04/15/2010 08:30 AM House FINANCE

CS FOR SENATE BILL NO. 305(FIN)(title am)                                                                                     
                                                                                                                                
     "An Act providing that the tax rate applicable to the                                                                      
     production of oil as the average production tax value                                                                      
     of  oil, gas  produced  in the  Cook Inlet  sedimentary                                                                    
     basin,  and  gas produced  outside  of  the Cook  Inlet                                                                    
     sedimentary  basin  and  used in  the  state  increases                                                                    
     above  $30  shall  be 0.4  percent  multiplied  by  the                                                                    
     number  that  represents  the difference  between  that                                                                    
     average monthly  production tax value  and $30,  or the                                                                    
     sum  of  25 percent  and  the  product of  0.1  percent                                                                    
     multiplied   by   the   number  that   represents   the                                                                    
     difference between that  average monthly production tax                                                                    
     value   and  $92.50,   except  that   the  total   rate                                                                    
     determined  in  the  calculation   may  not  exceed  50                                                                    
     percent; providing for  an increase in the  rate of tax                                                                    
     on the production of gas  as the average production tax                                                                    
     value on a BTU equivalent  barrel basis of gas produced                                                                    
     outside  of the  Cook Inlet  sedimentary basin  and not                                                                    
     used  in the  state  increases above  $30; relating  to                                                                    
     payments of  the oil and  gas production  tax; relating                                                                    
     to  availability of  a portion  of  the money  received                                                                    
     from   the  tax   on  oil   and   gas  production   for                                                                    
     appropriation  to the  community revenue  sharing fund;                                                                    
     relating to  the allocation  of lease  expenditures and                                                                    
     adjustments  to lease  expenditures; and  providing for                                                                    
     an effective date."                                                                                                        
                                                                                                                                
9:02:15 AM                                                                                                                    
                                                                                                                                
Representative Fairclough MOVED CS CS SB 305(FIN) 26-                                                                           
LS1577\K, Bullock, 4/14/10 as a working document.                                                                               
                                                                                                                                
Co-Chair Hawker OBJECTED for discussion.                                                                                        
                                                                                                                                
ROGER  MARKS,  PETROLEUM  ECONOMIST,  LEGISLATIVE  BUDGET  &                                                                    
AUDIT,  detailed  the  "Summary  of  Changes  Between  House                                                                    
Resources  CS and  Finance Work  Draft" (copy  on file).  He                                                                    
listed the reasons as described on the list.                                                                                    
                                                                                                                                
        1. Timing window of moving between the one "bucket"                                                                     
          and two "bucket" regimes has been removed.                                                                            
        2. AS 43.55.011(g)(3): and (p)(3): This is a                                                                            
          technical  change that  adds  clarity. It  depicts                                                                    
          the   detailed   methodology  for   deriving   the                                                                    
          progressivity factor so that  it is clear the word                                                                    
          "average in the statute means weighted average.                                                                       
        3. AS 43.55.020(a): The section describing the                                                                          
          calculation of the monthly installment payments                                                                       
          has been repealed and reenacted. After all                                                                            
          previous  changes  a  more succinct  drafting  was                                                                    
          crafted.                                                                                                              
        4. AS 55.161(a)(1) and (a)(2): This is an expansion                                                                     
          on the current  section describing the calculation                                                                    
          of the  annual and monthly production  tax values.                                                                    
          Lease expenditures  include expenditures allocated                                                                    
          under  160(f)   (below)  for  the   calendar  year                                                                    
          incurred  to  explore  land not  under  lease,  or                                                                    
          explore or develop a  lease before commencement of                                                                    
          sustained production.                                                                                                 
        5. AS. 43.55.160(f): This is a new section.                                                                             
          Expenditures to  explore land not under  lease, or                                                                    
          to explore or develop  a lease before commencement                                                                    
          of  production  of  oil   or  gas,  are  allocated                                                                    
          between oil  and gas in  the year  the expenditure                                                                    
          is  incurred. (Method  of allocation  is specified                                                                    
          in  AS  43.55.165(h)[an  amendment  out  of  House                                                                    
          Resources]  stating  that   for  allocating  costs                                                                    
          between oil and gas gross  value should be used to                                                                    
          the maximum extent possible).                                                                                         
        6. AS 43.55.(g): This is a new section that                                                                             
          clarifies   that    lease   expenditures   include                                                                    
          expenditures  for producing  or that  are incurred                                                                    
          for   exploration   or   development   after   the                                                                    
          commencement of sustained production, as well.                                                                        
                                                                                                                                
