Legislature(2007 - 2008)HOUSE FINANCE 519
11/07/2007 09:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB2001 | TELECONFERENCED | |
HOUSE 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.
9:13:09 AM
Representative Gara asked about the changes between various
versions: ACES (HB 2001), CSHB 2001 (O&G), and CSHB 2001
(RES).
STEVE PORTER, LEGISLATIVE CONSULTANT referenced the
sectional analysis depicting a side by side comparison for
the three versions.
Vice-Chair Stoltze asked for a brief history of Mr. Porter's
professional experience regarding oil and gas tax issues.
Mr. Porter outlined his 21 years of experience with oil and
gas issues both in the private sector as well as in
government. He has worked as the deputy commissioner for the
Department of Revenue, Tax Division and also as a negotiator
on gas related issued; most recently before present
employment he worked for Senator Steadman. As a result of
his experience he felt he had a good understanding of the
economic relationship between tax, reserves and price.
9:16:04 AM
Mr. Porter identified specific areas of change in CSHB 2001
(RES). The title has been changed in each version of the
bill to represent changes made in each committee. The
current title includes a retroactive clause. of the tax,
with intent language on how to dedicate the funds. In
addition, there are changes to the tax for gas being used in
the State (Cook Inlet), to provide a benefit to consumers.
Mr. Porter noted that his presentation did not site sections
but rather the statute in which the changes are made.
Mr. Porter referenced the following statutory changes:
AS 38.05.035(a)
This change adds a requirement for Department of Natural
Resources (DNR) to furnish information to Department of
Revenue (DOR). This change enables DNR and DOR to better
forecast and understand the impact of change in the
industry. All three bills concur on this change.
He noted that the next several changes were conforming
amendments.
9:18:51 AM
Representative Gara requested an explanation of the
information sharing provision as compared from ACES. Mr.
Porter observed that a great deal of language was both taken
out and added back. He promised to explain the changes when
addressing the statute regarding information sharing.
He provided an overview of changes: PPT structure provided
a value (production and tax), minus cost, multiplied by the
tax, minus the credits. He noted that the tax portion is in
AS 39.25.011, credits are outlined in AS 29.25.023-025, and
AS 39.25.165 and .170 outlines information and lease
information. He went on to explain that these various
issues are addressed throughout the bill.
9:20:42 AM
He continued to explain changes in AS 39.25.110(42), Page 10
Line 6. This section makes auditors exempt. This remains
unchanged in all versions of the bill.
Representative Hawker asked for detailed supporting
documents from the State.
Mr. Porter resumed addressing changes in AS 43.05.230(a);
tax payer confidentiality. The intent is to allow DOR to
share information with the public by aggregating tax
information from 3 companies. This language shows up in
section 65 but under AS 43.05.230(h) is where it is first
cited because it falls under an umbrella statute regarding
confidentiality.
9:23:15 AM
AS 45.55.230(h) - provides the vehicle to change from three
years to six years. The change was necessary for the
Department of Revenue to have six years to complete their
tax assessments.
Mr. Porter directed attention to the tax sections in AS
45.55.011 noting that it had been restructured slightly. In
current law, there is a format change but the result is the
same. AS 45.55.011(e) identifies how the production tax and
the progressivity tax are computed. The language is in AS
45.55.011(g) & (h).
9:24:37 AM
AS 43.55.011(f) in the ACES version inserts a tax floor.
The tax floor provision was deleted from the House Oil & Gas
version (HO&G) and the House Resource Committee Version
(HRES) concurred with this change.
Representative Gara referenced Page 11, Section 15. He
recalled that the value of the oil was assessed monthly
under PPT, in HO&G this was changed to yearly. The HRES
changed the assessment back to monthly, but the change was
not reflected in the language. Mr. Porter believed the
intention was to retain the HO&G language. Mr. Porter said
he would seek clarification and added that regardless of the
potential language error it would not change the formula.
9:26:40 AM
Mr. Porter reiterated previous comments on AS 43.55.011 (f).
AS 43.55.011 (g) establishes the base tax rate at 25%, the
progressivity factor at .2 and the tax cap at 50%.
Representative Nelson asked for clarification regarding the
rate indicated. Mr. Porter apologized that he did not have
time to edit the version before the Committee and noted
there were typos.
9:28:46 AM AT EASE
9:31:53 AM RECONVENED
Mr. Porter clarified that the aforementioned provision,
establishing rates, was deleted in HO&G. The progressivity
language is in 43.55.011(o).
In AS 43.55.011(h), the ACES version sets progressivity on a
calendar year basis instead of monthly and establishes the
subtraction factor to 30 instead of 40. The language was
deleted in HO&G and progressivity was placed in AS
43.55.011 (o), HRES concurred.
AS 43.55.011(j) & (k) are technical changes without
sustentative impact.
AS 43.55.011(l) is a conforming reference that results in a
basic technical change.
AS 43.55.011(m) changes "for" to "on". This is a technical
change that was deleted in HO&G and was reinserted in HRES.
AS 43.55.011(o) as established in HO&G, is progressivity
rates: .225% based on the gross value, starting at $50;
HRES expanded that language to establish progressivity at
.2, starting at $30 net and increasing to .3 above $40, and
.4 percent above $50. There was an amendment that implied a
cap but it did not clarify a cap. He recommended that the
Committee address this discrepancy.
9:35:14 AM
Co-Chair Chenault asked for more information regarding the
gross/net trigger points. Mr. Porter explained that there
are two portions of the progressivity tax, one is the
trigger amount, which is based on the net. The trigger
amount allows companies $30 dollars in cash flow before the
progressivity tax kicks in. The other factor is a per
barrel value. Instead of taking production tax value, which
is minus operating and capital expenditures, it returns to
the gross value of production.
Representative Gara commented on the impact of cost
increases on the net tax trigger price. He went on to
comment on the different points of view and opined that the
aforementioned provisions seem to satisfy all sides. He
asked Mr. Porter if there is a downside reflecting the costs
percentage of the gross value. Mr. Porter replied that in
theory the net cash flow would be shared and provided an
example. He noted that the net trigger works well between
economic projects. He explained that the new tax increased
the curve slightly and that there is not a pure sharing of
cash flow.
9:39:52 AM
Co-Chair Chenault summarized the impacts of the new
provisions in HRES regarding progressivity. Mr. Porter
clarified that progressivity affects two things: the
percentage grows higher, and is disproportionate from the
cash flow relationship. He reiterated that it is no longer
a pure net relationship.
9:40:56 AM
Representative Kelly referenced the production tax. He
asked if the companies would be able to claim the
progressivity tax piece as a deduction with the net trigger
and gross progressivity provision. Mr. Porter responded
that it would not change their ability to claim deductions.
He added that the provision would impact the economic
analysis slightly in respect to cash flow. He did not know
the percentage of loss of value (in tax take) that would
result.
Representative Kelly asked for a comparison of the five bill
versions - PPT, ACES, HRES, HO&G and Senate Judiciary. Co-
Chair Chenault agreed and added that he would like to see
how the net trigger works on the gross and its effect. Mr.
Porter responded by offering to provide a chart illustrating
the progressivity curve on the deductibility piece.
Representative Kelly asked if the mechanism changed the
ability to deduct expenses and what effect this would have
in the different models.
Representative Gara followed-up and requested the fiscal
impact of each of the 5 bills, with a comparison sheet.
9:45:49 AM
Mr. Porter continued with his presentation: AS
43.55.011(p)(referenced in title change) - allows for gas
produced in the State to receive the same tax treatment as
Cook Inlet gas. Co-Chair Chenault asked if there was a cap.
Mr. Porter did not think so. Co-Chair Chenault suggested
that Cook Inlet Basin is the example to follow to allow
constituents around the State access to the gas. Mr. Porter
added that the current draft would allow the gas to be
brought from the North Slope. Representative Gara noted a
provision in PPT deflated the amount of gas in the Cook
Inlet. He described this provision as an urban "PCE".
Representative Nelson added that it is like PCE "plus". She
clarified by saying the natural gas not only covers much of
the need for electrical use, but would also cover heating
cost. Co-Chair Chenault pointed out that many people still
use oil rather than natural gas because of the lack of
availability.
Representative Thomas commented that PCE does not cover
schools or businesses.
9:49:34 AM
Mr. Porter pointed out that ANGDA has been considering
evaluation of compressed gas projects in the Yukon and
Southeast Alaska. The HRES version could help rural
communities through pilot projects.
He continued his presentation: AS 43.55.020(a) establishes
installment payments consistent with changes in the
production tax. This language was deleted in the HO&G, HRES
concurred.
Mr. Porter explained that AS 43.55.020 (g), (h), & (i) have
minor language changes. HRES established a new section (i).
The provision provides for civil penalties on installment
payments to accrue at 5% of the difference between the
amount due and the amount paid.
Representative Gara cited two terms used in the bill:
"underpayment" and "understatement" and asked if there was a
difference. Mr. Porter did not know. Representative Gara
pointed out that in many of the State's provisions,
negligence needs to be proved in order to get the penalty
payment. He said he understood that this was not the case
with regard to the 5%. Mr. Porter observed that this would
be best discussed when he addressed the provision in his
presentation. Representative Hawker asked for a
comprehensive list of all penalty provisions for the State
of Alaska regarding filings on production taxes.
