Legislature(2011 - 2012)BUTROVICH 205

03/09/2011 03:30 PM RESOURCES

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Heard & Held
Presentation by Sponsor
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         March 9, 2011                                                                                          
                           3:34 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Senator Joe Paskvan, Co-Chair                                                                                                   
Senator Thomas Wagoner, Co-Chair                                                                                                
Senator Bill Wielechowski, Vice Chair                                                                                           
Senator Bert Stedman                                                                                                            
Senator Lesil McGuire                                                                                                           
Senator Hollis French                                                                                                           
Senator Gary Stevens                                                                                                            
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
OTHER LEGISLATORS PRESENT                                                                                                     
Senator Cathy Giessel                                                                                                           
Representative Mike Doogan                                                                                                      
Representative Les Gara                                                                                                         
COMMITTEE CALENDAR                                                                                                            
SENATE BILL NO. 85                                                                                                              
"An Act providing for a tax  credit applicable to the oil and gas                                                               
production tax  based on the cost  of developing new oil  and gas                                                               
production; and providing for an effective date."                                                                               
     - HEARD & HELD                                                                                                             
SENATE BILL NO. 49                                                                                                              
"An  Act relating  to  the interest  rate  applicable to  certain                                                               
amounts  due for  fees,  taxes, and  payments  made and  property                                                               
delivered to the  Department of Revenue; relating to  the oil and                                                               
gas  production   tax  rate;  relating  to   monthly  installment                                                               
payments of  estimated oil  and gas  production tax;  relating to                                                               
oil  and gas  production  tax credits  for certain  expenditures,                                                               
including    qualified   capital    credits   for    exploration,                                                               
development,  and  production;  relating  to  the  limitation  on                                                               
assessment  of oil  and  gas production  taxes;  relating to  the                                                               
determination  of  oil  and gas  production  tax  values;  making                                                               
conforming amendments; and providing for an effective date."                                                                    
     - HEARD & HELD                                                                                                             
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: SB  85                                                                                                                  
SHORT TITLE: TAX CREDIT FOR NEW OIL & GAS DEVELOPMENT                                                                           
SPONSOR(s): SENATOR(s) WAGONER                                                                                                  
02/07/11       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/07/11       (S)       RES, FIN                                                                                               
02/25/11       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/25/11       (S)       Heard & Held                                                                                           
02/25/11       (S)       MINUTE(RES)                                                                                            
02/28/11       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/28/11       (S)       Heard & Held                                                                                           
02/28/11       (S)       MINUTE(RES)                                                                                            
03/07/11       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/07/11       (S)       Heard & Held                                                                                           
03/07/11       (S)       MINUTE(RES)                                                                                            
03/09/11       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
BILL: SB  49                                                                                                                  
SHORT TITLE: PRODUCTION TAX ON OIL AND GAS                                                                                      
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
01/19/11       (S)       READ THE FIRST TIME - REFERRALS                                                                        
01/19/11       (S)       RES, FIN                                                                                               
03/09/11       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
WITNESS REGISTER                                                                                                              
BRYAN BUTCHER, Commissioner-designee                                                                                            
Department of Revenue (DOR)                                                                                                     
Anchorage, AK                                                                                                                   
POSITION STATEMENT: Presented SB 49 to the committee.                                                                         
SUSAN POLLARD, Assistant Attorney General                                                                                       
Division of Oil, Gas and Mining                                                                                                 
Department of Law (DOL)                                                                                                         
Juneau, AK                                                                                                                      
POSITION STATEMENT: Provided technical walk-through of SB 49.                                                                 
CHERIE NIENHUIS, Acting Chief Economist                                                                                         
Department of Revenue (DOR)                                                                                                     
Anchorage, AK                                                                                                                   
POSITION STATEMENT: Commented on SB 49.                                                                                       
LENNIE DEES, Master Auditor                                                                                                     
Department of Revenue (DOR)                                                                                                     
Juneau, AK                                                                                                                      
POSITION STATEMENT: Commented on SB 49.                                                                                       
ACTION NARRATIVE                                                                                                              
3:34:10 PM                                                                                                                  
CO-CHAIR  JOE  PASKVAN  called   the  Senate  Resources  Standing                                                             
Committee meeting  to order at 3:34  p.m. Present at the  call to                                                               
order  were  Senators  Wielechowski,  Stedman,  McGuire,  French,                                                               
Stevens, Co-Chair Wagoner, and Co-Chair Paskvan.                                                                                
        SB  85-TAX CREDIT FOR NEW OIL & GAS DEVELOPMENT                                                                     
3:34:57 PM                                                                                                                    
CO-CHAIR PASKVAN announced  SB 85 to be up  for consideration and                                                               
invited Senator Wagoner, sponsor of SB 85, to make a statement.                                                                 
CO-CHAIR  WAGONER said  he wanted  to hold  the bill  for another                                                               
week,  so they  would  have  something that  would  be easier  to                                                               
model. Therefore, SB 85 was held.                                                                                               
