Legislature(2011 - 2012)HOUSE FINANCE 519
04/24/2012 09:00 AM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB3001 | TELECONFERENCED | |
HB3001-OIL AND GAS PRODUCTION TAX
9:19:48 AM
CO-CHAIR SEATON announced that the only order of business would
be HOUSE BILL NO. 3001, "An Act relating to adjustments to oil
and gas production tax values based on a percentage of gross
value at the point of production for oil and gas produced from
leases or properties north of 68 degrees North latitude;
relating to monthly installment payments of the oil and gas
production tax; relating to the determinations of oil and gas
production tax values; relating to oil and gas production tax
credits including qualified capital credits for exploration,
development, or production; making conforming amendments; and
providing for an effective date."
CO-CHAIR SEATON relayed that the committee would be addressing
HB 3001's sectional analysis and fiscal note, and acknowledged
the presence of the commissioner of the Department of Revenue,
Bryan Butcher.
9:22:39 AM
SUSAN POLLARD, Assistant Attorney General, Oil, Gas & Mining
Section, Civil Division (Juneau), Department of Law (DOL) -
referring to the Department of Revenue's sectional analysis
detailing HB 3001's proposed changes to AS 43.55, Oil and Gas
Production Tax - explained first that Section 13 would add a new
section 162 providing for a reduction of production-tax-value,
sometimes referred to as a gross-revenue exclusion, for purposes
of calculating the base tax rate and what she termed,
"progressivity," under AS 43.55.011(e) and (g), respectively,
and is intended to apply to production from both new and
existing fields on the North Slope. Specifically, via use of
the language, "from leases or properties north of 68 degrees
North latitude that were not, as of January 1, 2008, either
within a unit or in commercial production", subsection (a) of
proposed new AS 43.55.162 addresses new field production,
additionally stipulating that its proposed 30 percent reduction
applies to both the base rate and progressivity and that it
would be applicable during [the first 10 consecutive years after
the later of either the start of sustained production or the
effective date of this proposed new section]. It's very likely
that it's always going to be [for] the first 10 [consecutive]
years after the start of sustained production once this
section's proposed effective date is passed, she remarked,
surmising that the language of subsection (a) was written as it
was simply "to accommodate the possibility that there would be
some production that would ... qualify before the effective date
of the ... [section]."
MS. POLLARD, in response to questions, offered her understanding
that the intention is to ensure that all new North Slope fields
enjoy subsection (a)'s proposed 30 percent reduction for at
least 10 consecutive years.
BRUCE TANGEMAN, Deputy Commissioner, Office of the Commissioner,
Department of Revenue (DOR), concurred.
9:28:57 AM
MS. POLLARD, in response to another question, relayed that the
term, "sustained production" is defined under subsection (l)(3)
of existing AS 43.55.025 - Alternative tax credit for oil and
gas exploration - as production of oil or gas from a reservoir
into a pipeline or other means of transportation to market, but
does not include testing, evaluation, or pilot production.
MR. TANGEMAN, in response to a question, explained that
Section 13's proposed effective date is January 1, 2013; that
for purposes of determining which fields to consider as new
fields under subsection (a), the administration chose the date
of January 1, 2008, to be the delineating date; and that that
would allow [the production-tax-value of any oil and gas
produced from such new fields] over the last four years to
qualify for subsection (a)'s proposed 30 percent reduction.
REPRESENTATIVE SADDLER asked whether existing law's definition
of the term "sustained production" would apply to the bill.
MS. POLLARD indicated that it would.
MR. TANGEMAN, in response questions, relayed that having a
delineation date of January 1, 2008, would allow more companies
to qualify for subsection (a)'s proposed reduction of
production-tax-value, and is intended to provide them with the
incentive to accelerate certain projects; and that there
currently are companies with projects that could qualify for the
proposed reduction.
CO-CHAIR FEIGE offered his understanding that some such
companies are waiting to be provided with some kind of incentive
before starting production, and that that is why that particular
delineation date was chosen for purposes of distinguishing new
fields from existing ones.