Representative Kelly suggested that answers to questions and
requests should be directed to the Committee Chair, rather
than be the responsibility of Mr. Porter. Co-Chair Chenault
agreed.
9:54:54 AM
Mr. Porter resumed his presentation: AS 43.55.023(a)
addresses credits. He informed the Committee that the
Department of Revenue wanted to shift the credits and allow
the applicant to take half in one year and half the next.
This was deleted in the last two versions. He went on to
say that these deletions will be consistent in other areas
of the bill that address credits.
AS 43.55.023(d) is a conforming amendment regarding
transferable tax credits. The provision also extended the
timeframe from 60-120 days for the Department to approve the
applications. The HO&G version deleted the language and
reverted back to PPT language; HRES reestablished the
ability to obtain a gas payment, but did not change the
timeframe back to 120 days.
AS 43.55.023(e) contained conforming references that were
deleted in the last two committees.
AS 43.55.023 (g) added conforming language related to the
purchase of certificates. This was deleted in HO&G and
reinstated in the HRES version.
Transitional Investment Credits (TIE) were repealed in Sec.
65 of ACES and reinstated in the HO&G version. There was a
five year time frame that had been reduced to three years.
In effect, the provision reduced the credit that could be
captured. The provision remains in HRES.
9:57:48 AM
Representative Gara asked about the TIE credits. He asked
which bill provided the compromise allowing the credits to
the new explorers, but not the major companies. Mr. Porter
explained the provision was in the Senate Judiciary
Committee (SJUD) version. The language attempted to delete
the TIE credits entirely, effective January 1, 2008. The
provision did allow for explorers to apply credits in the
future.
Representative Gara asked if it was unwise to allow credits
for investments already made. Mr. Porter explained that, in
order to capture the credit in the future, a company would
have to spend capital at twice their previous rate. He
added, the formula allows 10% per year until 2013.
10:01:32 AM
Representative Hawker emphasized that the TIE credits
outlined in PPT are purchased, not given.
Mr. Porter outlined changes in AS 43.55.023(o), which
clarifies that tax credits are not available to tax exempt
entities.
Co-Chair Chenault asked about the Alaska Retirement
Management (ARM) Board. Mr. Porter explained that the ARM
Board is excluded from the provision and summarized language
in AS 43.55.023 (m), HRES. The ARM Board can not get a
credit for their exploration, but they can purchase credit
to capture the incremental value.
AS 43.55.024(a) provides that AS 43.55.024 credits can not
be applied against the tax floor, AS 43.55.011 (f), to lower
the obligation for legacy fields. This was deleted in HO&G
and HRES.
Mr. Porter discussed AS 43.55.025(a). Under ACES the credits
could not be applied to reduce the tax on the floor; HO&G
deleted the language; and HRES reinstated the ACES language,
but increased the exploration credits from 20% to 30%.
10:04:59 AM
Mr. Porter reviewed AS 43.55.025(b), which requires a well
be "completed or abandoned" prior to receiving credit. In
addition, the provision exempts costs arising from gross
negligence and any violation of Health Safety &
Environmental statutes and regulations. The HO&G version
deleted the ACES language. HRES reinstated the ACES
language and added "suspended, completed or abandoned".
AS 43.55.025 (c) establishes additional requirements of DNR
approval in advance, and verification subsequent to drilling
the well in order to receive the credit. The ACES language
was deleted in HO&G and reinstated in HRES with a percentage
change from 20% to 30%.
AS 43.55.025(f) defines the data that would be necessary to
be submitted to receive an exploration credit. It also
reduced the confidentiality period from 10 years to 2 years
and provided that two certificates would be issued: one-half
the credit immediately useable and one-half delayed. The
HO&G version deleted all these provisions. The original
ACES language was reinstated in HRES with the following
changes: provided the DNR commissioner the discretion to
grant extended confidentiality under certain circumstances
and made the certificates immediately available.
10:07:27 AM
AS 43.55.025(h) provides that the AS 43.55.025 tax credits
cannot be applied against the tax floor in AS 43.55.001(f).
The HO&G version deletes the ACES language, which was
reinstated in HRES.
AS 43.55.025(k) changes the definition of preexisting well,
in ACES, to a well spudded within 150 days rather than 120.
This language was deleted in the HO&G and was reinstated in
the HRES version.
AS 43.55025(l) allows DNR to purchase seismic data with
credits for 5% of the investment expenditure. This was
deleted in HO&G and reinstated in the HRES version.
Mr. Porter reiterated that the language in AS 43.55.025(m)
was added in HRES only. The provision allows the ARM Board
to purchase transferable certificates for which the
Department is authorized to issue cash refunds.
AS 43.55.028 creates the Gas Credit Fund and establishes the
amount of reserves to be deposited into the Fund. The
language was established in ACES, deleted in HO&G, and
reinstated in HRES with the additional language: maximum
annual limit of $25 million on the purchase of certificates
with the exception that the maximum does not apply to the
ARM Board.
AS 43.55.030(a) amends tax payer requirements on filing.
This language is retained in both HO&G and HRES.
AS 43.55.030(d) in ACES established $1000 a day penalty for
not filing required reports. This language was deleted in
HO&G and reinstated in HRES.
10:10:06 AM
Mr. Porter continued:
AS 43.55.030(e) adds reporting obligations for explorers
that do not have production. The HO&G and HRES versions
adopted this language.
AS 43.55.040 grants powers and duties of the Department of
Revenue to require producers and explorers to file reports
that are "considered necessary" for forecasting and provides
penalties for not doing so. The HO&G version deleted the
penalties portion. The HRES version reinstated the ACES
language with additional requirements on the penalty
prohibiting the department from compromising on the penalty
for less than 50% of the assessed penalty.
AS 43.55.075 extends the time frame for the Department to
file an assessment from 3 years to 6 years. There were no
changes in HO&G or HRES.
Representative Gara asked if the provision increased the
time allowed the Department to file an audit or make a claim
for underpayment from 3 to 6 years. Mr. Porter replied that
it was the assessement itself. Under ACES, the assessment
determines the dollar amount owed if there is a difference.
Representative Gara asked if "assessment" was the legal term
used to describe the determination of a claim. He further
questioned if the tax assessment period was six years in the
current version of the bill. Mr. Porter affirmed that the
Department has six years to complete its tax assessment in
the current version of the bill.
10:12:39 AM
AS 43.55.110 allows the Department to require electronic
filing. This provision remained in all versions.
***Mr. Porter observed that, in the HRES version, AS
43.55.150(a) inserted new language for determining the
actual transportation costs of the gas outlining three
contingencies. Current law requires all three contingencies
be met. The current language changes that to; if any one of
the contingencies is met the Department will determine what
is reasonable.
AS 43.55.150(b) establishes new language, added in HRES,
stating that transportation costs filed with the Regulatory
Commission of Alaska must be adjudicated.
AS 43.55.160(a) clarifies how production tax values are
calculated in Cook Inlet. HO&G changed language reverting
to PPT language with conforming references. HRES added
information related to AS 43.55.011(p) provision which
allows the tax to be the same as Cook Inlet (in state gas
use).
AS 43.55.160(b) clarifies the loss carried forward. This
language was deleted in HO&G and HRES concurred.
AS 43.55.160 (f-i) addresses the allocation of costs between
leases. The language was deleted in the HO&G, HRES
concurred. Representative Gara questioned the practical
application of that deletion. Mr. Porter recommended that
Mr. Dickinson address the methodologies of Cook Inlet.
Representative Gara asked if ACES was concerned with
artificially reducing the value. Mr. Porter did not
remember those discussions.
10:16:56 AM
Mr. Porter continued:
AS 43.55.165(a) outlines the type of costs associated with
lease expenditures and standards by which the Department can
determine allowable costs. HO&G deleted ACES language and
reverted to PPT language with conforming references. HRES
concurred.
AS 43.55.165(b) addresses language additions and deletions
regarding direct costs. The current language in HRES
changed "in the state" to "on the premises of the lease or
property from which oil or gas is recovered".
10:18:26 AM
AS 43.55.165(b) describes the types of costs that qualify as
lease expenditures and provides standards for the Department
to determine which costs are allowed.
Mr. Porter noted that section 53 amended section 52.
AS 43.55.165(e) establishes the list of disallowed costs.
Mr. Porter read from the handout the list of costs in the
ACES version. The HO&G concurred with ACES. The HRES added
to the list of disallowances. Further language was added
amending the departments responsibility to write regulations
to cover the allocation of costs under AS 43.55.011(p), the
instate gas use clause.
10:20:17 AM
AS 43.55.170 (a) deletes qualifying language regarding
payment or credit with no changes to either version.
AS 43.55.890 allows the department to disclose tax
information aggregated from three or more taxpayers. HO&G
and HRES concurred.
AS 43.55.900 defines the following terms: "nonunitized
reservoir", "pool", "producer", and "unit". HO&G deletes
"nonunitized reservoir" and "pool". HRES version concurred
and added a definition of "used in state".
10:21:24 AM
Effective dates 1/1/08 for ACES version and HO&G. HRES
version changed the effective date to 1/1/07
RECESSED: 10:22:50 AM
REONVENED:10:50:32 AM
Commissioner Galvin, Department of Revenue noted that the
intent of ACES was to gain the needed tools to implement the
tax system and ensure the state receives an equitable share.
