Legislature(2009 - 2010)BARNES 124
03/26/2010 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SJR27 | |
| SB195 | |
| HB308 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 195 | TELECONFERENCED | |
| + | SJR 27 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 308 | TELECONFERENCED | |
HB 308-OIL AND GAS PRODUCTION TAX
[Contains discussion of HB 337]
1:23:16 PM
CO-CHAIR JOHNSON announced that the next order of business is
HOUSE BILL NO. 308, "An Act relating to the tax rate applicable
to the production of oil and gas; relating to credits against
the oil and gas production tax; and relating to the period in
which oil and gas production taxes may be assessed." [Before
the committee was HB 308, Version 26-LS1328\P, Bullock, 3/17/10,
adopted as a work draft on 3/17/10.]
REPRESENTATIVE SEATON withdrew Conceptual Amendment 1.
CO-CHAIR JOHNSON explained that Conceptual Amendment 1 was
adopted on 3/17/10 and Representative Seaton will be bringing up
another amendment later.
CO-CHAIR JOHNSON moved to adopt Amendment 2, labeled 26-
LS1328\P.2, Bullock, 3/24/10, written as follows [original
punctuation provided]:
Page 9, line 8, following "expenditure":
Insert "incurred after June 30, 2010"
REPRESENTATIVE KAWASAKI objected.
CO-CHAIR JOHNSON stated that Amendment 2 adds an effective date.
1:25:28 PM
CO-CHAIR JOHNSON, in response to Representative Tuck, confirmed
that Conceptual Amendment 1 was withdrawn and Representative
Seaton will be introducing another amendment that is not
conceptual. He reiterated that Amendment 2 would provide an
effective date.
REPRESENTATIVE KAWASAKI maintained his objection. He inquired
about the implication of adding this effective date over the
total bill's effective dates.
CO-CHAIR JOHNSON responded the purpose of this effective date is
to end in the fiscal year so July 1 can be started with a clean
set of taxes and not have overlapping taxation policies.
1:26:46 PM
REPRESENTATIVE KAWASAKI observed that the effective dates in
Sections 18-22 regarding the applicability of these laws is
confusing. He asked whether the regulation propagated by these
would be done by that time and what the impact would be for the
Department of Revenue (DOR) in analyzing how much the tax is.
MARCIA DAVIS, Deputy Commissioner, Office of the Commissioner,
Department of Revenue, replied Amendment 2 would ensure that the
tax credit for well-related expenditures applies to expenditures
that are incurred after June 2010. In order for the Department
of Revenue to identify what will and will not be considered
well-related expenditures, the department will have to
promulgate regulations if nothing else changes in the bill.
However, she said she believes Co-Chair Johnson has another
amendment pending which may clarify the type of costs that would
fall within this credit, so the answer to the question depends
upon what happens with the other amendment.
1:28:23 PM
REPRESENTATIVE KAWASAKI inquired whether the Department of
Revenue would be able to come up with those definitions and the
regulations before that date.
MS. DAVIS answered that the 70-80 days is the absolute minimum
time necessary for moving out a regulation because the
regulation must first be drafted, then 30 days must be allowed
for public comment, followed by another 30 days for the
regulation to become effective. She presumed that if this
passes the department might be able to do it.
1:29:27 PM
REPRESENTATIVE SEATON asked whether the taxpayer's tax year is
July 1 or the calendar year.
MS. DAVIS responded it is the calendar year for the production
tax.
REPRESENTATIVE SEATON speculated this may be problematic because
the state has a profits-based tax and the profits are calculated
on a yearly basis and estimated payments are made on a monthly
basis. He inquired whether this will create a problem for DOR.
MS. DAVIS replied that any time a tax law has two phases in the
midst of a single tax year it is more complicated for both the
department and the taxpayer. While that does not mean it is
insurmountable, it is a challenge to do.
1:31:11 PM
CO-CHAIR NEUMAN asked whether a profits-based tax is the same as
a production tax given that both terms are being used.
MS. DAVIS answered the tax rate is applied to the dollar amount
that is left over after the product is sold and the
transportation and lease expenditure costs, which are all the
costs to produce the oil or gas, are deducted from the price
received. This dollar amount represents what is held by the
company after it has recovered its costs, so by definition that
is the net profit remaining and the tax rate goes against that
net profit. However, the bill uses the term "production tax
value at the point of production" rather than the term "profit".
1:32:51 PM
CO-CHAIR NEUMAN understood Ms. Davis to be saying that in the
bill, expenditures for development are considered to be upstream
development cost. He inquired whether it would also include
midstream or delivery costs.
MS. DAVIS responded both are being talked about. The production
tax liability is determined by applying the tax rate to the
dollar amount that is left over after taking into account the
downstream costs, which are the tanker and pipeline costs, and
the upstream costs, which are all the lease expenditure costs
from out of the ground to the pipeline. A tax credit, which is
a certain percentage of those costs, is applied against the
taxpayer's tax bill. Thus, a certain cost may be counted to
both arrive at the net taxable amount and to create a credit.
1:34:36 PM
CO-CHAIR NEUMAN noted that HB 308 would expand exploration
credits. He asked whether this is a tax against the profits or
a credit that can be used against additional taxes owed.
MS. DAVIS replied this particular provision is a credit that
would be applied against the tax that is owed. In further
response, she said it is a credit against the taxes that would
otherwise be owed.
1:36:16 PM
REPRESENTATIVE KAWASAKI maintained his objection to Amendment 2,
saying that the proposed effective date is much different than
the calendar year dates of taxation, the retroactivity date of
February 28, 2007, and the effective date of 90 days after the
bill goes into law. This creates a confusing situation for the
Department of Revenue, he surmised, especially when there are so
many things at stake. He further commented that if the bill
becomes law, some producers may wait to explore until after June
30, 2010.
CO-CHAIR JOHNSON, in response, inquired whether Representative
Kawasaki thinks the date should be amended to May 30, 2010.
