Legislature(2017 - 2018)BARNES 124

03/06/2017 01:00 PM RESOURCES

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01:02:29 PM Start
01:03:41 PM HB133
02:44:04 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
Scheduled but Not Heard
-- Testimony <Invitation Only> --
**Streamed live on AKL.tv**
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                         March 6, 2017                                                                                          
                           1:02 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Andy Josephson, Co-Chair                                                                                         
Representative Geran Tarr, Co-Chair                                                                                             
Representative Dean Westlake, Vice Chair                                                                                        
Representative Harriet Drummond                                                                                                 
Representative Justin Parish                                                                                                    
Representative Chris Birch                                                                                                      
Representative DeLena Johnson                                                                                                   
Representative George Rauscher                                                                                                  
Representative David Talerico                                                                                                   
MEMBERS ABSENT                                                                                                                
Representative Mike Chenault (alternate)                                                                                        
Representative Chris Tuck (alternate)                                                                                           
OTHER LEGISLATORS PRESENT                                                                                                     
Representative Lora Reinbold                                                                                                    
COMMITTEE CALENDAR                                                                                                            
HOUSE BILL NO. 133                                                                                                              
"An  Act  relating  to  the  oil  and  gas  production  tax,  tax                                                               
payments, and tax  credits; relating to adjustments  to the gross                                                               
value at the point of  production; and providing for an effective                                                               
     - HEARD & HELD                                                                                                             
HOUSE BILL NO. 111                                                                                                              
"An  Act  relating  to  the  oil  and  gas  production  tax,  tax                                                               
payments,  and  credits;  relating   to  interest  applicable  to                                                               
delinquent  oil and  gas  production tax;  and  providing for  an                                                               
effective date."                                                                                                                
     - SCHEDULED BUT NOT HEARD                                                                                                  
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB 133                                                                                                                  
SHORT TITLE: OIL & GAS: TAXES; CREDITS; GROSS VALUE                                                                             
SPONSOR(s): REPRESENTATIVE(s) GARA                                                                                              
02/20/17       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/20/17       (H)       RES, FIN                                                                                               
03/06/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
WITNESS REGISTER                                                                                                              
REPRESENTATIVE LES GARA                                                                                                         
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Presented HB 133 as the prime sponsor.                                                                   
KEN ALPER, Director                                                                                                             
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   During  the hearing  of  HB 133,  answered                                                             
ACTION NARRATIVE                                                                                                              
1:02:29 PM                                                                                                                    
CO-CHAIR  GERAN   TARR  called   the  House   Resources  Standing                                                             
Committee meeting  to order at  1:02 p.m.   Representatives Tarr,                                                               
Parish,  Talerico, Westlake,  and Josephson  were present  at the                                                               
call  to order.   Representatives  Birch, Johnson,  Rauscher, and                                                               
Drummond arrived  as the meeting  was in progress.   Also present                                                               
was Representative Reinbold.                                                                                                    
         HB 133-OIL & GAS: TAXES; CREDITS; GROSS VALUE                                                                      
1:03:41 PM                                                                                                                    
CO-CHAIR TARR announced that the  only order of business would be                                                               
HOUSE  BILL  NO.  133,  "An  Act relating  to  the  oil  and  gas                                                               
production  tax,  tax  payments,  and tax  credits;  relating  to                                                               
adjustments to  the gross value  at the point of  production; and                                                               
providing for an effective date."                                                                                               
1:03:55 PM                                                                                                                    
REPRESENTATIVE LES  GARA, Alaska  State Legislature,  speaking as                                                               
the prime sponsor  of HB 133, provided  a PowerPoint presentation                                                               
entitled, "And  Fairness to All  Fair Production Tax  To Alaskans                                                               
And  Industry,  HB  133."     Representative  Gara  informed  the                                                               
committee  HB 133  is the  legislature's best  attempt to  ensure                                                               
Alaska receives  a fair  share for  its oil  in order  to provide                                                               
stable funding for  schools, oil tax credits,  and the University                                                               
of Alaska, and to move society  forward.  Further, HB 133 intends                                                               
to provide balance  to the state's fiscal plan  so that everybody                                                               
contributes, without  a focus just  on those who have  little and                                                               
not on those who do well;  the bill also follows the provision in                                                               
the state  constitution that directs state  government to develop                                                               
the state's resources  for the maximum benefit  of Alaskans, thus                                                               
HB 133  also provides balance between  meeting the aforementioned                                                               
constitutional mandate and treating industry fairly [slide 2].                                                                  
REPRESENTATIVE GARA  said, "We have  fields in the state  that we                                                               
are  supposed to  be living  off, in  terms of  raising revenue,"                                                               
however,  under  current  law,   the  aforementioned  fields  are                                                               
allowed to  pay a production tax  of zero, and many  other fields                                                               
will pay zero for their first  seven years.  In addition, bigger,                                                               
higher taxpaying  fields, until  the price  of oil  reaches about                                                               
$74  per barrel,  pay  a 4  percent  tax.   That,  he opined,  in                                                               
combination with generous  tax credits, is a  "double whammy" for                                                               
the state:  very low production  taxes, and tax credits that will                                                               
eat up all of the production  taxes this year and in future years                                                               
will yield very little net production tax.                                                                                      
REPRESENTATIVE  GARA explained  in  2003,  Gross Value  Reduction                                                               
(GVR) fields were unitized, and GVR fields include "most post-                                                                  
2003 fields,  and they are all  future fields."  For  example, if                                                               
the Arctic National  Wildlife Refuge (ANWR) were to  open [to oil                                                               
production], fields there would pay GVR  tax, thus a field of any                                                               
size in  ANWR would  pay zero  production tax -  [as long  as oil                                                               
price  is below]  $70 per  barrel oil  - for  seven years,  which                                                               
could be  some of the  fields' most  productive years.   When oil                                                               
price reaches $90 per barrel, the  state would receive one of the                                                               
lowest  profits taxes  in the  world at  12.2 percent  [slide 3].                                                               
There are three factors that qualify  an oilfield for the GVR tax                                                               
provision; one factor is to  accommodate fields at Point Thomson,                                                               
and he  provided a short history  of the status of  Point Thomson                                                               
production.     Point  Thomson's  primary  owner   is  ExxonMobil                                                               
Corporation, which would benefit from  "this zero percent GVR tax                                                               
for their  first seven years as  long as oil remains  below $70 a                                                               
barrel."  [The  three ways to obtain GVR tax  reduction for post-                                                               
2002 fields were shown on slide 4.]                                                                                             
1:07:58 PM                                                                                                                    
REPRESENTATIVE  GARA  said there  are  parts  of Senate  Bill  21                                                               
[passed in the Twenty-Eighth Alaska  State Legislature] and parts                                                               
of Alaska's Clear  Equitable Share (ACES) [passed  in the Twenty-                                                               
Fifth Alaska  State Legislature]  that make  sense, and  he urged                                                               
the legislature  to learn from  the past  and develop an  oil tax                                                               
bill that makes  sense for everyone.   Currently, Alaska assesses                                                               
a  zero percent  tax until  oil  reaches $15  a barrel,  and a  1                                                               
percent tax at an oil price  just above $15 per barrel, rising to                                                               
4 percent  between $25 per barrel  and $74 per barrel.   In North                                                               
Dakota, at $10  per barrel oil, the tax is  10 percent gross, and                                                               
in  Louisiana it  is 12.5  percent gross.   He  cautioned against                                                               
comparing  Alaska's revenue  with  North Dakota  and Louisiana  -                                                               
Alaska should instead compare revenue  with big basins around the                                                               
world -  although other states  raise substantially  more revenue                                                               
than does Alaska, up to $74 per barrel [slide 5].                                                                               
REPRESENTATIVE  GARA advised  in the  coming fiscal  year, Alaska                                                               
will not  take in $6  billion to  $7 billion in  production taxes                                                               
and   royalty  as   in  the   past,  but   will  instead   garner                                                               
approximately $225 million in production  taxes; after paying out                                                               
tax credits to companies, the  state will actually be $25 million                                                               
in the red.   By fiscal years 2019 (FY 19) and  FY 20, after Cook                                                               
Inlet tax credit changes have  taken place, even though the state                                                               
will  take  in, in  theory,  around  $250 million  in  production                                                               
taxes, it will  give back approximately 60-70 percent  of that to                                                               
the industry.   So,  the net  earned by the  state will  be about                                                               
$100 million in FY 19 and $150 million  in FY 20.  He opined that                                                               
is far short  of what Alaska should be  generating, especially as                                                               
[oil] prices get higher [slides 6 and 7].                                                                                       
1:11:14 PM                                                                                                                    
REPRESENTATIVE  JOHNSON stated  the materials  presented seem  to                                                               
