Legislature(2005 - 2006)SENATE FINANCE 532
04/03/2006 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 305 | TELECONFERENCED | |
| + | TELECONFERENCED |
CS FOR SENATE BILL NO. 305(RES)
"An Act providing for a production tax on oil and gas;
repealing the oil and gas production (severance) tax;
relating to the calculation of the gross value at the point
of production of oil or gas and to the determination of the
value of oil and gas for purposes of the production tax on
oil and gas; providing for tax credits against the tax for
certain expenditures and losses; relating to the
relationship of the production tax on oil and gas to other
taxes, to the dates those tax payments and surcharges are
due, to interest on overpayments of the tax, and to the
treatment of the tax in a producer's settlement with the
royalty owners; relating to flared gas, and to oil and gas
used in the operation of a lease or property under the
production tax; relating to the prevailing value of oil or
gas under the production tax; relating to surcharges on
oil; relating to statements or other information required
to be filed with or furnished to the Department of Revenue,
to the penalty for failure to file certain reports for the
tax, to the powers of the Department of Revenue, and to the
disclosure of certain information required to be furnished
to the Department of Revenue as applicable to the
administration of the tax; relating to criminal penalties
for violating conditions governing access to and use of
confidential information relating to the tax, and to the
deposit of tax money collected by the Department of
Revenue; amending the definitions of 'gas,' 'oil,' and
certain other terms for purposes of the production tax, and
as the definition of the term 'gas' applies in the Alaska
Stranded Gas Development Act, and adding further
definitions; making conforming amendments; and providing
for an effective date."
This was the third hearing for this bill in the Senate Finance
Committee.
CSSB 305(RES):
The Rest of the Story
DAN DICKINSON, CPA, Consultant to the Office of the Governor,
noted that the Committee's first two hearings on this bill
focused on the key elements of the proposed Petroleum Production
Tax (PPT). Today's "The Rest of the Story" presentation [copy on
file] would focus on the relatively "minor" issues" in the bill.
Mr. Dickinson communicated that this presentation would be
followed by a discussion comparing the provisions of the Senate
Resources committee substitute (CSSB 305) to those of the
Governor's bill (SB 305) and the House of Representatives
Resources committee substitute, CSHB 488(RES).
9:05:54 AM
ROBERT MINTZ, Assistant Attorney General, Oil, Gas & Mining
Section, Department of Law testified via teleconference from an
offnet location. The "miscellaneous provisions" addressed in
this presentation could be categorized into two types. The first
being "improvements or corrections or updates" to current
production tax statutes, and the second being elements, which
while not being "core points" of the bill, should be discussed.
Mr. Mintz communicated that rather than "the logical approach"
taken in the discussions of the key elements of the PPT, the
provisions discussed today would be addressed in numerical
section order.
Page 2
Sections 1 & 11
· Clarify AS 43.55.020 (f) to reflect consistent
department interpretation, upheld in formal hearing
decision in 1996
· Prevailing Value is used to set a taxable value for
internally refined barrels
· May be moot for a taxpayer using "DNR" or formulaic
valuation
Mr. Mintz noted that Sections 1 and 11 of CSSB 305 would amend
AS 43.55.020(f) to include legislative intent, "recognizing this
is not actually intended to be a change in the law, but simply a
confirmation and clarification of the law" as historically
interpreted by the Department of Revenue. These sections would
affirm the Department's interpretation of "the valuation of oil
and gas where either the selling price is not reflective of
market conditions or where there is no actual sale". Previous
controversy in this issue had been resolved in favor of the
Department. There is currently no controversy in this regard.
Mr. Mintz exampled a situation to which this provision would
apply: "a producer in an integrated company that instead of
selling oil to someone else, internally refines it in its own
refineries; there is no real sale price to use to value the oil.
Thus, the Department of Revenue would determine the value of the
oil based on "prevailing values". Taxes would be levied on that
basis. While there was no continuing controversy in this regard,
the effort was to confirm the use of this practice as "the
appropriate interpretation of the law".
Page 3
Sections 2 & 17
· Amends current statute (AS 43.05.230 and 43.55.040) to
clarify rules for using one taxpayer's information to
determine another taxpayers tax
· Generally limited to Prevailing value calculation,
which may be moot for taxpayer electing alternative
valuation formula
· Taxpayer recipients of information are brought under
confidentiality provisions of AS 43.05.230
Mr. Mintz expressed that the explanation of this language was
"longer than its importance" since the issue being addressed
does not often arise. The Prevailing Market Value (PMV) is where
"the Department would calculate what oil and gas is worth in the
market, and tax the taxpayer on that basis". In order to make
this determination, the Department might be required to gather
transaction information such as transportation costs from a
variety of taxpayers.