REPRESENTATIVE KAWASAKI answered his other objection is that the
department would be unable to comply with this provision;
additionally, he said he has a general objection to the bill.
1:38:25 PM
DAN E. DICKINSON, CPA, Consultant to the Legislative Budget and
Audit Committee, in response to Co-Chair Johnson, said he does
not have anything to add to the effective date argument. It
would be preferable to have this become effective on the first
of the month rather than the date the bill becomes effective
because that could be the middle of the month, which would
create argument over when something was actually paid for. The
rules are clearest when they are over the division of a year.
The Department of Revenue already has rules to deal with what
happens when it occurs on the first of the month. He said the
reason for the bill's wide range of other effective dates is
that interest is calculated on a quarterly basis so the
provisions would affect interest on the first day of the
quarter, and progressivity is calculated on a monthly basis so
the provisions would affect progressivity on the first day of
the month.
1:39:32 PM
REPRESENTATIVE SEATON stated he has no problem with the
effective date provided that Amendment 2 will not prohibit
discussion of how the bill would have affected state revenue in
the years since Alaska's Clear and Equitable Share (ACES) went
into effect.
CO-CHAIR JOHNSON responded he does not intend to limit debate on
HB 308 in any way.
REPRESENTATIVE KAWASAKI maintained his objection.
CO-CHAIR JOHNSON, in response to Representative Guttenberg,
confirmed that without Amendment 2 the bill would go into effect
90 days after being signed by the governor.
A roll call vote was taken. Representatives Seaton, Edgmon,
Guttenberg, Tuck, P. Wilson, Olson, Neuman, and Johnson voted in
favor of Amendment 2. Representative Kawasaki voted against it.
Therefore, Amendment 2 was adopted by a vote of 8-1.
1:41:57 PM
CO-CHAIR JOHNSON moved to adopt Amendment 3, labeled 26-
LS1328\P.3, Bullock, 3/25/10, written as follows [original
punctuation provided]:
Page 9, lines 24 - 31:
Delete all material and insert:
"(3) In this subsection, "well-related
expenditure" means a lease expenditure that is
(A) directly related to a well; a lease
expenditure is directly related to a well if,
(i) during exploration and development, the
lease expenditure is a qualified capital expenditure
and an intangible drilling and development cost
authorized under 26 U.S.C. (Internal Revenue Code), as
amended, and 26 C.F.R. 1.612-4, regardless of the
elections made under 26 U.S.C. 263(c); in this sub-
subparagraph "exploration and development" includes
well sidetracking, well deepening, well completion or
recompletion, well workover regardless as to whether
the well is or has been a producing well,
stratigraphic test wells, and injection wells, except
that "exploration and development" does not include
disposal wells;
(ii) during production, the lease
expenditure is an expenditure that is intended to
increase, maintain, enhance, or mitigate the decline
of well production and is directly related to the
processes of operating a well and moving fluids to the
assembly of valves, pipes, and fittings used to
control the flow of oil and gas from the casinghead,
but does not include the processes of gathering,
separating, and processing well fluids downstream from
that assembly;
(B) for seismic work conducted within the
boundaries of a production or exploration unit; or
(C) an overhead expenditure authorized
under AS 43.55.165(a)(2) and calculated on well-
related lease expenditures allowed under (A) and (B)
of this paragraph."
REPRESENTATIVE KAWASAKI objected.
1:42:14 PM
CO-CHAIR JOHNSON explained that Amendment 3 defines well-related
expenditures and, for clarification and consistency, it adopts
the same language that was included in a previous bill regarding
gas storage. He invited Ms. Davis to speak to the amendment.
MS. DAVIS deferred to Mr. Dickinson.
MR. DICKINSON said Amendment 3 is based on the definition that
was in HB 280, although there are some changes between that bill
and HB 308. The idea is to draw a bright line rather than
having a general definition that states "well-related
expenditures", for which the Department of Revenue would then
have to take public testimony and craft a definition.
[Subparagraph (A)(i)] would use the bright line in federal tax
law called intangible drilling and development costs. During
exploration and during development, something that qualifies as
an intangible drilling and development cost would be considered
a well-related expense and would include: well sidetracking,
well deepening, well completion or recompletion, and well
workover. When something is going to be part of a taxpayer's
federal tax return, the taxpayer can take it as part of the
credit and the state would be able to go back and check on this.
1:44:35 PM
MR. DICKINSON said subparagraph (A)(ii) would provide that
during production a lease expenditure would be those things that
are designed to enhance productivity. It draws the line that
the credit would not apply once the well fluids hit the surface
and move into processing facilities. While the Department of
Revenue would write regulations, he said he thinks in general
this credit could be effective immediately because producers
would have a very good sense of what would be in and what would
be out since they know what the federal tax rule is.
MR. DICKINSON stated subparagraph (B) clarifies that seismic
work undertaken within a unit is included because, generally,
seismic work within a unit is well-related. This provision
complements the exploration credits for seismic work conducted
outside the boundaries of a production or exploration unit that
are provided under AS 43.55.025.
1:46:53 PM
MR. DICKINSON said subparagraph (C) simply fits this into the
same category as the way other things are handled. For example,
indirect costs are not allowed, but once the direct costs are
known there is a markup on that. The size of that markup is
determined by the Department of Revenue under AS
43.55.165(a)(2), which he said he believes is currently at 4.5
percent. Thus, instead of fighting about whether a particular
support cost is part of this, a company would just take its
direct costs and multiply them by 4.5 percent. Although
Amendment 3 is longer than the existing language in Version P,
it will give direction and make it clearer as to what the
legislature had in mind.
CO-CHAIR JOHNSON clarified that this is the well workover
section that Governor Parnell has in his legislation [HB 337],
and he wants to ensure that the administration is comfortable
with this definition.