3:35:57 PM                                                                                                                    
              SB  49-PRODUCTION TAX ON OIL AND GAS                                                                          
CO-CHAIR PASKVAN announced  SB 49 to be up  for consideration. He                                                               
said the  bill's sponsor would  explain the rationale  behind it.                                                               
He outlined  future discussions on  the bill and said  he intends                                                               
to inform  the public as  soon as he  knows what the  agenda will                                                               
3:38:23 PM                                                                                                                    
BRYAN  BUTCHER,  Commissioner-designee,   Department  of  Revenue                                                               
(DOR), stepped forward to present SB 49 to the committee.                                                                       
COMMISSIONER BUTCHER said the bill  covers primarily three topics                                                               
as well as some smaller  ones. The first one, progressivity rates                                                               
and cap, had  gotten a lot of discussion in  the building as well                                                               
as in the press.  He explained that SB 49 keeps  the base rate of                                                               
the  current production  tax of  25  percent and  keeps the  same                                                               
progressivity  slope  but  changes from  having  each  additional                                                               
dollar of progressivity  applying to the rest of the  barrel to a                                                               
bracket model  similar to federal  income taxes -  where earnings                                                               
from  $0-$30,000 would  be taxed  at a  10 percent  tax rate  and                                                               
$30,000-40,000 might  be taxed at a  15 percent rate, and  as one                                                               
makes more money  the higher tax bracket applies  to that bracket                                                               
but not the entire income.                                                                                                      
3:40:17 PM                                                                                                                    
The second major  change looks at leases or  properties that have                                                               
not been unitized  or have not been producing as  of the last day                                                               
in  2010 and  starts those  with a  base tax  rate of  15 percent                                                               
instead of  20 percent. This  provision is trying  to incentivize                                                               
development  of areas  on the  North Slope,  in particular,  that                                                               
have  not been  developed yet.  This  bill will  also change  the                                                               
current progressivity cap  of 75 percent to 50 percent  and to 40                                                               
percent  for  undeveloped  fields. So,  the  progressivity  slope                                                               
would be  the same, but  shifted down  10 percent for  areas that                                                               
haven't been developed.                                                                                                         
The third major thing the bill  does is it expands the 40 percent                                                               
well  lease expenditure  tax  credits from  south  of 68  degrees                                                               
(from the  last legislature)  to north of  68 degrees  to include                                                               
the North Slope.                                                                                                                
One of  the smaller  pieces of  the bill is  that it  changes tax                                                               
credits  being  claimed from  a  two-year  period to  a  one-year                                                               
period. The  effect would  be to increase  the dollar  amount the                                                               
state would pay  out toward taxes in the first  year of 2012, but                                                               
it would go down the next year and flatten out thereafter.                                                                      
COMMISSIONER  BUTCHER  said  SB   49  also  changes  the  monthly                                                               
Alaska's Clear  and Equitable Share  (ACES) tax calculation  to a                                                               
yearly  calculation,  because  that   makes  it  easier  for  the                                                               
department to administer and clearer  for industry to understand.                                                               
He then invited Ms. Pollard to go into a little more detail.                                                                    
3:43:18 PM                                                                                                                    
SUSAN POLLARD,  Assistant Attorney General, Division  of Oil, Gas                                                               
and Mining, Department  of Law (DOL), said her goal  today was to                                                               
do  a technical  walk-through of  SB  49, so  at the  end of  the                                                               
presentation they  would have a  good idea of where  changes were                                                               
made to  existing law and what  each section of the  bill intends                                                               
to accomplish.  She said  she would use  the effective  dates for                                                               
the  major   components  for  her   general  walk   through.  The                                                               
progressivity rates and tax cap are  covered in sections 8, 9 and                                                               
20; the base tax  rate is in section 6 (page  3); tax credits are                                                               
covered  in  the   next  seven  sections;  most   of  them  being                                                               
conforming   amendments.  Interest   rate  changes,   statute  of                                                               
limitations  and  effective  dates  follow. It  is  important  to                                                               
remember that the default effective  date in this bill happens to                                                               
be  July  1, 2011  because  of  the  interest rate  changes.  She                                                               
cautioned  them to  be  careful with  amendments  because of  the                                                               
three or four different effective dates.                                                                                        
3:46:09 PM                                                                                                                    
MS.  POLLARD said  the three  major components  of this  bill are                                                               
establishment  of incremental  progressivity, establishment  of a                                                               
separate rate  for base fields  and the extension of  last year's                                                               
well lease expenditure credit to the North Slope.                                                                               
She  explained that  currently the  based  tax of  25 percent  is                                                               
levied by  AS 43.55.011(e) and  in SB  49 that remains  the same;                                                               
the monthly progressivity tax is  calculated under subsection (g)                                                               
and that  has been changed  in section 8  to be calculated  on an                                                               
annual  basis. But  there  is still  a  requirement that  monthly                                                               
estimated  payments are  made  based  on the  base  rate and  the                                                               
progressivity. So, even  though the progressivity is  going to be                                                               
calculated annually, there will still be monthly payments.                                                                      
MS. POLLARD  said the  language that explains  how both  the base                                                               
tax rate and the incremental  progressivity will be applied is in                                                               
section (9)  on page 4, beginning  on line 12. You  calculate the                                                               
average  annual production  tax value  as is  currently done  and                                                               
then  calculate the  fraction of  the production  tax value  that                                                               
would  fall into  each  incremental  progressivity bracket.  Then                                                               