He noted two provisions in the bill: the need for auditors
and clear rules for what is and is not allowable and the 10%
gross tax.
Commissioner Galvin noted that he was before the Committee
to discuss the current version of the bill.
He explained that the intent section identifies
retroactivity and designates revenue received from the
provision into a fund. The Administration sees this as an
opportunity to acquire and save funds. He said the
administration supports any attempts at savings of
additional funds received from the tax. He went on to say
that equitable share can be generated in a number of ways.
He said the progressivity piece allows for the opportunity
to gain and save when prices are high so funds can be used
during a time of low prices.
10:55:44 AM
Vice-Chair Stoltze questioned if there is a strong
commitment to saving a significant portion of the revenues.
Commissioner Galvin stated that the Administration has been
clear in their commitment to saving additional revenue for
the future.
10:57:21 AM
Representative Crawford stressed the need to diversify from
a one time resource to a recurring resource. He stressed the
importance of investments that would provide for generations
in the future.
10:58:23 AM
Commissioner Galvin acknowledged the desire of the
legislature to find the balance of protecting the state when
oil prices are low and ensuring the state gets a fair share
when oil prices are high. He noted that the progressivity
mechanism weighs the risk preference and can be structured
in a number of ways depending on current prices. He
cautioned that the focus should be on the representational
price range as a realistic expectation rather than the
current high price.
11:01:12 AM
Representative Gara expressed skepticism that the high price
of oil would remain and asked for an average of the last
three years. Commissioner Galvin said the average price was
$50 per barrel over the last three years. He said that
forecasted prices are based on previous patterns and look at
$60 dollars a barrel over the next few years. He emphasized
the prudence of remaining with a conservative approach.
Representative Gara asked for the last two year average
fiscal year oil prices. Commissioner Galvin said he would
provide the information to the committee.
11:04:38 AM
Commissioner Galvin spoke to the tax rate for gas. He
asserted that new gas projects would have a disparity in
treatment under the PPT structure. Therefore, the
Administration supports the Cook Inlet provision in the
current HRES version. He felt a cap was unnecessary as it
only applied to gas used in the state. He underlined that
the gas that fills state demand would receive the
preferential treatment.
11:06:48 AM
Representative Crawford asked the Commissioner if there
could be problems selling in state gas, with a different tax
rate, out of state. Commissioner Galvin acknowledged that
there could be constitutionality issues. He further
commented that there is no in state gas sold out of state
now and would not be for the near future.
11:08:14 AM
Representative Gara described the in-state gas tax provision
as a subsidy and requested an estimate of the cost to the
state in a decreased tax take. He underlined the point by
saying that the discounted tax rate benefits those
communities on the road system. Commissioner Galvin
disagreed with the characterization of subsidy by explaining
that part of the tax is due to the economics of the field
and part is subsidy.
11:12:20 AM
Representative Gara reiterated his point regarding the cost
to the state in a decreased tax take. He went on to point
out that only certain areas will receive the benefit
creating inequity statewide.
11:12:56 AM
Vice-Chair Stoltze spoke in support of reducing consumer
costs whenever possible.
11:13:41 AM
Representative Nelson, in response to Representative
Stoltze, pointed out that she did not think anyone wanted to
take away the subsidy. She noted that Tanana [corrected from
Nenana] is looking at retrofitting homes and businesses from
diesel to propane. She questioned if a gas pipeline would
power these communities by propane rather than diesel.
Commissioner Galvin responded that it would be possible.
Representative Joule asked for a chart of where these
prospects are in the state. Commissioner Galvin said he
would provide studies done by DNR and ANGDA.
Co-Chair Chenault suggested that all subsidies should be
evaluated and pointed to PCE and other subsidies.
11:18:23 AM
Commissioner Galvin focused on TIE credits. He explained
that the Senate version added clarifying language
representing the intent of the ACES bill (Explorers that
have qualified for TIE credits by making expenditures after
enactment of PPT, would be frozen and could be used once
production was realized). The House version reverts to the
existing TIE program with a limit on past expenditures that
qualify. The full five years would allow a billion dollars
of TIE credits to be taken. The current version would allow
$750 million available in credits. He noted that there had
been discussion regarding the benefit of allowing a credit
on past expenditures. He suggested that providing an
additional 10% credit for an existing producer is not
creating an equal playing field with explorers.
Commissioner Galvin spoke to transferable credits. He
pointed out that an explorer has to find a way to capture
the value of the credit. Currently there is a $25 million
opportunity for the state to provide cash for the credit;
they would have to find a producer to buy anything beyond
that amount. The state would realize the full value of the
credit on the books. The Administration feels that it is
better to cut out the transaction, and allow the explorer to
get full value from the state. The mechanism to ease the
bookwork would be the creation of a fund that would be
filled by production tax revenue and then used to pay the
credits generated by new explorers. The HRES version caps
the ability to provide the full value of the credit at $25
million per explorer. It provides the beginnings of an
alternate path that would bring those explorers to the ARM
Board with the ability to purchase credits at a discounted
amount. The Administration supports lifting the cap and
providing the full value to the explorer.
11:23:30 AM
Commissioner Galvin addressed the penalties provision and
expressed the desire to have all the penalties recognized in
one place. He noted that with all the changes the intent was
confusing. He further discussed lease expenditures and
allowable deductions. Representative Gara discussed
penalties for underpayment. He expressed a number of
concerns regarding the ability of the state to properly
audit a profits tax.
11:27:27 AM
Commissioner Galvin said ACES provides for costs to be
identified and defined in regulation. The language was
removed in HRES. He spoke in support of restoring the
original language.
11:28:39 AM
Representative Hawker expressed concern with the original
language because it would be dependent on the implementation
of regulation. He expressed concern regarding the use of
regulation to enact legislation.
Commissioner Galvin emphasized that regulation allows for
the department to define the parameters for individual tax
payers and thus reflects the intent of the legislature. He
pointed out that the legislature has the power to address
the issue if the regulations are not in alignment with their
intent.
Commissioner Galvin clarified for Representative Kelly that
he was referring to costs on lease expenditures in HB 2001
section page 41, line 11.
11:34:39 AM
Commissioner Galvin spoke to the allowable lease
expenditures section. He said that provisions have been
added in a number of versions to restrict costs to those
incurred in the state. He said the Administration does not
support that restriction and noted the difficulty in
implementation. He asserted that in terms of policy, the
state does not have the capacity to support all activities
related to oil and gas. The Administration supports a system
that recognizes that some costs are incurred out of state.
11:37:36 AM
Representative Gara said the point of the provision was to
limit gaming of the system. Commissioner Galvin argued that
the statute is clear that costs must be directly related to
oil and gas produced in Alaska. Companies would have to
justify their expenditures. He felt that the Department
could resolve the problem through the audit. Representative
Gara argued that the expenses would be claimed and that the
state would have to make the argument through litigation. He
felt that the state's definition and the oil companies would
differ. Commissioner Galvin maintained that audits would be
done and enforced. Representative Gara spoke in support of
restricting proportioning of costs. Commissioner Galvin
agreed. He explained that there is an allowance for overhead
that must be demonstrated through documentation. On top of
that the state would provide 3% on capital expenditures and
9% on operating expenses.
11:46:06 AM
Representative Gara asked for clarification on the
percentage allotted for indirect costs. Commissioner Galvin
reiterated the 3% on capital expenditures and 9% on
operating expenditures. He cited the HRES version on Page
40, Line 15: reasonable allowances.
Commissioner Galvin addressed the corrosion issue. The said
there is a broadly accepted principle that cost for repair
of improperly maintained equipment should not be a
deductible cost. In order to address this specifically,
language could be added to say: If "improperly maintained".
The commissioner pointed out that this language would be put
to a test and it would require extensive analysis to
determine. He emphasized that the proposal brought forward
is more objective than subject.
The Department would identify an unscheduled event and those
costs would be excluded. He further noted that this was more
easily implemented with auditors rather than engineers. This
method of addressing the issue was removed from the present
committee substitute and was replaced with Page 41, Lines 3-
6,(HRES) extending the costs that arise out of willfulness,
misconduct or gross negligence.
11:52:02 AM
Representative Hawker agreed with the addition of language.
He referenced Lines 4 - 6 and expressed concern that
"failure to comply" was overly broad. He pointed out that
the language regarding leases, permits etc., restrictions
and penalties are already outlined in a lease contract. He
opined that perhaps this was a reaction to Exxon and the
Point Thompson lease. Commissioner Galvin recognized the
concern. He clarified that it is more a matter of
implementation. He explained the difference between
resolving lease violations and a statutory violation
providing for a penalty in fees.
Representative Hawker emphasized that non offensive
violations and egregious violations are treated the same
under the provision.
12:00:19 PM
Commissioner Galvin, responding to Representative Hawkers
comments, discussed the difficulties of determining
violations.
12:01:52 PM
Representative Gara referenced Page 41, Lines 3 - 6, and
asked how the original ACES language compared. Commissioner
Galvin stated that the reference to the Clean Water Act and
"criminal negligence" was added. Representative Gara asked
about language regarding unscheduled interruption of
service. Commissioner Galvin said the language was on Page
42, Line 30, subsection (19).