1:48:10 PM
MS. DAVIS, in response to Representative Kawasaki, confirmed
this provision for well-related expenditure would apply to new
wells, existing wells, and well workovers because the intent is
to capture the phases of the life of a well. [Subparagraph
(A)(i)] would focus on the exploration and development phase of
locating and drilling a well. Subparagraph (A)(ii) would focus
on production of the well, but what would be covered under the
various categories is different. The governor's bill would add
a category for infill drilling because the current drill credit
in the exploration section requires that the drilling be so many
miles outside existing units, although infill drilling qualifies
for 20 percent capital credit under AS 43.55.023. In terms of
creating an enhanced credit for that type of infill work, this
is similar to the governor's bill but a little broader.
1:49:41 PM
REPRESENTATIVE KAWASAKI asked what the reason would be for not
wanting to give infill credits and having credits apply only for
outside of the field.
MS. DAVIS responded that when ACES was considered and passed, it
was thought that the 20 percent [capital] credit would be
adequate for work within the unit and that the enhanced credit
for exploration was necessary because of the risk. Kuparuk and
Prudhoe Bay produce the lion's share of Alaska's production and
revenue stream and those declining fields may require more
extraordinary costs and efforts to continue their productivity.
Since the passage of ACES, the question has become why the state
would not want to also incentivize some of those in-field
activities because that would have the same, if not a more
immediate, effect on production.
1:51:19 PM
REPRESENTATIVE KAWASAKI understood that subparagraph (B) would
provide for seismic work conducted within the boundaries of a
unit, not outside.
CO-CHAIR JOHNSON said he believes Mr. Dickinson was explaining
that seismic work outside the field is different than inside the
field because seismic work inside a field is to enhance
production and seismic work outside is to find.
MR. DICKINSON stated correct.
1:52:33 PM
REPRESENTATIVE GUTTENBERG inquired whether the enhancement under
subparagraph (B) would be for a specific well, specific groups
of wells, wells not drilled yet, or wells that might be drilled
on other pads because of a redefined field.
MS. DAVIS understood that seismic work is often used in
recompletions of an existing well bore to help redirect where to
make another lateral completion from the bottom of the well
bore. She further explained that there are fields within
already-producing units where the resource is fractured and
contained within lenses. She said she believes the Department
of Natural Resources (DNR) often considers such production to be
contiguous and part of the same unit and the seismic can be used
to target these smaller pockets.
1:53:55 PM
REPRESENTATIVE GUTTENBERG asked whether there is a definition of
seismic given that it can be two dimensional, three dimensional,
or by explosives or vibrator.
MS. DAVIS replied she does not believe there is a definition in
the state's tax code and she thinks that during the exploration
phase the only type of costs that would be eligible for this
credit are those that qualify under the Internal Revenue Service
definition of intangible drilling cost. She said she does not
think production is really going to apply in this piece because
it is talking about existing production. The way this is
written, development would more likely involve an existing field
and continued development and access to new parts of the
existing reservoir or new reservoirs. She said she therefore
thinks the seismic is going to be tied to the exploration and
development phase.
1:55:16 PM
REPRESENTATIVE GUTTENBERG inquired whether current state statute
deals with well-related expenditures in any way.
MS. DAVIS answered this is a new term of art. For credits under
AS 43.55.023, the term of art is qualified capital expenditure
and both the statute and the department's regulations have
defined that. For credit under AS 43.55.025, which is existing
exploration, the statute defines categories of costs that are
allowed to receive that credit and these categories include both
some capital and some operating types of expenses. However,
this proposed credit would create a new category of expenses.
1:56:07 PM
REPRESENTATIVE GUTTENBERG, regarding subparagraph (A)(i), asked
whether the intangible drilling cost under IRS code is
specifically for exploration and development costs, or whether
there are other definitions under the IRS code or other
definitions outside of the IRS code that the committee might
want to consider.
MS. DAVIS responded that Amendment 3 first starts with what
would be allowed as a lease expenditure; it then goes to a
subset of allowed lease expenditures that must qualify as
intangible drilling and development costs. She said her
understanding is that intangible drilling and development costs
are a circumscribed set of cost items and that a large body of
law has been worked up that makes it clear what those costs are.
MR. DICKINSON added he is unaware of any other definitions,
although he is sure there are other definitions of what well-
related costs are. Because this is a tax definition there are a
lot of court cases that have clearly set the boundaries in a tax
context. It therefore makes sense to go to this set of pre-
existing definitions.
1:57:53 PM
REPRESENTATIVE GUTTENBERG inquired whether anything has been
left out of Amendment 3 for which a deduction could be given.
MS. DAVIS replied that this particular subset of lease
expenditures allowed during production is narrowly circumscribed
in the amendment by virtue of having to be related to the
processes of operating a well and moving fluids to the wellhead.
By excluding the processes listed on page 1, lines 22-23, a line
has been drawn at the wellhead assembly which says the costs
incurred upstream of that will not be taken into account, but
the costs downstream of that are included. So, yes, absolutely,
there are things upstream that the committee could consider, but
this is a fairly clear line in the sand.
1:59:19 PM
REPRESENTATIVE GUTTENBERG, given that a wellhead or Christmas
tree might have a well house on top, asked how downstream is
defined.
MS. DAVIS answered the language talks about the assembly of
valves, pipes, and fittings used to control the flow of oil and
gas from the casinghead, so it defines what is being called the
assembly. She thus assumed that "that assembly" on line 23 of
the amendment refers to the assembly described in the lines
above it. She said she thinks it would be interpreted by
Department of Revenue tax specialists as stopping at wherever
the valves, pipes, and fittings that control the flow stop.
CO-CHAIR JOHNSON added that the intention is to stop once it
gets above ground, so this is trying to define that as tightly
and narrowly as possible.
2:00:44 PM
REPRESENTATIVE P. WILSON inquired whether every type of well
there is has been named in subparagraph (A)(i).
MS. DAVIS responded there could conceivably be an injector well,
which is not literally listed, but it should fit within this
description.
