Legislature(2009 - 2010)
04/16/2010 10:47 AM House FIN
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
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."
2:09:30 PM
Co-Chair Hawker related that an accord had been set with
the Department of Revenue concerning the technical
competency of the legislation.
Vice-Chair Thomas MOVED to ADOPT the work draft for HCS for
CSSB 305 26-LS-1577\U, Bullock, 4/15/10 as a working
document.
Co-Chair Hawker OBJECTED for discussion.
ROGER MARKS, PETROLEUM ECONOMIST, LEGISLATIVE BUDGET AND
AUDIT COMMITTEE, detailed that the changes from Version "K"
to Version "U" were the result of requests from the
administration. He cited the technical amendments adopted
in Version "U" (copy on file).
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, clarified
that technical problems had been identified in Version "K"
and subsequently amended in Version "U". He expressed
interest in examining the current version for any necessary
technical changes.
2:17:33 PM
Mr. Marks stated that he would be comparing Version "K"
with Version "U", while highlighting the changes. He
referred to, "List of Technical Amendments to HCS CS SB 305
Adopted in Version "U"", Prepared by Representative
Hawkers' Office (copy on file).
2:20:02 PM
Representative Kelly queried the removal of the language
"from each lease or property", from Page 15, line 10.
Commissioner Galvin replied that the phrase had been
removed to for clarity.
Mr. Marks relayed that next change was in Section 8, which
stated that lease expenditures occurring prior to
commercial production, or during exploration, could be off-
set against income within specific areas.
Representative Doogan requested clarification as to which
version of the bill was being discussed. Mr. Marks replied
that the latest version of the bill was the "U" Version,
and that the discussion concerned the changes form Version
"K" to Version "U". Co-Chair Hawker added that Section 8
was physically located in the same place in the "U"
version, but the language had been changed from Version
"K".
Mr. Marks reiterated that the new Section 8 language stated
that expenditures incurred within an area, could only be
used in that area. The department preferred the word
"commercial" over "sustained", because "commercial
production" was a defined term.
2:23:38 PM
Co-Chair Hawker asked Mr. Marks and Commissioner Galvin if
they supported the version changes. Both replied in the
affirmative.
Co-Chair Hawker WITHDREW his OBJECTION.
The work draft for HCS for CSSB 305 26-LS-1577\U, Bullock,
4/15/10 was ADOPTED as a working document.
Co-Chair Hawker WITHDREW Amendment 1 (Hawker).(copy on
file).
Co-Chair Hawker MOVED to ADOPT Amendment 2 (Hawker):
Page 8, line 20
Delete "land , lease,"
Insert "land or lease or"
Page 9, line 19 following "property"
Insert "in the state"
Page 11, line 25
Delete "land, lease,"
Insert "land or lease or"
Page 12, line 9
Delete "land, lease,"
Insert "land or lease or"
Page 12, line 21
Delete "land, lease,"
Insert "land or lease or"
Page 13, line 2
Delete "land, lease,"
Insert "land or lease or"
Page 16, line 13
Delete "Sections 2 - 4"
Insert "Sections 2 - 5"
Co-Chair Stoltze OBJECTED for discussion.
Commissioner Galvin pointed out to the committee the
language changes in the bill. The word "lease or "property"
were defined terms. The purpose of the language change was
to distinguish the land from the lease or property.
Co-Chair Hawker clarified that the language included
everything in the amendment, except Lines 5 and 6, and Line
24 through 26.
Commissioner Galvin stated that the amendment would provide
consistency between bill sections. The last lines of the
amendment ensured that the department's directive to adopt
regulation was made retroactive.
Co-Chair Hawker asked if the sponsor was comfortable with
Amendment 2. Mr. Marks replied yes.
Commissioner Galvin said that the amendment fulfilled the
technical concerns raised by the department.
Co-Chair Stoltze WITHDREW his OBJECTION to Amendment 2.
There being no further OBJECTION, Amendment 2 was ADOPTED.
Co-Chair Hawker asked if the amendments were sufficient to
the department. Commissioner Galvin replied yes, for the
moment.
2:29:27 PM
Representative Gara attempted to summarize his
understanding of the bill. Until gas was exported, Alaska's
Clear and Equitable Share (ACES) remained unchanged, a 25
percent production tax on oil, and the equivalent of a 25
percent production tax on gas, with progressivity, under
the agreed upon terms. Producers received a benefit if they
turned gas fields for production into a pipeline, and gas
costs could be deducted from the oil taxes. He understood
that the policy conversation about decoupling would happen
at a future date. Mr. Marks concurred.