Representative Gara asked if this language applied, would
the State have to prove criminal negligence for the BP
shutdown. Commissioner Galvin said they would have to prove
that all the costs claimed were due to criminal negligence.
Commissioner Galvin referenced Page 41, Paragraph 8. The
section deals with what is excluded from lease expenditures.
He emphasized the department does not oppose inclusion of
"criminal negligence" language.
12:05:57 PM
Co-Chair Chenault asked about the current status of audits.
Commissioner Galvin said the first tax returns came in
before April 1. He said the accounting and auditing system
is set up for the fall for the federal packages. That
information will provide the starting point for auditing
personnel and developing strategy. Co-Chair Chenault asked
how the strategy would be developed and how the regulations
pertain. Commissioner Galvin explained that the regulations
were developed under PPT and put in place in
January/February. He noted that there were some issues
regarding the details of the costs outlined in the joint
interest billings. He pointed out that the Department has
brought the issues before the Legislature so that the
regulations are written to the legislative intent. The bulk
of the audit strategies would remain regardless of the
changes. The decision regarding which costs incurred in the
calendar year 2006 are going to be allowable under PPT will
affect what happens in 2007. Transition language will need
to be put in place if provisions are going to be
retroactive.
The cost issue, Page 43, Line 10, new Section 20, makes
clear that costs are excluded for the reasons described
earlier.
12:11:11 PM
Representative Hawker asked about new provision 19 regarding
topping plants. Commissioner Galvin explained that the
Department was asked if the expenditure for the construction
of a manufacturing plant was an appropriate deductible
expense. The Administration determined that it is not an
appropriate lease expenditure as the plant is not directly
related to production.
Representative Hawker asked how a fair transfer price would
be determined. Commissioner Galvin clarified that the
transfer price would be fair market value of the product.
Representative Hawker explained the relationship of
increased revenue by decreasing costs through a topping
plant. He thought the provision would discourage investment
capital in the fields. Commissioner Galvin did not share
the concern, noting that companies would not consider this
when determining operation costs.
Representative Hawker reiterated the operating expense and
cost of fuel, which he thought precludes making investing in
the field.
12:20:00 PM
Representative Crawford commented that the language was too
specific and asked if it could be replicated in other areas
of the state. Commissioner Galvin acknowledged that there
are other topping plants on the North Slope and that it
could replicate itself in other ways without the language.
Representative Kelly did not think it was a good idea to put
something in statute that can be addressed in regulation.
12:23:00 PM
Representative Thomas referenced the retroactivity clause
and asked what the anticipated cost of heating fuel would be
for the consumers. Commissioner Galvin responded that there
is no direct relationship between the increased production
tax and the price of heating fuel. Representative Thomas
worried about the increases to taxes applied to the oil
tankers. He noted that it is likely the transporters will
increase price to make up for tax increase and this would be
passed on to consumers. Commissioner Galvin said that the
increased tax goes to the producers. He reassured
Representative Thomas that the tax increase would not impact
the consumer.
12:28:49 PM
Representative Joule disclosed that he holds shares in
Native Corporations. He asked if the drilling information
from private land had to be made public. He said that this
could leave businesses at a disadvantage. Commissioner
Galvin clarified that this only applies if a business
chooses to participate in the incentive credit program.
12:34:55 PM
Co-Chair Meyer understood that the Administration requested
that the effective dates and retroactivity language be
"cleaned-up". He worried about a legal challenge to the
retroactivity language. He asked the preference of the
Administration. Commissioner Galvin said the legal advice
from the Department of Law is that as long as they act in
the same taxable year, they would be in solid ground. The
st
original recommendation of January 1 noted that the
Administration recognized the value of starting at the
beginning of the year.
Co-Chair Meyer asked when regulations would be completed. He
went on to say that one of the current problems is that the
regulations for PPT are not in place. Commissioner Galvin
advised that when PPT was passed, the bulk of the
regulations were in place within six months. There were
still issues that needed to be resolved and the proposed
bill addresses those issues. He thought regulations would
be in place within six months of passage.
Co-Chair Meyer worried that this was the third tax change
within three years. He wondered if it would be revisited
within the next couple years with further changes.
Commissioner Galvin hoped and expected that the tax law that
passes would be in place long-term and did not expect that
the tax system would be revisited.
12:40:37 PM
Representative Hawker referenced non-state land issues
brought forth by Representative Joule. He thought that the
substance gives the State an unfair advantage against
private land owners when the private land owner is required
to disclose to the state information that can be revealed to
the public. He expressed concern that mandatory disclosure
is discriminatory. Commissioner Galvin reiterated that it is
optional for companies to participate in the additional
credit, which requires the submission of data.
12:43:37 PM
Representative Hawker pointed out that the provision would
establish the "shelf life" of 24 months. Commissioner
Galvin maintained his point that the owner had the option of
using the credits.
12:44:29 PM
Representative Hawker maintained that the state would pay
for bad data and never get the good data. Commissioner
Galvin responded that one of the changes in the EIC section
is the requirement that the companies come to DNR ahead of
time and file for the credit.
12:45:22 PM
Representative Gara observed that deductions increase as the
tax rate increases. He suggested that, as long as you are in
a reasonable range of taxes, increasing the deduction rate
is an additional incentive to invest. Commissioner Galvin
agreed. Representative Gara expressed a concern regarding
progressivity at $50 - $55 a barrel. Commissioner Galvin
clarified that there is a range across fields with a 52
percent average for all. He went on to say that within
those fields there are lower cost fields that will have a
lower margin and others where progressivity kicks in at a
higher rate. Representative Gara asked about the
relationship between production decline and increased
progressivity. Commissioner Galvin pointed out that there
are two moving parts: operating expenditure and capital
expenditures. He explained that capital expenditures would
be the reflection of new investment to increase production.
With regards to the numbers changing the question is whether
the increase is due to the $8 per barrel of additional
investment or because the operating expenditures have gone
up by $8 per barrel. Representative Gara asked for the best
estimate of where the progressivity "kick in" would be over
the next few years.
12:49:24 PM
Representative Gara asked if raising the base rate from
22.5% to 25% would provide additional incentives through
deductions. Commissioner Galvin said yes.
Representative Gara cited the Department's August report
identifying that PPT is projected to bring in $800 million
less than what was projected. Last year the legislature was
told that PPT would raise more than ELF starting at $26 per
barrel, but the old system would raise more than PPT until
oil hits $46 dollars a barrel, not $26. He further stated
that the progressivity kick in was going to be around $55
per barrel, but under the commissioners analysis it might
not be until oil $63 per barrel. He maintained that PPT was
broken.
12:50:58 PM
Co-Chair Chenault noted that questions should be submitted
in writing so that they can be shared with the other
members.
12:53:24 PM
Commissioner Galvin discussed fiscal notes. He noted that
the projected revenues, with the forecasted prices, would
result in $2.97 billion, which would be $1.05 billion more
than PPT. He also pointed out the additional $244 million
that would be received from retroactivity in 2007. He
further noted the percentage increases in the analysis with
different dollar amount projections. He underlined that the
fiscal note reflects the production estimates that have been
used throughout the special session. The production
forecasts for the fall are currently being updated to
provide an official number to the Office of Management and
Budget (OMB). He said new fiscal notes incorporating new
production forecasts would be available by the end of the
week.
Co-Chair Chenault asked if the ACES version was reflected in
the current fiscal note.
Commissioner Galvin observed that ACES is not in the fiscal
note.
Representative Chenault requested that all bill versions be
reflected in a fiscal note.
Representative Gara concurred on that request and asked for
a side by side analysis.
12:58:12 PM
Representative Hawker asked for a more thorough analysis of
the consequences of various options. Commissioner Galvin
agreed. Representative Kelly also asked for more
information.
RECESS: 1:01:42 PM
RECONVENED: 1:41:13 PM
BARRY PULLIAM, SENIOR ECONOMIST, ECON ONE RESEARCH,
presented the Report to the Alaska Legislature on Production
Cost Increases (copy on file). He briefly outlined the
changes from ELF to the PPT net system. He noted that the
difference between the gross system and the net system
required looking at operating expenditures (OPEX) and
capital expenditures.
1:44:06 PM
Rep. Joule asked Mr. Pulliam if he was still under contract
with Legislative Budget and Audit (LB&A). He confirmed he
was hired by LB&A along with Dan Dickenson and Steve Porter.
Mr. Pulliam addressed the first slide. He explained that
cost projections were pulled from a number of sources. He
showed how the total costs of the fiscal note on HB 2001
break out to $1.1 for capital and $1.1 for operating costs,
totaling $2.2 billion.
1:48:25 PM
Mr. Pulliam explained that the cost figures are not based on
a particular version, but have been used for projections of
the ACES version.
1:50:15 PM
Representative Gara asked for clarification regarding the
cost projections. Mr. Pulliam said it was his understanding
that the numbers reflected in the handout are those that are
being used for all versions. He clarified that the
calculations use the average cost for the North Slope, not
including royalty oil. Representative Gara asked for the
cost per barrel for all oil and asked if the numbers were
overstated by 1/8. Mr. Pulliam explained that the amount
per barrel reflects the amount that is deductible in
calculating the tax. He explained that the cost per barrel
for the North Slope would be $16.50 per barrel on an
eight/eighth's basis.
