR WAGONER asked whether the final PPT bill version last
year retained a two-to-one on the "look back": to get a one-
dollar credit, a company would have to expend two additional
dollars.
MS. DAVIS affirmed that.
SENATOR STEDMAN asked whether there was any indication that this
particular section had encouraged expansion and development to
get the two-to-one.
MS. DAVIS said she'd take a look, but the department keeps
coming up dry when asked whether it is increased spending or
just higher costs. She surmised the answer wouldn't be found
until books could be looked at and so forth.
3:33:03 PM
SENATOR STEDMAN asked whether a policy call must be made without
numeric backup, then. Or are there numbers that aren't in the
state's best interests and thus the desire is to change the
policy? He asked who is driving the train.
MS. DAVIS acknowledged these are good questions. She said even
if there were precise numbers about capital expenditures, tying
this to the motivation - whether or not a capital expenditure in
a forward year is attributable to the TIE credit match or to the
capital or exploration credit itself - would be difficult. Many
elements in PPT and the ACES revisions were designed to motivate
future investment. For the state to pick which it was would be
challenging. In response to Chair Huggins, she indicated DOR
would bring a side-by-side comparison tomorrow. She pointed out
that there is one other credit, not included in the slides.
CHAIR HUGGINS asked to hear Senator Wielechowski's questions
first.
3:34:29 PM
SENATOR WIELECHOWSKI asked whether it is true, as stated by
Dr. van Meurs yesterday, that the gas line is dead and
uneconomic. He also asked whether ACES impacts construction of
the gas line in any way. He suggested at some point Alaskans
need a response.
MS. DAVIS replied that the administration wouldn't support the
broad statement that Dr. van Meurs made regarding the gas line
economics. It is hard to judge what he is comparing, although
clearly he's looking at a line from Alaska through Alberta and
Back East. She said the netbacks from Back East are some of the
old data. It also ignores that the Alaska Gasline Inducement
Act (AGIA) set up an application process designed to elicit
applications not only from the North Slope to the Midwest, but
also that could potentially be driving gas to Valdez for a
liquefied natural gas (LNG) plant, for instance. There are
various options.
MS. DAVIS said Dr. van Meurs' statement that North America's
markets have changed ignores that Alaska's gas has more than the
North American market. She cited the "hungry" market for LNG in
Asia and other parts of the world. Ms. Davis expressed
confidence that there'll be some interesting proposals, a
variety of applications that reflect different markets and
structures; those are expected by the end of November.
SENATOR WIELECHOWSKI asked whether ACES impacts AGIA or the gas
line.
3:36:48 PM
MS. DAVIS answered that the focus in the bill is oil. The
administration doesn't want to ask the legislature to change
things in an air of speculation or hypotheticals. A lot more
will be known in the next few years about a potential gas
commercialization project. There'll be a much clearer view of
how industry looks at the economics and who the state's
competitors are worldwide. Although PPT and ACES both treat oil
and gas the same, gas has some different economics. She
predicted a directional change in the next few years that will
be favorable to industry in terms of making the tax structure
more facilitative of the process.
3:38:44 PM
CHAIR HUGGINS referred to slide 21 shown by Dr. van Meurs
yesterday, recalling the following: He'd said the gas pipeline
isn't economically feasible now, based on two variables, gas
price risk and cost overruns; he'd mentioned about $20 billion
and that this had at least doubled; and he'd said "it's dead
unless you liquefy the gas." Noting the state would spend huge
amounts in pursuit of a gas pipeline, Chair Huggins expressed
hope that people are working hard to ensure the state doesn't
get blindsided and would consult with such experts. For
example, what if there is an encouraging application and the
state spends its money, but Dr. van Meurs was correct?
MS. DAVIS emphasized that before the state makes a monetary
commitment, it will have to have been verified by state experts
to be credible, realistic, and designed to provide a path to an
economic project. This is part of the administration's
obligation in making a presentation to the legislature when
coming forward with a proposal believed to do that. At that
point, the administration will have to show why it believes that
application is credible and addresses precisely these risks
relating to gas prices, cost overruns, and other market factors.
These key questions must be addressed first.
3:41:16 PM
CHAIR HUGGINS pointed out that the administration's task, within
a hundred and some days, is to choose somebody's application and
then hand it to the legislature. It is a big task. He
encouraged using all available assets, including Dr. van Meurs.
SENATOR WAGONER urged Chair Huggins to write to Dr. van Meurs on
behalf of this committee, asking him to specify what pipeline he
was talking about. For instance, was it a 52-inch pipeline from
the North Slope to Chicago, or a 48-inch pipeline from the North
Slope to Alberta?
SENATOR STEDMAN related his understanding that under the AGIA
process someone doesn't have to own gas reserves. The state
could still issue the license to someone who has no gas to go in
the line at all.
MS. DAVIS affirmed that.
SENATOR STEDMAN added to Senator Wagoner's point, suggesting the
need for a conversation with the Legislative Budget & Audit
Committee about having some further work done on that comment so
it can be addressed during this special session.
3:43:00 PM
CHAIR HUGGINS noted they're viewing a snapshot today to look at
the tax issue, but it cannot be done in a sterile environment.
He suggested the department's task is to help bridge this
through multiple years to ensure this is economically viable for
the state.
MS. DAVIS returned attention to the final credit, saying it
would be addressed further on Sunday when there is discussion of
ACES and the structure of the different economic settings,
including how it changes PPT. One slight change in the way
credits are handled is the 10 percent gross-tax floor for legacy
fields. One aspect is that capital credits that arise in those
fields stay in those fields. Thus Prudhoe Bay and Kuparuk
credits would stay within those two fields, although they could
cross over. Otherwise, it defeats having a floor.
SENATOR STEDMAN requested that the side-by-side comparison,
which Ms. Davis would try to provide tomorrow, address "ring
fencing" and why it was excluded last time. He clarified that
there had been discussions when looking at PPT and setting a tax
rate as to whether particular areas such as Prudhoe Bay and
Kuparuk should be treated differently from the rest of the oil
basin, or whether everything should be aggregated to get an
average calculation that would be easier to administer. He
recalled there'd been some complexities with the ring fencing
approach, although it would allow a tiered tax structure.
3:45:54 PM
MS. DAVIS acknowledged the request. Concluding the presentation
on ACES, she advised members that tomorrow there would be
discussion of Alaska's position in the global competition,
focusing on the net tax and the changes suggested with ACES,
including how it positions Alaska to compete with other
jurisdictions. Sunday there would be a look through the eyes of
the industry with respect to how it views Alaska and the
opportunities for reinvestment and new investment.
CHAIR HUGGINS thanked the participants. SB 2001 was held over.
There being no further business to come before the committee,
Chair Huggins adjourned the Senate Resources Standing Committee
meeting at 3:47:06 PM.
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