Co-Chair Hawker asked about the intent of the legislation.
Commissioner Galvin concurred with Representative Gara's
assessment of the bill. Co-Chair Hawker reminded the
committee that the mission was to take a bill that
accomplished the tasks recommended to the House Floor,
where the policy call would be made by the entire body. He
added that it was the sponsor's belief that the dilutive
effect of the current statutory construct would cause an
immediate decrease in tax revenues the minute gas was
produced. The sponsor predicated that the issue was
urgent. He requested an evaluation and policy discussion by
the Department of Revenue concerning the issue.
2:33:18 PM
Commissioner Galvin introduced the PowerPoint presentation,
"Comments On HCS CSSB 305 (FIN) Ver.U" (copy on file).
Slide 2 details the three major concerns to the department
regarding the bill:
· Decoupling is not necessary at this time.
ƒSB 305 could be passed at anytime in the next 10
years, and the result would be the same.
· SB 305 "locks-in" a lower gas production tax
obligation
ƒWould reduce the state's negotiating flexibility
in the coming years
o We could always lower the gas tax after
"lock-in", but we might not be able to raise
it
· SB 305 is a significant overall tax increase
ƒIt sends the Producers and the rest of the world
the wrong message about Alaska's interest in
promoting a gasline project
Representative Gara understood that the legislation would
lower the gas tax. Commissioner Galvin responded that the
under the current law, the entire tax obligation for oil
and gas was divided equally between the two resources. The
legislation would separate the tax systems between oil and
gas to determine the tax obligation. Commissioner Galvin
stressed that the current formula resulted in a larger
obligation than when calculated under SB 305.
Representative Gara asked if the breadth of the term "gas
tax" had been defined in the original regulations.
Commissioner Galvin responded that defining the gas tax
obligation had been a priority. The department believed it
would not be in the state's interest to imply that the
impact on the oil tax was caused by the introduction of
natural gas into the conversation. The department chose the
point of production formula, which reflected the value of
the two commodities when combined.
2:41:18 PM
Representative Gara stated that when the bill passed in the
other body the gas tax was calculated on the British
Thermal Unit (BTU) equivalent. He pointed out to the
committee that under the current Version "U", a point of
production approach was being used to calculate the tax. He
asked if the language change expanded the breadth of the
gas tax. Commissioner Galvin replied that the version that
had passed out of the senate indicated that the department
would develop regulations on cost allocations while
considering the barrel of oil equivalent (BOE). The current
version placed an expectation that the point of production
formula would be used when possible. Representative Gara
requested an estimate of how much lower the tax would be
using the department's preferred formula. Commissioner
Galvin referred to the presentation, "Comments on HCS CSSB
305 (FIN) VER. U" (copy on file), Page 21, which charts the
gas tax with prices ranging from $40 per barrel to $200 per
barrel. The slide compares the status quo with the other
possible formulas.
2:43:41 PM
Co-Chair Hawker noted that the chart detailed the tax that
was attributable to gas.
Commissioner Galvin said that SB 305 would be an overall
tax increase. The tax burden on the gas pipeline project
would be significantly raised. He stressed that decoupling
now would send a negative message to producers.
Commissioner Galvin directed committee attention back to
Slide 3. If SB 305 were enacted in 2020, the resulting
state revenue would be the same as if it were enacted in
2010. Slide 4 indicated that in all of the modeling cases
run by the department, the "locked-in" gas production tax
obligation was larger under the current system than it
would be under SB 305. Commissioner Galvin continued to
Slide 5, "Sample Cases: Comparing SB 305, Petroleum
Production Tax (PPT), and the Status Quo". At current
prices, SB 305 would be a larger tax increase than
adjustment from PPT to ACES. The Status Quo brings in
nearly the same tax revenue that would be generated if the
PPT system had been decoupled (Slide 6). Slide 7 shows
another example of a comparison of the total tax revenue
under a PPT/Stranded Gas Development Act (SGDA) scenario.
When compared with the Status Quo, there was no perceived
significant loss. He said that the projected tax numbers
under SB 305 could be misleading, and would color public
discussion about an appropriate fiscal system for the
gasline far into the future. He cited the charts on Slide 8
and 9 of the presentation, which illustrate different
comparisons of the overall tax-take between oil and gas in
different combinations. He questioned the problem being
solved by SB 305, Slide 10.