Mr. Mintz stated that a taxpayer paying under the PMV scenario
might request to know the basis of the assigned value, and "in
fairness", it would be necessary to provide that taxpayer access
to "certain information subject to appropriate confidentially
protections"; specifically when one taxpayer's PMV determination
depended on information from other taxpayers. Thus, this
language would affirm that the Department could disclose that
information provided that disclosure adhered to appropriate
conditions preserving the confidentially of the information.
Mr. Mintz noted that this language would also apply "existing
criminal penalties for violating confidentiality to the persons
associated" with the taxpayer granted access to confidential
information. Currently such penalties only apply to State
employees and officers; this would expand the penalties to
private individuals.
Page 4
Sections 3 & 4
· Clarify state income tax code that production tax is
not a tax "based on or measured by net income"
· Ensures that the PPT is deductible for state income
tax purposes.
Mr. Mintz communicated that this language would clarify, rather
than change, existing law allowing production taxes on oil and
gas to be deductible when calculating income taxes. Concern had
been raised regarding whether Alaska or another state "might
interpret the new tax differently because the tax is on the net
value rather than the gross value". These provisions would
clarify "the general rule that production taxes are deductible
for income tax purposes".
Page 5
Section 6
· Amends AS 43.55.017 (a) to conform language to the
Internal Revenue Code provision to which it refers
Mr. Mintz noted that a law regarding tangible billing costs
currently existed in the federal Internal Revenue Code. Section
6 was a technical amendment which would "conform" existing
statutory language to that Code.
9:12:44 AM
Senator Stedman asked whether Mr. Mintz's references to
amendments meant that an amendment would be forthcoming or that
the language was already included in the bill.
Mr. Mintz clarified that the amendments being discussed were
included in the bill.
Mr. Dickinson interjected to clarify that the Section numbers
referenced in the presentation pertain to provisions in CSSB
305(RES), Version 24-GS2052\C.
Senator Stedman expressed that the intent of his question was to
clarify that the language being discussed was included in
Version "C".
Mr. Dickinson affirmed. The purpose of this presentation was to
explain the affect of language included in CSSB 305(RES),
referred to in this presentation as CSSB 305.
9:14:16 AM
Mr. Mintz reiterated that any amendment being referenced was
embodied in CSSB 305.
Page 6
Sections 9, 19, 20
Conforming amendments for language consistency and
modernization.
[NOTE: The reference to Section 9 is incorrect. The correct
section is Section 8.]
Mr. Mintz pointed out that the current State production tax law
applied a separate tax on oil and gas. The production tax
proposed in the PPT would apply "a single tax" to both oil and
gas. Thus, the purpose of the language in Sections 8, 19, and 20
would be to replace the word "or" with "and" where applicable in
this regard.
Page 7
Sections 10, 24, 26
· Repeals and Reenacts AS 43.55.020 (e)
· Simplifies three tiered system where flared gas was
either tax free, taxed, or subject to tax and a
penalty.
· Now gas and oil are not taxed or subject to
conservation surcharges if used for necessary lease
operations. (If AOGCC determines they have been
wasted, then they are taxed.)
Mr. Mintz stated that this language would simplify existing
production tax provisions relating to "flared gas" which is gas
"released, burned, or otherwise vented" and gas or oil used in
the production process, such as gas or oil burned as fuel or
"gas that is re-injected for pressure maintenance".
Mr. Mintz stated that existing production tax law recognized
three categories of flared gas: flared gas "authorized for
safety purposes by the Alaska Oil and Gas Conservation
Commission" (AOGCC) was not subject to the production tax; waste
flared gas was subject to the tax as well as a penalty equal to
the amount of the tax; and flared gas authorized by AOGCC for
something other than safety purposes was subject solely to the
tax. The PPT would condense the three categories into two: any
flared gas authorized by AOGCC would be exempt from the tax and
flared gas not authorized by AOGCC would be taxable. The penalty
currently assessed on waste gas was eliminated in consideration
of the fact that AOGCC would continue to levy its separate
penalty on it. Their penalty was higher than the penalty
currently levied by the Department of Revenue.
