Legislature(1999 - 2000)
03/04/1999 10:07 AM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 58 - OIL & GAS AUDITS Number 0089 CHAIRMAN WHITAKER stated that the agenda for the meeting was over House Bill No. 58, "An Act relating to certain audits regarding oil and gas royalty and net profits and to audits regarding costs relating to exploration incentive credits and oil and gas exploration licenses; and providing for an effective date." Number 0133 KEVIN BANKS, Petroleum Market Analyst, Division of Oil and Gas, Department of Natural Resources, stated that HB 58 transfers the authority to audit royalty and net profit share revenues from the Department of Revenue (DOR) to the Department of Natural Resources (DNR). It is a housekeeping bill that changes what the legislature had enacted in 1980. MR. BANKS further stated that the oil and gas resources that the state owns generate bonuses, rents, royalties and net profit shares. It's the royalties in that profit share that are subject to audit. The DNR also enters into agreements with oil refineries to sell some of their royalty oil, and those contracts occasionally need to be audited. The other responsibilities that the DNR has, that involves auditing, is the provisions to provide for exploration incentive credits. Auditors examine the records of the producers to determine how much was spent on exploration activity allowed under those credits. Those credits are applied toward royalties and taxes to provide the incentives for exploration. Number 0277 MR. BANKS continued, since 1980 the DOR has acted as the audit contractor. The process is as follows; each year the DNR prepares a wish list, prior to the beginning of the fiscal year, and asks the DOR to conduct several audits. As the audit is conducted, the DNR participates, and is frequently called upon for input. When the DOR finishes the audit, the DNR is given the opportunity to review the work and suggest changes. Ultimately, the DOR completes a final audit and issues it to the DNR, who then take it to the lessee to start pursuing the claim. He called attention to the amount of time and costs that go into the process, which includes staff time and photocopying. MR. BANKS stated that in 1980, when the legislature gave the DOR's audit authority to the DNR, there was a lot of overlapping in responsibilities between the agencies. He referred to a brief, titled "DNR Analysis of HB 58", that he sent to the committee, which describes why the overlapping responsibilities occurred. There were two reasons. One, production taxes and royalties were due on all of the production, so there might be some savings gained in conducting a tax audit by gathering information that would be useful for a royalty audit. Two, the way severance, production and royalty taxes were calculated was the same, but now there are some changes. The DNR has entered into a lot of settlement agreements. The lease language that the DNR uses to define the value of royalty has changed and the calculation of royalty values is unique to each of the lessees. On the other hand, the calculation for the value for severance taxes is the same for every lessee. Number 0583 MR. BANKS continued, the economic limit factor (ELF) has contributed to some change in the overlap of responsibility. The ELF means that in some cases no taxes are due, but royalty revenues are still required. MR. BANKS concluded, that by placing the audits back into DNR it would clear up some of the red tape that exists between the departments and lead to more efficiency. The DNR staff is familiar with the process, there is one chain of command guiding the audit and there will be less interdepartmental recording requirements. In this way, the audits will be done more quickly and the information won't become stale. Lastly, the fiscal notes, that have been submitted to the committee, show that three positions will be transferred from the DOR to the DNR at no additional cost. Number 0698 REPRESENTATIVE KEMPLEN asked why the areas for auditing were being limited. He referred to page 4 of HB 58, lines 6 through 8, where it reads (deleted text bracketed), "or memoranda bearing upon tax matters [OR MATTERS RELATING TO OIL AND GAS ROYALTY OR NET PROFITS UNDER CONTRACTS, AGREEMENTS, OR LEASES UNDER AS 38.05]". He said that it seems that a relatively broad authority is being narrowed to focus just on tax matters. If the responsibility is moved from the DOR, whose main mission is to ensure that the state of Alaska gets its fair share of money, to the DNR, whose responsibility is to promote development, there is the risk of producing a situation where the state of Alaska, in its interest to promote development, overlooks some areas having to do with revenue. Number 0847 DAN DICKINSEN, Director, Oil and Gas Audit Division, Department of Revenue, replied that the language that is pertinent to the royalty audits is being removed from