Representative Gara  found it difficult  to follow  the bill                                                                    
while  using  the  "bucket  explanation."  He  assumed  that                                                                    
decoupling  would not  be necessary  until  the state  began                                                                    
exporting gas. Mr.  Marks clarified that if  the bill passes                                                                    
then  the decoupling  is effective  immediately. He  offered                                                                    
another bucket analogy.                                                                                                         
                                                                                                                                
9:07:52 AM                                                                                                                    
                                                                                                                                
Mr. Marks  explained that the progressivity  for the current                                                                    
activity would  be calculated together with  Cook Inlet Gas,                                                                    
North Slope Oil, and all other instate gas.                                                                                     
                                                                                                                                
Representative Gara asked if the  system would be similar to                                                                    
the current one. Mr. Marks responded yes.                                                                                       
                                                                                                                                
Mr. Marks continued to describe the technical changes.                                                                          
                                                                                                                                
Representative  Gara asked  if  a deduction  from gas  taxes                                                                    
would be appropriate when producing  gas. Mr. Marks answered                                                                    
yes.                                                                                                                            
                                                                                                                                
Representative  Gara asked  if  small field  were found  and                                                                    
dedicated  to  a  certain  demand,  would  decoupling  allow                                                                    
deduction  of  gas  costs  from   the  gas  tax.  Mr.  Marks                                                                    
discussed allocation.  Costs are  allocated between  oil and                                                                    
gas pursuant to Section 165(h),  as seen on page 15, Section                                                                    
9.  This amendment  adopted by  House Resources  stated that                                                                    
costs  are allocated  between  oil and  gas  based on  gross                                                                    
value at  the point of  production. If the producer  had gas                                                                    
income, the cost  for developing the gas  would be allocated                                                                    
between  their gas  and oil;  expenditures  could be  offset                                                                    
against the gas income.                                                                                                         
                                                                                                                                
Representative  Gara  commented   that  companies  producing                                                                    
small  amounts of  gas  are not  required  to decouple.  Mr.                                                                    
Marks agreed that is correct.                                                                                                   
                                                                                                                                
Representative  Gara asked  to  know  the trigger  enforcing                                                                    
decoupling.  Mr.  Marks responded  that  a  North Slope  oil                                                                    
producer selling  a small amount  of taxable gas  to Alyeska                                                                    
is considered an in-state gas  sale. Those incomes and costs                                                                    
are allocated in  proportion to gross value at  the point of                                                                    
production.                                                                                                                     
                                                                                                                                
Co-Chair  Hawker  clarified  that  Representative  Gara  was                                                                    
seeking  the  trigger   point  export.  Representative  Gara                                                                    
understood  that companies  producing small  amounts of  gas                                                                    
would operate under current law.                                                                                                
                                                                                                                                
Mr.  Marks commented  that current  law  and activities  are                                                                    
divided  into  segments. He  listed  the  segments as  North                                                                    
Slope oil and in-state gas.                                                                                                     
                                                                                                                                
Representative  Gara asked  if in-state  gas is  taxed under                                                                    
Alaska's  Clear  and  Equitable   Share  (ACES).  Mr.  Marks                                                                    
answered yes.                                                                                                                   
                                                                                                                                
Representative  Gara  asked  if   export  gas  triggers  the                                                                    
decoupling rules. Mr. Marks responded correct.                                                                                  
                                                                                                                                
9:17:00 AM                                                                                                                    
                                                                                                                                
Mr. Marks continued with the technical changes.                                                                                 
                                                                                                                                
Representative Kelly  clarified that the mechanism  does not                                                                    
change  for  in-state  gas.  Mr.   Marks  answered  that  is                                                                    
correct.                                                                                                                        
                                                                                                                                
Representative  Austerman asked  if the  new subsection  for                                                                    
Section  8 was  discussed in  both the  Senate and  Resource                                                                    
Committees  as  an  option.  Mr.  Marks  responded  no.  The                                                                    
subsection  was an  alternative  way  of addressing  concern                                                                    
regarding the deduction of cost in the future.                                                                                  
                                                                                                                                