indicate that the oil tax credits  appear to be working, and that                                                               
the state's  production is  up for  the first  time in  14 years.                                                               
She suggested  a comparison between  Alaska and North  Dakota was                                                               
relevant and  said, "I believe Exxon  said they were going  to be                                                               
looking  to  $40  a  barrel  oil, for  production  ...  and  that                                                               
includes  some of  the large  basin areas  ...."   Representative                                                               
Johnson observed this tax is only a portion of the equation.                                                                    
REPRESENTATIVE GARA pointed  out that under the  old ACES system,                                                               
the  state  had a  very  high  tax  and  paid out  very  generous                                                               
credits; under current law, the state  has a low tax and pays out                                                               
generous credits.  He said  the fields with current activity were                                                               
moving  forward  under ACES;  for  example,  Eni, Armstrong,  and                                                               
Repsol  came  to Alaska  under  ACES  and before  companies  were                                                               
offered tax breaks.  Representative Gara remarked:                                                                              
     And  [Repsol] came  up under  ACES saying,  "Alaska has                                                                    
     great  geology, it's  a stable  place  to do  business,                                                                    
     we're  going  to  invest three-quarters  of  a  billion                                                                    
     dollars,  and we're  going to  move forward  with those                                                                    
     fields  that, that  are economic."   And  we have  seen                                                                    
     some of those fields announced,  but I don't think that                                                                    
     there's a  field - if there  is, there's maybe one  - I                                                                    
     don't think there's a field  that wasn't moving forward                                                                    
     before Senate  Bill 21.   And our  goal is  to increase                                                                    
     oil  production, though,  the forecasts  are that  it's                                                                    
     going to  continue to decrease  over the next  15 years                                                                    
     unless  there is  a major  find, and  we're hoping  for                                                                    
     major finds.                                                                                                               
REPRESENTATIVE  JOHNSON asked  what part  of oil  production will                                                               
continue to decrease.                                                                                                           
REPRESENTATIVE GARA answered that  according to the Department of                                                               
Revenue (DOR) and the Department  of Natural Resources (DNR), oil                                                               
production is forecast to decrease  almost every year through the                                                               
next 20 years, down to less than 300,000 barrels per day.                                                                       
REPRESENTATIVE  JOHNSON  said, "But  that's  not  what ...  we're                                                               
currently experiencing."                                                                                                        
REPRESENTATIVE GARA expressed his  understanding that DNR's model                                                               
forecasts one  year where  oil production  isn't going  down, but                                                               
then it  continues to  go down,  which is similar  to all  of the                                                               
forecasts the state has had for the last 10 years.                                                                              
1:14:11 PM                                                                                                                    
REPRESENTATIVE  BIRCH  asked   whether  the  materials  presented                                                               
incorporate  the  royalty  share;   for  example,  in  the  event                                                               
production does go  down to 300,000 barrels per day,  if there is                                                               
a one-sixth  royalty share, 50,000 of  the aforementioned barrels                                                               
are  state-owned.   He further  asked  whether any  of the  state                                                               
asset  [royalty] -  that is  made possible  as a  result of  this                                                               
production - is represented in today's presentation.                                                                            
REPRESENTATIVE GARA  responded no, today's presentation  is about                                                               
production taxes.   He acknowledged that the  state receives 12.5                                                               
percent  royalty on  some fields,  and receives  approximately 16                                                               
percent  royalty on  other  fields.   He  said  he would  address                                                               
royalty  briefly later  in the  presentation,  but currently  the                                                               
discussion  is  focused  on production  taxes  levied  under  the                                                               
Economic Limit Factor  (ELF) formula [passed in  the Tenth Alaska                                                               
State  Legislature,   and  modified   in  2005],   the  Petroleum                                                               
Production Tax  (PPT) [passed in  the Twenty-Fourth  Alaska State                                                               
Legislature], ACES, and now Senate Bill 21.                                                                                     
REPRESENTATIVE  BIRCH  said at  some  point  the state  needs  to                                                               
"account  for that  production," and  as  a one-sixth  or a  one-                                                               
eighth owner of the oil that  is produced, the committee needs to                                                               
recognize and  understand that  [royalty] is  a key  component in                                                               
Alaska's revenue picture.  He  stressed anything the state can do                                                               
to   increase  throughput   or  production   is  a   good  thing.                                                               
Representative  Birch said  he welcomed  discussion on  the [tax]                                                               
credits, however, he urged the  legislature to maintain its focus                                                               
on  what  is needed  to  do  to  increase production  and  invite                                                               
additional exploration and development.                                                                                         
REPRESENTATIVE  GARA turned  attention to  slide 8  that depicted                                                               
the  state's  current effective  tax  rates  on  net value.    He                                                               
explained  bigger "Prudhoe  Bay-type" fields  are called  non-GVR                                                               
fields.  According  to DOR, the state has a  "greater of" system:                                                               
when the profits  tax, under Senate Bill 21, is  greater than the                                                               
4 percent  minimum gross tax, the  profits tax kicks in,  and DOR                                                               
projected around $73  or $74 per barrel, the  state will generate                                                               
more money  on the profits tax  version of current law  than from                                                               
the gross  minimum.  Slide 5  showed that the state  assesses a 4                                                               
percent tax on  the Prudhoe Bay-type fields until $73  or $74 per                                                               
barrel.   Even  at $80  per barrel  for Prudhoe  Bay-type fields,                                                               
under current  law there is  a minimal  13.1 percent tax,  and an                                                               
oil price much  over $80 per barrel is not  forecast for the next                                                               
10 years;  furthermore, 13.1 percent  production tax  is reported                                                               
to  be in  the lower  end of  what is  charged around  the world.                                                               
Representative Gara continued as follows:                                                                                       
     If you look at the GVR  fields, the ones with the lower                                                                    
     tax rate,  they, for the  first seven years,  if prices                                                                    
     are below $70, [would] not  pay a production tax.  Were                                                                    
     prices $80 a  barrel, their production tax  is about 40                                                                    
     percent lower than  the non-GVR fields.   So, the newer                                                                    
     fields  - the  ANWRs, the  fields you  hear ...  talked                                                                    
     about - they pay about a  40 percent lower tax rate for                                                                    
     their first  seven years, or  if there are  three years                                                                    
     of $70  prices then  for three years.   But,  those are                                                                    
     low tax  rates.  ...   I don't  think that we  can move                                                                    
     this state forward at a  zero percent production tax on                                                                    
     GVR fields, and a 4 percent tax on non-GVR fields, for                                                                     
     prices that go up to the $70 range.                                                                                        
1:18:22 PM                                                                                                                    
REPRESENTATIVE GARA said  DOR estimates the cost  for producing a                                                               
barrel of  oil on  the North  Slope, is about  $40 [slides  9 and                                                               
10].   He explained that the  "4 percent oil tax  problem" occurs                                                               
because up until about  $73 per barrel, there is a  tax rate of 4                                                               
percent.   Proposed HB  133 recognizes that  an average  field on                                                               
the North  Slope is profitable  at approximately $41  per barrel,                                                               
therefore,  he suggested  not  raising  the 4  percent  tax to  5                                                               
percent until  $50 per  barrel, and then  at every  $8 increment,                                                               
raise it  by 1  percent.  The  analysis from DOR  [on HB  133] is                                                               
that the  state share [would be]  5 percent at $50,  6 percent at                                                               
$58, and  7 percent at  $66 per  barrel, which does  not approach                                                               
the North  Dakota or  Louisiana tax rates.     The aforementioned                                                               
price-sensitive and profit-sensitive  increases would still leave                                                               
the industry with  a larger share in revenue than  the state.  He                                                               
reiterated  this  component  of  HB 133  provides  a  price-  and                                                               
profit-sensitive gross  tax that increases modestly  as prices go                                                               
up [slide 11].                                                                                                                  
REPRESENTATIVE  TALERICO asked  whether  Representative Gara  had                                                               
information on royalty shares or  municipal property tax rates in                                                               
North Dakota or Louisiana.                                                                                                      
REPRESENTATIVE GARA indicated  Representative Talerico's question                                                               
would  be  answered  later  in   the  presentation;  he  recalled                                                               
previous  testimony before  the  committee  that private  royalty                                                               
assessed  where oil  is being  produced on  private land  is much                                                               
higher than  Alaska's royalty, as  well as [the cost  of] leasing                                                               
REPRESENTATIVE  TALERICO asked  whether  there is  state take  in                                                               
"those areas."                                                                                                                  
REPRESENTATIVE  GARA  answered  states  do  not  get  royalty  if                                                               
production  is not  on state  land; the  royalty is  paid to  the                                                               
owner of the land.                                                                                                              
REPRESENTATIVE TALERICO  restated his request for  information on                                                               
municipal taxes.                                                                                                                
REPRESENTATIVE GARA responded that  every state is different; for                                                               
example, North Dakota has a  severance tax, and another [unnamed]                                                               