9:16:57 AM
Mr. Mintz stated that the PPT would also expand the provision
exempting the tax on "gas used in lease operations for
production" to also exempt oil used in that manner. This oil and
gas would also be exempt from conservation surcharges.
Page 8
Section 14 and 15
· Conforming changes to 43.55.030(a) (dealing with tax
returns)
· Gross/net, and/or, simplified reporting
· Repeals the $25 a day filing penalty which predated
the 43.05 civil penalties
Mr. Mintz categorized the language in Sections 14 and 15 as
conforming changes. The PPT would require additional information
in tax returns; specifically in regard to lease expenditures as
"that would be a major new deduction". In addition, the $25 per
day late filing penalty would be repealed as current State's
revenue statutes apply stiffer penalties to both late filings
and late taxes.
Mr. Mintz recalled a situation in which the filings of a small
producer who owned a minuscule amount of production internally
"fell through the cracks". The $25 per day late filing penalties
"cascaded … into many times the tax due".
9:19:02 AM
Mr. Mintz stated that since the Department of Revenue is
provided "limited discretion" in terms of "compromising
penalties", a question of "fairness and proportionality"
sometimes arose.
Mr. Dickinson also shared a situation in Cook Inlet in which, as
the result of a number of equity trades, a producer became
unknowingly responsible for the filing due on "a fraction of a
percentage in a lease". Four years later when the producer
became aware of the situation, the $25 per day late filing
penalty generated a total penalty exceeding one million dollars
on a tax liability of approximately $100. Such situations
attributed to the decision to eliminate the $25 a day penalty.
"This was a superfluous situation which led to bizarre results".
9:20:11 AM
Page 9
Section 18
Amends AS 43.55.080
· Conforms statute to constitution
· Namely: recognizes that money from resolved disputes
goes into Budget Reserve Fund and not into the general
fund
Mr. Mintz communicated that AS 43.55.080 allowed money resulting
from oil tax disputes to be deposited into the State's general
fund. Amending this statute, which predated the adoption of the
[Constitutional] Budget Reserve Fund (CBR) amendment that
required certain revenues resulting from the resolution of tax
disputes to be deposited into the CBR, would conform the Statute
to the State's Constitution.
Page 10
Sections 27, 29
· New definition of "gas"
· Point of production moved downstream
· Gas processing now included in Upstream
· New definition of "oil"
· Liquid hydrocarbons recovered by mechanical separation
or gas processing
9:21:14 AM
Mr. Mintz reiterated that the definition of gross value at the
point of production would change under the proposed PPT. While
the point of production for oil "would not be materially
changed", the point of production for gas would move downstream
of its current location. In addition, the definitions of gas and
oil would be changed. This "common sense approach" to the
definitions would consider "anything that is in a gaseous phase
at the end of the production process" to be gas and "anything
that is in a liquid phase" would be considered oil.
Page 11
Section 28
· Redefine "gross value at the point of production"
· Oil pt.-of-prod. definition essentially unchanged (but
if there is gas processing, the pt.-of-prod. for
extracted liquids is downstream of processing)
· Gas pt.-of-prod. is downstream of any gas processing
· If there is a combined processing / treatment plant
facility, pt.-of-prod. is further upstream point where
processing ends or treatment begins
Mr. Mintz stated that under current Statutes, "gas processing,
which is the extraction of liquid hydrocarbons from gas, is
considered downstream from the point of production". Under the
PPT, gas processing would be upstream from the point of
production. Furthermore, certain liquid hydrocarbons extracted
during gas processing are considered gas under current
production tax statutes; however, they would be considered oil
under the definitions of the PPT.
9:22:41 AM
Mr. Mintz stressed that there was an important distinction
between gas processing and gas treatment. While gas processing
was the extraction of liquid hydrocarbons, gas treatment, which
was "associated with the gas transportation process, would
involve extracting non-hydrocarbon components such as carbon
dioxide and conditioning gas to make it suitable for pipeline
transportation". In addition, gas processing would be considered
upstream of the point of production while gas treatment would be
considered downstream of the point of production
Mr. Mintz stated that Section 28 would also address the
situation in which an integrated facility conducted both gas
processing and gas treatment. The point of production for gas
would be considered upstream of gas treatment.
Mr. Dickinson advanced the presentation to page 14, as that
schematic would assist in understanding the point of production
process.
Page 14
[This chart depicted a schematic pertaining to the Point of
Production process for oil and two schematics applicable to
the Point of Production process for gas.]