2:53:47 PM
Commissioner Galvin pointed out to the committee that the
trepidation of becoming locked in to an obligation for fear
of economic loss was unwarranted. Slide 10 refuted the
claim of a potential $2 billion dollar loss in the
Department of Law analysis, which states:
· Only the gas production tax obligation (not the rate)
is "locked-in" at the open season;
· The legislature can change the oil tax system anytime
before or after the open season;
· The so-called "$2 billion loss" will only occur if
three things happen:
o We are successful in achieving a large capacity
gas pipeline;
o The price of oil and gas remain far apart
(defying fundamental economic principles); AND
o The next 5 Legislatures decide that it is
appropriate to leave the current tax system as
is.
Commissioner Galvin continued to Slide 11, which states:
"What is the "Problem Being Solved by SB305?"
· Is It?: That any "dilution" of oil taxes caused by
mixing in a lower value hydrocarbon is an unacceptable
"loss" of oil tax revenue?
· Response: Should the Legislature react similarly when
a large volume heavy oil project is proposed?
· Will it have the same dynamic; highly profitable sweet
crude will be diluted, thus reducing its profitability
and it progressivity tax rate
· State will "lose" oil tax revenue due to the
introduction of heavy oil
2:57:26 PM
Commissioner Galvin addressed the question proposed on
Slide 12:
"What is the "Problem Being Solved by SB305?"
· Is It?: That under the status quo, at high oil/gas
price parity, the state is at risk of seeing a
reduction of overall production tax revenue when they
"flip the gas switch"?
· Response: Legislature has 10 years to decide if it
wants to take on that risk in exchange for a gasline;
· If it is not an acceptable risk, then there are a
number of alternative options (including decoupling)
that could be carefully considered.
One alternative approach to address the possible revenue
loss would be to establish in the current tax system a
minimum tax equal to a separate oil tax (i.e. the combined
tax cannot be lower than what the separate oil tax would
be). This would preserve the economic incentive nature of
the current system, while protecting the state's downside
risk in the case of high parity, and did not require
significant structural changes to the current system, such
as cost allocation. Commissioner Galvin offered closing
observations. He relayed that passing such a large tax
increase just before the two upcoming open seasons sent a
confusing message about the state's desire for a gasline,
SB 305 locked in a lower gas production tax obligation,
thus reducing the state's negotiating flexibility, and SB
305 could be passed after the open season without legal
restriction or economic limitation. He felt that the bill
failed to meet the best interest of the state and
maintained strong opposition to the legislation.
3:03:05 PM
Co-Chair Hawker revealed that were the bill to pass
committee, he would be attaching a "no recommendation" to
his signature on the committee report. He urged the
committee to compare and contrast the arguments presented
by the bill sponsor with that of Commissioner Galvin, when
weighing the legislation.
Representative Austerman questioned the use of the word
"might" on Slide 2 of the presentation. Commissioner Galvin
replied that the language hedged the legal risk in the
event that the state failed to honor the Alaska Gasline
Inducement Act (AGIA) tax inducement exemption.
Representative Austerman believed that the bill was too
complicated.
Commissioner Galvin attempted to clarify. He assured the
committee that the gas tax obligation was on the gas that
was shipped through the AGIA acquired facility.
Representative Austerman requested that the bill be broken
down into layman's terms to facilitate further discussion.
Commissioner Galvin endeavored to simplify:
"You have $8 gas and your all-on cost for transportation
and so forth is $4, just to make it easy. So you have $4,
what is called "point of production" value. Then the
question at that point is, "What is the production tax
that's gonna be ascribed to that?" And under the current
system you would tax that gas with whatever oil, and you'd
end up splitting it based upon the relative values at the
point of production, and you might end up with a gas tax
obligation of $1.50, say. With SB 305 you're gonna take
that $4 dollar point of production, you're gonna take some
of the costs for production and subtract it from that, and
you are going to have a tax rate that you are going to then
charge, and you're going to end up with a tax obligation
somewhere less than $1.50. It's going to be, maybe, $1.25
or $1.00. And that's the difference, is that, at the end of
the day, the tax obligation on that gas is going to be
lower with SB 305 than ostensibly what you have under the
status quo."