MR. DICKINSON corrected Ms. Davis's statement by clarifying that
injection well is included in subparagraph (A)(i). A difference
between the governor's bill and this is that the governor's bill
would exclude service wells, and service wells include injectors
under Alaska Oil and Gas Conservation Commission (AOGCC)
regulations. Amendment 3 is therefore a little broader than the
governor's bill because it includes injection wells. One issue
is how to minimize conflicts when drawing clean lines. For
example, some wells are specifically drilled as injection wells,
but a production well may be turned into an injection well when
that area is no longer producing. This subparagraph makes it
clear that injection wells would be allowed.
2:02:35 PM
REPRESENTATIVE SEATON asked what the distinction is between an
injection well and a disposal well.
MS. DAVIS replied that water or a miscible fluid is injected
into injector wells to enhance or drive production. A disposal
well is a type of injection well used to get rid of something,
such as drill cuttings, mud, or water for which there is no
useful purpose, and a disposal well does not enhance production.
REPRESENTATIVE SEATON surmised that the disposal of carbon
dioxide, water, or natural gas would be considered an injection
well under the terminology of Amendment 3, and not an injection
well for mud, chips, or something else that does not pressurize
the field in some way.
MS. DAVIS answered as long as there is some production enhancing
aspect to the injection, the department would consider it to be
an injector well that is allowed. The purpose of the injection
would define whether the material is being disposed.
2:04:45 PM
REPRESENTATIVE SEATON presumed there is no way for either the
Department of Revenue or the Department of Natural Resources to
determine whether the disposal of carbon dioxide is to
pressurize the field or to get rid of it.
MS. DAVIS responded that the location of the bottom hole
relative to the reservoir makes it very clear whether an
injector well is being used for pressurizing or disposal.
2:05:28 PM
REPRESENTATIVE SEATON understood that subparagraph (A)(ii)
relates to the normal operation of the field and giving a tax
credit for anything below the surface.
MS. DAVIS replied that there is a more nuanced approach to this
because this is a part of the definition that was included in
HB 280 in a nod to the governor's concern that a credit be given
to get something. The design here is not to give a credit to
someone who tinkers with the wellhead but does nothing to stem
the normal decline of that well production. Rather, this is
designed to target those activities that try to improve the
production rate above what it would be if nothing was done.
MR. DICKINSON added that when he gives a presentation he always
displays a graph depicting the amount of decline in Alaska's
production. He said Ms. Davis's point is that if well
production is maintained, the line in the graph would be flat
rather than declining by 6-7 percent every year. So, that is
the why the term "maintain" is used in Amendment 3.
2:08:18 PM
REPRESENTATIVE SEATON noted that every field on the North Slope
is in decline, and asked whether there is any time that it could
be said a producer is not attempting to maintain production
above what it would otherwise be if nothing is done.
MR. DICKINSON answered the intent is to avoid just that kind of
dispute by creating a rule that says any time new money is spent
or invested to get oil out of the ground, the below-ground
portion of that will be included. The costs for central gas
facilities, gas compression plants, flow stations, and gathering
centers are excluded from this. The line has been drawn to
specifically aim for the well costs.
2:10:19 PM
CO-CHAIR JOHNSON inquired whether Mr. Dickinson or Ms. Davis
knows of an oil company that has spent money to keep production
at the same decline level.
MR. DICKINSON pointed out that there was no decline after 1999
because a lot of money was spent to simply not decline further.
Generally, the reason a producer invests is to get oil out and
if that investment does not get more production then that
investment will not be made.
CO-CHAIR JOHNSON said his hope is to get more production.
2:11:05 PM
REPRESENTATIVE TUCK asked whether a well recompletion is
different from a well workover.
MS. DAVIS understood that a recompletion is when the well has
been drilled to the targeted zone but the producer believes the
well's performance is suboptimal and therefore chooses to
recomplete the well at a deeper or shallower depth. In further
response, she said she thinks a well workover under Amendment 3
would include currently producing wells and wells that have been
suspended. The presumption is that the well was drilled and
producing at one time, and whether production has stopped or
not, the provision is intended to cover well workover costs. In
response to another question, she confirmed that tax credits for
a well workover could be for re-opening a well that had been
shut down or a recompletion by drilling down further.
[Co-Chair Johnson passed the gavel to Co-Chair Neuman.]
2:13:11 PM
REPRESENTATIVE TUCK requested a definition of stratigraphic test
well.
MS. DAVIS described a stratigraphic well as one that is drilled
solely for the purpose of ascertaining data. She said this is
defined in various locations, one of which she thinks is AS
43.55.025. The challenge is that that kind of well can qualify
as an intangible drilling and development cost if it is capable
of transporting hydrocarbon fluids should they be encountered.
Thus, it is possible to have a stratigraphic well that yields
both data and production.
[Co-Chair Neuman returned the gavel to Co-Chair Johnson.]
2:14:42 PM
REPRESENTATIVE TUCK inquired whether a stratigraphic test well
could end up becoming a disposal well.
MS. DAVIS replied it could, but it would be unlikely because
most disposal wells are designed according to what will be
disposed as far as the casing size, which usually has to be
large for disposal. Also, the location to which a disposal well
goes has to be carefully selected because it must be approved by
various environmental agencies and demonstrated that the
drilling is to a location that cannot access drinking water or
be susceptible to leaking.
2:15:31 PM
REPRESENTATIVE TUCK asked whether a disposal well is the only
exception to any type of exploration and development.
MS. DAVIS answered she cannot think of anything else that would
be well related. As long as something fits within the
definition of being a lease expenditure and meets the criteria
of being an intangible drilling and development cost, that
should pretty much exclude just disposal wells.
MR. DICKINSON agreed that that summarizes the kinds of wells.
He added there are some wells for which a different credit would
be used. For example, there is a 40 percent exploration credit
for wildcat wells more than 25 miles from an existing unit or
other drilling location. If 30 years earlier a well had been
drilled closer than that, then this would be the pertinent place
where the credit would go.