9:24:00 AM
Mr. Dickinson reviewed the current point of production process.
The point at which well fluids were mechanically separated would
be considered the point of production for the majority of oil
and gas. The point of production for oil was the place at which
it is "metered and measured and placed in a sales line". The
point of production for gas, were "a simple lease" in place,
would mirror that of oil.
Mr. Dickinson communicated, however, that the fluids on the
North Slope tend to consist of "a gaseous mixture of
hydrocarbons" which, could not be defined as either oil or gas.
In Prudhoe Bay that fluid would be transported to a central gas
facility which is "a gas processing plant where valuable liquid
hydrocarbons are removed".
Mr. Dickinson communicated that under current definitions, the
stream of approximately 45,000 barrels a day of liquid
hydrocarbons emitting from the central gas facility would be
transported via the Trans Alaska Pipeline Service (TAPS) and
"for all intensive purposes sold as oil downstream". However,
"for tax purposes", that material would be treated "as if they
were gas".
Mr. Dickinson estimated that approximately eight percent of the
fluid moving through TAPS was gas not oil. Under the revised
definitions of gas and oil in the PPT, any material transported
via TAPS would be recognized as oil.
Mr. Dickinson stated that, under the PPT, the gas processing
plant would be moved upstream of the point of production rather
than downstream as is currently the case. Gas processing
expenses would qualify as a credit in addition to being a tax
deduction under the PPT.
Mr. Dickinson stated that the credits allowed by moving the gas
processing plant upstream of the point of production would
increase a small producer or explorer's ability to build a
plant. "This may change the dynamic of the negotiations". Rather
than the end result being "a dozen half empty or half used
processing plants in the North Slope", it is anticipated that
this scenario would improve a small producer's negotiating
position with a producer who currently has a facility.
9:27:40 AM
Senator Stedman suggested that the gas processing schematic
depicted on the right portion of the page 14 graph more
identifiably reflect the TAPS transportation component. While
the verbal discussion clarified that point, the graph as a
stand-alone did not.
9:28:34 AM
Senator Stedman requested that further information be provided
as to whether the credits issued to a producer via the gas
processing component might be affected by Federal Energy
Regulatory Commission (FERC) federal regulations.
9:29:45 AM
Mr. Dickinson pointed out that, as depicted in the gas
production schematic on the right side of page 14, gas
processing would be upstream of the point of production and gas
treatment would occur downstream of the point of production. In
the event of a combined gas processing/gas treatment plant the
point of production would be between the two processes.
9:30:21 AM
Mr. Dickinson shared the Administration's determination that,
were a gas pipeline constructed, the gas treatment plant, which
would be the last facility before the gas entered a main
transportation line, would be considered "part of the
transportation infrastructure". As a condition of a gas pipeline
proposal currently being considered, the State would acquire an
ownership percentage in project components downstream of the
point of production, such as the gas treatment plant. Further
information in this regard would be forthcoming.
9:31:40 AM
Mr. Dickinson concluded that "once you cross" the line between
the upstream and downstream processes, a different set of
building and facility maintenance regulations would be in
effect, as the downstream facilities would be regulated by the
Federal Energy Regulatory Commission (FERC). FERC would ensure
there being just and reasonable rates and that access would be
allowed for anyone desiring to use the line at that just and
reasonable rate. "The whole issue of credits and support would"
become more complex.
9:32:12 AM
Co-Chair Green noted that a six-page memorandum [copy on file]
dated March 19, 2006 to Senator Gene Therriault from Donald
Shepler with Greenberg Traurig, a consulting firm to the
Department of Revenue, clarified that FERC would have the
ability to make decisions regarding downstream events.
9:32:35 AM
Senator Stedman asked that time be allotted to discuss the
information in Mr. Shepler's letter, as this issue has a "huge
impact". While the parameters of such a discussion could be
limited to the issues addressed in this bill, the issue would
become more complicated as discussions advanced. It would have
"major consequence" on how the credits provided to producers
could be utilized.
Co-Chair Green asked whether Senator Stedman was referring to
the 20 percent credit provision in the bill.
Senator Stedman affirmed. FERC's involvement could negatively
influence how production tax credits could affect a producer's
equity position. There is nothing concrete as to how the credits
would be recognized. His understanding was that FERC's
regulations would, in the case where a producer had a 40 percent
equity position and a 20 percent credit, result in the credits
"diluting" the producer's equity position. The Committee must
"understand the full flow through of impact on rates, impact on
the value of the commodity we're selling, when we make these
decisions".