only the  value that is in  that bracket is taxed  at that higher                                                               
rate,  which  is a  change  from  the  current system  where  the                                                               
highest  value dollar  percentage  applies to  all dollars  below                                                               
that.  Section 8  (g)(1)  applies the  progressivity  to all  the                                                               
fields that are going to be subject to the 25 percent rate.                                                                     
Instructions for  calculating the progressivity begin  on page 5,                                                               
line 4; the  brackets themselves are listed on page  5, lines 18-                                                               
3:50:26 PM                                                                                                                    
CO-CHAIR  PASKVAN   asked  if  it   would  be  helpful   for  the                                                               
commissioner to explain the use  of the term "nominal" production                                                               
tax rates.                                                                                                                      
COMMISSIONER BUTCHER replied:                                                                                                   
     'Nominal'  is simply  the number  that would  appear in                                                                    
     the bill...as not comparing it  to real dollars or just                                                                    
     comparing it to what the  actual number that is applied                                                                    
     in legislation would be, which is 25 percent.                                                                              
MS.  POLLARD said,  "This segues  nicely because  this does  make                                                               
that change to how the nominal  rate is calculated, because it is                                                               
now  just  the production  within  that  particular bracket.  And                                                               
that's all set out in section 8 of the bill."                                                                                   
3:51:52 PM                                                                                                                    
She said a related section, section  9, beginning on page 5, line                                                               
26,  repeals  and  reenacts  language because  it  would  be  too                                                               
confusing  otherwise.  This section  covers  payment  of the  tax                                                               
which  is levied  under  AS  43.55.011(e), and  some  of the  tax                                                               
payment  that  is  determined  under (g).  Section  .020  of  the                                                               
production tax gives instructions on how  the tax is paid for the                                                               
monthly installments.                                                                                                           
Section 9  takes into  account the  change in  progressivity from                                                               
the  monthly  basis  to  the   annual  basis  and  instructs  the                                                               
taxpayers on  how to  make their  monthly estimated  tax payments                                                               
and how each category of  production tax value is reported. Those                                                               
segments begin on page 6 and  appear again in the section dealing                                                               
with annual  production tax  value. She  said this  section makes                                                               
sure that  for every area where  there is a separate  tax value -                                                               
North Slope and  Cook Inlet oil and  gas and gas used  in state -                                                               
that the monthly reporting takes that into account.                                                                             
SENATOR WIELECHOWSKI asked  what the impact would  have been over                                                               
the past three years if  ACES payments had been calculated yearly                                                               
instead of monthly.                                                                                                             
COMMISSIONER BUTCHER replied for  2009 and 2010 calculating taxes                                                               
on a yearly  basis would bring the state just  under $100 million                                                               
less. The most  volatile year for oil prices in  history was 2008                                                               
when  that figure  was around  $600 million.  He added  the state                                                               
would have  seen in the range  of $100-200 million less  for each                                                               
year over 10 years with the exception of 2008.                                                                                  
SENATOR  WIELECHOWSKI clarified  that the  state would  have lost                                                               
$800  million over  the last  three years  if this  provision had                                                               
been in ACES.                                                                                                                   
COMMISSIONER BUTCHER answered yes.                                                                                              
SENATOR WIELECHOWSKI asked  if he projected that  the state would                                                               
lose another $100-200 million every year for the next decade.                                                                   
COMMISSIONER BUTCHER replied  a lot would depend  on how volatile                                                               
oil was. Over  2009 and 2010, the state treasury  would have lost                                                               
less than $100 million.                                                                                                         
SENATOR WIELECHOWSKI  said he didn't see  those numbers reflected                                                               
in his fiscal note.                                                                                                             
COMMISSIONER  BUTCHER responded  that  that is  because the  bill                                                               
changes the progressivity calculation  and it would be impossible                                                               
to look into  the future and make an estimate  of what the result                                                               
might be.                                                                                                                       
SENATOR STEDMAN  asked if the  administration intends  to present                                                               
what policy calls were made with these decisions.                                                                               
3:57:55 PM                                                                                                                    
COMMISSIONER  BUTCHER replied  yes,  they are  planning on  doing                                                               
that this Friday.                                                                                                               
SENATOR STEDMAN  recalled that several  years ago  this committee                                                               
put  the original  progressivity  in the  PPT,  because with  the                                                               
[current] flat 20  percent base tax, the state's  share of profit                                                               
oil   under   advancing   oil   prices   diminishes.   That   was                                                               
unacceptable. Legislators  put in  progressivity that  raised the                                                               
state's  share as  prices advanced  as a  policy call;  and under                                                               
ACES  it  was raised  even  more.  So,  he  thought it  would  be                                                               
beneficial to  spend some time  on a  thorough review of  why the                                                               
policy calls were made - and make sure the public understands.                                                                  
CO-CHAIR  PASKVAN agreed  that  those policy  issues  need to  be                                                               
fully understood in  order to understand what choices  have to be                                                               
MS.   POLLARD  continued   on   to   the  incremental   bracketed                                                               
progressivity in  section 8 and  the fact that there  would still                                                               
be monthly payments and how  they would be calculated (in section                                                               
9).  A  new  15  percent  tax  rate  segment  was  added  to  the                                                               
determination of production tax value  for oil and gas in section                                                               
20, starting on  page 13. This section is  repealed and reenacted                                                               