CO-CHAIR JOHNSON stated Amendment 3 is a conforming amendment
and is the same language for defining wells that was adopted a
week ago [in HB 280]. He said he would like the committee to
decide whether it wants consistent language in the bill.
2:17:39 PM
REPRESENTATIVE SEATON inquired whether the state receives the
data for credits given under AS 43.55.025 for the North Slope.
MS. DAVIS responded yes.
REPRESENTATIVE SEATON asked whether the data would be received
under this provision.
MR. DICKINSON replied not in this definition, but page 9 where
Amendment 3 would go, lines 19-23, would require that the
producer agree in writing to the terms and submit the data to
receive the credit. So, yes, all the terms that apply to the
exploration data would apply to anything that is done here.
REPRESENTATIVE SEATON noted that the state allows deductions for
an amount of overhead and inquired whether there are any other
places where credit is given for overhead.
MS. DAVIS answered no, this would be the only credit she is
aware of that would have an allowance for overhead.
2:19:06 PM
REPRESENTATIVE KAWASAKI maintained his objection to Amendment 3.
REPRESENTATIVE P. WILSON asked whether there is a deduction for
overhead anywhere else.
MS. DAVIS responded yes, and recalled her answer to Co-Chair
Neuman about how transportation costs and lease expenditures are
subtracted from the selling price of the product, and that one
of the elements of lease expenditures is overhead. The taxpayer
recovers 4.5 percent of all direct costs as its overhead, which
is deducted before the department comes up with the net
remaining amount, called the production tax value, against which
the tax is applied.
MR. DICKINSON added that if HB 280 becomes law, a deduction will
be there as well; however, Ms. Davis is correct that right now
there is not.
REPRESENTATIVE P. WILSON surmised this would allow a taxpayer to
deduct the overhead twice.
MS. DAVIS replied yes, the overhead as well as the underlying
cost because all of those get deducted as lease expenditures to
arrive at the net amount. The beauty of credits is that the
taxpayer receives a double bang for its buck.
2:20:59 PM
REPRESENTATIVE EDGMON inquired whether the Department of Revenue
supports Amendment 3.
MS. DAVIS answered the department supports the concept of having
a credit similar to that included in the governor's bill for
infill drilling expenditures. While HB 308 is not the
administration's bill, it has similar elements.
REPRESENTATIVE EDGMON asked whether this language is more
aggressive than the Department of Revenue and the governor would
desire.
MS. DAVIS responded there are a few places where it goes further
than the governor's bill. As far as having a credit for that
type of activity, the governor is supportive. Speaking just to
Amendment 3, she said she thinks the governor could live with
this type of credit.
2:22:26 PM
REPRESENTATIVE KAWASAKI maintained his objection.
A roll call vote was taken. Representatives Edgmon, P. Wilson,
Olson, Neuman, and Johnson voted in favor of Amendment 3.
Representatives Guttenberg, Kawasaki, Tuck, and Seaton voted
against it. Amendment 3 was therefore adopted by a vote of 5-4.
2:23:20 PM
REPRESENTATIVE SEATON moved to adopt Amendment 4, labeled 26-
LS1328\P.4, Bullock, 3/25/10, written as follows:
Page 2, following line 22:
Insert a new bill section to read:
"* Sec. 5. AS 43.55.011(f) is repealed and
reenacted to read:
(f) This subsection applies to a taxpayer that
produces more than 100,000 BTU equivalent barrels of
oil and gas a day north of 68 degrees North latitude.
Notwithstanding any contrary provision of law, a
producer may not apply tax credits to reduce the
producer's total tax liability under (e) of this
section for oil and gas produced from all leases or
properties within the unit or nonunitized reservoir
below 10 percent of the total gross value at the point
of production of that oil and gas. If the amount
calculated by multiplying the total tax rate
determined under (e)(1) and (g) of this section times
the total production tax value of the oil and gas
taxable under (e) of this section produced from all of
the producer's leases or properties is less than 10
percent of the total gross value at the point of
production of that oil and gas, the tax levied by (e)
of this section for that oil and gas is equal to 10
percent of the total gross value at the point of
production of that oil and gas."
Renumber the following bill sections accordingly.
Page 4, lines 6 - 23:
Delete all material and insert:
"(B) for oil and gas produced from leases
or properties subject to AS 43.55.011(f), 1/12 of the
amount due for the calendar year of the tax amount due
under AS 43.55.011(f) [THE GREATEST OF
(i) ZERO;
(ii) ZERO PERCENT, ONE PERCENT, TWO
PERCENT, THREE PERCENT, OR FOUR PERCENT, AS
APPLICABLE, OF THE GROSS VALUE AT THE POINT OF
PRODUCTION OF THE OIL AND GAS PRODUCED FROM ALL LEASES
OR PROPERTIES DURING THE MONTH FOR WHICH THE
INSTALLMENT PAYMENT IS CALCULATED; OR
(iii) THE SUM OF 25 PERCENT AND THE TAX
RATE CALCULATED FOR THE MONTH UNDER AS 43.55.011(g)
MULTIPLIED BY THE REMAINDER OBTAINED BY SUBTRACTING
1/12 OF THE PRODUCER'S ADJUSTED LEASE EXPENDITURES FOR
THE CALENDAR YEAR OF PRODUCTION UNDER AS 43.55.165 AND
43.55.170 THAT ARE DEDUCTIBLE FOR THOSE LEASES OR
PROPERTIES UNDER AS 43.55.160 FROM THE GROSS VALUE AT
THE POINT OF PRODUCTION OF THE OIL AND GAS PRODUCED
FROM THOSE LEASES OR PROPERTIES DURING THE MONTH FOR
WHICH THE INSTALLMENT PAYMENT IS CALCULATED];"
Page 10, line 23:
Delete "sec. 8"
Insert "sec. 9"
Page 10, line 31:
Delete "sec. 8"
Insert "sec. 9"
Delete "sec. 9"
Insert "sec. 10"
Page 11, line 1:
Delete "sec. 10"
Insert "sec. 11"
Page 11, line 5:
Delete "sec. 8"
Insert "sec. 9"
Page 11, line 7:
Delete "sec. 9"
Insert "sec. 10"
Page 11, line 8:
Delete "sec. 10"
Insert "sec. 11"
Delete "sec. 13"
Insert "sec. 14"
Page 11, line 11:
Delete "secs. 1, 2, 4, and 6 - 19"
Insert "secs. 1, 2, 4, and 7 - 20"
Page 11, line 13:
Delete "AS 43.55.011(g)"
Insert "AS 43.55.011(f), as repealed and
reenacted by sec. 5 of this Act, and AS 43.55.011(g)"
Delete "sec. 5"
Insert "sec. 6"
Delete "takes"
Insert "take"
Page 11, line 14:
Delete "secs. 1, 2, 4, and 6 - 19"
Insert "secs. 1, 2, 4, and 7 - 20"
Page 11, line 15:
Delete "secs. 20 and 21"
Insert "secs. 21 and 22"
CO-CHAIR JOHNSON objected.