9:36:55 AM
MR. TANGEMAN added that under the proposed delineation date of
January 1, 2008, [the companies] "Great Bear, Repsol, Armstrong,
Brooks Range, [and] anything with new activity" would qualify
for subsection (a)'s proposed reduction of production-tax-value,
but the Point Thomson, Oooguruk, and Nikaitchuq [fields] would
not. In response to comments and questions, he clarified that
Section 13 does not address facilities, but instead addresses
production related to certain fields, and thus what particular
facility the oil or gas is going through is irrelevant for
purposes of calculating Section 13's proposed reduction of
production-tax-value; if the oil or gas is produced from a field
that qualifies under Section 13's proposed AS 43.55.162(a), then
the production-tax-value of that oil or gas would be reduced as
stipulated regardless of which facility is used.
CO-CHAIR SEATON asked that information be provided in writing
regarding which North Slope fields would be covered under
subsection (a) and which would not.
REPRESENTATIVE HERRON asked for the rationale behind choosing
30 percent for subsection (a)'s proposed reduction.
MR. TANGEMAN explained that the DOR ran a model using that
percentage and determined it would be fair, both in terms of
providing an incentive for new production, and in terms of
providing a starting point for conversations between the state
and industry. In response to a question, he expressed his
belief that "fair" is what will bring the most investment to the
state in order to increase production. Based on the fact that
industry activity is occurring elsewhere but not in Alaska, it
appears that what Alaska currently has in place is not fair to
industry, although it works quite well for bringing cash into
the state in the short-term. However, the administration is
looking for what is fair, long-term, for industry, while
continuing to ensure that the state is getting its fair share.
He opined that the state is "over-collecting" at this point. In
response to comments and questions, he indicated that Section 13
also addresses what would be considered existing fields under
its proposed delineation date of January 1, 2008, and does so
because it was felt that addressing only new fields would be
insufficient in terms of providing industry with meaningful
incentives.
9:46:07 AM
MS. POLLARD, continuing with her explanation of HB 3001's
proposed changes to AS 43.55, turned members' attention to
Section 13's proposed new AS 43.55.162(b), and explained that
for purposes of calculating progressivity, subsection (b)
provides for a 40 percent reduction of the production-tax-value
of oil and gas produced from existing North Slope fields,
described therein as "oil and gas produced from leases or
properties north of 68 degrees North latitude, other than oil
and gas subject to subsection (a)" of proposed new AS 43.55.162.
REPRESENTATIVE HERRON asked for the rationale behind choosing
40 percent for subsection (b)'s proposed reduction.
MR. TANGEMAN relayed that the administration chose 40 percent as
a good place to start based on input from and activity by
industry. In response to another question, he indicated that
the administration would be amenable to having subsection (b)'s
proposed percentage changed as long as both the administration
and industry agree that the new percentage would still engender
a [positive] change in Alaska's investment climate.
REPRESENTATIVE GARDNER, in response to comments addressing the
issue of industry commitments, offered her recollection that
without making any actual commitments to increasing oil and gas
activity in Alaska, industry has said only that changes [to
Alaska's oil and gas tax structure] "may help." Such
statements, she pointed out, are not a guarantee that passing
HB 3001 - or any other such bill - would result in the sought-
after level of industry investment in Alaska, or a guarantee
that not passing such a bill would result in that investment
never occurring.
REPRESENTATIVE TUCK questioned why existing fields should be
given a reduction in production-tax-value for purposes of
calculating progressivity, particularly given that the
[legislature's consultants] have declined to speculate on
whether [HB 3001] really would reduce the current decline in
production, but have indicated that Alaska's existing tax
structure already adequately addresses existing fields.
MR. TANGEMAN relayed that the goal is to provide industry with a
more competitive tax structure for existing North Slope fields
as an incentive to increase production from them.
REPRESENTATIVE TUCK questioned how Section 13's proposed
AS 43.55.162(b) would help reduce the current decline in
production.
MR. TANGEMAN reiterated that under it, Alaska would have a more
competitive tax structure for existing fields - an incentive for
industry to increase production from such fields. The state
must decide whether to simply accept the current decline in
production, or lower its tax rates in some fashion so as to draw
in more industry investment in an attempt to reduce that
decline.