Co-Chair  Hawker  added that  the  three  day window  was  a                                                                    
creation of legislative legal. The  approach presented was a                                                                    
joint  crafting  by  Department of  Revenue  (DOR)  and  the                                                                    
sponsor.                                                                                                                        
                                                                                                                                
Mr. Marks commented  that the issue of  cost recognition was                                                                    
in  statute and  regulation. As  long as  status quo  was in                                                                    
place, the concern was alleviated.                                                                                              
                                                                                                                                
9:20:06 AM                                                                                                                    
                                                                                                                                
Mr. Marks  continued with  Page 7, Section  7, which  are in                                                                    
the  current  statue and  describe  how  the production  tax                                                                    
values  are  derived  for   the  different  segments.  Lease                                                                    
expenditures  should  include  those  allocated  by  current                                                                    
production   for  the   calendar  year   for  expenses   for                                                                    
exploration and development. Costs  incurred can be deducted                                                                    
against current production.                                                                                                     
                                                                                                                                
Representative  Doogan  asked  if  an oil  and  gas  company                                                                    
looking for  gas can  deduct costs  against oil  taxes until                                                                    
gas  development  occurs.  Mr.  Marks explained  that  if  a                                                                    
company were  looking for gas  but had only  oil production,                                                                    
the  gas  seeking  costs  could   be  deducted  against  oil                                                                    
production. Once  both oil and  gas are produced,  the costs                                                                    
are deducted against  both in proportion to  the gross value                                                                    
of the oil and the gas.                                                                                                         
                                                                                                                                
Representative Doogan  presented a scenario where  a company                                                                    
is exploring just for gas  without oil production. Mr. Marks                                                                    
explained  that  the  company  would take  a  credit  of  25                                                                    
percent of the expenditures.                                                                                                    
                                                                                                                                
9:23:13 AM                                                                                                                    
                                                                                                                                
Mr.   Marks  explained   that  lease   expenditures  include                                                                    
expenditures for producing and  exploration before and after                                                                    
the commencement of production.                                                                                                 
                                                                                                                                
Representative  Austerman asked  for  identification of  the                                                                    
section discussed.  Mr. Marks clarified Section  8, Page 14,                                                                    
Section 43.55.160(g).                                                                                                           
                                                                                                                                
Co-Chair   Hawker  commented   that   an   update  for   the                                                                    
comprehensive sectional for the bill  will be provided.  Mr.                                                                    
Marks agreed to provide the comprehensive sectional.                                                                            
                                                                                                                                
Representative  Gara pointed  out  that the  state will  not                                                                    
require decoupling until Alaska  exports gas. Companies that                                                                    
wish  to produce  gas for  export understand  the decoupling                                                                    
rule.                                                                                                                           
                                                                                                                                
Representative  Gara  asked  where  the  decoupling  trigger                                                                    
point was stated  in the statute. Mr.  Marks replied Section                                                                    
4, AS 43.55.011(p). The current  statute includes a base tax                                                                    
and  progressivity for  current  activity in  Section G.  He                                                                    
noted that Section  P sets up progressivity tax  for gas. He                                                                    
mentioned Section  7, Page 9  which references  gas produced                                                                    
during a  calendar year.  He noted that  the key  phrase was                                                                    
the bottom of Subsection f  which explains that exported gas                                                                    
that is subject to a distinct progressivity calculation.                                                                        
                                                                                                                                
Representative Gara  highlighted that  the section  does not                                                                    
define  that  the trigger  point  is  for exported  gas.  He                                                                    
understood  the definition  to read  that in-state  gas uses                                                                    
ACES and  out of state  gas employs the  decoupling process.                                                                    
The issue of the commerce  clause problem will be dealt with                                                                    
when the state begins exporting gas.                                                                                            
                                                                                                                                
Mr. Marks  chose not to provide  advice about constitutional                                                                    
issues.                                                                                                                         
                                                                                                                                
9:29:00 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hawker removed  his objection  to adoption  of the                                                                    
work draft. The work draft was adopted.                                                                                         
                                                                                                                                
Representative  Fairclough  communicated  that  her  silence                                                                    
does not mean that that  she agrees with the statements made                                                                    
about the inner-state commerce clause.                                                                                          
                                                                                                                                
Representative Gara clarified  that he did not  know that an                                                                    
inter-state  commerce  violation  existed, but  he  realized                                                                    
that the question existed.                                                                                                      
                                                                                                                                
SB  305  was  HEARD  and   HELD  in  Committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
9:31:55 AM