tax, both of  which add up to  10 percent of the  gross.  Experts                                                               
may be  able to offer  information on what is  called "government                                                               
take,"  although  that should  be  called  "government take  plus                                                               
private take,"  because in  many other states  royalty goes  to a                                                               
private landowner.                                                                                                              
CO-CHAIR TARR  noted that the House  Resources Standing Committee                                                               
refers to  "non-producer share" to  reflect [taxes or  royalty an                                                               
oil producer pays  to governments, or to a  private landowner, or                                                               
REPRESENTATIVE JOHNSON  returned attention to slide  9, and asked                                                               
what is included in the average break-even point of $40.21.                                                                     
REPRESENTATIVE  GARA  said the  Fall  2016  Revenue Sources  Book                                                               
(RSB), DOR, indicates $40.21 includes  the cost of transportation                                                               
and   the  cost   of  production.     In   further  response   to                                                               
Representative   Johnson,  he   explained   that   the  cost   of                                                               
development  is $40.21,  before taxes,  and deferred  to DOR  for                                                               
CO-CHAIR  TARR said  yes, and  added that  lease expenditure  are                                                               
estimated at $30.88 [slide 10].                                                                                                 
1:24:13 PM                                                                                                                    
CO-CHAIR JOSEPHSON  shared others'  concerns about "4  percent up                                                               
to  $74."   However,  as  indicated on  slide  11,  HB 133  would                                                               
provide 10  percent gross at $90  per barrel, and he  pointed out                                                               
that the state receives a  higher percentage under Senate Bill 21                                                               
at $90 per barrel.                                                                                                              
REPRESENTATIVE GARA advised  that by $90 per  barrel, the current                                                               
law "shifts over" to a profits tax, and he remarked:                                                                            
     Is a  10 percent  on the gross  bigger than  14 percent                                                                    
     profits?   Probably,  but  ...  it's field-sensitive  -                                                                    
     there might be a very profitable  field that is at a 20                                                                    
     percent tax rate  at $90 per barrel.  So,  ... our bill                                                                    
     does the  same thing  that current  law does,  which is                                                                    
     when the profits tax is  bigger than the gross tax, the                                                                    
     profits tax  kicks in,  so were the  profits tax  to be                                                                    
     larger than  10 percent on  the gross, the  profits tax                                                                    
     would  kick  in.    This   would  not  stop  that  from                                                                    
REPRESENTATIVE  BIRCH returned  attention  to slide  10 -  second                                                               
line from  the bottom -  that indicated the "North  Slope Credits                                                               
applied  against [total]  tax liability,"  totaled $225  million.                                                               
He asked:                                                                                                                       
     Are not those credits  an expenditure that was incurred                                                                    
     in  the production  of the  revenue that's  realized in                                                                    
     the line above, in other  words, the gross revenue? ...                                                                    
     It seems to me like that's  a part of the cost of doing                                                                    
     business,  the credits  basically are  a representation                                                                    
     of  the expenditure  that was  made  necessary for  the                                                                    
     exploration,  development,   and  realization   of  the                                                                    
     revenues that are derived out  of that field.  Are they                                                                    
REPRESENTATIVE GARA responded, "You know,  the tax is on top, and                                                               
then you  get the credits  back."  He agreed  with Representative                                                               
Birch's point.                                                                                                                  
REPRESENTATIVE BIRCH  said the  point is  that the  credits could                                                               
also  be realized  as an  expense  against doing  business.   For                                                               
example, certain  costs are incurred  in the daily  operation and                                                               
the startup  of a new  business.  He expressed  his understanding                                                               
that the credits relate to  an expense that was actually incurred                                                               
in  the  production and  realization  of  the oil  asset  flowing                                                               
through the Trans-Alaska Pipeline System (TAPS).                                                                                
REPRESENTATIVE GARA further agreed  that Representative Birch was                                                               
accurate as  to what [slide  10] does  not show, [which  are] the                                                               
additional credits  the state  pays and  gives to  companies that                                                               
are not producers.                                                                                                              
REPRESENTATIVE  JOHNSON  pointed  out   that  the  estimates  for                                                               
transportation costs and  lease expenditures are not  the same on                                                               
slides 8 and 10.                                                                                                                
REPRESENTATIVE GARA acknowledged there  is about a $2 difference,                                                               
and deferred  to Ken Alper,  Director, Tax Division, DOR,  for an                                                               
[There  followed   a  brief  discussion  on   the  aforementioned                                                               
1:29:05 PM                                                                                                                    
CO-CHAIR JOSEPHSON  commented that  [an average  break-even point                                                               
for oil producers] of $40-$41 was  provided by the Alaska Oil and                                                               
Gas  Association  in   January  [2017].    For   the  purpose  of                                                               
explaining  the  bill,  he  opined, [$40.21]  works  as  well  as                                                               
anything, because the amount is not an audit-specific number.                                                                   
REPRESENTATIVE JOHNSON stressed it  is important to have accurate                                                               
facts; in fact, DOR has  said that sometimes the break-even point                                                               
is as high as $46.                                                                                                              
REPRESENTATIVE  GARA observed  that  a  break-even point  changes                                                               
from field to  field; for example, in Prudhoe  Bay the break-even                                                               
point is probably a lot lower than  it would be for Nuna, as each                                                               
field is different in size,  age, and infrastructure.  The break-                                                               
even point [on  slide 9] is DOR's best assessment  of the average                                                               
costs for a North Slope field over the life of the field.                                                                       
REPRESENTATIVE  JOHNSON  agreed  that  the  discussion  was  "the                                                               
average"  and  expressed  her  hope   "that  we  weren't  picking                                                               
individual fields  ...."   She noted  various estimates  from DOR                                                               
that were included in the  presentation, and urged DOR to explain                                                               
why there is a discrepancy.                                                                                                     
REPRESENTATIVE GARA  said, "The basic point  of HB 133 is  to not                                                               
start the  progressive gross  minimum tax  until above  the point                                                               
where a field is profitable on  the North Slope."  Royalty relief                                                               
will  be addressed  later  in the  presentation;  in fact,  there                                                               
cannot be  an exact tax that  is perfect for every  single field,                                                               
which is  why adjustments through  royalty relief  are necessary.                                                               
The  bill doesn't  raise  the  4 percent  minimum  until $50  per                                                               
barrel -  above where  the average  field on  the North  Slope is                                                               
profitable -  and the  bill slowly  increases the  tax rate  to 6                                                               
[percent  to   10  percent],  in   order  to   recognize  company                                                               
profitability  and  the  impact   that  price  plays  on  company                                                               
REPRESENTATIVE GARA presented  slide 12 that was  a comparison of                                                               
the tax rate the state would levy  as a minimum tax under HB 133,                                                               
with  the  tax   rates  of  North  Dakota  and   Louisiana.    He                                                               
acknowledged  North  Dakota and  Louisiana  are  not the  perfect                                                               
states  to compare  to Alaska,  and there  are other  states with                                                               
lower tax  rates; however,  Alaska is  really not  competing with                                                               
shale oil  states, but with  jurisdictions around the  world that                                                               
have big traditional pools of oil.                                                                                              
REPRESENTATIVE  JOHNSON asked  why  Alaska  isn't competing  with                                                               
shale oil states.                                                                                                               
REPRESENTATIVE GARA  answered that some companies  try to produce                                                               
both, but  shale oil is  produced by a different  technology that                                                               
involves drilling well  after well, because some  wells only last                                                               
two  years.   He  has  heard  from  tax  experts that  Alaska  is                                                               
actually  competing with  jurisdictions  that have  pools of  oil                                                               
similar to those found on the North Slope.                                                                                      
1:33:43 PM                                                                                                                    
REPRESENTATIVE JOHNSON reported  that ExxonMobil Corporation, one                                                               
of Alaska's  major producers, stated  this morning it  is looking                                                               
to develop the  production of shale oil at $40  per barrel, which                                                               
sounded to her like direct competition [with Alaska].                                                                           
REPRESENTATIVE GARA responded, "... Exxon  is okay, I guess, with                                                               
the North  Dakota tax  rate, which  is much  higher than  what we                                                               
have, if we're  competing with North Dakota."  He  pointed out HB
133  is  for  the  committee  to assess,  and  if  the  committee                                                               
believes the state is competing  with North Dakota, Louisiana, or                                                               
Norway,  Alaska has  a much  lower  tax rate.   In  the end,  the                                                               
legislature  is supposed  to  determine a  tax  rate it  believes                                                               
achieves the maximum  benefit to the public,  as the constitution                                                               
requires, and  which, he stated,  is a combination  of [obtaining                                                               
maximum]  oil  revenue for  the  oil  the  state owns,  and  also                                                               
ensuring there is production.                                                                                                   
REPRESENTATIVE GARA  directed attention to slide  13 and recalled                                                               
the longest  and much  criticized tax regime  in Alaska  was ELF.                                                               
Under ELF  until 2005, the gross  tax rate on Prudhoe  Bay was 13                                                               
percent,  and on  Alpine and  Northstar [oilfield  units] it  was                                                               