CO-CHAIR SEATON, in response to comments regarding high oil
prices, stressed the importance of ensuring that Alaska has a
tax structure that's adaptive to oil-price fluctuations, and
expressed concern that with regard to new field production under
Section 13's proposed new AS 43.55.162(a), revenue to the state
would be reduced and industry could make a profit without paying
any production tax.
10:03:14 AM
LENNIE DEES, Production Audit Master, Anchorage Office, Tax
Division, Department of Revenue (DOR), acknowledged that such
could result once tax credits are applied, though the
calculation for the [base tax rate] would remain the same as
under existing law.
REPRESENTATIVE MUNOZ asked whether [the DOR] has a way to
quantify current industry investment addressing the decline in
production compared to the investment anticipated [under the
bill].
MR. TANGEMAN indicated that [the DOR] does not.
REPRESENTATIVE TUCK, referring to Section 13's proposed new
AS 43.55.162(b), questioned whether anything would ensure that
industry invested its profits in Alaska.
MR. TANGEMAN offered his belief that the existence of Alaska's
significant remaining oil and gas reserves would ensure that
such investment occurs. In response to comments, he again
reiterated his belief that in providing industry with a more
competitive tax structure for existing fields, subsection (b)
would serve as an incentive to increase investment in, and
production from, such fields. In response to a question, he
explained that existing law already addresses calculating the
gross value of oil and gas at the point of production, and
calculating both the annual and monthly production-tax-values,
and that nothing in the bill would change those calculations -
Section 13's proposed reduction wouldn't be applied until after
those other calculations are made.
MS. POLLARD drew attention to Section 13's proposed new AS
43.55.162(c), and explained that similar to subsection (b) of
existing AS 43.55.160 - under which production-tax-values are
calculated - it stipulates that the annual and monthly
production-tax-value may not be reduced below zero.
Section 13's proposed new AS 43.55.162(d) stipulates that the
tax rate under AS 43.55.011(g) - what's been termed
"progressivity" - shall be determined before the application of
subsection (a) or (b)'s proposed reduction.
MR. DEES, in response to a question, reiterated that calculating
the gross value at point of production and calculating the
annual and monthly production-tax-values would not change under
the bill, and that Section 13's proposed reduction of
production-tax-value wouldn't be applied until after both of
those calculations have been made, and indicated that Section 13
in and of itself doesn't address operating costs or losses or
the impact of those costs/losses on the total amount of taxes
paid.
CO-CHAIR SEATON observed that Section 13 isn't really providing
for an actual gross-revenue exclusion regardless of how the
administration is referring to it - Section 13 is really just
providing for a reduction of production-tax-value.
MS. POLLARD directed members' attention to Section 13's proposed
new AS 43.55.162(e), and explained that it stipulates that
proposed new AS 43.55.162 would not apply to [gas] produced
before 2022 and used in the state. Section 13's proposed new
AS 43.55.162(f) stipulates that no adjustment under AS 43.55.162
may be made if the annual or monthly gross value at the point of
production is zero or below.
10:19:35 AM
MS. POLLARD went on to explain that Sections 1, 2, and 3 of
HB 3001, respectively, provide conforming changes - regarding
Section 13's proposed reduction of production-tax-value - to
AS 43.55.011(e)(1), addressing the calculation of the annual
production-tax-value for purposes of calculating the base tax
rate; to AS 43.55.011(g), addressing the calculation of the
monthly production-tax-value for purposes of calculating what's
been termed, "progressivity"; and to AS 43.55.020(a), addressing
monthly installment payments of estimated taxes. She noted that
Section 3 also provides AS 43.55.020(a) and its paragraph (1)(A)
and (C) with reworded references to AS 43.55.011 and its
subsections. Section 4 of HB 3001 would amend AS 43.55.023(a)
by removing the words, "however, not more than half of the tax
credit may be applied for a single calendar year;" from the end
of existing paragraph (1) so that a tax credit for a qualified
capital expenditure could be applied for a single calendar year,
instead of having to be split and applied for two calendar
years.
The committee took three at-eases between 10:25 a.m. and
10:54 a.m., the last two to address technical difficulties.
CO-CHAIR SEATON, in response to a question, offered his
understanding that the date of 2022 referenced in Section 13's
proposed new AS 43.55.162(e) is the same date used in existing
law regarding gas used in the state.
