Legislature(2005 - 2006)

01/13/2006 09:02 AM W&M

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09:02:10 AM Start
09:03:26 AM Overview(s): Pers/trs Funding
09:07:02 AM HB63
09:31:18 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 63-OIL SEVERANCE TAX                                                                                                       
9:07:02 AM                                                                                                                    
CHAIR WEYHRAUCH announced  that the only order  of business would                                                               
be  HOUSE BILL  NO.  63, "An  Act  relating to  the  oil and  gas                                                               
properties  production  (severance) tax  as  it  applies to  oil;                                                               
establishing a  minimum rate  of tax for  certain fields  of five                                                               
percent;  providing  for  an  adjustment   to  increase  the  tax                                                               
collected when  oil prices  exceed $20 per  barrel and  to reduce                                                               
the tax collected when oil prices  fall below $16 per barrel; and                                                               
providing for  relief from the tax  when the price per  barrel is                                                               
low or  when the  taxpayer demonstrates that  a reduction  in the                                                               
tax is necessary  to establish or reestablish  production from an                                                               
oil  field  or pool  that  would  not otherwise  be  economically                                                               
9:07:21 AM                                                                                                                    
REPRESENTATIVE LES GARA, Alaska  State Legislature, sponsor of HB
63,  mentioned  that  his  slide  presentation  includes  updated                                                               
forecasts  from the  Department of  Revenue (DOR)  that show  oil                                                               
company profits  and the state's  share under existing  tax laws,                                                               
and relayed  that Deborah Vogt  has updated information  to share                                                               
as well.                                                                                                                        
9:08:25 AM                                                                                                                    
DEBORAH VOGT explained that she has  worked on oil tax matters in                                                               
both the DOR and the Department  of Law (DOL) for about 20 years.                                                               
She said she  feels HB 63 is long overdue,  and characterized the                                                               
current tax structure,  including the severance tax,  as "way out                                                               
of wack."   Additionally, she  opined, the economic  limit factor                                                               
(ELF) changes  that were passed  in 1989 were appropriate  at the                                                               
time  but are  now "allowing  vast sums  of money  to escape  the                                                               
MS.  VOGT offered  her  understanding that  Article  VIII of  the                                                               
Alaska  State Constitution  mandates that  the natural  resources                                                               
belonging to the  state be developed "for the  maximum benefit of                                                               
its people."   She opined that this mandate is  not being carried                                                               
out,  and that  the industry  hired  to produce  Alaska's oil  is                                                               
being benefited to the detriment of Alaska's residents.                                                                         
MS.  VOGT  indicated her  belief  that  HB  63 would  change  the                                                               
respective  shares  the state  and  the  industry receive.    She                                                               
explained that  under the current tax  structure, DOR projections                                                               
for fiscal  year 2007  (FY 07)  show that  the oil  industry will                                                               
take  $7.25 billion  in net  profit  from oil  production out  of                                                               
Alaska assuming  prices stay  at today's  $60/barrel level.   The                                                               
state's share  at the same price,  she said, would be  just under                                                               
$4 billion.   Over the  years, she remarked, many  policy makers,                                                               
including the late Governor Jay  Hammond, have suggested that the                                                               
state should  be retaining as  large a  share of the  state's oil                                                               
wells as the industry takes.                                                                                                    
MS.  VOGT also  noted DOR  projections for  2006 show  that under                                                               
today's  law, with  oil  prices  at $47/barrel  -  the price  the                                                               
federal  Energy Information  Administration  (EIA) projects  over                                                               
the  long-term -  the industry  would  net $5.8  billion and  the                                                               
state would net  $3.5 billion.  Under HB 63,  these amounts would                                                               
change to $4.9 billion for the  industry and $4.7 billion for the                                                               
state, a much more equitable share.                                                                                             
MS. VOGT  relayed her belief that  HB 63 would not  drive the oil                                                               
industry  out  of   Alaska.    For  example,   according  to  DOR                                                               
projections,  following  passage of  HB  63,  the industry's  net                                                               
profit   would   be  35   percent   at   the  $47/barrel   price;                                                               
profitability  at the  $60/barrel price  would be  higher.   Even                                                               
with oil  prices reverting  to $20/barrel,  she claimed,  the net                                                               
profit for the industry would be  21.4 percent.  The questions to                                                               
consider, she suggested,  are:  who should spend  the wealth from                                                               
Alaska's natural resources, and where  should it be spent.  Right                                                               
now, it  is the oil  industry that  decides the answers  to those                                                               
questions, she added.                                                                                                           
MS.   VOGT   read   from   correspondence   written   by   former                                                               
Representative Hugh  Malone to the  Kenai Chamber of  Commerce in                                                               