approximately 10 percent; these  fields represent the majority of                                                               
the  state's production.   Under  ELF -  criticized as  being too                                                               
generous to industry - the  tax rate on the aforementioned fields                                                               
was double  and triple that of  current law.  In  fairness, under                                                               
ELF,  "a number  of fields  paid nothing  in terms  of production                                                               
taxes [such as] smaller fields,  [and] older fields.  But Prudhoe                                                               
Bay,  [and] the  places  we  had that  got  the  majority of  our                                                               
production from  under ELF,  [oil companies]  paid a  much higher                                                               
gross tax than [they] do right now."                                                                                            
REPRESENTATIVE GARA continued to slide 14, and remarked:                                                                        
     So, the reality is that  producers, they will take home                                                                    
     what  they get  after they  pay everybody  else, right?                                                                    
     And,  in Alaska  that's largely  the state.   In  other                                                                    
     states,  that's  the   state  and  private  landowners.                                                                    
     While  our  normal  royalty in  Alaska  is  about  12.5                                                                    
     percent, in  Texas though,  according to  Mr. Ruggiero,                                                                    
     it's now up  to 20 to 30 percent.   The Competitive ...                                                                    
     the Competitiveness  Review Board,  the report  that we                                                                    
     got  in 2015,  back  then the  average Texas  royalties                                                                    
     were  12.5 to  30 percent  depending on  the landowner.                                                                    
     Mr.  Ruggiero  says  they're  now   20  to  30  percent                                                                    
     according to  the landowner in Texas.   California [is]                                                                    
     16 to 25  percent, North Dakota [is] up  to 25 percent,                                                                    
     [and]  Oklahoma [is]  up to  20 percent.   The  royalty                                                                    
     share and also the land  lease payments in those states                                                                    
     tend to be much higher than they are in Alaska.                                                                            
REPRESENTATIVE   BIRCH  related   his   understanding  from   the                                                               
commissioner of DNR  that "Most of the leases that  are going out                                                               
now are one-sixth of royalty  share, or one-sixth, or sixteen and                                                               
two-thirds, whatever one-sixth  works out to."   He recalled some                                                               
of  the legacy  fields,  the older  ones,  are one-eighth,  which                                                               
would be 12.5 percent.                                                                                                          
REPRESENTATIVE GARA said  there are a number  of one-sixth fields                                                               
now, however,  Prudhoe Bay and  Kuparuk are 12.5  percent fields.                                                               
The  general  view  of  DNR,  he opined,  is  that  on  the  more                                                               
promising fields,  higher royalty  is part of  the contract.   He                                                               
     Oddly  enough, under  current law,  you basically  lose                                                                    
     the  benefit  of  the higher,  higher  royalty  because                                                                    
     there's a provision in the  current law that says "Even                                                                    
     for those  more generously  profitable fields  that you                                                                    
     have  a 16  percent royalty  on, we  just give  you the                                                                    
     money back in  a lower production tax rate."   So, it's                                                                    
     a wash right now under current law.                                                                                        
1:38:28 PM                                                                                                                    
REPRESENTATIVE  GARA further  explained under  any tax  system, a                                                               
particular field may not have the  right tax and therefore is not                                                               
profitable.  Royalty relief is  a repair mechanism to ensure that                                                               
the overall  taxes charged  by the state  - production  taxes and                                                               
royalty - are  not too high.   If a company can prove  a field is                                                               
not  economic  under the  current  royalty  system, most  of  the                                                               
royalty can  be waived.   Or DNR  can issue royalty  orders which                                                               
specify that at  low prices, most of the royalty  will be waived,                                                               
in  order to  make  the  field economic.    For example,  royalty                                                               
relief applications  from Oooguruk,  [Nikaitchuq], and  Nuna have                                                               
all  been  granted [slide  15].    Furthermore, royalty  for  new                                                               
fields can be reduced to 5  percent to make a new field economic,                                                               
and if costs  to a producer change, including a  change in taxes,                                                               
royalty on a producing field can  be reduced to 3 percent.  Thus,                                                               
he  said, the  state would  receive one-fifth  of the  16 percent                                                               
royalty [the state is due]  if DNR determines that royalty relief                                                               
is  necessary to  keep  a  field economic  [slide  16].   Royalty                                                               
relief statute  is AS 38.05.180  [slide 17].  He  reiterated that                                                               
royalty relief was  granted to Nuna in 2014, and  to Oooguruk and                                                               
[Nikaitchuq] [slides 18 and 19].                                                                                                
REPRESENTATIVE GARA informed the  committee ConocoPhillips is the                                                               
only  oil company  that  reports  its Alaska  profits,  as it  is                                                               
required to  do so by  the Securities Exchange  Commission (SEC).                                                               
As an aside,  he said BP also lists Alaska  profits, but one year                                                               
included  the cost  of the  Deepwater Horizon  [4/20/10 oil  well                                                               
explosion and]  spill [as a  loss], therefore, he  questions BP's                                                               
veracity.   Returning to ConocoPhillips,  he said in  2016 Alaska                                                               
was  one of  the  highest  generating regions  in  the world  for                                                               
ConocoPhillips,  generating  $116  million  in  profits  for  the                                                               
fourth  quarter,   although  the  company  lost   money  overall.                                                               
Representative Gara attributed  Alaska profits for ConocoPhillips                                                               
to Alaska's larger pools of  oil, and ConocoPhillips' interest in                                                               
Prudhoe  Bay, Alpine,  and  some of  the  more profitable  fields                                                               
[slide 20].  In past  years of higher oil prices, ConocoPhillips'                                                               
profits  in Alaska  were approximately  $2 billion  on an  annual                                                               
basis [slides  21 and 22].   Slide 23 illustrated that  by FY 19,                                                               
if HB  133 is adopted,  it would  generate about $200  million in                                                               
additional  revenue; however,  the amount  of additional  revenue                                                               
from any  new legislation will  depend on  the price of  oil, and                                                               
the oil price is  projected to be about $60 per  barrel by FY 19,                                                               
and $78 per barrel by FY 24 [slide 24].                                                                                         
1:43:07 PM                                                                                                                    
REPRESENTATIVE BIRCH  turned to the  larger issue of  tax credits                                                               
and inviting  new development, and  recalled the  initiative that                                                               
encourages  smaller investors  has  been fairly  successful.   He                                                               
asked whether Representative Gara  agreed that the credit program                                                               
was generally successful.                                                                                                       
REPRESENTATIVE GARA remarked:                                                                                                   
     When  you have  a  tax system  that  generates a  large                                                                    
     amount of  money, you can  afford to be an  investor in                                                                    
     new  oilfields with  very generous  credits.   When you                                                                    
     have a  tax system  that is generating  almost nothing,                                                                    
     you can't  afford to  do that.   Whether  those credits                                                                    
     lead  to new  production -  a company  will always  say                                                                    
     that.   Do  we know  that's true?   Possibly,  possibly                                                                    
     not.   And, I know  this committee is looking  at that.                                                                    
     I am not one for  taking somebody who receives money at                                                                    
     face value when  they say, "that money  was really good                                                                    
     to  me and  really important."   They  will always  say                                                                    
     that.   You should  have some independent  experts that                                                                    
     tell you  whether or not  they are working.   I'll tell                                                                    
     you,  in Louisiana,  their credit  is basically  a two-                                                                    
     year  credit on  horizontal drilling,  from 1994,  when                                                                    
     horizontal drilling  was new.   And  you can  only take                                                                    
     the credit for  the cost of the well, and  you can only                                                                    
     take that for  up to two years and if  you can't deduct                                                                    
     it within  two years, you  can't use  it.  It  has been                                                                    
     testified,  when  I've  been   around,  that  no  other                                                                    
     jurisdiction in  the world has the  same combination of                                                                    
     low  tax  revenue  take and  high  credit  payments  as                                                                    
     Alaska.    Alaska  is  unique  in  the  world  in  that                                                                    
     combination  of  the  revenue   it  generates  and  the                                                                    
     credits it pays.                                                                                                           
REPRESENTATIVE GARA  stated he has  no interest in going  back to                                                               
the  ACES mechanism,  or debating  whether ACES  was better  than                                                               
Senate  Bill  21.    The   maximum  profit  take  under  ACES  on                                                               
production tax  was approximately  75 percent,  and under  HB 133                                                               
the state would do better at low  prices, and not as well at high                                                               
prices; in fact,  HB 133 is a compromise that  is "modest on both                                                               
ends" [slide 25].  Turning to  the second feature of the bill, he                                                               
reminded the  committee that the  profits tax for GVR  fields can                                                               
be next  to nothing:   below and around  10 percent at  very high                                                               
prices. For  non-GVR fields, until approximately  $90 per barrel,                                                               
the profits  tax ranges from 10  percent to 12 percent,  which he                                                               
characterized as  very low.   Under  PPT, the  tax rate  was 22.5                                                               
percent and  ACES incorporated a  base 25  percent tax rate.   He                                                               
pointed  out there  are few  "profits  jurisdictions" around  the                                                               