to make  it easier to read  and to clean up  tax ceiling language                                                               
that will expire in 2022 that  wasn't taken into account when the                                                               
current AS 43.55.160 was structured.                                                                                            
The basic rules  for determining the annual  production tax value                                                               
remains the  same, but they have  added segments (a term  used by                                                               
the DOR in their regulations, not  in the legislation) on page 14                                                               
that have a different tax  treatment. They make sure they include                                                               
all  possible categories  of taxation  including  the 15  percent                                                               
rate and the  25 percent rate within both of  those rates as well                                                               
as anything  subject to Cook  Inlet ceilings  or gas used  in the                                                               
state ceilings  and the minimum  taxes considered in  the section                                                               
.020 reporting.                                                                                                                 
4:02:00 PM                                                                                                                    
SENATOR WIELECHOWSKI asked her to  refresh him about the point of                                                               
the year 2022.                                                                                                                  
MS. POLLARD  answered there are  some tax limitations  that apply                                                               
to gas and  oil produced in Cook Inlet and  gas produced anywhere                                                               
in the state  for consumption as fuel. Those  tax ceilings expire                                                               
in 2022.                                                                                                                        
SENATOR WIELECHOWSKI asked if that is being changed.                                                                            
MS. POLLARD answered that is not being changed.                                                                                 
SENATOR STEDMAN asked the chairman  in future presentations to go                                                               
back  and look  at why  2022 was  in there  in dealing  with Cook                                                               
Inlet, and the  potential for a major gas line  and other "policy                                                               
creep issues" from Cook Inlet  - ring fencing and some incentives                                                               
- expanding north from Cook Inlet  to the North Pole. The history                                                               
needs  to  be   understood;  2022  is  not  in   there  "just  by                                                               
SENATOR WIELECHOWSKI asked  the commissioner if he  had given any                                                               
thought to ring fencing for legacy  fields or other fields or any                                                               
thought to decoupling oil and gas.                                                                                              
COMMISSIONER  BUTCHER replied  no.  While  the administration  is                                                               
willing to  have that discussion, that  is not the focus  of this                                                               
legislation, but rather to increase production.                                                                                 
4:06:00 PM                                                                                                                    
SENATOR  STEDMAN said  he wanted  the  committee to  look at  the                                                               
decoupling issue and  that maybe they would end up  with a better                                                               
product because of it.                                                                                                          
MS. POLLARD stated  there are some specific rules  that relate to                                                               
lease expenditures  for production  that are  subject to  the tax                                                               
ceilings. That is also in section .160 which is not changed.                                                                    
SENATOR WIELECHOWSKI said lease  expenditures is another issue to                                                               
add  to the  list of  the things  that need  to be  discussed. He                                                               
asked  how   the  regulations  are  going   regarding  the  lease                                                               
expenditures that  were supposed  to be  enacted after  ACES. Are                                                               
those complete and  does the department have the  full ability to                                                               
audit those lease expenditures?                                                                                                 
MS.  POLLARD   replied  that  most   of  the   lease  expenditure                                                               
regulations are done,  the main component being in  15 AAC 55.250                                                               
and .260.  She didn't  know of  any regulations  that need  to be                                                               
COMMISSIONER BUTCHER  added that he  wasn't aware of  any either.                                                               
He said that  Lennie Dees, Master Auditor,  Department of Revenue                                                               
(DOR), would give his presentation next week.                                                                                   
4:09:03 PM                                                                                                                    
MS. POLLARD  said the next major  component of the bill  is found                                                               
in section  6 that amends  AS 43.55.011(e), where  the production                                                               
tax  is  levied.   The  main  change  is  that   the  entire  tax                                                               
calculation  is in  subsection (g)  - as  opposed to  the current                                                               
setup where  the base  rate for production  tax values  under $30                                                               
oil is  listed in  (e). The  reason for that  is because  that is                                                               
annual whereas  the progressivity  was done  on a  monthly basis.                                                               
So, they have  what she refers to simply  as "(e)(1) production,"                                                               
- or  "oil and gas produced  from a lease or  property containing                                                               
land that,  as of December 31,  2010, was or had  previously been                                                               
within a  unit or in  commercial production, would be  subject to                                                               
the current  25 percent rate  plus the  incremental progressivity                                                               
in .011(g)(1)." The  new fields production that  would be subject                                                               
to  the 15  percent  rate  plus the  progressivity  in (g)(2)  is                                                               
listed on page 3, line 17.                                                                                                      
CO-CHAIR  PASKVAN asked  for an  explanation  of the  distinction                                                               
between a  parcel of land  that is classified  as a unit  and one                                                               
that is not classified as  a unit, because that's the distinction                                                               
in the tax.                                                                                                                     
COMMISSIONER BUTCHER  replied that the lessor  property cannot be                                                               
in a unit,  in an area that had been  unitized for production, or                                                               
be in commercial production prior to December 31, 2010.                                                                         
MS.  POLLARD added  that DNR  was  involved in  figuring out  the                                                               
language  that would  best  implement the  policy.  So, both  the                                                               
lessor  property and  a unit  are defined  within the  production                                                               
tax; a unit  is like a state  unit or a unit  under federal land.                                                               
She said a DNR person could do a more detailed explanation.                                                                     
SENATOR  STEDMAN   said  he   would  be   happy  to   hear  their                                                               
justification  for the  15  percent base  tax  versus some  other                                                               