MS. POLLARD then explained that Sections 5 and 6 of HB 3001,
respectively, provide conforming changes to AS 43.55.023(d) and
(g) - addressing tax credit certificates - regarding Section 4's
proposed change to AS 43.55.023(a) and [Section 14's] proposed
repeal of AS 43.55.023(m), a provision addressing the issuance
of multiple, transferable tax-credit certificates. Also, to
address an oversight made when existing AS 43.55.023(l) was
enacted, Section 5 adds well lease expenditures to the list of
items in AS 43.55.023(d) for which a tax credit may be claimed.
Furthermore, the changes that would be made via Sections 4-6 in
order to allow the application of a tax credit in a single
calendar year would similarly be made elsewhere in AS 43.55.023
via other provisions of HB 3001.
MR. TANGEMAN, in response to questions, explained that tax
credit certificates are the mechanism by which industry realizes
its tax credits, and confirmed that under the bill, a tax credit
for a qualified capital expenditure could be applied for a
single calendar year, instead of having to be split and applied
for two calendar years.
MS. POLLARD turned the committee's attention to Section 7 of
HB 3001, and explained that by deleting the phrase, "south of 68
degrees North latitude" throughout AS 43.55.023(l) and by
replacing the date currently stipulated therein, Section 7 would
ensure that a producer or explorer could apply for a tax credit
for any well lease expenditure incurred in the state after
December 31, 2012; Section 7 also provides a conforming change
regarding allowing the application of a tax credit in a single
calendar year. Section 8 of HB 3001 provides conforming changes
to AS 43.55.023(n) - which stipulates what constitutes an
applicable well lease expenditure - regarding Section 7's
proposed changes to subsection (l) and [Section 14's] proposed
repeal of subsection (m). She indicated that Section 8 is going
to require a technical amendment splitting it into two, separate
sections because currently under the bill, [both Section 7 and
Section 8 have] an effective date of January 1, 2013, but apply
to expenditures incurred after December 31, 2012, whereas in
contrast, [Section 14 has an immediate effective date but] is
retroactive to January 1, 2012.
11:02:38 AM
JOHN LARSEN, Production Audit Master, Anchorage Office, Tax
Division, Department of Revenue (DOR), in response to a question
regarding language in Section 8, explained that operating
expenses would not be eligible for a well-lease-expenditure tax
credit because the language of AS 43.55.023(n) - [both existing
and under the bill] - stipulates that to be considered a well
lease expenditure eligible for a tax credit, the expenditure
must be directly related to certain types of wells, listed
therein, and be both a qualified capital expenditure and an
intangible drilling and development cost authorized under
certain provisions of federal law, listed therein, and
stipulates that an expenditure directly related to a well could
include an expenditure for certain activity, listed therein.
With regard to the term, "well workover" - one of the listed
activities in Section 8 - he added that a well workover that
merely repaired a well or maintained a well would not be a
qualifying activity, but a well workover that either increased
production or added what he called, "rate" would be, and that
this [interpretation] is consistent with how federal law is
applied with regard to federal tax.
CO-CHAIR SEATON expressed interest in obtaining a written legal
opinion regarding the language in Section 8's proposed AS
43.55.023(n).
MR. LARSEN, in response to another question, ventured that the
purpose of the bill's proposed changes regarding well lease
expenditures and associated tax credits is to encourage more
industry investment on the North Slope.
MR. TANGEMAN, in response to a further question, offered his
understanding that existing AS 43.55.023(n) did result in more
industry investment in other parts of the state.
MR. LARSEN, in response to a question regarding the term,
"intangible drilling and development cost" as used in
Section 8's proposed AS 43.55.023(n)(1), explained that such
costs are generally those associated with things that cannot be
salvaged/reused, such as labor, cement, lubricants.