world  with  a 12  percent  profits  tax;  HB 133  maintains  the                                                               
current approach  that the state  gets paid the higher  of either                                                               
the  profits tax  or  the gross  minimum tax.    However, if  oil                                                               
prices rise to  $90 per barrel, it is unfair  that Alaskans would                                                               
have to live off of a  13 percent profits tax, because that would                                                               
be too  generous to industry.   Representative Gara  explained as                                                               
follows [slide 26]:                                                                                                             
     So, we've imposed a new  sort of higher of minimum tax,                                                                    
     and that  will be --  we will still have  the mechanism                                                                    
     for determining the profits tax  under the current law,                                                                    
     but  it can't  go  below an  effective  rate of  [22.5]                                                                    
     percent.  You can deduct  below that your, your credits                                                                    
     but ... having  an effective tax rate of  9 percent, 11                                                                    
     percent -  at $90  a barrel -  [or] 13  percent doesn't                                                                    
     seem sustainable to  me.  And so, we've  adopted a very                                                                    
     modest [22.5] percent profits tax  as the higher of tax                                                                    
     that ...  would be  imposed when  it's larger  ... than                                                                    
     the gross minimum tax.                                                                                                     
1:47:56 PM                                                                                                                    
REPRESENTATIVE  GARA  noted  the bill  also  incorporates  former                                                               
Governor  Sean Parnell's  first effort  to reduce  the ACES  tax:                                                               
[through] bracketing.  Because at  some point oil companies reach                                                               
windfall profits range, HB 133  also addresses future high prices                                                               
through  bracketing.   Under the  ACES tax  system, when  the tax                                                               
rate  increased,  the  higher  taxes applied  to  all  oil,  thus                                                               
Governor  Parnell  and opponents  of  ACES  proposed a  bracketed                                                               
windfall  profits tax  such  that when  companies  achieve a  $40                                                               
profit per barrel, there is a  10 percent profits surcharge; at a                                                               
$50  profit  per barrel,  the  [surcharge]  would increase  by  5                                                               
percent on  the portion  of net  income between  $50 and  $60 per                                                               
barrel; an additional 5 percent  [surcharge] at $60 per barrel on                                                               
that portion  of net income  between $60  and $70 per  barrel; an                                                               
additional 5  percent [surcharge]  at $70  per barrel  and above.                                                               
Therefore, a company  could have a 25 percent  surcharge, but the                                                               
incremental  charges on  the incremental  value of  oil would  be                                                               
much less  [slide 27].   In summary, Representative  Gara advised                                                               
HB 133 provides the following [slides 28 and 29]:                                                                               
   · a fair and modest compromise, with a higher gross tax at                                                                   
     lower prices to protect the state, that would be fair to                                                                   
     the industry, and that includes royalty relief                                                                             
   · a modest profits tax at high prices                                                                                        
   · recognition that when the price of oil increases all should                                                                
REPRESENTATIVE  GARA  then  presented  slide 30  that  showed  an                                                               
alternative  provision  for  the committee's  consideration,  and                                                               
     We have a  proposal that says at $50 a  barrel the rate                                                                    
     goes up to 5 percent -  the gross minimum tax; and then                                                                    
     it goes  up goes  up at  every $8  increase at  $58, at                                                                    
     [$]66, at [$]74, at [$]82,  and at [$]90, by 1 percent.                                                                    
     We erred  on the side  of being conservative  before we                                                                    
     had modeling done on the  bill.  But, the state's share                                                                    
     of the  increase in  a gross  minimum tax  would remain                                                                    
     smaller than  the overall  revenue taken  in by  an oil                                                                    
     company producer  if we did it  at every $6, and  if we                                                                    
     did it  at every $6, and  instead of going all  the way                                                                    
     up  to 10  percent, just  capped it  at 8  percent. So,                                                                    
     just four additional  brackets instead of six.   So, we                                                                    
     did, 5  [percent] to  6 [percent] to  7 [percent]  to 8                                                                    
     [percent]  and stopped  at a  maximum  8 percent  gross                                                                    
     minimum tax, but  we did it at every  $6 price increase                                                                    
     so at  [$]56, at [$]62, at  [$]68, [and at $]74.   Next                                                                    
     fiscal year we  would take in an extra  $200 million in                                                                    
     revenue.    The  state's  share  for  those,  for  that                                                                    
     increase would allow  for the producer also  to take in                                                                    
     extra profits  and extra revenue that  would be greater                                                                    
     than the  amount of money  the state's share  would be.                                                                    
     So,  their  revenue  share would  be  higher  than  the                                                                    
     state's  ...  additional  take.   I  think  that's  the                                                                    
     better proposal,  I didn't  want to ...  put it  in the                                                                    
     bill until ...  it was modeled.  But, that  would be my                                                                    
     personal recommendation, and  not go all the  way up to                                                                    
     10 percent - only go up to 8 percent.                                                                                      
1:52:09 PM                                                                                                                    
REPRESENTATIVE  RAUSCHER   noted  that  the   slide  presentation                                                               
alluded  to progressivity  and bracketing,  and often  referenced                                                               
the  ACES  tax system.    He  asked whether  Representative  Gara                                                               
recommended a return to ACES.                                                                                                   
REPRESENTATIVE GARA answered  no.   The  legislature should learn                                                               
from all  of the  previous oil  tax systems  and devise  a system                                                               
that addresses  the valid  concerns related  to prior  or current                                                               
law, and that incorporates the best  parts from those laws and is                                                               
informed by the  best advice available.  He  said, "Frankly, were                                                               
that  [Ballot Measure  1, Alaska  Oil Tax  Cuts Veto  Referendum,                                                               
defeated 8/19/14] to pass, I  would have proposed a different law                                                               
back then, and I had, as a matter of fact."                                                                                     
REPRESENTATIVE GARA  further described the  alternative proposal:                                                               
5 percent at $50;  6 percent at $56; 7 percent  at $62; capped at                                                               
8 percent  at $70.   At  the point when  the profits  tax becomes                                                               
bigger than the  gross minimum, he said, "that  would take over."                                                               
The result  would be  $200 million  in revenue  in FY  18, rather                                                               
than $100 million after credits.   Representative Gara stated the                                                               
bill  would allow  the legislature  to start  building the  state                                                               
again,  pay  back  outstanding  oil  tax  credits  of  almost  $1                                                               
billion, and  create one component  of a revenue plan  that would                                                               
help get the state out of the red [slide 31].                                                                                   
REPRESENTATIVE RAUSCHER  asked whether all would  agree that more                                                               
oil  moving down  the pipeline  would be,  in a  large part,  the                                                               
answer to the current problem.                                                                                                  
REPRESENTATIVE  GARA  agreed that  all  seek  more oil  down  the                                                               
pipeline; however, it is not  in the state's greatest interest to                                                               
have  more oil  in the  pipeline while  receiving a  zero percent                                                               
production  tax for  the first  seven years,  during some  of the                                                               
most vibrant years  of a field's production, "or a  4 percent tax                                                               
after that."                                                                                                                    
REPRESENTATIVE  BIRCH   referred  to  fiscal   note  [Identifier:                                                               
HB133-DOR-TAX-03-03-17]  found  in  the  committee  packet  which                                                               
indicated that  approaching FY  23, additional  revenue increases                                                               
from $200  million a year to  over $300 million per  year "as you                                                               
have  a presumably,  a declining  throughput," and  asked whether                                                               
[the legislation]  is basically  a $300  million tax  increase on                                                               
the oil industry.                                                                                                               
REPRESENTATIVE GARA answered:                                                                                                   
     When  you're looking  at those  "out"  years, where  it                                                                    
     raises  $300 million  a year,  that's only  because oil                                                                    
     companies are  reaping in much  larger profits,  so you                                                                    
     would  ...  be taking  a  share  as oil  companies  are                                                                    
     getting a share from higher  oil prices.  So, that $300                                                                    
     million-year  is at  much higher  prices  than we  have                                                                    
     today, and I think an  oil tax system should be written                                                                    
     in a way where the  state shares and industry shares in                                                                    
     high oil prices.                                                                                                           
1:56:00 PM                                                                                                                    
REPRESENTATIVE  GARA  returned attention  to  GVR  - gross  value                                                               
reduction - which  reduces a company's tax payment  to zero until                                                               
approximately $70 per barrel for  the first seven years, and then                                                               
by  approximately  40 percent  of  the  tax  rate paid  by  other                                                               
fields.   He said  HB 133  would eliminate  GVR for  large fields                                                               
that  are presumably  more profitable  - 50,000  barrel fields  -                                                               
while recognizing  that small, more  challenged fields  can still                                                               
retain  GVR.   Further, the  maximum  length of  the GVR  benefit                                                               
would be five  years, instead of seven years.   Turning attention                                                               
to Cook Inlet, Representative Gara  said under current law, after                                                               
a  certain  sunset  date,  Cook Inlet  [producers]  will  pay  35                                                               