MS. POLLARD stated that was  the "technical walkthrough" of those                                                               
four sections.                                                                                                                  
4:13:30 PM                                                                                                                    
She explained  that the third major  component of the bill  - the                                                               
policy  direction -  was  to  expand the  40  percent well  lease                                                               
expenditure   credit  to   the  North   Slope.  The   well  lease                                                               
expenditure  credit was  added to  section .023  last year  in HB                                                               
280, the Cook Inlet Recovery Act,  and at first it was limited to                                                               
Cook Inlet, but now it extends out  of Cook Inlet and south of 68                                                               
degrees north. The actual language  of the credit remains exactly                                                               
the same,  but the language  that would  keep that credit  out of                                                               
North Slope is simply taken out.                                                                                                
CO-CHAIR PASKVAN  asked if there  has been a calculation  of what                                                               
the additional credit would amount to going forward.                                                                            
COMMISSIONER BUTCHER  replied that  the fiscal note  estimates it                                                               
to be $200-400 million annually.                                                                                                
SENATOR WIELECHOWSKI asked how they came up with that estimate.                                                                 
COMMISSIONER  BUTCHER  invited  Ms.  Nienhuis  who  prepared  the                                                               
fiscal note to answer that question.                                                                                            
4:17:08 PM                                                                                                                    
CHERIE NIENHUIS,  Acting Chief  Economist, Department  of Revenue                                                               
(DOR), said  their information from  which to make  that estimate                                                               
is limited and  that is why they provide a  range. The department                                                               
gets   some   forward-looking   drilling  cost   estimates   from                                                               
operators, because they do ask  for projections. But because only                                                               
the  intangible  drilling  costs  pertain  to  this  credit  they                                                               
estimated  about  85  percent  of the  drilling  costs  they  saw                                                               
forward looking and used a pretty conservative estimate.                                                                        
SENATOR WIELECHOWSKI  asked if  these numbers  are based  on what                                                               
producers said they are already planning on drilling.                                                                           
MS. NIENHUIS replied that it has  that component to it; they also                                                               
increased the number slightly because  they thought more drilling                                                               
would be seen with this provision.                                                                                              
SENATOR WIELECHOWSKI  asked if this  applied to  infield drilling                                                               
on Prudhoe and the North Slope.                                                                                                 
MS. NIENHUIS  replied this  would apply to  any kind  of drilling                                                               
that has intangible drilling costs.                                                                                             
SENATOR  WIELECHOWSKI  asked  if  she  had  run  any  numbers  on                                                               
internal rates of return (ROR)  for the infield drilling programs                                                               
on the North Slope.                                                                                                             
MS. NIENHUIS  replied no, although  they had done  internal rates                                                               
of return for various modeling projects.                                                                                        
SENATOR STEDMAN asked why not.                                                                                                  
4:19:26 PM                                                                                                                    
MS. NIENHUIS replied probably because  they weren't looking at it                                                               
on a project type basis, but they could.                                                                                        
SENATOR  STEDMAN asked  if  Gaffney  Cline, the  administration's                                                               
consultants, had  looked at  the total  credit impacts,  the gold                                                               
plating and  rates of return  issues. Some oil basins  have whole                                                               
fiscal structures  based on  rate of return,  he said.  He wanted                                                               
them  to  pay  particular  attention to  the  profit  oil  split,                                                               
because ultimately  they are  moving cash  from the  sovereign to                                                               
the  industry and  from the  industry to  the sovereign.  He also                                                               
wanted to  get some idea of  sensitivity issues and, if  they are                                                               
looking  at  credit  increases,   base  tax  changes,  annual  v.                                                               
monthly, and  the step v.  the slope change to  progressivity. He                                                               
said he has  been concerned since they  started expanding credits                                                               
that the impact is huge and  he is not convinced that credits are                                                               
the  solution to  the problem.  He  hadn't even  heard a  problem                                                               
defined, yet.                                                                                                                   
COMMISSIONER  BUTCHER said  they are  certainly willing  to model                                                               
anything he asks them to do.                                                                                                    
CO-CHAIR WAGONER  said he didn't know  why this bill took  the 40                                                               
percent drilling credit out of  Cook Inlet, which was supposed to                                                               
incent additional  drilling and exploration  for gas, and  put it                                                               
on the North Slope and applied it to infield drilling for oil.                                                                  
COMMISSIONER BUTCHER responded that the  governor had a bill last                                                               
year and this is the essence of that bill.                                                                                      
SENATOR WIELECHOWSKI  asked for copy  of the Gaffney  Cline model                                                               
of  infield  drilling at  Prudhoe  Bay  with $80/barrel  oil  and                                                               
$30/barrel oil  under the  current ACES structure;  it had  a 123                                                               
percent rate of return.                                                                                                         
CO-CHAIR PASKVAN asked  for an explanation of footnote  6 on page                                                               
2 of the fiscal note and the  context of the phrase "DOR has very                                                               
limited data."                                                                                                                  
4:24:50 PM                                                                                                                    
MS. POLLARD explained that when  she says they have limited data,                                                               
it's   because  they   have   forward-looking  information   from                                                               
operators;  sometimes it's  for one  year, sometimes  for several                                                               
years. Sometimes they  get more detail with some  units than with                                                               
others,  so  she  means  they   can  draw  some  conclusions  and                                                               
assumptions from that data, but it's not all-encompassing.                                                                      