The committee took an at-ease from 2:23 p.m. to 2:27 p.m.
2:27:09 PM
REPRESENTATIVE SEATON moved to adopt Conceptual Amendment 1 to
Amendment 4, written as follows:
Page 1, line 8:
Delete "within the unit or nonunitized reservoir"
Page 1, lines 10 and 11:
Insert "producer's total tax liability under (e)
of"
Page 1, line 12, [after] "section":
Delete "produced from all of the producer's"
Insert "for oil and gas produced from"
CO-CHAIR NEUMAN objected.
CO-CHAIR JOHNSON objected.
2:27:48 PM
REPRESENTATIVE SEATON explained that Conceptual Amendment 1
[adopted at the previous meeting and withdrawn at the start of
today's meeting] had provisions that delineated by field.
Several sections in that amendment were by taxpayer's producing
over 100,000 British Thermal Unit (BTU) equivalent barrels of
oil and gas per day, and in Amendment 4 these sections did not
get changed to the tax liability. On page 1, line 8, "within
the unit or nonunitized reservoir" should be deleted because
Amendment 4 is now talking about a taxpayer instead of a
taxpayer's production from a field or unit. This is the same
throughout, so Conceptual Amendment 1 to Amendment 4 would
delete the references to a field or unit and insert the
producer's total tax liability.
2:28:59 PM
CO-CHAIR NEUMAN noted that oil is currently selling on the
market for about $80 [West Coast price per barrel] and gas is
selling at about $4 [per thousand cubic feet]. He inquired
whether those prices would be considered the gross values of
that oil and gas.
MS. DAVIS responded no, the gross value is a term of art used at
the point of production, which on the North Slope is Pump
Station 1. The gross value is determined by taking the selling
price and deducting the marine and pipeline transportation costs
that are incurred starting at Pump Station 1. In further
response, she said the Department of Revenue uses roughly $6.50
to $7.00 for the transportation cost, so the gross value of the
oil in this example would be $73 [per barrel].
2:31:41 PM
REPRESENTATIVE SEATON, in response to Representative P. Wilson,
again explained that Conceptual Amendment 1 to Amendment 4 is
conforming language to ensure it is the taxpayer's liability
that is talked about and not oil and gas produced from a
specific unit or reservoir.
CO-CHAIR JOHNSON withdrew his [objection to the amendment to the
amendment], but said this does not in any way indicate he
supports the pending amendment.
REPRESENTATIVE TUCK objected to ask if the reason for the
amendment to the amendment is because there could be more than
one taxpayer on a particular reservoir.
REPRESENTATIVE SEATON responded that rather than a specific unit
or field, what is being talked about is a taxpayer that produces
over 100,000 [BTU equivalent barrels] in total production and
this total production is the taxpayer's tax base.
2:33:27 PM
CO-CHAIR NEUMAN withdrew his objection. There being no further
objection, Conceptual Amendment 1 to Amendment 4 was adopted.
CO-CHAIR JOHNSON maintained his objection to Amendment 4.
REPRESENTATIVE SEATON stated that industry has asked to receive
more of the upside through reduced progressivity or other means
of taking less tax on the upside. Under ACES, a balance was
struck using a floor mechanism whereby the state took the risk
through no taxes on the downside in return for taking more tax
on the upside. Now, the legislature is recalculating the taxes
and credits so that industry receives more of the upside. To
restore the balance, Amendment 4 would provide that the state
receive tax when prices are low.
2:35:55 PM
CO-CHAIR NEUMAN inquired what the BTU equivalent is for a
standard cubic foot of methane.
MS. DAVIS responded the amount of gas it takes to create 6,000
BTU's of energy is called one barrel equivalent, although the
conversion factor is not exactly 1 because it depends upon the
gas field.
2:37:03 PM
CO-CHAIR NEUMAN pointed out that in the coming years as more and
more miscible fluids are injected into wells to keep up oil
production, the oil will become less and less valuable because
of its decreased BTU value. He further noted that propane has a
BTU value two and a half times that of methane, so a 100,000 BTU
equivalent of gas could be as little as 10-14 cubic feet of gas.
MS. DAVIS replied she thinks that as used in Amendment 4,
100,000 BTU equivalent barrels of oil and gas refers to the
definitional section and is not taking the BTU in isolation.
Rather, BTU equivalent barrel is a term of art, and for gas that
will always be the amount of gas that has a heating value of 6
million BTUs. A BTU equivalent barrel equilibrates the
differences between propane, natural gas liquids, and liquefied
natural gas.
2:39:35 PM
CO-CHAIR NEUMAN said [Amendment 4] is about all oil and gas
produced north of 68 degrees."