11:13:27 AM
MS. POLLARD then directed members' attention to Sections 9
and 10 of HB 3001, and explained that they provide conforming
changes to AS 43.55.028(e) and (g), respectively, regarding
[Section 14's] proposed repeal of AS 43.55.023(m); AS 43.55.028
addresses the oil and gas tax credit fund and purchases of tax
credit certificates, and would not otherwise be changed by the
bill. Section 11 of HB 3001 repeals and reenacts AS 43.55.160 -
which stipulates how annual and monthly production-tax-values
shall be calculated for the various "subsets" of production -
providing clarification as well as conforming changes regarding
Section 13's proposed new AS 43.55.162. Under Section 11,
proposed AS 43.55.160(a)(1)(A) would address production from new
North Slope fields, and proposed AS 43.55.160(a)(1)(B) would
address production from existing North Slope fields; these
subparagraphs (A) and (B) contain the applicability and
delineation-date language used in Section 13. There would be no
change, however, to how the annual and monthly production-tax-
values are calculated.
MS. POLLARD noted that recently-passed legislation also amends
AS 43.55.160(a), and explained that that's why the
administration has chosen to repeal and reenact that section of
statute via HB 3001: so as to ensure the readability of the
changes being made by the two bills to that provision.
Additionally, HB 3001 contains a provision directing the revisor
of statutes to give preference to HB 3001 should any conflict
arise when those two Acts are consolidated into statute. In
response to a question, she touched on aspects of that other
legislation. In conclusion, she reiterated that the way annual
and monthly production-tax-values are calculated is not being
changed via HB 3001's proposed repeal and reenactment of
AS 43.55.160(a).
MS. POLLARD went on to explain that Section 12 of HB 3001 would
provide conforming changes to AS 43.55.160(e) regarding [Section
11's] proposed changes to AS 43.55.160(a)(1). Section 14 of
HB 3001 would repeal AS 43.55.023(m), the provision addressing
the [issuance of multiple, transferable tax-credit certificates.
Section 15 of HB 3001 would add an applicability section to
uncodified law] stipulating which production and which
expenditures the various sections of HB 3001 would apply to. In
conclusion, she noted that [Section 13 of HB 3001] has an
effective date of January 1, 2013, and would apply to production
occurring after [December 31, 2012].
MR. DEES, in response to questions, spoke briefly about [other,
now-failed] legislation previously heard in committee, and
surmised that industry won't have difficulty understanding
HB 3001's effects.
11:31:34 AM
CO-CHAIR SEATON then turned the committee's attention to the
DOR's fiscal note for HB 3001.
MR. TANGEMAN explained that page 2 of the fiscal note lists five
points addressing HB 3001's main proposed changes. Points 1
and 2, respectively, address Section 13's proposed new
AS 43.55.162(a) and (b), which, respectively, provide for a
30 percent [reduction in production-tax-value] for new North
Slope fields and a 40 percent [reduction in production-tax-
value] for existing North Slope fields. He referred to point 3
on page 2 of the DOR's fiscal note, and said: "This is the
'cap' provision, where we're lowering the cap from 75 percent to
60 percent - currently, the 75 percent cap applies to a
production-tax-value of $342.50 - the new 60 percent cap would
... 'cap out' at a production-tax-value of $192.50." Point 4
addresses [Sections 4 and 5's proposed changes to AS 43.55.023]
allowing a tax credit for a qualified capital expenditure to be
applied for a single calendar year instead of two. Point 5
addresses [Sections 5 through 8's proposed changes to
AS 43.55.023] adding well lease expenditures incurred anywhere
in the state to the list of items for which a tax credit may be
claimed.
MR. TANGEMAN referred to page 3 of the DOR's fiscal note,
containing two tables, illustrating for fiscal years 2013
through 2018 the estimated changes in production-tax revenue and
royalty revenue anticipated under [Section 13 of] HB 3001,
compared to estimated changes in such revenues under existing
law coupled with increases in forecasted production amounts -
specifically, forecasted amounts plus either a 5 percent, a 10
percent, a 15 percent, or a 20 percent increase. In response to
questions, he indicated that none of the information on page 3
of the DOR's fiscal note addresses the estimated decline in
production, and indicated that the DOR's production forecast -
outlined in [the DOR's Fall 2011 Revenue Sources Book] -
addresses [fields] currently producing, [fields] under
development, and [fields] under evaluation, with the latter two
types [of fields] that are coming "on line" still requiring
significant capital investment.