SENATOR WIELECHOWSKI  said the  DOR's consultant,  Rick Ruggerio,                                                               
has  testified in  the House  that Alaska  has very  limited data                                                               
compared to  other sovereigns,  and he wanted  to know  where the                                                               
data gaps are.                                                                                                                  
COMMISSIONER BUTCHER responded  that he hoped to  have their data                                                               
spreadsheet by this week and it would show where the gaps are.                                                                  
MS.  NIENHUIS reiterated  that this  does not  change the  credit                                                               
that  went  into  effect  for expenditures  after  July  1,  2010                                                               
because it  was enacted in  last year's legislative  session. The                                                               
effective  date  on this  particular  credit  provision would  be                                                               
January  1,  2012  and  it  would  apply  to  expenditures  after                                                               
December 31, 2011.                                                                                                              
If  the credit  is changed  so  that the  well lease  expenditure                                                               
credit applies  to expenditures north  of 68 degrees,  then there                                                               
are conforming  amendments they  will see  made to  AS 43.55.028,                                                               
which  is where  certain  producers  can get  a  cash refund  for                                                               
credit - just to reflect the  change in the credit provisions and                                                               
the repeal of .023(m).                                                                                                          
SENATOR WIELECHOWSKI  asked if  the bill  changes the  20 percent                                                               
credit to  40 percent. His understanding  is that it jumps  up to                                                               
40 percent three miles outside of existing units.                                                                               
MS.  POLLARD answered  not for  this  particular credit.  Senator                                                               
Wielechowski  was  referring  to  the alternate  tax  credit  for                                                               
exploration  in section  .025. The  credit under  .023, which  is                                                               
where the  well lease expenditure  is, doesn't have  the distance                                                               
limitations that the exploration tax credit does.                                                                               
SENATOR WIELECHOWSKI  asked if the  tax credit under  sections 15                                                               
and 16 is  currently 20 percent or  if this is a  tax credit that                                                               
exists only in Cook Inlet right now.                                                                                            
COMMISSIONER BUTCHER answered that  it currently applies south of                                                               
68 degrees north latitude.                                                                                                      
SENATOR  WIELECHOWSKI asked  how effectively  the 40  percent tax                                                               
credit south of 68 degrees is working.                                                                                          
COMMISSIONER BUTCHER  replied since the bill  passed last session                                                               
and has  been in effect less  than one year, they  don't have any                                                               
solid data, but they do hear things anecdotally.                                                                                
4:30:10 PM                                                                                                                    
CO-CHAIR PASKVAN  asked if the  $200-400 million was  in addition                                                               
to the $850  million in gross credits being  projected for fiscal                                                               
year (FY) 2012.                                                                                                                 
COMMISSIONER BUTCHER answered  yes, but they did  as Ms. Nienhuis                                                               
said, ratcheted  it up with  the expectation that there  would be                                                               
more spending as a result of these credits.                                                                                     
SENATOR FRENCH  asked a  more general  question about  the theory                                                               
behind the bill; was it to  reduce taxes and get more exploration                                                               
that eventually leads  to more oil production that  leads to more                                                               
tax income  or is that  money given away  in the interests  of an                                                               
operating pipeline and more jobs?                                                                                               
COMMISSIONER BUTCHER  answered that  one piece  of the  answer is                                                               
that they  would be presenting  reinvestment scenarios  that will                                                               
give them  an idea of what  amount of reinvestment would  need to                                                               
occur  and what  level of  production  they believe  will be  the                                                               
result.  The  second   piece  is,  and  what   the  governor  has                                                               
emphasized, is  up to the industry  that will be in  front of the                                                               
committee  at  some  point  and  will  have  a  role  in  telling                                                               
legislators what they think SB 49 will do.                                                                                      
SENATOR STEDMAN  asked him to gather  up all of the  revenue from                                                               
royalties,  the  base  tax, progressivity,  property  and  income                                                               
taxes from the  last seven years before PPT, so  they can look at                                                               
the  entire picture  of revenue  due to  the state  from the  oil                                                               
industry. He thought it was  interesting that the FY12 budget has                                                               
$860 million  in credits  and $700  million in  progressivity, so                                                               
the industry net wouldn't pay any progressivity.                                                                                
COMMISSIONER  BUTCHER replied  that he  didn't know  specifically                                                               
what those  numbers are, but  he has  talked to the  chairman and                                                               
would  be providing  a comparison  of  credits and  progressivity                                                               
very similar to what Senator Stedman is asking for.                                                                             
4:34:44 PM                                                                                                                    
SENATOR  STEDMAN said  the  reason  he asked  is  that the  state                                                               
doesn't have  the ability to  look at individual  companies; they                                                               
have to look at  the basin as a whole. But across  the basin as a                                                               
whole  there is  zero projected  progressivity to  be paid.  That                                                               
progressivity is one of the  key issues, although he hasn't heard                                                               
the argument about  why it's wrong yet. The issue  before them is                                                               
the  splitting of  the profit  oil at  high oil  prices. Industry                                                               
needs to be asked what these credits are generating.                                                                            
SENATOR WIELECHOWSKI  said they have  heard that the  hundreds of                                                               
millions of  tax credits the  state is giving out  aren't leading                                                               
to  any more  exploration  or  any more  drilling  and asked  the                                                               
commissioner what makes him think  that increasing the credits to                                                               
40 percent will lead to any additional drilling.                                                                                
COMMISSIONER BUTCHER  answered that this  is a piece of  a larger                                                               
view. Companies  have come  in under ACES  and explored  over the                                                               