MS. DAVIS answered it applies only to the North Slope, as she
reads it, and it only applies to a taxpayer that on any average
day of a year has at least 100,000 barrels of oil equivalent in
production credited to its account. This minimum tax would only
apply to those specific tax payers regardless of whether this
production is all oil, or a mixture of oil and gas, or all gas.
2:40:22 PM
CO-CHAIR NEUMAN stated that would be just about all producers
north of 68 degrees.
MS. DAVIS responded that this minimum tax would apply only to a
taxpayer whose various interests in the North Slope added
together average 100,000 barrels of oil equivalent a day. Under
AS 43.55.024, a producer eligible for the $6 million credit is
defined as one that does not have more than 50,000 barrels of
equivalent average per day. This statute also has a $12 million
credit and to qualify for that credit a producer cannot have
more than 100,000 barrels of oil equivalent a day. She said she
therefore thinks the 100,000 was intended to draw a line between
the last entity that could be a small producer and the others.
MR. DICKINSON interjected that three producers would currently
meet that qualification - "ExxonMobil, BP, and ConocoPhillips."
No other producer comes close.
2:42:11 PM
CO-CHAIR NEUMAN offered his belief that the language [in
Amendment 4, page 1, lines 6-7] that states "Notwithstanding any
contrary provision of law, a producer may not apply tax credits
to reduce the producer's total tax liability under (e) of this
section...." would basically kill HB 308.
MS. DAVIS explained (e) is a reference to AS 43.55.011 and deals
with the base tax and progressivity tax, so (e) is the tax
liability. This first part of Amendment 4 would provide that a
large producer's tax liability under the production tax for its
North Slope oil cannot be less than 10 percent of the gross
value at the point of production, a large producer being one
with more than 100,000 barrels [of oil equivalent a day]. The
second part of Amendment 4 is about credits and would provide
that credits can draw down a large producer's tax liability no
further than 10 percent of the gross value. Thus, credits could
not be used to bring a large producer's tax liability down to
zero, and any credits that could not be used would then be
carried forward.
2:44:29 PM
CO-CHAIR NEUMAN noted that Amendment 4 would insert a new
Section 5 that would repeal AS 43.55.011(f) and reenact it with
new language. He read this new Section 5 aloud as it would read
amended by Conceptual Amendment 1. He understood that if $80 is
the oil price and the transportation cost is deducted to arrive
at a gross value of $73 at the point of production, then no more
than $7.30 could be taken off of that for the total tax on that
produced value.
MS. DAVIS replied it is correct that $7.30 is 10 percent of the
gross value; however, that represents the minimum tax that would
be paid by one of these large producers for its production. If
ACES is higher, this does not get implicated; but, if for some
reason the tax liability is calculated using ACES, it cannot
fall below the $7.30. Likewise, a producer could not have a
higher tax liability under ACES and then apply all its credits
to draw it down below $7.30. The $7.30 would be the floor in
tax that would be paid on those barrels at $80 West Coast price.
2:48:36 PM
CO-CHAIR NEUMAN understood "Notwithstanding any contrary
provision of law" to be royalties.
MS. DAVIS answered no, it would be the production tax section.
CO-CHAIR NEUMAN reiterated his belief that being unable to use
credits to reduce the tax liability would kill HB 308.
MS. DAVIS responded the provision does not say that credits
cannot be used, it says the credits cannot be used to drive down
the tax liability to less than $7.30 per barrel in this
hypothetical example.
MR. DICKINSON agreed with Ms. Davis's characterization of how
this provision would work. He noted a minor correction that
could be made to the amendment, explaining that the law being
replaced talks about tax subject to (i) and tax subject to (o).
As currently framed, Amendment 4 would put a double tax on gas
used in the state because it is not exempted from one. That is
a technicality because here the liability under (e) is compared
against the total gross value at the point of production. So,
gross value at the point of production would include everything,
while the value under (e) does not include a tax on the royalty
portion of private royalties and gas used in the state. He said
it is a very minor point because very few dollars are attached
to it, but it is one correction.
2:50:52 PM
CO-CHAIR JOHNSON asked whether "few dollars" means $100 million
or $10 million.
MR. DICKINSON replied that at $73 the floor typically would not
apply, but it would if oil prices declined to the $10 range. He
said he believes this would only occur when there are very low
prices, like the low prices for gas now, so what is being talked
about is hundreds of thousands of dollars. However, for several
small taxpayers it would be critical that they understand what
their obligation was.
CO-CHAIR JOHNSON clarified that Amendment 4 would take the floor
out and protect the state on the down side while sharing more on
the upside. He asked whether it is correct that the downside
would be around $10.
MR. DICKINSON answered it would occur when the gross value at
the point of production is about 1.6 times the lease costs. For
example, at a lease cost of $20 this provision would be
triggered at 1.6 times $20, which would be about $32.
Therefore, this would not be triggered at today's prices of
nearly $80, but it would be triggered earlier than $10.
2:52:46 PM
MR. DICKINSON, in response to Representative Seaton, explained
that for the $26 figure used in Department of Revenue
publications, $20 was the upstream cost and $6 was from the
destination value in the Lower 48 to the gross value at the
point of production.
REPRESENTATIVE SEATON, in response to Co-Chair Johnson,
confirmed that the remaining language in Amendment 4, page 2,
line [19] onward, is conforming amendments.
2:54:29 PM
CO-CHAIR JOHNSON withdrew his objection.
CO-CHAIR NEUMAN maintained his objection, saying he does not
believe the changes made by Amendment 4 are appropriate.
CO-CHAIR JOHNSON said he will look into this, but at his point
he does not have a terrible objection to the amendment.
A roll call vote was taken. Representatives Guttenberg,
Kawasaki, Tuck, P. Wilson, Olson, Seaton, Edgmon, and Johnson
voted in favor of Amendment 4, as amended. Representative
Neuman voted against it. Therefore, Amendment 4, as amended,
was adopted by a vote of 8-1.