percent profits tax; presently,  producers are paying essentially                                                               
zero, and the  calculations resulting in "close  to no production                                                               
taxes  in Cook  Inlet"  can be  explained by  DOR.   The  credits                                                               
provided  by  the  legislature for  Cook  Inlet  production  were                                                               
intended to  incentivize the production of  natural gas, although                                                               
when  searching for  gas, many  companies  found oil.   The  bill                                                               
proposes a  22.5 percent tax on  profits in Cook Inlet,  but does                                                               
not  propose a  gross  minimum  tax.   In  addition, a  bracketed                                                               
windfall profits  surcharge is assessed after  a company achieves                                                               
$40 per  barrel in profits;  however, Cook Inlet is  a challenged                                                               
area  and a  $40 per  barrel profit  may never  be achieved.   He                                                               
opined  some tax  is  needed as  right now,  "Cook  Inlet is  all                                                               
zeros" [slide 32].                                                                                                              
REPRESENTATIVE GARA  acknowledged the  bill contains  one mistake                                                               
in judgment on  his part, and one drafting error.   The bracketed                                                               
provision  was  not  written  as   intended,  thus  there  is  an                                                               
amendment  available  to  address  the  aforementioned  technical                                                               
error [amendment not provided].   Further, there was no intent to                                                               
increase the gross minimum tax on  heavy oil, which is defined by                                                               
the "Schrader  Bluff and Ugnu  definition of heavy oil,"  in that                                                               
any field  that has oil  with a lower  gravity than the  Ugnu and                                                               
Schrader  Bluff reservoirs  would not  be subject  to the  rising                                                               
gross  minimum tax,  but  would  be left  at  the existing  gross                                                               
minimum tax rate [amendment not provided].                                                                                      
REPRESENTATIVE  JOHNSON  asked  whether Representative  Gara  had                                                               
reviewed HB 111, and how HB 111 compares to HB 133.                                                                             
REPRESENTATIVE  GARA pointed  out  HB 133  does  not address  tax                                                               
credits,  and he  opined the  House Resources  Standing Committee                                                               
should make a  decision on tax credits.  He  restated that if the                                                               
state has  higher revenue  it can afford  to pay  tax incentives,                                                               
otherwise, it cannot.  He added  that there are two sides when it                                                               
comes  to the  state's  fiscal  health:   the  revenue the  state                                                               
brings in, and  what the state does in terms  of incentives.  The                                                               
proposed  legislation addresses  the revenue  side; in  fact, the                                                               
provisions in HB  133 protect the fiscal health of  the state and                                                               
allow  it to  move forward  in a  more economically  vibrant way,                                                               
while respecting company profits.                                                                                               
REPRESENTATIVE  JOHNSON  inquired  as  to  Representative  Gara's                                                               
opinion on changing tax policy almost on a yearly basis.                                                                        
REPRESENTATIVE  GARA  stressed that  the  two  most unstable  tax                                                               
regimes possible are those that  are too high, because there will                                                               
always be efforts  [by industry] to make changes,  and those that                                                               
are too  low, because that  affects investment decisions  made in                                                               
anticipation of  changes brought by  the public.   Currently, the                                                               
state  has  a too  low  tax  regime that  may  be  subject to  an                                                               
initiative and/or  future legislation.   Preferable to  changes -                                                               
brought by industry  or the public - is  passing legislation such                                                               
as HB 133 that would provide more certainty to the oil industry.                                                                
2:02:20 PM                                                                                                                    
REPRESENTATIVE  BIRCH opined  there is  stability in  Senate Bill                                                               
21.   He  suggested comparing  the cost  of production  in Alaska                                                               
with the  cost of production  in competitive fields in  the Lower                                                               
48, excluding  royalty, which has  been discussed.   He cautioned                                                               
that bankers  who have invested  in small producers based  on the                                                               
state's promise  to pay their  exploration costs,  have indicated                                                               
there is a very competitive market  for capital.  He asked if the                                                               
bill sponsor had  compared the cost of production  in Alaska with                                                               
that of other jurisdictions.                                                                                                    
REPRESENTATIVE GARA said  yes.  As a legislator,  he has listened                                                               
to an unknown number of  oil tax presentations from experts, "And                                                               
it's not as  simple as just taking the cost";  in fact, there are                                                               
significant cost  differences between producing a  Shell oilfield                                                               
and drilling  for shale oil,  which can  be done with  many small                                                               
wells.  All  things being equal, drilling a large  pool of oil is                                                               
more efficient than  drilling for tiny amounts of  oil with large                                                               
numbers  of  small  wells.     In  addition,  one  could  compare                                                               
production in Alaska with offshore  oil production in the Gulf of                                                               
Mexico, although the  cost per barrel of  offshore oil production                                                               
is much higher  than oil production on land.   There is no simple                                                               
answer as  to where Alaska  ranks in  terms of cost,  he advised,                                                               
but  a profits  tax  equalizes the  fact that  the  costs may  be                                                               
higher;  furthermore,  there  is   not  one  decisive  comparison                                                               
factor, but many comparison factors.                                                                                            
REPRESENTATIVE PARISH  returned attention to slide  6 that showed                                                               
production tax  net of tax  credits earned  [in FY 18]  was about                                                               
negative $25  million.   He asked  about the  state's net  in the                                                               
previous years of FY 16 and FY 17.                                                                                              
REPRESENTATIVE  GARA answered  that prior  analyses measured  oil                                                               
production revenue compared to what  the state owes in cumulative                                                               
years of tax  credits.  He was unsure whether  2017 was the first                                                               
year  the state  owed more  in tax  credits than  it received  in                                                               
production taxes.   The state is  hampered in its ability  to pay                                                               
the tax  credits due  to decreased levels  of oil  production tax                                                               
2:07:25 PM                                                                                                                    
KEN ALPER,  Director, Tax Division,  DOR, referred to  an earlier                                                               
question    regarding   estimated    per    barrel   costs    for                                                               
transportation,  capital  expenditures   (CAPEX),  and  operating                                                               
expenditures  (OPEX). [Differing  estimates of  per barrel  lease                                                               
expenditure and transportation  costs were shown in  slides 8 and                                                               
10.]  He said both estimates  were from the current RSB, Appendix                                                               
E tables.  However, the  estimate of $9.33 in transportation cost                                                               
is the  division's estimate  for FY 17,  the current  fiscal year                                                               
[slide  10].   The  other  estimate of  $9.77  is the  division's                                                               
estimate for  FY 18 [slide 8].   Therefore, this year,  the total                                                               
estimated cost is  approximately $40 and next  year the estimated                                                               
cost is approximately $43.   Last year, the division expected the                                                               
cost  for FY  17 would  be $46,  but company  efficiency measures                                                               
have  reduced   the  oil  industry's   per  barrel   spending  by                                                               
approximately $5 per barrel in the current fiscal year.                                                                         
CO-CHAIR  TARR suggested  industry's changes  in costs  might lag                                                               
behind the actual  change in oil price because,  for example, the                                                               
companies cannot respond overnight with reductions in workforce.                                                                
MR. ALPER advised  each year DOR contacts  industry regarding its                                                               
plans  for work  in  the next  year, thus  data  is collected  in                                                               
September and October for inclusion  in the Revenue Sources Book.                                                               
For the  industry, mobilization of  workforce requires  months or                                                               
even  one   year's  notice  and   depends  upon   each  company's                                                               
investment decisions  and reaction to  price changes.   He opined                                                               
once industry determined  the drop in oil price was  not going to                                                               
immediately  rebound, "spending  has followed."   The  division's                                                               
forecast from the  fall of 2014 - when the  price first dropped -                                                               
was that  oil price  would be  back up to  $100 by  FY 17.   Soon                                                               
thereafter, the  division extended  its negative outlook,  and in                                                               
spring 2016, forecast  prices in the low [$]40s for  the next two                                                               
or  three years.    However,  the fall  forecast  is  a bit  more                                                               
CO-CHAIR  JOSEPHSON  recalled  discussion  about  the  unofficial                                                               
"[former Governor  Jay] Hammond Doctrine" of  oil industry taxes:                                                               
[two-thirds for  state and federal government,  and one-third for                                                               
industry].   Apropos of [slide  6], in 2018 state  production tax                                                               
was $230 million.   He questioned whether  legislators should ask                                                               
if industry  received $710  million, [approximately  $230 million                                                               
times  three]  or whether  the  state's  portion of  tax  revenue                                                               
should not  be paid until oil  prices return to $100  per barrel.                                                               
He pointed  out that the  state is  due billions of  dollars, "of                                                               
course,  that's  not possible  right  now."   Co-Chair  Josephson                                                               
asked, "How do I know what the industry brought in, in 2018?"                                                                   
MR. ALPER  returned attention to  slide 6 that  showed production                                                               
tax, and  explained total government take,  or total non-producer                                                               
take, is  the sum total of  all of the different  taxes; in fact,                                                               
an oil  company working  in Alaska  typically has  five different                                                               
taxes:     state  property  tax,  state   production  tax,  state                                                               
corporate income tax, royalty, and  federal corporate income tax.                                                               