last few  years and are excited  about the credits that  got them                                                               
here, but  when they got  to the point  of trying to  find deeper                                                               
pocketed  partners to  move it  to a  production unit  (where the                                                               
progressivity  piece kicks  in),  that is  where  they have  been                                                               
dealing with the lack.                                                                                                          
SENATOR MCGUIRE said there is  a disconnect; it appears those who                                                               
are in  a position to produce  are using credits for  things like                                                               
maintenance. She wanted  the department to use its  data to break                                                               
down  the  numbers showing  it's  clear  that the  explorers  are                                                               
benefiting and  what credits  they are using.  The new  jobs that                                                               
have been  created on the North  Slope, which are very  few, have                                                               
gone to  those maintenance-type jobs  and she is  leaning towards                                                               
giving the  credits once  oil has been  produced, which  is where                                                               
they would benefit Alaska. She  wanted to see from the department                                                               
an analysis of where the $3 billion in credits have been used.                                                                  
4:40:30 PM                                                                                                                    
At ease 4:40:30-4:40:59.                                                                                                        
4:40:59 PM                                                                                                                    
COMMISSIONER  BUTCHER responded  that  when  their credit  expert                                                               
gives  his  presentation  next week,  the  committee  will  learn                                                               
everything the department  knows - which is a lot  more than they                                                               
knew pre-PPT, but not as much as  they would like to know. All of                                                               
what they would  like to know they can get  statutorily, but they                                                               
just  haven't  put  the  regulations  out  to  get  it.  That  is                                                               
something they are working on very actively now.                                                                                
CO-CHAIR WAGONER  asked him to  talk about  item 6 on  the second                                                               
sheet of  the fiscal note. He  was curious about where  the $200-                                                               
$400  million spread  came  from  and how  that  came about.  For                                                               
instance, just  how many  wells were drilled  on the  North Slope                                                               
last year?                                                                                                                      
MS. NIENHUIS responded  that she didn't have the  number of wells                                                               
drilled although she could find  that number again. She looked at                                                               
well related  expenditures rather than  the number of  wells. Not                                                               
every producer  uses the same  terms for  what they are  going to                                                               
do.  Typically, she  said, 75-85  percent of  drilling costs  are                                                               
intangible, and she  applied the higher of those  two numbers and                                                               
came up with a conservative range.                                                                                              
SENATOR  WIELECHOWSKI said  Senator  McGuire did  a  good job  of                                                               
summarizing his  thoughts, but he  heard Mr. Ruggerio  testify in                                                               
the House last week that  the state's tax credits for exploration                                                               
are some of the  best in the world; he didn't  know why they need                                                               
expanding  in that  area  when  they see  a  company like  Repsol                                                               
coming in and spending $700-800 million. That loop is closing.                                                                  
MS. POLLARD  summarized the only  changes in  SB 49 happen  in AS                                                               
43.55.023(the capital credits provision).  The main components in                                                               
the bill to pay attention to  are the expansion of the 40 percent                                                               
to the North  Slope and second, when section .023  was enacted in                                                               
2006, it didn't  have the language that required  that credits be                                                               
split over  two-years. That language  was added in ACES,  and she                                                               
recalled  that was  more of  a  reactive addition  as opposed  to                                                               
something proactive. There were  concerns about what would happen                                                               
with some of the credits under  ACES, so there was this idea that                                                               
if you had  a credit certificate you could only  apply half of it                                                               
in one  year. So, another  important component of  the governor's                                                               
bill is  to remove that language.  Legally that would be  fine as                                                               
well as removing  an administrative tangle that is  caused now by                                                               
some credits having  to be split and others  not, particularly in                                                               
conjunction  with  section  the  well  lease  expenditure  credit                                                               
provision (section .023(m)).                                                                                                    
She explained that some credits  that occur outside of Cook Inlet                                                               
and below the North Slope are  not split whereas credits that are                                                               
incurred on the North Slope  are still split. That language would                                                               
be cleaned  up in sections  11, 12, 14  and 24  of the SB  49 and                                                               
credits  would be  issued as  one; the  effective date  for those                                                               
would be January 1, 2012. So,  they would just muddle through the                                                               
rest of this year with the split/non-split issue.                                                                               
CO-CHAIR  PASKVAN  said it  would  be  nice  to hear  the  policy                                                               
reasons  why  the  split  occurred   initially  and  what  policy                                                               
arguments are now being advanced as  to why it should be changed.                                                               
It's important to  know what happened yesterday so  they can make                                                               
better policy decisions now.                                                                                                    
MS.  POLLARD  added  that the  transferable  credits  that  don't                                                               
expire are part of the reason for not having a split.                                                                           
SENATOR STEDMAN asked  for clarification on the last  page of the                                                               
second  fiscal note  (prepared  by Kevin  Banks)  where it  talks                                                               
about the  North Slope producers  receiving 20  percent qualified                                                               
capital expenditure  credit for  well expenditure.  The amendment                                                               
provides  that producers  will receive  a 40  percent credit  for                                                               
those expenditures.                                                                                                             
4:51:17 PM                                                                                                                    
MS. POLLARD answered that section could  almost be read as if all                                                               
of the qualified  capital expenditure credits on  the North Slope                                                               