1981,  in which  he  emphasized  that the  real  question is  not                                                               
whether  taxes  [to the  industry]  are  unfair, but  rather  who                                                               
should have control  in "how to use money from  Alaska to benefit                                                               
Alaskans."   Ms. Vogt remarked  that 25 years later  the question                                                               
remains, "who  should determine  the use of  the wealth  from our                                                               
natural resources."                                                                                                             
9:17:09 AM                                                                                                                    
MS. VOGT,  in response to questions,  relayed that Representative                                                               
Gara could provide the committee with the statistics she'd used.                                                                
9:18:14 AM                                                                                                                    
REPRESENTATIVE  GARA  opined  that  just within  the  last  three                                                               
years,  the state  has given  out $4  billion in  unjustified tax                                                               
breaks, and  that the money allowed  to leave the state  could be                                                               
better  spent within  the state  by addressing  concerns such  as                                                               
reducing classroom  size, building roads, and  making communities                                                               
REPRESENTATIVE   GARA  explained   that  HB   63  addresses   the                                                               
production tax, which is affected by  the ELF, and that last year                                                               
the  state  took  in approximately  $800  million  in  production                                                               
taxes.   Additionally, Representative  Gara explained,  under the                                                               
ELF,  which determines  how much  of the  "15 percent  production                                                               
tax" oil  fields pay, only three  oil fields in the  entire state                                                               
are paying any  substantial production tax:   Prudhoe Bay [Unit],                                                               
Northstar [Unit], and Alpine.                                                                                                   
REPRESENTATIVE  GARA offered  his  belief the  state is  charging                                                               
nothing  to "blockbuster"  fields.   For  example,  he noted  the                                                               
Kuparuk  River [Unit],  the second  largest field  in the  United                                                               
States, is paying  .1 percent in production taxes,  and the Milne                                                               
Point [Unit], the thirteenth largest  field in the United States,                                                               
is paying zero  percent production tax.  He  expressed his belief                                                               
that this would make sense at $10/barrel, but not at $60/barrel.                                                                
9:23:09 AM                                                                                                                    
REPRESENTATIVE GARA posed the question  of what current oil taxes                                                               
have done  for Alaskans.   According to DOR estimates,  he noted,                                                               
the oil companies  took in $13 billion in gross  revenue and $5.2                                                               
billion in profits  with a 40 percent profit  margin; the state's                                                               
share  was 60  percent  at $3.2  billion.   Six  months into  the                                                               
current  fiscal  year,  Representative   Gara  relayed,  the  DOR                                                               
projects oil  companies will take  $16 billion in  gross revenue,                                                               
with profits somewhere over $7 billion  and a profit margin of 43                                                               
percent.  Furthermore,  he continued to explain,  should the cost                                                               
of oil go  down again to $22/barrel, oil  companies would receive                                                               
a  25 percent  profit margin  well  above the  15 percent  profit                                                               
margin oil  companies have  indicated they  wish to  achieve over                                                               
the long run.                                                                                                                   
REPRESENTATIVE  GARA  offered  his  understanding  that  the  oil                                                               
companies have  stated they need  incentives in order to  build a                                                               
gas  pipeline.   He then  pointed out  that within  a three-month                                                               
period in  2005, "Exxon, BP, and  Conoco" took in $20  billion in                                                               
"pure profit," enough to build the entire gas pipeline.                                                                         
9:29:12 AM                                                                                                                    
REPRESENTATIVE GRUENBERG asked for  information regarding how the                                                               
[Alaska]  system  and  profit  margins  work  compared  to  other                                                               
governmental systems.                                                                                                           
REPRESENTATIVE  GARA replied  that  according  to a  confidential                                                               
report  which the  legislature commissioned  the consulting  firm                                                               
Wood Mackenzie to  do, Alaska allows a much  higher profit margin                                                               
[to  industry] than  most other  taxing jurisdictions  worldwide.                                                               
Additionally,  Representative  Gara said,  [similar]  comparisons                                                               
are  addressed  in   a  December  10,  2005,   article  from  The                                                             
9:31:18 AM                                                                                                                    
REPRESENTATIVE  GRUENBERG   opined  that   information  regarding                                                               
[profit margins] should be available to the public.                                                                             
CHAIR  WEYHRAUCH noted  that members'  packets  contain a  letter                                                               
dated  January 9,  2006,  submitted  by the  Alaska  Oil and  Gas                                                               
Association (AOGA).                                                                                                             
[HB 63 was held over.]                                                                                                          

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