Total  government take  is a  share  of "divisible  rents" -  the                                                               
total divisible profit from producing  oil, which is more or less                                                               
production tax value with the royalty  added back into it as part                                                               
of   the  divisible   total.     As  discussed   in  a   previous                                                               
presentation, it  is hard to track  the share of the  net because                                                               
the division must use aggregated  data taken from net profits tax                                                               
filings;  thus,  the division  does  not  have knowledge  of  any                                                               
company's  profits  in 1995,  because  that  information was  not                                                               
required.   Further, the division's  use of corporate  income tax                                                               
filings  [to determine  profit] is  complicated by  apportionment                                                               
formulas and  the complexity of  corporate income tax.   However,                                                               
data  is available  from 1978-1981,  a time  period during  which                                                               
corporate  income  taxes  were   determined  through  a  separate                                                               
accounting mechanism.                                                                                                           
2:13:49 PM                                                                                                                    
CO-CHAIR  JOSEPHSON questioned  whether  the  division could  use                                                               
data from  ConocoPhillips to extrapolate profits  earned by other                                                               
MR. ALPER said  probably, although in the years  before 2006, the                                                               
breakdown  of ownership  would  need to  be  known; for  example,                                                               
ConocoPhillips  may have  30  percent ownership.    He added,  "I                                                               
suppose that would be possible  ... [but] there's always going to                                                               
be  differences  among the  producers  based  on their  corporate                                                               
structure, their, what investments  they're making at that moment                                                               
in history, that sort of thing."                                                                                                
REPRESENTATIVE  WESTLAKE  returned  attention  to  slide  8,  and                                                               
referred to the discrepancy that was discussed earlier.                                                                         
MR. ALPER restated  the estimate of $9.77  in transportation cost                                                               
and   $33.64  [in   per  taxable   barrel  in   deductible  lease                                                               
expenditures],  is  the  division's   current  forecast  for  the                                                               
average [oil  industry] spending  in FY 18.   In  December [2016]                                                               
the  tax  division was  asked  to  use the  aforementioned  data,                                                               
assume the  other features of  the tax system, and  calculate the                                                               
average effective  tax rate  at a variety  of price  points; thus                                                               
the data  on slide  8 is  taken from  a letter  to Representative                                                               
Gara dated January or February  [2017], included in the committee                                                               
REPRESENTATIVE WESTLAKE  said he  understood the need  to revisit                                                               
the   issue  of   tax  credits,   and   asked  whether   [revenue                                                               
information] on royalty is readily available.                                                                                   
MR. ALPER answered  that royalty revenue is  fully documented and                                                               
reported  in the  Revenue Sources  Books [prepared  by DOR].   He                                                               
observed  Prudhoe  Bay,  Kuparuk,  and  other  major  finds  were                                                               
discovered  on  state land;  however,  future  production in  the                                                               
National  Petroleum  Reserve-Alaska  (NPR-A), offshore,  and  the                                                               
Arctic National Wildlife Refuge (ANWR),  which are not located on                                                               
state  land,  will  not  provide  the state  the  same  share  of                                                               
REPRESENTATIVE   PARISH   referred   to   Representative   Gara's                                                               
statement that BP reported deductions  of Deepwater Horizon costs                                                               
from its Alaska profits, and  asked whether Mr. Alper had further                                                               
MR. ALPER indicated no.                                                                                                         
REPRESENTATIVE  GARA,  in   response  to  Representative  Parish,                                                               
clarified  an example  of why  BP's annual  reports could  not be                                                               
relied upon for an accurate  rendition of their Alaska profits is                                                               
that BP deducted  some of its Deepwater Horizon  costs, which are                                                               
not allowed  to be deducted  from Alaska's corporate  income tax;                                                               
if BP is paying the gross minimum  tax of 4 percent, there are no                                                               
deductions other  than the  net operating loss.   He  pointed out                                                               
Alaska's corporate income tax system  works in a "funky" way, and                                                               
deferred   to  Mr.   Alper  for   an  explanation   of  worldwide                                                               
2:18:38 PM                                                                                                                    
CO-CHAIR  TARR  asked Mr.  Alper  to  briefly describe  worldwide                                                               
MR.  ALPER informed  the committee  oil companies  have a  global                                                               
income number, which is their  profit from around the world, thus                                                               
taxes  paid in  Alaska  are  not necessarily  on  profit made  in                                                               
Alaska,  but  are  on  the   amount  a  company  made  worldwide,                                                               
multiplied  by  a series  of  ratios  tied  to ratios  of  Alaska                                                               
activity to global activity, such  as a payroll ratio, a property                                                               
asset ratio, and an extraction  factor.  The resulting formula is                                                               
multiplied and applied  to regular corporate income  tax for non-                                                               
oil and gas  companies, and to a special formula  for oil and gas                                                               
companies.  He continued:                                                                                                       
     The effect  of that, on  average, is a little  bit less                                                                    
     than the  statutory tax rate.   So, if you look  at the                                                                    
     corporate income  tax statutes  in [AS] 43.20,  the top                                                                    
     rate is  9.4 percent of  profits.  What  we've learned,                                                                    
     based  on a  track record  of  many years,  is at  this                                                                    
     moment in history,  the average oil and  gas company is                                                                    
     paying the  equivalent of about [6.5]  percent of their                                                                    
     profits to the  State of Alaska.  So,  the short answer                                                                    
     there is,  the net  effect of  that multiplier  is that                                                                    
     we're  a  little  bit  of   a,  a  below-the-mean  type                                                                    
     calculation for the  State of Alaska.   And, that's why                                                                    
     you sometimes hear  talk about going back  to this idea                                                                    
     of  separate  accounting  which would  -  at  least  in                                                                    
     theory - bring us back to the 9.4 statutory rate.                                                                          
MR. ALPER,  in response to Representative  Parish, clarified that                                                               
the  percentage   actually  paid,  on  average,   is  a  modeling                                                               
convention of approximately 6.5  percent.  For modeling purposes,                                                               
he explained, the  division deducts production tax  paid from the                                                               
income, or  production tax  value, and "the  amount that  is left                                                               
after  the production  tax  is what  we  calculate the  corporate                                                               
income tax  on.  And  then to  go further, after  subtracting the                                                               
corporate income  tax, what's  left after  that, that's  what you                                                               
would calculate the federal corporate income tax on."                                                                           
2:21:22 PM                                                                                                                    
REPRESENTATIVE  PARISH  concluded  that the  state  is  receiving                                                               
approximately 3  percent less  in corporate  income tax  than the                                                               
statute indicates.                                                                                                              
MR. ALPER agreed "on average";  however, the percentage will vary                                                               
from  company  to  company  because  each  company  has  its  own                                                               
circumstances and ratios.                                                                                                       
REPRESENTATIVE   PARISH   further   asked  whether   the   global                                                               
apportionment  formula  takes  into account  the  higher  average                                                               
quality of  Alaska oil - which  is low gravity oil  - in contrast                                                               
with tar sands that are prevalent in other parts of the world.                                                                  
MR. ALPER was  unsure and offered to provide a  response from the                                                               
CO-CHAIR  JOSEPHSON questioned  whether  the  state is  receiving                                                               
less than what  is statutorily designated because  the formula at                                                               
the   present  time   is   affected   by  worldwide   deductions,                                                               
apportionment, and such.                                                                                                        
MR.  ALPER said  exactly  right.   For  example,  if a  company's                                                               
global  share of  income is  $1 billion,  Alaska's 10  percent of                                                               
that would  be $100  million, and  if the  share of  property the                                                               
company  owns in  Alaska is  less  than one-tenth  of its  global                                                               
property, "that  will reduce  the multiplier  in some  way, those                                                               
kinds of factors."                                                                                                              
2:23:24 PM                                                                                                                    
REPRESENTATIVE   PARISH   returned   attention  to   the   global                                                               
apportionment  issue and  opined  if the  state  is getting  paid                                                               
less, due  to the aforementioned  formula, somebody else  must be                                                               
getting paid more.                                                                                                              
MR.  ALPER recommended  that Representative  Parish discuss  this                                                               
issue with  the division's corporate  income tax  expert, Brandon                                                               
Spanos, Deputy Director, Tax Division, DOR.                                                                                     
CO-CHAIR TARR  recalled there was previous  legislation sponsored                                                               
by  Representative  Seaton  [House  Bill 191  introduced  in  the                                                               
Twenty-Ninth Alaska  State Legislature]  on this topic,  and said                                                               
over the years  the monetary value of  separate accounting versus                                                               
worldwide  accounting has  added up  to approximately  $6 billion                                                               
[in additional revenue to the state].                                                                                           
MR.  ALPER related  in 1978  the legislature  enacted a  separate                                                               
accounting  based  system,  which  was  adjudicated  through  the                                                               