1:52:31 PM
Mr. Pulliam discussed the department's current estimates for
HB 2001. He explained that the information from the
department is total cost information. More specific data
was not available due to tax payer confidentiality.
1:55:53 PM
Representative Kelly asked what the projected costs would
be. Mr. Pulliam noted that flat costs are being forecasted
for the next several years. The relationship between cost
and price is built into the forecast.
Representative Gara revisited the issue of the $16.5 cost
per barrel. Mr. Pulliam noted this is a forecast number
based on a gross cost and has not been audited.
Representative Gara assumed that costs would be overstated
by the industry. Rep Gara referred to the assumption that
costs are lower for bigger fields and higher for smaller
companies. He agreed with the assumption and reiterated that
the department did not share specific field information.
Representative Gara asked if in the case of $98 per barrel
oil, everything above $18.85 would be profit with the
exception of what is paid in taxes. Mr. Pulliam noted that
there is the cost of moving the oil. In addition TAPS
tariffs are estimated at $25 on $95 barrel of oil, which
would leave a $75 margin for which you would pay taxes.
2:00:39 PM
Representative Hawker, as a point of clarification,
emphasized that within the tax formula are excluded costs
that cannot be deducted, which would be taken from the
margin.
2:01:22 PM
Mr. Pulliam addressed the question of increased costs. He
said the costs of production have gone up due to both actual
and expected prices of crude oil. He pointed to the chart
that denotes the cost increase in crude oil from 2000 -
2007. In the past there have been spikes in crude oil, but
the chart highlights the steady increase. He underlined
that it is the projected expectation that drives investment
2:04:26 PM
Mr. Pulliam discussed future prices, which went from $45 a
barrel to $80 per barrel. The expectation of oil prices have
shifted upward. Increased activity puts pressure on
available services, which then increase production costs.
2:06:02 PM
Co-Chair Meyer questioned what the appropriate price would
be based solely on supply and demand. Mr. Pulliam could not
answer, but explained that a great deal depends on
geopolitics. He noted additional variables that come into
play on the price of oil and the costs to produce it.
2:10:12 PM
Mr. Pulliam said companies are more likely to pursue new and
heavy oil at higher prices and margins.
Co-Chair Meyer noted that a gas pipeline would assist
consumption. Mr. Pulliam explained that the demand would not
ease, but the pace of increase would stabilize. If consumer
behavior changes and demand falls it would put the pressure
back on crude oil.
2:12:32 PM
Mr. Pulliam reviewed the upstream capital cost put together
by HIS/CERA. He pointed out that the chart illustrates a 10
percent increase from 2000-2004 associated with upstream
production. The chart further demonstrates the large
increase in costs in 2005. He noted that the increase was
level with inflation in the economy. He explained that
there is some tapering off in 2007 due to the ability of
companies to respond to demand.
2:15:38 PM
Representative Hawker asked if anything is attributed to the
point in influxation, specifically the huge increase in
2004. Mr. Pulliam reiterated that the increase is due to
supply constraint of equipment and services to meet the
demand. The shortage can be attributed to increase demand
for services with constraint of available rigs and the time
it takes to build additional equipment. It takes time and
planning to produce needed equipment.
2:19:49 PM
Representative Hawker noted that the past three years should
have allowed the supply industry to meet demand. Mr. Pulliam
explained that expectations have changed for the price
environment. The supply industry operates on these
expectations and thus will meet the demand to the point of
constraint. The closer to the constraint point the higher
utilization rates and the decision to meet demand further is
based on is whether the prices will remain in the long run.
2:22:31 PM
Mr. Pulliam reviewed the chart illustrating the relationship
between the rising prices of ANS with the rise in upstream
costs. He reiterated that actual prices play a role, but the
process of forming expecations is what influences investors.
2:24:11 PM
Mr. Pulliam provided information regarding rig rates for the
lower 48 states. Co-Chair Chenault noted that the chart
refers to drilling rigs available in the lower 48, which
does not require the lead time as a rig designed for Alaska.
Mr. Pulliam said that rigs in the lower 48 can be moved
between states, while they cannot be used in Alaska. He
noted that rig rates would be a bit more difficult to
determine. He pointed out that in 2002 - 2006 there was a
doubling of rig rates, which started to come down in 2007.
He observed that suppliers are catching up with demand,
which then influences price and costs. He expected the same
would happen in Alaska with a bit more of a challenge due to
logistics.
2:27:18 PM
Mr. Pulliam referenced the chart illustrating the oil
drilling rig daily rates vs. the West Coast ANS Price. The
information is based on federal reports on operating costs
for a variety of different type of lease operations. Where
the capital expenses are dramatic, the operating costs
reflect a steady increase.
2:29:10 PM
Mr. Pulliam referred to reports by BP and ConocoPhillips,
specifically the production costs, which is considered an
operating expense. Co-chair Chenault asked if the numbers
reflected what was real for Alaska. Mr. Pulliam clarified
that there would be lower average cost for large fields than
small scattered fields in Alaska.
2:30:54 PM
Co-Chair Meyer asked why there is a spike in production
costs for Alaska. Mr. Pulliam did not have a definitive
answer. He noted disruptions in 2006 in Prudhoe Bay and
added that there are costs associated with the disruptions.
He explained that the information on costs can not be
extrapolated from the filings as costs are simply
"production costs" and not detailed.
2:32:19 PM
Co-Chair Meyer mentioned that the costs to extract the oil
are greater since 2005. Mr. Pulliam said the numbers
indicated are in line with what DNR is using in its
estimates.
Co-Chair Meyer said it looks like costs stayed relatively
stable in the lower 48, compared to the drastic increase in
Alaska. He asked if this had to do with location and
bringing drills to Alaska. Mr. Pulliam noted that the
transportation of drills would fall under capital. He
elaborated that an increase in labor force, specific to
Alaska, would have an impact on costs.
Representative Gara questioned the accuracy of the numbers
used to forecast operating costs last year. He pointed out
that ConocoPhillips's operating costs where at $6 while the
modeling was done at the $4. Mr. Pulliam clarified that the
department based their forecast on costs through 2005 as
2006 information was not available. He believed, based on
the numbers available at the time, they were the correct
numbers.
2:40:56 PM
Co-Chair Chenault noted other factors effecting costs,
including those associated with the shut down of Prudhoe Bay
and the volume of oil that was deferred. Mr. Pulliam
acknowledged that the repair numbers and greater level of
activity, increased costs for facility maintenance.
2:42:20 PM
Mr. Pulliam referenced the next slide [B.P. production costs
per BOE 2002-2006] and pointed out that B.P. does breakout
spending cost in Alaska. He addressed the slide
comparing B.P. and ConocoPhillips production costs per BOE.
He noted the increase in costs for BP from 2005-2006 and
said this was likely due to the repair costs from the shut
down. In response to Representative Hawker, Mr. Pulliam
stated that the numbers are based on calendar year were
consistent for all represented. He explained that the
information was taken from the 10-K's and 20-F which are end
of the calendar year numbers.
Mr. Pulliam mentioned the corrosion expenses and management
costs. Publicly available information from BP states that
they will spend $260 million to replace transit lines. In
addition, the 20-F filing says they will spend $550 million
on integrity management over 2007-2008. It is uncertain
whether the $550 million is just for the 07/08.
2:49:40 PM
Representative Gara continued his questioning about
increased costs. He pointed out that prior and after the
shut down, costs were rising. Mr. Pulliam agreed that costs
are going up and that the shut down is just another layer of
costs. He also explained that the integrity management
piece increases costs significantly.
Representative Gara thought that the costs were continuing
to rise and asked if it was wise to have a model
representing flat costs. Mr. Pulliam responded that the
higher cost scenario component is built on increased costs,
over the $60 dollar barrel based on the PPT filings. He did
not know if the forecast would ultimately provide the exact
correct numbers.
2:53:30 PM
Representative Gara asked if they are using flat costs in
the model. Mr. Pulliam said they were forecasting overall
costs unit to unit.
Representative Kelly commented on all the variables involved
in the cost projection. Mr. Pulliam acknowledged that every
fluctuation creates unanticipated results. Representative
Kelly understood the difficulties for industry and noted the
intention for the special session is to determine a rate
that is fair for all Alaskans and encourages investment.
Mr. Pulliam recommended that members remember that costs
have gone up as have the price of oil per barrel. The
margin is greater and the margin of error is larger.
3:00:39 PM
Mr. Pulliam referenced the final two slides concluding his
presentation.
3:02:16 PM
Co-Chair Chenault noted the handout from Marcia Davis to
address concerns voiced by Representative Hawker.
RECESSED: 3:03:03 PM
RECONVENED: 5:19:44 PM
DAN DICKINSON, CONSULTANT, TAX DIVISION, DEPARTMENT OF
REVENUE compared ACES to current law, HO&G, HRES. See
attached spreadsheet. He noted that the base rate has gone
back and forth between the bills from 22.5 - 25 %. The HRES
version is at 25%.
Mr. Dickinson reviewed the progressivity feature. He noted
that the starting point has varied from $30-$60. He observed
that the HRES version did not supply a cap, which results in
the unintended consequence of a government take of 90
percent at $190 a barrel.