11:36:50 AM
DAN STICKEL, Acting Chief Economist, Anchorage Office, Tax
Division, Department of Revenue (DOR), added that in calculating
the estimated changes in revenues in the columns reflecting the
forecast increased by a certain percentage, both forecasted
production amounts and lease expenditures were increased by the
same percentage. For example, in the column reflecting
forecasted production plus a 5 percent increase, the forecasted
production amounts were increased by 5 percent, and the lease
expenditure amounts were also increased by 5 percent.
CO-CHAIR SEATON observed that information provided during
previous presentations on HB 3001 addressed the anticipated rate
of decline in production.
MR. STICKEL, in response to questions, relayed that [for all
three types of fields together,] the aforementioned Fall 2011
Revenue Sources Book indicates a [total] anticipated 3.3 percent
decline in FY 13, a [total] anticipated 1.0 percent increase in
FY 14, and a [total] anticipated 4.1 percent decline in FY 15;
that the second table on page 3 of the DOR's fiscal note
reflects only the estimated changes in production-tax revenue,
whereas the first table reflects the estimated changes in both
production-tax revenue and royalty revenue; that the estimates
in both of those tables pertain only to Section 13 of HB 3001;
that the oil prices used in the tables' calculations were based
on those forecasted in the Fall 2011 Revenue Sources Book and
varied between $108 per barrel of oil (/bbl) and $109/bbl; that
as used on page 3 of the DOR's fiscal note, the phrase "PF and
SF contributions" refers to "permanent fund" contributions and
"school fund" contributions; and that in the first table on
page 3 of the DOR's fiscal note, the column illustrating the
forecasted production amounts plus a 20 percent increase
reflects an estimated increase in revenues of $25 million in
year 2015 and no estimated change in revenues in years 2016 and
2017.
11:45:25 AM
MR. TANGEMAN went on to explain that page 4 of the DOR's fiscal
note contains a table illustrating the estimated fiscal impacts
of the main provisions of HB 3001 in fiscal years 2013 through
2018 based on information in the aforementioned Fall 2011
Revenue Sources Book. The first row of information on that
table corresponds with points 1 and 2 from page 2 of the fiscal
note and pertains to Section 13's proposed reduction in
production-tax-value. The second row of information
[corresponds with point 3 from page 2 of the fiscal note and]
pertains to what he'd earlier referred to as the "cap"
provision.
MR. STICKEL explained that the third row of information
[corresponds with point 4 from page 2 of the fiscal note and]
pertains to tax credits for a qualified capital expenditure
being applied for a single calendar year instead of two; this
information is intended to illustrate that [the change effected
by Sections 4 and 5 of the bill] would be revenue neutral in the
long run.
MR. TANGEMAN, in response to questions, recommended that members
read the DOR's Fall 2011 Revenue Sources Book, available on
line, adding that it provides information about the
aforementioned three types of fields - those currently
producing, those under development, and those under evaluation -
and anticipated declines in production; and - referring to a
table on page 39 of the Fall 2011 Revenue Sources Book - relayed
that for currently producing fields only, the anticipated rate
of decline is 11.6 percent in FY 13, 6.9 percent in FY 14, 10
percent in FY 15, and 9.1 percent in FY 16, adding that for all
three types of fields together, there is a total anticipated 2.1
percent increase in FY 16. For currently producing fields, the
aforementioned anticipated rates of decline do take into account
the fact that significant investment is occurring in those
fields.
11:53:45 AM
MR. STICKEL, in response to questions, referred to a table on
page 91 of the Fall 2011 Revenue Sources Book, and relayed that
total unrestricted general fund (GF) [petroleum] revenue is
projected to be $8.2177 billion in FY 13, $7.7428 billion in
FY 14, $7.0434 billion in FY 15, $7.0655 billion in FY 16,
$6.7389 billion in FY 17, and $7.125 billion in FY 18; and that
the information provided on page 4 of the DOR's fiscal note
reflects the bill's estimated fiscal impact on the projected
total revenue amounts outlined in the Fall 2011 Revenue Sources
Book.
MR. TANGEMAN, in response to questions regarding pages 3 and 4
of the DOR's fiscal note, explained that the information the
administration is providing the committee addresses annual
figures, not monthly ones; and offered his belief that because
there are still significant resources to extract, it would be
reasonable to see increases in production beyond what's been
forecast.
[HB 3001 was held over.]
12:06:09 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 12:06 p.m.
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