will qualify  for the 40  percent credit and that's  not correct.                                                               
The  only capital  expenditures that  will qualify  for the  well                                                               
lease expenditure  credit are specifically defined  in subsection                                                               
(l), the intangible drilling costs.                                                                                             
COMMISSIONER BUTCHER  said they  would get clarification  on that                                                               
from Kevin Banks.                                                                                                               
MS. POLLARD  continued on to section  7 on page 3,  line 20, that                                                               
changes  the  minimum  tax  that  only  applies  to  North  Slope                                                               
production. It compares  the gross production tax  value based on                                                               
the  threshold  percentages  that  go  from  4  percent  to  zero                                                               
percent; on  the North Slope  one would calculate  under whatever                                                               
bracket he is  under (the 25 or the 15  percent). That comparison                                                               
happens  on page  6,  lines 10-29.  The effect  is  to lower  the                                                               
threshold  of the  ANS price  at  which the  North Slope  minimum                                                               
applies.  So, it  would broaden  the  price ranges  at which  the                                                               
taxpayer would have to make that comparison.                                                                                    
SENATOR  WIELECHOWSKI  asked if  this  section  had ever  applied                                                               
since ACES passed.                                                                                                              
COMMISSIONER BUTCHER replied no.                                                                                                
SENATOR WIELECHOWSKI  recalled when  the governor first  came out                                                               
with ACES, it had a gross  floor and industry "really hated that"                                                               
because it  affected their margins.  So, the policy call  at that                                                               
time removed  the significant gross  floor in her bill,  but then                                                               
took more at  the high end. This  was at a time  when they didn't                                                               
know if  oil was  going to be  $30 or $150  barrel. Now  they are                                                               
giving up more  at the top for something  that realistically will                                                               
never be.                                                                                                                       
COMMISSIONER BUTCHER  said Ms. Nienhuis  pointed out to  him that                                                               
we are  always under  the minimum tax,  so technically  it always                                                               
applies. But because  we are at a dollar amount  much above this,                                                               
the question he is asking is if  we ever fall into a period where                                                               
this applies and not the base  in progressivity. And that has not                                                               
CO-CHAIR  PASKVAN  asked if  the  concern  in  part is  that  the                                                               
credits  are so  large that  at these  hypothetically low  prices                                                               
they  so  overwhelm  the  progressivity  that  this  is  like  an                                                               
alternative minimum tax.                                                                                                        
COMMISSIONER  BUTCHER  replied  that  is  not  how  he  heard  it                                                               
described. "We  just gave  ourselves...in the  bill a  little bit                                                               
more protection  on the  bottom end. It's  unlikely we'll  get to                                                               
that point, but no one has a crystal ball."                                                                                     
4:55:20 PM                                                                                                                    
MS. POLLARD  went to the  interest rate amendments  and explained                                                               
that  this  is  the  interest  rate  that  would  apply  to  both                                                               
delinquent taxes and the situations  where the state might have a                                                               
refund obligation for  an overpayment of the tax. It  is the only                                                               
section of the bill that affects a non-production tax area.                                                                     
She  said that  section 3  on  page 2  of  SB 49  shows the  main                                                               
change. The  current interest rate  is 5 percentage  points above                                                               
the annual rate charged for  advances by the 12th Federal Reserve                                                               
or 11  percent, whichever  is greater.  The rate  has been  at 11                                                               
percent for a while. She said  section e effectively lowers it to                                                               
3  percent above  the 12th  Federal Reserve  rate or  11 percent,                                                               
whichever is lesser. It would  apply basically to most tax types;                                                               
the ones it  would not apply to are specifically  detailed in the                                                               
bill, such  as section  1, which  is about  delinquent permitting                                                               
fees or section 2 which  refers to an unclaimed property statute.                                                               
There are a variety of  conforming amendments, but just where the                                                               
interest rate is mentioned.                                                                                                     
SENATOR WIELECHOWSKI recalled  the policy call behind  this was a                                                               
feeling  that the  state  was  going to  have  a  hard time  with                                                               
accounting  and  the department  wanted  a  big stick.  Has  that                                                               
changed?  How much  in  delinquent taxes  and  refunds has  there                                                               
COMMISSIONER  BUTCHER replied  that  the rationale  is that  this                                                               
interest rate goes both ways;  if a taxpayer underpays, they have                                                               
to pay the  state this amount. If a taxpayer  overpays, the state                                                               
has to pay  them back - and it seemed  excessively high from both                                                               
the state and industry views.                                                                                                   
4:58:36 PM                                                                                                                    
LENNIE DEES,  Master Auditor, Department  of Revenue  (DOR), said                                                               
he would  research the number  for delinquent taxes  and refunds,                                                               
but agreed that it cuts both ways.                                                                                              
5:00:01 PM                                                                                                                    
CO-CHAIR  PASKVAN said  the knowledge  and history  his committee                                                               
members bring  to this  debate is  appreciated and  adjourned the                                                               
meeting at 5:00 p.m.                                                                                                            

Document Name Date/Time Subjects
SB 49_Fiscal Note_DNR_1-19-2011.PDF SRES 3/9/2011 3:30:00 PM
SB 49
SB 49_Hearing Request.pdf SRES 3/9/2011 3:30:00 PM
SB 49
SB 49_Fiscal Note_DOR_1-19-2011.PDF SRES 3/9/2011 3:30:00 PM
SB 49
SB 49_Version A_Bill.PDF SRES 3/9/2011 3:30:00 PM
SB 49
SB 49_Version A_Sectional Analysis_1-20-11.pdf SRES 3/9/2011 3:30:00 PM
SB 49
SB49_PowerPoint Presentation of Sectional Analysis_3-9-2011.pdf SRES 3/9/2011 3:30:00 PM
SB 49
SB 49_Back-Up_DOR Answers to Rep Seaton Questions 2.18.11.pdf SRES 3/9/2011 3:30:00 PM
SB 49
SB 49_Back-Up_DOR Modeling for Rep. Seaton 2.23.11.pdf SRES 3/9/2011 3:30:00 PM
SB 49
SB 49_Back-Up_DOR Response for 2-21-11.pdf SRES 3/9/2011 3:30:00 PM
SB 49
SB 49_DOR 2011 O&G Production Tax Report_1-18-2011.pdf SRES 3/9/2011 3:30:00 PM
SB 49
SB 49_Back-Up_DOR response to 2.7.11 questions.pdf SRES 3/9/2011 3:30:00 PM
SB 49
SB 49_Back-Up_DOR Response to Feb. 11 Questions 2.23.11.pdf SRES 3/9/2011 3:30:00 PM
SB 49