TIE credits exist in current law and where removed under
ACES. The HO&G version allows going back to 2003 rather than
2001. The HRES version retained this change.
Mr. Dickinson discussed exploration credits predating PPT.
The base credit was raised from 20 to 30 percent. The old
language was left in because anything that qualified for the
20% would qualify under AS 43.55.023 of the new rule.
5:28:03 PM
Mr. Dickinson addressed General Administrative costs:
Aces provides a list of disallowable administrative costs
titled Bad Act I. The HRES version retains the ACES
language. He noted the colors on the chart are as follows:
Red indicates PPT language (current law) and yellow is if it
was in ACES and is retained in other versions.
Mr. Dickinson explained that HRES adopted the
Governor's proposal, keeping well data confidential for 2
years. The HRES version adopted the Aces language for
defining "pre-existing well". The definition being that if
within 2 drilling seasons wells were active they could
receive the 30% credit in the next year. Under current law
if a company found something in one year and went back the
next, it would not longer qualify for the credits. The next
provision regarding seismic data allows the commissioner of
ddnr to acquire seismic data anytime before 2003, purchased
with a 5% credit. This was original ACES language and is
retained in HRES.
5:30:41 PM
Mr. Dickinson discussed the state purchase of credits, which
was a new idea in the Governor's bill. Where there is a cap
in the current law and in the HO&G version. There is no
limit in the HRES version. Unlike all other versions, the
HRES version allows the ARM board to purchase credits and
the state then would purchase from the ARM Board.
Language regarding allowable lease expenditures from the
ACES bill was adopted in the HRES version. The difference
from current law is that legal expenses from disputes
between state and taxpayers can not be deducted. The ACES &
HRES versions disallow any dispute resolution costs.
Mr. Dickinson outlined the language regarding the "corrosion
issue": In current law, .30 cents a barrel is disallowed.
The intent of the language was to find a quick and easy
method of addressing the issue. The Governor left in the
current language, but added that unscheduled events are
disallowed. The HRES version reverted back to PPT language.
Additionally, topping plant expenses are not allowed in any
bill versions.
5:34:04 PM
Mr. Dickinson outlined the sections on information sharing.
A set of forward looking information is required to be
supplied with a penalty of up to $1,000 a day. Mr. Dickinson
expressed concern over the wording "necessary to forecast".
The disclosure of tax information under current law says it
must be aggregated to prevent the identification of returns.
Both ACES and HRES removed the requirement and added that
tax information only needs to be aggregated with two other
producers. The Department of Natural Resources is allowed
to share royalty information with the Department of Revenue
(DOR) and allows DOR to share tax information with DNR. The
penalty provisions that apply to individual departments
carry over to the department who receives the information.
Mr. Dickenson went on to explain changes:
The statute of limitation section was extended to 6 years in
all versions.
The provision making DOR and DNR auditors exempt was not in
PPT, but is in all other versions of the bill.
The Governor's effective date would be January 2008, as is
HO&G. The HRES version changes back to 2007 with a
retroactive piece for loss carry forward, TIE credits and
redefinition of cost to April 1, 2006.
5:36:59 PM
Mr. Dickinson addressed the last page of his presentation
that outlines new provisions in the HRES version. He
clarified for Representative Gara that this piece relates to
the TransAlaska Pipeline (TAPS). The first issue regarding
downstream costs is to replace "and" with "or" when linking
the 3 criteria. He concluded that an auditor could conclude
the criteria are met because only one, rather than all
three, need to be met.
The language adds another audit issue defining what
information can be used and under what circumstances.
5:40:47 PM
Mr. Dickinson explained that gas ceilings through 2022 are a
new issue. In current law there are ceilings in the Cook
Inlet for gas sales. The HO&G version expanded language to
deal with non North Slope sales. The HRES version expanded
language to clarify that if any gas is sold outside the
North Slope it is subject to the same ceiling as Cook Inlet.
The rate and price that was in effect between April 1, 2005
and March 31, 2006 is the rate that applies.
Additional penalties were added in HRES bill. The estimated
monthly payments currently have penalties, which are just
the application of interest. The estimated monthly payments
cannot be underestimated without penalty.
5:42:35 PM
Mr. Dickinson continued his presentation outlining the four
provisions in the intent section added to the HRES version:
One is an overall statement of intent. The ACES language
establishing the statute of limitations is retained. The
next puts (allocates) half the money received from
retroactive provisions into PERS and public education fund.
The final language puts for that the tax savings from gas
ceilings outside Cook Inlet should be passed on to the
consumer.
5:44:17 PM
Representative Gara asked about penalties for underpayment
of taxes, if they applied to just the estimated underpayment
or to total payments for the year. Mr. Dickinson referenced
page 18, Section 25. He interpreted it to apply to the
installment payments, further noting that the final payment
in March is not considered an installment payment.
Representative Gara asked if there was any provision dealing
with underpayment of taxes. Mr. Dickinson said there is
nothing added, but current law has penalties for "willful
neglect" of the law. Representative Gara asked what would
happen in the situation where the state could not prove
"willful neglect". Mr. Dickinson explained that there would
be no penalty beyond the application of interest. He
further clarified that as of March 31 the rate would be 11%,
which is the Alaska statutory rate.
5:47:46 PM
Representative Kelly referenced AS 43.55.011 and asked for
clarification regarding non Cook Inlet gas. Mr. Dickinson
acknowledged the confusion of his statement that "the
provision applied to everything accept the North Slope". He
corrected his statement after noting that the provision
applies to everything outside the Cook Inlet used in the
state.
5:49:19 PM
Representative Gara referenced page one of the handout
noting the 50% cap and asked if Mr. Dickinson knew what the
price of oil would need to be to meet that cap. Mr.
Dickinson did not know the answer. Co-Chair Chenault said
he saw it modeled at $107.50 per barrel.
5:50:53 PM
Representative Gara asked about the two progressivity
features: the $30 net price and the language from HRES that
added a percentage of the gross. He asked Mr. Dickenson his
opinion on the provision and further questioned if added
percentage on gross would have an impact on investment.
Mr. Dickinson thought that having the tax measured on the
net will always help the investment incentive. It does so
in that progressivity does not kick in until costs have been
recovered. He concluded that applying the progressivity to
gross has the same effect as raising the tax rate.
He noted a Line 9, Page 1, "apply to" should include
"gross".
Representative Gara further questioned the differences
between progressivity on the net vs gross. He cited
comparative examples and asked why it would matter whether
the percentage was on gross or net. Mr. Dickenson said the
state take would increase differentially because the tax
base of the company making the investment would be much
larger that the company not making an investment.
5:56:09 PM
Mr. Dickinson clarified the phrase "disallow bad acts I".
He explained that there are two lists one in AS 43.555.02
and one in AS 43.55.023. He suggested the lists be made the
same.
GAFFNEY, CLINE & ASSOCIATES
5:58:41 PM
RICH RUGGIER, CONSULTANT, GAFFNEY, CLINE AND ASSOCIATES
INC., presented Alaska's Equitable Share. The first section
outlined the four goals of the fiscal system design and the
four proposals presented. The second part illustrated the
way in which a representative portfolio of projects would
look and how invest decisions might appear under the various
proposals. In addition they offered an opportunity to review
an analysis of infield drilling that was presented to other
committees.
Representative Gara asked about the progressivity model and
how that affected rate of return and profitability. Mr.
Ruggerio recommended that a background would be provided in
order to help answer the question.
Mr. Ruggeri addressed the handout: Goals for the fiscal
design (copy on file.) He observed that the challenge of
addressing these goals is to know how much to take while
encouraging investment through giving back (credits).
He addressed goal 3: Encourage new investment outside legacy
units. He noted that the current provision provide a
healthy environment to encourage investment.
6:03:35 PM
Mr. Ruggeri observed that Alaska is favorable for new
investment. Additional liquid carbons that can be put down
the TAPS would extend the life of Trans-Alaska Pipeline
System. He asserted extending the life of TAPS should then
extend the life of the legacy fields.
6:04:27 PM
Mr. Ruggiero discussed the slide: Key Point Easily
Misunderstood.
The margin to price relationship changes with time and with
project addition. Costs increase when fewer barrels are
produced. He also gave an example of a heavy oil project
where operating costs are higher in addition to a market
price quality deduction.
He cautioned that when looking at what might be considered a
negative for producing heavy oil, it is important to look at
individual projects and how they fit into different models.
6:06:57 PM
Mr. Ruggerio addressed the next slide: Regime comparison
comparing the four systems; PPT, ACES and Senate committee
substitute. The chart illustrates how the base tax
increases with price increase, where and how progressivity
kicks in, and how that impacts corporate income tax and
producer profit.
Mr. Ruggiero addressed the summary of terms based on the net
margin: base, kick-off, progressivity and cap. The chart
illustrated the percentages and dollar amounts in each bill
version that determine base tax and progressivity.
Representative Gara referenced the chart and asked if a 50%
tax cap was common world wide. Additionally, he inquired if
there would be a detriment to industry to raise the cap at
extreme high prices. Mr. Ruggerio informed him that the
world average is in the high 60's.