the DOR's purview, but the tax audit portion remains. The question of whose looking at DNR and if DNR is suppose to encourage development may need to be looked at. MR. DICKINSON stated that he wanted to talk about audits in general. When an audit is done, the auditor is looking for evidence of a specific assertion. In the royalty audits that the DOR performs, the DOR is basically asking if the royalty payer paid the correct amount under the agreement reached with the department. The DOR has not been asked to ask any of the larger questions , for example, whether or not the agreement set up by the DNR was an appropriate one or whether or not there was too much given away to encourage development. Number 0974 REPRESENTATIVE PHILLIPS said that she has no problem with the intent of the bill, but wanted to bring into question line 3 on page 2 of HB 58, which reads (deleted text in brackets), "The Department of Revenue may obtain from the department [INSPECT ALL REPORTS AND OTHER] information." In the past it has included the word inspect. The troubling issue has to do with confidentiality; information staying within the department. If there is a hard copy it could be used against one company for the benefit of the other company. The confidentiality issue seems to be lessened in the language of HB 58. Number 1052 MR. BANKS stated that in some respects the bill strengthens the confidentiality provisions, at least from the perspective of the DNR. Under the present statute, information can be held confidential by the DNR at the request of the industry, but there is no criminal penalty should that information be revealed. In rewriting HB 58, when an audit is handled, even a royalty audit, there is a criminal penalty imposed on agents of the DNR. Section 2 and 3 of HB 58 change the relationship between the departments to provide for a better flow of information. He asked the legislature to consider that the DNR's job, under the constitution, is to collect revenues and maximize benefits to the people of Alaska, therefore, by pocketing information into two different departments and not letting one review or obtain information that is related to the other business could be a risk. REPRESENTATIVE PHILLIPS said that she feels the information needs to be available to the DNR, but she is still questioning the confidentiality. Number 1177 REPRESENTATIVE PORTER asked Mr. Banks if the industry representatives will be subject to any new requirements in this audit procedure. MR. BANKS replied, no. MR. DICKINSON added that the people who were formerly doing these audits will be in the same positions, so no institutional knowledge will be lost, there will just be a layer of bureaucracy cut out. REPRESENTATIVE KEMPLEN followed up, in Section 5 it reads (deleted text bracketed), "The department may examine the books, papers, records, or memoranda of any person to ascertain the correctness of a return filed or to determine whether a tax [OR A PAYMENT FOR OIL OR GAS ROYALTY OR NET PROFITS SHARES UNDER A CONTRACT, AGREEMENT, OR LEASE UNDER AS 38.05] is due", it seems that the DOR is being limited by the deletion of the language in brackets. He asked if Mr. Dickinson would explain where the issues related to oil and gas royalty or net profit shares will be in the statutes and who will cover that. Number 1333 MR. DICKINSEN said that he did not think the state of Alaska was being limited by the removal of the language, because the language is simply being transferred from AS 43.05 to AS 38.05. There has been some additional change to the language, but the general idea is that anything to do with royalties and net profit shares is being transferred from the DOR to the DNR. REPRESENTATIVE KEMPLEN asked Mr. Dickensen where that transfer is occurring. MR. DICKINSEN referred to page 1, Section 1, and noted that the department being referred to is the Department of Natural Resources. REPRESENTATIVE KEMPLEN asked where the language being deleted from Section 5 is being inserted in Section 1. MR. DICKINSEN said that Representative Kemplen is correct, in that it is not the exact same language, but the phrase that is going to stay in Section 1 is, "royalty and net profits under this chapter and regarding costs related to oil and gas exploration licenses." The intent of the draft was to have them cover the same thing even though they are not the same language, except for the exploration incentive credit, which was not in the old statute. REPRESENTATIVE PHILLIPS commented on the analysis of the fiscal note, saying that it looks like people are getting the idea that results based budgeting is a good thing. CHAIRMAN WHITAKER said that the intent is to hear HB 58 again on Thursday, March 11, 1999, which gives the industry an opportunity to speak with regards to some of the concerns raised in the present meeting. [HB 58 was held over]
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