9:33:56 AM
Senator Bunde stated that the schematics on page 14 were
confusing as they depicted two points of production for gas: the
center schematic depicted a point of production immediately
following the mechanical separation and the schematic on the
right depicted a point of production involving processing and
treatment.
9:34:35 AM
Mr. Dickinson explained that the Point of Production for Gas
following the mechanical separation referred to gas utilized on
the North Slope or small amounts of gas sold for industrial
purposes. The majority of North Slope gas would be the gaseous
mixture of hydrocarbons process reflected in the schematic on
the right side of the page. It's metering and weighing would
occur at the point of production after processing.
Mr. Dickinson communicated that the 8.5 billion cubic feet (Bcf)
per day of gas that is re-injected into the ground was not
considered "produced" and as such was never metered or measured.
"Produced is a technical term of having a gross value at a point
of production."
Senator Bunde understood therefore that re-injected gas was not
considered "produced". Metering would only occur for gas
identified in the schematic on the right side of the page 14
chart.
9:35:50 AM
Mr. Dickinson affirmed. Were the Central Gas Facility (CGF) at
Prudhoe Bay to remain in its current location, and a separate
gas treatment facility constructed near it, the point of
production for gas would be between those two facilities.
9:36:08 AM
Senator Bunde asked for further clarification regarding the
point of production in a combined gas processing/treatment
plant.
Mr. Dickinson clarified that the schematic on the right side of
the page contained two scenarios. One involved separate
processing and treatment facilities, and one involved a combined
processing/treatment facility. In the latter case, the point of
production would be considered the point between the two
processes.
Senator Bunde acknowledged.
9:36:46 AM
Co-Chair Wilken referenced a three-page handout titled "Prudhoe
Bay: Point of Production" [copy on file] provided by Mr.
Dickinson and asked whether the point of production was treated
the same under SB 305, CSSB 305(RES) and CSHB 488(RES).
Mr. Dickinson affirmed it was.
Senator Stedman reiterated that the impact of FERC's regulations
on how proposed PPT gas credits might affect producers was "a
big big issue". To that point, he requested Committee members to
carefully read the first paragraph in the Conclusion section on
page 6 of Mr. Shepler's memorandum. This language reads as
follows.
I have not found any clearly binding precedent that answers
the question you posed. However, since FERC bases rates on
the costs incurred to provide the services, the fact that
Project Sponsors received quantifiable state tax credits
and deductions as a direct result of investing in a GTP
suggests that FERC would be included to require that those
benefits be flowed through to shippers whom make us of the
GTP this would be the result I would expect.
9:37:52 AM
Mr. Dickinson stated that under the provisions of CSSB 305,
there was "a line between gas treatment and gas processing". No
credits would be issued in regards to gas treatment. "It is gas
treatment that typically is regulated by the FERC." Continued
maintenance of that line would provide "the clear clean
separation" required.
Co-Chair Green understood that CSSB 305 would maintain that
line.
Mr. Dickinson affirmed.
Senator Stedman informed the Committee that the Point of
Production line being drawn between Gas Processing and Gas
Treatment was the result of numerous amendments to the bill. He
supported those amendments. Members should be cognizant of the
fact that many issues had been addressed during the bill's
Legislative committee process.
Co-Chair Green pointed out that several issues had been
addressed in the Senate Resources committee substitute.
Senator Stedman affirmed. His point was that, even though this
issue was addressed by the Senate Resources Committee, issues
such as the one he raised regarding FERC, should be issued
addressed by the Finance Committee.
Co-Chair Green reiterated her understanding that the issue had
been addressed in CSSB 305(RES).
Senator Stedman affirmed.
[NOTE: The discussion regarding the information on page 14
concluded and the presentation cycled back to page 12.]
9:39:08 AM
Page 12
Section 30 (part 1)
· New definition of "Cook Inlet Basin"
· For purposes of the 1.5 percent tax on lessor's
royalty share (outside of Cook Inlet Basin the tax is
5 percent)
Mr. Mintz noted that the royalty tax rate included in CSSB 305
for oil and gas activities specific to Cook Inlet prompted the
inclusion of a new definition of Cook Inlet Basin in the
committee substitute.
Page 13
Section 30 (cont.)