3:09:10 PM
Representative Kelly asked Commissioner Galvin how he would
have constructed the tax from the beginning; for Alaska,
and then for the rest of the world. Commissioner Galvin
responded comparing the state's options with the rest of
world presents two thoughts. One, Alaska was in a unique
situation in the world going from a full oil providence
with a long-term existing fiscal system, into a world class
oil and gas province. Most provinces do not have a
transition; they enter into the production of oil and gas
simultaneously. He queried the opportunity to "start from
scratch". He said that if the state were to take tax cues
from other areas of the world, it would be discovered that
most places had a tax combination of oil and gas. However
there were places that kept them separate. He felt that
separating the profitability streams of oil and gas was an
arbitrary accounting exercise.
Representative Kelly cited Page 15, Line 6. He commented
that "the department shall" could be changed to "the
department may". Commissioner Galvin responded that the
amount of discretion that was appropriate to give the
department in establishing the cost allocation methodology
had been under discussion. The issue was a policy call,
without empirical arguments to weigh when establishing a
right or wrong answer. The department preferred to receive
direction from the legislature as to which methodology to
use.
3:16:18 PM
Representative Doogan asked about the 3 closing
observations found on Slide 14 of the presentation. He
requested reconciliation between points 1 and 2.
Commissioner Galvin responded that, as illustrated on Slide
18, using the status quo method to derive the gas
production tax obligation, although the overall tax is
lower, the proportion of tax attributed to gas is greater.
The relationship holds true throughout the different price
scenarios. Decoupling would cause the oil tax to rise
faster than the gas tax decreased. As the costs between oil
and gas were moved, oil was moved up the progressivity
line. Gas was not at the progressivity line, and remained
flat. This resulted in a lesser gas tax under SB 305.
Representative Doogan understood that under the current
system, gas production diluted the effect of the higher oil
price, but the lower gas tax did provide a favorable
position. Commissioner Galvin agreed. He added that the
passing of the bill would be off-putting to producers
because it would insinuate that the state should receive
considerably more tax revenue when gas was being produced.
3:22:19 PM
Representative Gara expressed concern that without SB 305,
the "lock-in" gas tax rate defined by regulation could be
successfully challenged in court. Commissioner Galvin said
that a challenge to the department's regulations would be
unprecedented. He pointed out to the committee that the
regulations had been reviewed during a public comment
period, and had been accepted by producers. He believed
that the state should be confident with the system already
in place.
Representative Fairclough asserted that the gasline and gas
revenues were not a "silver bullet" for the state. She
pointed out to the committee that all of the models in
question had been modeled out to 10 years. She wondered if
modeling to 20 years would be more beneficial, as a point
would eventually be reached where production was going to
adversely, in an inverse way, affect the value of oil and
the taxes the state collected. She asked if the department
had modeled out further than ten years in order to know the
ramifications on projections of oil going down and gas
coming online. Commissioner Galvin answered yes.
Representative Fairclough probed how much the state could
receive if oil were provided for under a different rate
through decoupling, specifically, in the second 10 year
section. Commissioner Galvin replied that if there were a
disincentive for a gas pipeline, then the state could
expect to continue to see a decline of oil production, and
overall state revenue. Representative Fairclough wondered
if the benefit to the state for not collecting taxes in the
first 10 years of production would be significant.
Commissioner Galvin replied that in order to answer the
question, the legislature would need to decide on the price
relationship between oil and gas for the years 2020 through
2030.
3:29:06 PM
Commissioner Galvin stated that he could not fully answer
the question with the information available. He stated that
if the tax system for the next 20 years were put into place
under the legislation, the state would not succeed in
building a gas pipeline. Representative Fairclough
clarified that the Commissioner had presented a scenario
explaining the problems with SB 305. She requested that he
provide the committee with an alternative scenario, for
2020 through 2030, that explains what the state would
receive in the second 10 years of production.
Commissioner Galvin argued that if SB 305 failed, and the
state were to move forward in the development of the gas
pipeline, when the time arrived for the state to "lock-in"
the oil tax, the price relationship would remain $120/$8
gas. He predicted that the current system would be replaced
by an alternative minimum tax in order to capture the
value. He contended that Alaska was not in a position to
make the decision right now. He stressed that the state
should leave its options open in order to create a system
that provides for a pipeline, and the ability to change the
system if necessary.
Representative Fairclough voiced discomfort with the risk
that not decoupling could "lock-in" tax rates for the
state.
Co-Chair Hawker requested that someone from the department
schedule a sit down with Representative Fairclough.
3:34:14 PM
Representative Salmon queried the urgency of the May 1,
2010 passage of the legislation suggested by the bill
sponsor.