6:11:15 PM
BOB GEORGE, CONSULTANT, GAFFNEY, CLINE AND ASSOCIATES INC.
elaborated that with royalty added and federal and state
income tax the percentage can be closer to 70%. He
cautioned that with Alaska it is important to look at the
totality of the tax package.
Mr. Ruggiero referenced the next chart pointing out when the
tax would reach a 50% cap. He also clarified the earlier
question noting that the House version reaches the cap at
$92 net margin. With current costs projections that would
be a $115 per barrel market price.
Co-Chair Chenault asked about the property tax inclusion in
the model. Mr. Ruggiero stated that it was left out because
it was insignificant.
6:13:53 PM
Mr. Ruggiero highlighted the slide that included the four
fiscal systems. The system is plodded against margins with
current oil prices above the weighted average of cost.
He noted that the Senate, House and ACES versions start with
a base rate of 25% with PPT at 22.5%. He pointed out that
progressivity kicks in at different rates and caps out at
50% in the Senate and ACES versions and at 47.5% with PPT.
Representative Gara asked the estimate of what progressivity
would need to be under the House version to raise a similar
amount of revenue to the Senate version. Mr. Ruggiero
offered to provide that information.
6:17:11 PM
Mr. Ruggiero addressed progressivity impacts. He said the
use of progressivity creates a sizeable difference between
the effective rate and the marginal rate of tax in relation
to investment decisions.
6:19:46 PM
Mr. Ruggiero highlighted the following slides and posed the
example of each scenario of a company deciding to reinvest:
Taxpayer A - low margin business
Taxpayer B - high margin
Taxpayer C - low on the slope
6:22:25 PM
Mr. Ruggiero continued:
Taxpayer D - High on the slope
The handout calculates the math based on variables in each
scenario.
Mr. Ruggerio further outlined his point through the next
slide C & D New marginal tax rate higher. He informed the
committee that this chart indicates the effect of
progressivity on investment.
6:24:24 PM
Co-Chair Chenault pointed out that the models are not based
off the current HRES version. He noted the leeway given to
the presenters in lue of timeframe with the drafting of CSHB
2001 (RES).
Representative Kelly suggested that another curve be added
to reflect the HRES version.
Mr. Ruggiero offered to run the House committee substitute
with a 50% cap, but noted that there is no cap in the HRES
version. Representative Kelly said that was an oversight and
the 50% cap should have been in the bill. Mr. Ruggerio
offered to oblige the request.
Mr. Ruggiero addressed the next slide - Progressivity and
Goals 1, 2 & 3. He provided examples of the relationship
between variables: production, investment and margin. He
maintained that base rate plus progressivity, and the cap is
a self-correcting mechanism.
6:30:15 PM
Representative Gara questioned the slide, "likely zone of
operation". He asked if at $50 per barrel is the State the
largest investor on the North Slope. Mr. Ruggiero responded
that when investment credits equal 50%, anything above that
point, the State is the largest investor of any project.
6:31:30 PM
Mr. George explained that the net tax is based on cash flow
retained by the company rather than a simple tax on profits.
· Profitability as typically described. This slide
provides a simple overview of the portfolio of
profitability.
· PPT based on $53/bbl profit. This slide extrapolates
out components of the PPT. He presented examples on
the next several slides.
· Misconception of the net progressivity
6:34:23 PM
Mr. George presented - Understanding how "net" works.
The presentation exemplified net effect on the tax rate when
a company reinvests in lesser profitable field. The blended
rate brings the rate down.
6:38:45 PM
Mr. Ruggiero commented on the slide titled: The Impact on
the lower margin Fields is more noticeable. The effective
rate on some lower-margin fields may even be lower than the
basic rate (22.5% PPT) of 17.7%. This is manifested in the
blended rate being lower than the weighted average rate. He
underlined that this is the rate companies would consider
when deciding whether to invest.
Mr. George offered to illustrate how that aspect of the
portfolio would change within various versions of the bill.
Representative Gara asked how with a 25% tax rate could a
field pay for less than 25%. Mr. George explained that if
the field was the only one in the portfolio it would pay
25%. He elaborated that adding a less profitable field to
the portfolio lowers the overall rate and brings down the
blended rate.
Representative Gara asked if the reduced rate is due to the
amount of money spent developing the less profitable fields.
Mr. George responded that his description was one of capital
investment effect. He elaborated saying it is the overall
costs of production that brings down the tax rate of the
portfolio as a whole. Representative Gara asked if that
result is due to the progressivity factor. Mr. George
replied that it was entirely due to the progressivity
factor.
6:42:58 PM
Representative Kelly commented that the portion of the
benefit in terms of credits is there whether you have
progressivity or not. Mr. George agreed that it was the
progressivity factor.
Mr. George mentioned the blending of the margin slide.
6:46:48 PM
Mr. George presented a slide explaining the function of
capital investment as a function of the spending and
production. He provided calculations expressing different
scenarios.
6:48:09 PM
Mr. George further explained how the margin from which the
tax is calculated is reduced through capital expenditure.
6:50:44 PM
Mr. George spoke to the investment credits. The affect of
investment credits is to lower the tax rate further.
6:51:40 PM
Mr. George presented the slide: Tax Structure as applied
under various structures. He explained that under PPT,
progressivity reduced the effective rate on the less
productive fields. Under ACES the tax rate on existing
fields would go up, but would retain progressivity. The ACES
version established a higher base rate of 25% rather than
Pot's 22.5%. Though the progressivity percentage is
shallower at.2%, the starting point is at $30 rather than
$40.
6:53:56 PM
Mr. George addressed the Senate Judiciary version: He
explained that the Senate Judiciary version starts at the
same point as ACES, but has a progressivity of .4%. He
elaborated on the point that though this results in an
overall larger take, the less profitable field benefits from
a lower rate. In the HRES version the progressivity sets
the rate from the net cash flow per barrel, but taxes the
Gross Value. The effective rate becomes higher than a "pure
net" system with the same progressivity feature, but the
progressive taxation of different profitability fields is
maintained.
6:55:17 PM
In Conclusion Mr. George reiterated earlier comments that a
net tax is a tax on a company's retained cash flow. In
addition, all versions of the bill would allow fields of
different profitability within the same company to have
different effective tax rates. In closing, on the point of
net tax, he maintained that more aggressive net
progressivity provides a greater differentiation on the
effective rate.
Co-Chair Chenault asked if this is a bad thing. Mr. George
said that when looking at encouraging investment it could be
a good thing. He went on to say that progressivity allows
producers the choice between taking cash flow to reinvest to
lower the rate.
Co-Chair Chenault surmised that marginal fields receive a
larger break than greater producing fields would receive.
He felt that this is what is desirous as the larger fields
produce less.
6:57:40 PM
Representative Gara asked if it is an accurate assessment
that the higher base with a higher progressivity does more
to encourage investment than the lower base and lower
progressivity. Mr. Ruggiero responded that in general
principal it is, however, different prices get different
answers. He underlined the importance of looking at
individual company portfolios information regarding existing
operations and what the perceived new investment
opportunities could be.
Co-Chair Chenault asked if low base tax with a higher
progressivity is better for the investment climate in
Alaska. Mr. Ruggiero said there are two possible results:
At a lower base rate linked with net operating loss carry
forward, new explorers would have greater out of pocket
expense. He said that the expressed scenario would be
beneficial is in smaller projects as a lower rate can mean
higher profitability. Mr. George added that the steeper the
progressivity the more strength you give to the investment
piece whereby a producer lowers the rate thru investment.
7:01:30 PM
Representative Kelly asked about the producing of heavy oil
within the legacy fields. In response to a question by
Representative Kelly, Mr. Ruggerio referenced earlier
examples and explained that a stand alone (outside a legacy
unit) would pay 27.5; being inside the legacy unit the rate
would be 17%. Representative Kelly commented that a company
producing both light and heavy oil would have an effect of
lowering the total tax rate for the producer. Mr. George
agreed that less profitable components bring down the rate.
7:04:27 PM
Mr. Ruggiero addressed the question: Where is the tipping
point in the tax that plays into economics? He commented
that industry does not really supply that answer, but one
thing known is that wherever industry can get more oil out
of the ground that means greater profitability. The other
point made is that there are many variables that come into
play. All companies run economic models to decide what to
pursue and what not to pursue.
7:06:26 PM
Mr. Ruggerio addressed infill drilling. He presented overall
observations based on testimony from industry. Gaffney
Cline agrees that there is a significant upside in the
amount of existing main fields as expressed in BP testimony.
He asserted that the economics of the reinvestment are
extremely profitable.
7:07:53 PM
Mr. Ruggiero extracted from AOGA testimony: "the greatest
challenge facing Alaska is the ongoing decline". In other
parts of the AOGA testimony he pointed out that there is
current investment in those fields in, infill drilling,
contributing 70,000 barrels a day.
He spoke to a statement that he made at the round table that
70% of the upside comes from existing light oil. He
presented a BP slide to maintain his point.
7:09:31 PM
Mr. Ruggiero referenced a hand out on Prudhoe Bay from BP:
Prudhoe Bay infill drilling results. The chart outlined
the relationship between costs per barrel produced.
He drew several conclusions from the information:
It is getting costlier to find according to BP data.
The oil is harder to find and more expensive to find.