· Define "gas processing" and define "gas treatment"
· Gas processing: physical processes that extract liquid
hydrocarbons, upstream of a sales line or gas
treatment plant
· Gas Treatment: removing non- hydrocarbon substances
and conditioning gas for sales line
Mr. Mintz noted that Mr. Dickinson had addressed this
information in the discussion pertaining to page 14.
9:39:47 AM
Page 15
Section 31
· Repeal of superseded provisions, including individual
gas and oil taxes, ELF, and some definitions
Mr. Mintz identified Section 31 would repeal sections of the
current production tax statute.
Page 16
Sections 32, 33
· Applicability: Sections pertinent to taxing oil and
gas under the PPT apply to oil and gas produced
starting April 1, 2006
· Applicability: Prevailing value clarification of
existing law applies to all oil and gas
· Part-year conventions for 2006
· ELF based safe harbor for 6 months
Mr. Mintz stated these Applicability sections clarified that the
proposed PPT would apply to oil and gas produced as of April 1,
2006. The prevailing value statutes addressed earlier in Section
1 page 2 were "simply a clarification rather than a change in
the law", and therefore, that language would apply to oil and
gas produced before or after April 1, 2006.
Mr. Mintz noted there being several transition sections in the
committee substitute. Since the PPT tax would not be in effect
until April 1, 2006, the first three months of the calendar year
must be removed from the determinations. The bill must clarify
that the PPT provisions would apply to nine months rather than
12 months of the initial year of implementation.
9:41:03 AM
Mr. Mintz also noted the bill would include safe harbor tax
reporting and payment to taxpayers for the initial six months,
as taxpayers could not be expected "to retroactively pay the
correct amount". In addition, both the Department and taxpayers
would require time to "adjust their accounting and payment
procedures to comply with the new tax provisions". In essence, a
taxpayer could pay the tax due under existing production tax
provisions for the first six months, then be required to make up
the difference in the tax paid and the tax that would have been
levied under the PPT.
Page 17
Section 34
· Transition provisions --
· Department may develop PPT implementing regulations
immediately
· Implementing regulations may have retroactive effect
to April 1, 2006
Mr. Mintz noted the additional transitional provisions. This
language would authorize the Department of Revenue to begin work
immediately, rather than waiting for the effective date, on
implementing regulations in the case the effective date was
something other than April 1, 2006. Language providing
retroactive authorization for implementing regulations was
considered "very important". Regulations must specifically
address the retroactive affect of the bill.
9:43:26 AM
Page 18
Section 35
· Conform headings of statutory provisions
Mr. Mintz stated this Section would allow for conforming
headings of provisions "to the new tax law".
Page 19
Sections 36, 37, 38
· Effective dates -
· PPT provisions take effect April 1, 2006but if they
take effect after April 1, they are retroactive to
April 1
· Other provisions take effect immediately
Mr. Mintz noted that, while the bill specified an effective date
of April 1, 2006, this language would allow the bill's
provisions to be retroactive. "Provisions not integral to the
PPT, would have an immediate effective date."
Mr. Mintz concluded the presentation.
9:44:31 AM
"PPT: Comparing the Options" dated April 3, 2006
ROBYNN WILSON, CPA, Director, Tax Division, Department of
Revenue, testified via teleconference from on offnet location to
address the power point presentation titled "PPT: Comparing the
Options" dated April 3, 2006 [copy on file].
Mr. Dickinson noted that this presentation would review the
differences between the Governor's bill, SB 305, the House of
Representatives committee substitute, CSHB 488(RES) and the
Senate Resources committee substitute, CSSB 305(RES).
[NOTE: In these minutes, the Governor's bill is referred to as
SB 305, the Senate Resources committee substitute is referred to
as CSSB 305 and the House committee substitute is referred to as
CSHB 488.]
9:46:08 AM
Page 2
Effective Dates & payments
· Governor's bill
*Effective 7/1/06
· House CS & Senate CS
*Effective 4/1/06
Mr. Dickinson expressed that both CSSB 305 and CSHB 488 would
designate the provisions of the bill to be retroactive to April
1, 2006. SB 305 would have an effective date of July 1, 2006.
CSSB 305 with its April 1 effective date and Progressivity
component would generate approximately $430 million more revenue
than SB 305 with its July 1 effective date based on a forecasted
price of $58 per barrel. Oil was selling at $65 per barrel on
April 2, 2006. CSHB 488 would generate approximately $300
million more than SB 305.