2:56:39 PM
CO-CHAIR JOHNSON opened public testimony on HB 308.
MS. DAVIS offered testimony on behalf of the Department of
Revenue. She provided a 5-page handout and said that the last
page entitled, "Comparison of Progressivity Impacts," dated
2/24/2010, captures the upside that would be shifted back to
producers just by the proposed progressivity change. She noted
that the calculations for fiscal years 2008 and 2009 are based
on actual data and the calculations for fiscal years 2010, 2011,
and 2012 are based on the department's fall 2009 revenue
forecasts. The column for Version E shows the impact of
changing the progressivity from 0.4 to 0.2 percent. The column
for Version P shows the impact of keeping the progressivity
curve at 0.4 percent but starting the progressivity after $30.
The numbers in these columns are the reduction in current
production tax revenue that the state would receive during those
fiscal years; the figures are expressed in millions of dollars
as well as percentages. She related that the administration
under the governor is keen to give credits if the state will
receive value in the form of increased production or increased
employment, but the change in progressivity under HB 308 is not
necessarily tied to those elements.
2:59:35 PM
MS. DAVIS said another area of concern for the Department of
Revenue is the interest rate which the bill would set at 3
percent above the Federal Reserve rate. With the Federal
Reserve rate currently wavering between 0.5 and 0.75 percent,
DOR is very much concerned that the state may not get paid
because most companies could not borrow money at 3.75 percent;
if there are disputes or issues the companies will hang on to
the money and potentially make money on the difference. If the
11 percent rate is changed, she said the department would
suggest adjusting the rate to 5 percent.
MS. DAVIS, in regard to the statute of limitations, related she
has received calls from a company that is very anxious to get
its credits processed and cashed out. The company is moving
from the exploration and development phase to production, but
needs the cash flow to do so. Unfortunately, the auditor who
has the account for that company is tied up trying to complete a
three-year statute of limitation, so she must tell this company
that it will have to wait for its credits to be processed. She
cautioned that if HB 308 passes and all of the six-year statute
of limitations become three-year, all the efforts to create
credits for returning money back to investors will not be
realized because the department does not have the manpower to
process a three-year audit limitation and get the credits out
because both are done by the same people. She said she could
hire more staff if it was politically popular and financially
doable, but that is not the situation right now.
CO-CHAIR JOHNSON stated he is "not wrapped around the axle on
the statute of limitations" and if the bill passes out of this
committee he will work with the House Finance Committee in this
regard to help provide the department what it needs.
3:02:28 PM
MS. DAVIS, in response to Representative Seaton, explained that
the $300 million in impact for Version P in the fiscal year 2010
[page 5 of Ms. Davis's handout] represents actual data for the
month of January and the other 11 months are what were
forecasted for fall 2009.
REPRESENTATIVE SEATON observed that over the past three years,
Version P would have reduced the state's revenue by over $1.7
billion in actual income. In response to Co-Chair Johnson, he
pointed out that the chart compares the impacts of Version E and
Version P to current law under ACES.
3:04:03 PM
REPRESENTATIVE SEATON further observed that the chart does not
include the impact to state revenue of the proposed credits;
thus, the total decrease in revenue to the state from HB 308
would be well over $2 billion. He pointed out that there has
been no identification as to what would be cut from the state's
budget as a result of this revenue decrease. For example, would
forward funding of education or university capital construction
be cut out?
CO-CHAIR JOHNSON responded it would mean the state would only
have $11 billion in reserve instead of the current $12 billion,
so he does not think anything would be cut and instead there
would be less surplus.
3:05:06 PM
REPRESENTATIVE SEATON argued that the forward funding of
education is part of what the co-chair is calling the surplus.
Just this year the state finally repaid what it owed the
constitutional budget reserve fund, so when talking about what
things could be swept out, such as the Alaska Housing Finance
Corporation (AHFC), that is true. He said he needs to look more
at the economic impact of the bill.
CO-CHAIR JOHNSON replied there will be that opportunity in the
House Finance Committee and on the House floor.
3:05:54 PM
REPRESENTATIVE SEATON maintained that more information is
needed. He moved to table HB 308.
A roll call vote was taken. Representatives Kawasaki, Tuck,
Seaton, Edgmon, and Guttenberg voted in favor of tabling HB 308.
Representatives Olson, P. Wilson, Neuman, and Johnson voted
against it. Therefore, HB 308 was tabled by a vote of 5-4.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 195.pdf |
HRES 3/26/2010 1:00:00 PM |
SB 195 |
| SB 195 Fiscal Note.pdf |
HRES 3/26/2010 1:00:00 PM |
SB 195 |
| SB 195 Sponsor Statement.pdf |
HRES 3/26/2010 1:00:00 PM |
SB 195 |
| SB 195 GPUA map 4.pdf |
HRES 3/26/2010 1:00:00 PM |
SB 195 |
| SB 195 Image 1.jpg |
HRES 3/26/2010 1:00:00 PM |
SB 195 |
| SB 195 - Image 3.JPG |
HRES 3/26/2010 1:00:00 PM |
SB 195 |
| SJR 27 Bill Packet.pdf |
HRES 3/26/2010 1:00:00 PM |
|
| HB 308 Amendment P.2 3.24.10.pdf |
HRES 3/26/2010 1:00:00 PM |
HB 308 |
| HB 308 Amendment P.3 3.25.10.pdf |
HRES 3/26/2010 1:00:00 PM |
HB 308 |
| HB 308 Amendment P.4 3.25.10.pdf |
HRES 3/26/2010 1:00:00 PM |
HB 308 |
| HB 308 Ltr CP.pdf |
HRES 3/26/2010 1:00:00 PM |
HB 308 |
| CSHB308(RES)-REV-TAX-03-23-10 Oil and Gas Production Tax.pdf |
HRES 3/26/2010 1:00:00 PM |
HB 308 |