He referenced calculations in the handout.
7:11:49 PM
Mr. Riggerio said different sources had different numbers on
the per barrel produced calculations. He emphasized the
numbers are related to in-fill drilling only.
7:12:37 PM
Representative Gara asked if the quote from Pioneer noting
costs at $14 per barrel reflected both operating and capital
costs. Mr. Ruggiero explained that it represents the
capital costs only. He also confirmed a statement made by
Representative Gara that the incremental production in
Prudhoe Bay is at 4.90 per barrel.
Representative Gara followed up by asking for overall
production in PB. Mr. Ruggerio reiterated that they did not
have access to that data.
Mr. Riggerio confirmed additional assumptions made by
representative Gara that the blended rate (capital and
incremental) would render an amount less than $4.9. He
added that the economic choices companies are facing are not
based on past finding costs, but on its future projections.
7:14:22 PM
Mr. Ruggiero presented a chart: 5 year Prudhoe Drilling
Program. He pointed out that for every dollar BP spent on
an infill well another two dollars were spent on injection
and surface facilities - base case is 300% Capital
expenditures. The result is a $3.7 billion dollar program
to produce the wells.
7:15:14 PM
Mr. Ruggiero referenced a chart and explained that 50% of
production in Prudhoe is the result of a 5 year infill
drilling program, which is incremental. On an after tax
basis using 300% capital expenditures the after tax rate of
return on the investment (in-fill drilling only) is a little
over 60 percent.
7:17:14 PM
Mr. Ruggiero acknowledged that these numbers are high and
may be questioned. His organization ran numbers with a
lower price at $50 North Slope with high progressivity, 300%
capital expenditures, 200% operating expenditures, 25%
discount rate. He maintained that adjusting the variables to
higher stresses on the model, the calculation still results
in a 56 % rate of return.
7:19:19 PM
Mr. Ruggiero offered to demonstrate the model.
Representative Gara asked him to demonstrate the impact on
profitability with the HRES and SJUD versions.
Mr. Ruggerio demonstrated the model with different variables
per Representative Gara's request. The result was still a
rate of return at 64%.
Representative Gara asked for an explanation of "rate of
return". Mr. Ruggerio said it represents the amount of
interest earned.
Mr. Ruggerio clarified that 300% capital expenditures
represents the amount necessary to invest to produce the
infill wells.
Representative Gara asked if the model could show the
difference of a 22.5% and a 25% tax application.
Mr. Ruggiero explained that the change is minimal due to the
fixed numbers of the past.
7:23:27 PM
Mr. Ruggiero maintained his point that robust numbers remain
even with the variable of price decreasing and costs
increasing and provided examples.
7:25:18 PM
Representative Gara asserted that even at $50 per barrel a
37% rate of return is a healthy percentage. Mr. Ruggiero
agreed.
Mr. Ruggerio cautioned that the model is representative only
of infill drilling. He stressed that it is not the whole
picture but is half of the field.
7:27:24 PM
Mr. Reggerio spoke to the potential of heavy oil at
different rates of decline and the effects on return.
7:30:03 PM
Mr. Ruggiero spoke to North Slope Potential asserting that
production drives revenue. He referred to a chart depicting
the relationship between decline rate, produced barrels and
industry investment. He then introduced additional
variables of net present value (NPV) at 10% and undiscounted
NPV; cash flow with no time value of money impact. The
calculations were presented in the chart.
7:32:37 PM
Mr. Ruggerio made note that in the chart the abandonment
rate was set at 250,000 barrels per day. This can be
arrested with investment in a new well.
Mr. Ruggiero addressed the final chart: Delaying TAPS
Abandonment; Impact of abandonment rate on North Slope
Recovery. He concluded that even at the highest projected
decline rate of 15% and abandonment rate of 250,000, there
is still the potential recovery of 1.4 billion barrels.
He emphasized the importance of investment and reinvestment
in new fields, within the legacy fields, should not be
underestimated.
7:35:04 PM
In summary Mr. Ruggiero said that Oil companies must show
"reasonable certainty" about future investment and expected
production to be able to book oil in the ground as reserves.
He concluded that even with decline rate scenarios at 6% and
3% companies are able to book reserves. He maintained that
if a company chose to not pursue infill drilling it would
bring down booked reserves which would effect stock
investments.
He also reiterated goals and pointed out that all proposed
legislation meet the goals of the legislature. In addition
if reinvestment is attained there would be a significant
increase in barrels available from existing assets alone.
7:36:56 PM
Representative Gara asked Mr. George to elaborate on the
credit system. Mr. George responded that it is a generous
provision in a number of ways. For explorers, the immediate
ability to monetize operating expenses and the 20% is
available in only one jurisdiction. The ability is rare and
attractive to the various companies. Similarly, the rate
that you can deduct costs, 100% the first year, is not very
common. He offered examples.
Representative Kelly asked if there was anything about the
combination of credits that was of concern. Mr. Ruggiero
responded that there is a possibility under a unique set of
circumstances, of prolonged period of time that we would be
at a predictive margin (80-90pb) above cost predicted to be
there multiple years in advance such that the oil companies
could make sizeable investments. In such a case, there could
be a possibility that the state would pay over 100% of the
investment cost. A choice of capping the State contribution
might be a consideration in that case. He cautioned that
the other concern is that if there is $1 or $2 incremental
dollars moving up or down the curve, the result is the same.
He further noted that if the variables come together as
mentioned, the state would have the ability to contribute in
that way because the return rate would be high.
Representative Kelly commented on the plan. He asked if the
administration had been adequately consulted early on. Mr.
Ruggiero replied that they were asked for the worldwide view
on the perspective approximately a month before presenting
ACES. The views provided then are substantially the same as
the ones presented. He commented that the administration
did not tell them what to say and that they continue to
provide advice based on their knowledge.
7:44:38 PM
Co-Chair Meyer applauded the presentation. He asked,
considering the unique components of drilling oil in Alaska,
are the proposed tax rates competitive for reinvestment.
Mr. George responded that one of the key features on the
structure of the tax is the high reinvestment incentive. It
is a tax based on cash flow taxen out of the state rather
than based on pure profitability. In terms of how companies
will look at Alaska, companies will closely scrutinize the
profitability of the margins. The system as structured does
provide incentive. Companies look at political stability
and exploration, but the reinvestment opportunities are
substantial within the legacy fields. He further noted that
the investment credits pose a significant incentive.
Mr. Ruggiero added that most companies do not just consider
the tax rate and provided the example of West Africa's
history and tax rate. If taxes are raised at the top end
high progressivity assures the state gets a fair share. He
noted that the when there is a progressivity take the
profitability to companies is $100 profit per barrel.
The positive aspects of the Alaska system are an incentive
within the system. He provided the example of the incentive
to invest in the lesser profitable fields.
7:51:56 PM
Co-Chair Meyer agreed that the current tax system based on
net, works for Alaska. He maintained that a gross tax
system provides no incentive for reinvestment. He
emphasized that the net is the best way to go. Mr. Ruggiero
agreed.
Co-Chair Meyer asked about the existing Legacy fields and
the price on heavy oil. Mr. Ruggiero pointed out that there
is a posted price for oil of certain quality. He went on to
say when crude meets those specifications, and then it is at
market value. Heavy oil is less valuable and the market
places a discount on that crude. Co-Chair Meyer asked how
models could be run if the future is in heavy oil whereby
providing less than market price. Mr. Ruggiero noted that
it could be modeled with adding one more line in that
indicates the crude quality adjustment. He referred to a
chart that provides an example of a crude quality
adjustment.
7:56:03 PM
Representative Gara noted that his constituents want to know
why PPT underperformed. Mr. Ruggiero responded that the
three components in making a prediction: price, amount of
production and associated costs.
Mr. Ruggiero further pointed out that one of the provisions
in the bill is the data exchange. He said that forecasting
from the oil companies is critical for the state to forecast
accurately.
Representative Gara asked why the information exchange
provision would help. Mr. Ruggiero said if the companies
share the information regarding capital expenditure this can
assure revenue in the future.
Representative Gara asked if the information would provide
accuracy regarding projected return. Mr. Ruggiero replied
that was a difficult call due to all the variables the state
uses to make that prediction.
8:01:39 PM
Co-Chair Chenault expressed concern about the $800 million
dollar shortfall and how it is being represented. He
pointed out the variables that created higher costs and less
production which impacts the actual number. Mr. Ruggiero
agreed that increase in costs both operating expenditures
and capital expenditures, decline rate which raises the per
barrel costs and a significant change in market place affect
and create real numbers as apposed to what is predicted.
Co-Chair Chenault asked for information regarding all
aforementioned components.
He also requested how many the barrels of oil were differed
(not produced) due to costs. He further underlined that the
positive side of those barrels being produced in the future
is that with projected prices the state will receive a
greater benefit.
Representative Kelly addressed the Administration's desire
to adjust progressivity if the 10% floor is removed. Mr.
Ruggiero understood that if the floor is removed it would
need to be captured thru a progressive system. The
percentage change in the progressivity comes closer to
accomplishing the loss from the removal of the floor.
8:06:39 PM
Mr. Ruggiero clarified the requests made by the committee.
Mr. George agreed to provide the information.
8:07:47 PM
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