courts, and  which greatly increased  Alaska's revenue take.   At                                                               
that  time,  in  1978,  Alaska   had  a  lot  of  production  and                                                               
relatively low amounts  of infrastructure.  The  state was brand-                                                               
new to the oil business and  not a lot of infrastructure had been                                                               
built,  thus  "the  multipliers  were  strongly  in  our  favor."                                                               
However, multipliers  are shifting toward breaking  even:  Alaska                                                               
is  currently at  two-thirds [rate  of government  take collected                                                               
from industry] and  was probably at one-third  or one-quarter [in                                                               
1978].  Within  the tax division, there is concern  that a return                                                               
to  separate accounting  may instigate  manipulation  of the  tax                                                               
system  by taxpayers'  sophisticated  accountants.   He gave  the                                                               
simple  example of  a major  operator  in Alaska  that sells  its                                                               
Alaska operations to a subsidiary  based in Washington State, and                                                               
then leases the  Alaska operations back for $5  billion per year;                                                               
for  corporate  income  tax separate  accounting  purposes,  this                                                               
would mean  the major operator  is now operating  at a loss.   He                                                               
cautioned  that the  cumulative impact  of a  return to  separate                                                               
accounting  is unknown.   Furthermore,  the division  performed a                                                               
rudimentary   analysis   for   the  fiscal   note   attached   to                                                               
Representative Seaton's bill, and  estimated a change to separate                                                               
accounting may have  raised a couple hundred  million dollars per                                                               
year, presuming nothing else changed.                                                                                           
REPRESENTATIVE  JOHNSON requested  the  committee hear  testimony                                                               
from  the [Oil  and  Gas] Competitiveness  Review Board  (OGCRB),                                                               
CO-CHAIR TARR  related there  were no plans  to hear  from OGCRB.                                                               
She added  there was a  delay in the  board's work after  the new                                                               
administration took office, and she  was unsure whether the board                                                               
was fully appointed at this time.                                                                                               
MR.  ALPER advised  that  the 2015  Oil  and Gas  Competitiveness                                                               
Review  Board Report  was made  available to  the committee.   He                                                               
explained   that  the   most  recent   project  on   the  board's                                                               
[deliverables]  cycle  would have  been  a  Cook Inlet  analysis;                                                               
however, the board chose to defer  that analysis due to the major                                                               
changes to  the Cook  Inlet taxation system  that were  made last                                                               
year.  The board recently began  the process of hiring an outside                                                               
contractor to look at various  pieces of legislation, and how the                                                               
board might  compare and  contrast Alaska's  competitiveness, and                                                               
he said, "So,  I would doubt that there is  much of, of interest,                                                               
that's extremely timely,  that could be brought  to the committee                                                               
now, although, later in session I  think there will be at least a                                                               
draft report to bring forward."                                                                                                 
2:28:07 PM                                                                                                                    
CO-CHAIR  TARR said  she would  report  to the  committee on  the                                                               
status of OGCRB.                                                                                                                
2:28:31 PM                                                                                                                    
REPRESENTATIVE GARA  closed, restating  that the  state contracts                                                               
for  a  higher royalty  on  a  field  that  it believes  has  the                                                               
potential to  be more  profitable.  During  the debate  on Senate                                                               
Bill  21, an  amendment was  [adopted] to  reduce the  production                                                               
taxes on  [potentially more profitable] fields  to reduce overall                                                               
government take to that of  the 12.5 percent fields; however, the                                                               
benefit  that lowers  the production  tax on  16 percent  royalty                                                               
fields is eliminated  in HB 133.  Finally, the  gross minimum tax                                                               
in  HB 133  never  gets  to North  Dakota  and Louisiana  levels.                                                               
Representative  Gara reminded  the  committee  to subtract  about                                                               
four-tenths from the tax because 35  percent of the taxes paid to                                                               
the  state  are deductible  from  a  company's federal  corporate                                                               
income tax.  He further explained:                                                                                              
     So,  we can  sort  of  piggyback a  little  bit on  the                                                                    
     federal government's decision not  to accept as much of                                                                    
     a  share as  it  could,  but if  we  raise  taxes by  3                                                                    
     percent,  we're  really  raising   them  by  2  percent                                                                    
     because the  company then  gets that  much bigger  of a                                                                    
     federal  deduction.   And  the  way  our corporate  tax                                                                    
     works,  you get  to deduct  your production  taxes from                                                                    
     your  state  corporate  tax,  too.   So,  you  get  two                                                                    
     deductions  for  any  tax increase,  and  so,  any  tax                                                                    
     increase  here  really should  be  viewed  as ...  only                                                                    
     about six-tenths  of what it  looks like  because about                                                                    
     four-tenths of that, the company doesn't really pay.                                                                       
CO-CHAIR   JOSEPHSON,   although   not   representing   industry,                                                               
suggested  that one  of industry's  responses to  HB 133  will be                                                               
that  Louisiana's fixed  13 percent  tax  rate is  higher at  oil                                                               
prices  through   $90  per  barrel,   but  HB  133   provides  an                                                               
opportunity for  the state, theoretically,  to get 35  percent at                                                               
an oil price of $170 per barrel.                                                                                                
REPRESENTATIVE  GARA  pointed  out  legislators have  a  duty  to                                                               
represent  their constituents  now, and  now, no  one anticipates                                                               
world record  oil prices of the  amount it would take  to get the                                                               
profits tax under current  law up to 35 percent.   He said it's a                                                               
mythical tax rate because never has  there been an oil price that                                                               
would  have gotten  the state  [to a  35 percent  tax rate].   In                                                               
order to protect  the future of Alaskans during  the next decade,                                                               
and  provide a  vibrant university  system and  schools in  which                                                               
Alaskan children can  thrive, Alaska legislators need  to look at                                                               
the near-term -  three years, five years, and ten  years into the                                                               
future -  and HB 133 protects  Alaskans over the next  ten years;                                                               
without this  proposed legislation,  the revenue the  state needs                                                               
now, for reasons the committee understands, will be lost.                                                                       
2:32:56 PM                                                                                                                    
REPRESENTATIVE  RAUSCHER  spoke  of  the  confusion  created  for                                                               
producers  related  to  whether  the proposed  legislation  is  a                                                               
permanent fix to the oil tax system.                                                                                            
REPRESENTATIVE GARA  agreed the legislature should  not develop a                                                               
partial  oil tax  system that  would have  to be  revisited.   He                                                               
     So, in this bill  we've addressed the low-price problem                                                                    
     of the zero percent production  taxes on GVR oil, [and]                                                                    
     the 4 percent  gross minimum tax that we  live on until                                                                    
     $74 a  barrel.  So, that's  the "for the next  10 years                                                                    
     problem."    But,  we also  address  the  next  30-year                                                                    
     problem by also addressing the  fair share we should be                                                                    
     getting when  companies are in windfall  profits range.                                                                    
     So, this bill has both  provisions.  One provision that                                                                    
     probably won't kick  in for many, many  years, which is                                                                    
     when companies are in the  windfall profits range, [is]                                                                    
     "What should  our share  be?"   And, one  provision for                                                                    
     what  we do  now.   And  so, it's  ...  intended to  be                                                                    
     stable  across all  prices, and  to be  less aggressive                                                                    
     than ACES was  at high prices, but to  be stable across                                                                    
     all prices, rather  than focusing on just  now, or just                                                                    
REPRESENTATIVE GARA  reiterated there  are two amendments  to the                                                               
bill that  better reflect  the legislation's intent:   1.  to not                                                               
increase  the  tax  on  heavy  oil; 2.  to  correct  language  on                                                               
bracketing [amendments not provided].                                                                                           
CO-CHAIR  TARR announced  the committee's  intention to  have one                                                               
[oil and  gas tax] bill  reported from the  committee, therefore,                                                               
the purpose  of today's  presentation was  to hear  other options                                                               
that could be included in upcoming legislation.                                                                                 
[HB 133 was held over.]                                                                                                         
2:44:04 PM                                                                                                                    
There being no  further business before the  committee, the House                                                               
Resources Standing Committee meeting was adjourned at 2:44 p.m.                                                                 

Document Name Date/Time Subjects
HB 133 Version J 2.20.17.pdf HRES 3/6/2017 1:00:00 PM
HB 133
HB 133 Sponsor Statement 2.23.17.pdf HRES 3/6/2017 1:00:00 PM
HB 133
HB 133 Sectional Analysis 2.20.17.pdf HRES 3/6/2017 1:00:00 PM
HB 133
HB133 Supporting Documents - Oil Taxes Background 3.3.17.pdf HRES 3/6/2017 1:00:00 PM
HB 133
HB111 Supporting Document - Letters in Support 3.3.17.pdf HRES 3/6/2017 1:00:00 PM
HRES 3/6/2017 6:30:00 PM
HB 111
HB111 Opposing Document - Letters in Opposition 3.3.17.pdf HRES 3/6/2017 1:00:00 PM
HRES 3/6/2017 6:30:00 PM
HB 111
HB111 Opposing Documents - Letter of Oppostion- North Slope Borough 3.3.17.pdf HRES 3/6/2017 1:00:00 PM
HRES 3/6/2017 6:30:00 PM
HB 111
HB111 Opposing Document - Letter in Opposition NANA 3.2.17.pdf HRES 3/6/2017 1:00:00 PM
HRES 3/6/2017 6:30:00 PM
HB 111
HB111 Opposing Document - Letter in Opposition 3.2.17.pdf HRES 3/6/2017 1:00:00 PM
HRES 3/6/2017 6:30:00 PM
HB 111
HB111 Opposing Document - Letters in Opposition 3.3.17.pdf HRES 3/6/2017 1:00:00 PM
HRES 3/6/2017 6:30:00 PM
HB 111
HB133 Fiscal Note DOR-TAX 3.3.17.pdf HRES 3/6/2017 1:00:00 PM
HB 133
HB133 Supporting Document - Letters of Support 3.6.17.pdf HRES 3/6/2017 1:00:00 PM
HB 133
HB133 Supporting Document - Rep. Gara Slide Presentation 3.6.17.pdf.pdf HRES 3/6/2017 1:00:00 PM
HB 133