Commissioner Galvin felt that the difference between the
priority of the sponsor, and what the department
recommended was moot, as only the gas portion of the
obligation was relevant going into the open season.
3:36:53 PM
MICHAEL HURLEY, DIRECTOR, GOVERNMENT AFFAIRS,
CONOCOPHILLIPS, stated that the bill did not solve the
problem of gas taxation. He said that ConocoPhillips
understood the sponsor's intent, but feared that the public
would misinterpret what the bill would do. He remarked that
the bill was a reflection of one of the many flaws in AGIA.
The fundamental issue of how gas would end up being taxed
was not addressed. The lack of clarity concerning how the
gas would be taxed added to the uncertainty that producers
faced when considering proposing gas into the pipeline in
the 2, upcoming open seasons. He thought that fiscal issues
would eventually need to be addressed. He shared that
ConocoPhillips appreciated the sponsor's intent in
designing the bill to speak to the flaws in AGIA. He felt
that the bill added to the complexity of the issue. He
reported that ConocoPhillips would continue to work with
the state to create a tax structure that encouraged
investment, production, and jobs for Alaskans.
Representative Gara stated that there was an anomaly in the
existing tax. He asserted that it was not the desire of the
legislature to put into place a system that produced less
revenue for the state with gas and oil pipelines, than
would be received with solely an oil pipeline. He thought
that the issue would need discussed further.
3:42:21 PM
Representative Kelly asked Mr. Hurley if he preferred the
House Resources version of the bill (Version N), or the
current Version "U". Mr. Hurley replied that he would
suggest "no recommendation" for Version "U".
Representative Fairclough asked if there was a version that
worked best for the industry. Mr. Hurley replied that, in
the end, both versions accomplish same thing. He thought
that Version "N" had been cleaner than Version "U". The "U"
version required the commissioner to write additional pages
of regulations, ConocoPhillips would need restructuring,
and cost allocations would need review. Overall the "U"
version was messier for the company. However, both versions
keep current businesses operating at the status quo, until
the big gas flows in the big gasline.
Representative Fairclough wondered if the state would
retain the flexibility to change the tax rate for Alaskans
in the future. She requested the industry perspective on
whether there was a "drop-dead" date that would benefit
Alaskans. Mr. Hurley opined that what was designed and
promoted in AGIA as an inducement, was now being described
as something that could change on a whim. Representative
Fairclough added that the understanding had been that there
was a date certain that AGIA anticipated, and now it was
understood that the date still had flexibility to either
raise or lower the gas tax.
3:46:28 PM
Representative Kelly asked if locking in a tax rate now
would be enough for producers to go forward with a gasline.
Mr. Hurley replied no. Representative Kelly perceived that
Alaskans were being told that locking in a rate now would
be ineffective.
3:48:35 PM
Commissioner Galvin clarified why the state might not be
able to raise the tax in the future. He cited the
discussions during the special session on AGIA. At that
time, the administrations recommendation was that the AGIA
tax inducement be made a contractual commitment between the
state and the producers. The recommendation was removed
because the legislature wanted to retain the ability to
change the tax system and disregard what was being offered
during the open season. The Department of Law (DOL)
believed that there may still be an obligation inherent in
the AGIA language. The enactment of AGIA had never stated
that the tax inducement was an absolute "lock-in". The
administration acknowledged that the agreement should have
been contractual.
Co-Chair Hawker requested that Commissioner Galvin explain
the revised fiscal note.
3:51:13 PM
Commissioner Galvin stated that the necessary expenditures
as a result of Version "U" would mandate that the
department develop 2 sets of regulations; one handling cost
allocation, and the other dealing with the allocation of
adjustments to the cost. Based upon information from DOL
and the department's experience with the regulatory
process, the cost estimate generated was $330,000.
Vice-Chair Thomas MOVED to report HCS CS SB 305(FIN) out of
Committee with individual recommendations and the
accompanying new fiscal note.
Representative Joule OBJECTED for the purpose of
discussion.
Representative Joule WITHDREW his OBJECTION.
Co-Chair Hawker OBJECTED for the purpose of discussion.
Co-Chair Hawker closed public testimony.
Co-Chair Hawker WITHDREW his OBJECTION.
There being NO further OBJECTION, it was so ordered.
HCS CSSB 305(FIN) was REPORTED out of Committee with "no
recommendation" and attached new fiscal note by the
Department of Revenue.
3:56:07 PM AT EASE
4:22:16 PM RECONVENED
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