Page 3
Effective Dates & payments
· Governor's bill
*Effective 7/1/06
· House CS & Senate CS
*Effective 4/1/06
*6 mo. payment on ELF system, 7th mo. true-up
Mr. Dickinson communicated the Administration's support of the
transitional period included in both the House and Senate bills.
Such language was not included in SB 305 because the thought was
that were the bill adopted early in the Legislative session, a
six month transitional timeframe would have been provided
between its adoption and effective date. That not being the
case, a transitional timeframe should be specified regardless of
whether the Governor's bill or a Legislative committee
substitute was adopted.
Mr. Dickinson explained the transitional period included in CSSB
305: a taxpayer could pay their tax as determined under the
status quo tax system for the first six months after the
effective date of the bill. The difference, or "true up",
between the taxes paid and the amount due under the PPT would be
due during the seventh month. Interest and penalties would be
applied to any tax not satisfied at that time. From that point
forward, the monthly tax paid must comply with the provisions of
the PPT. A true up of a calendar quarter's taxes must occur by
the end of the following calendar quarter.
9:48:56 AM
[NOTE: The charts depicted on pages 4 and 5 were not discussed.]
Page 6
Tax Rate
Annual Oil Severance Tax(Millions of 2005 Dollars)
Low Volume Scenario, $20, $40, and $60 per bbl
Governor's PPT at 20/20 and 25/20
[This chart depicts various scenarios of the Severance Tax
under a low volume scenario based on a 20 percent and 25
percent tax as influenced by $20, $40, or $60 per barrel
prices between the years 2005 and 2030.]
Mr. Dickinson communicated that the information on the charts in
this presentation were presented in the format previously
suggested by the Committee. For comparison purposes, a variety
of scenarios were depicted on one chart. Additional grid lines
were added, and the information on the vertical "Y" axis and the
horizontal "X" axis would be uniform from chart to chart.
Mr. Dickinson stated that the chart on page 6 represented six
scenarios: the anticipated severance tax revenue generated by
the 20 percent tax rate proposed in SB 305 at a $20, $40 and $60
per barrel oil price as compared to CSSB 305's 25 percent tax at
those same prices. The difference between the 20 percent and 25
percent tax at a $20 per barrel price would each generate "tens
of millions of dollars"; however, they would provide an
"inconsequential" amount of revenue in comparison to the revenue
the State would receive at higher prices. He pointed out that
regardless of whether the 20 or 25 percent tax rate were in
place, a $20 per barrel price would provide zero revenue to the
State by approximately the year 2014.
Mr. Dickinson continued that, at $40 per barrel, both SB 305 and
CSSB 305 would generate substantially more revenue; however,
that revenue would start to decrease around the year 2014 and
would approach zero revenue around 2030.
Mr. Dickinson stated that, as would be expected, higher revenues
would be generated under both tax proposals at $60 per barrel.
CSSB 305 would initially generate approximately $250,000,000 per
year. The Governor's bill would generate a lesser amount.
However, as oil production, and consequently, revenues declined
the downward revenue slopes of the two tax rates "stay fairly
constant".
CHERIE NIENHUIS, Petroleum Economist, Department of Revenue
distributed a four page handout [copy on file] which further
portrayed the tax percentage comparisons. The first page, titled
"Slide 6: Tax Rate: Governor's Bill with 20/20 and with 25/20,
Low Volume", presented line item Low Volume revenues, in a
"table" format, for the 20 percent and 25 percent tax rates at
$20, $40 and $60 per barrel for the years 2007 through 2030.
Utilizing the information on the Slide 6 sheet, Ms. Nienhuis
pointed out that at $60 per barrel, the 25 percent tax proposed
in CSSB 305 would generate an "average annual increase" of $394
million dollars more than the 20 percent tax proposed in SB 305.
The $597 million 24 year cumulative revenue generated by the 25
percent tax at $20 a barrel would be a 231 percent increase over
the $180 million cumulative revenue generated by the 20 percent
tax at that price. "That's a significant increase." Additional
comparison information could be deemed from the Table.
9:53:51 AM
Mr. Dickinson stressed that, while the percentage difference
between the two tax rates at $20 a barrel might be "huge, as a
dollar amount it's very very small".
Ms. Nienhuis concurred. She reiterated that the amounts she had
quoted were cumulative rather than yearly revenues.
9:54:08 AM
Ms. Nienhuis noted that the cumulative difference between the 25
and 20 percent tax at $40 a barrel was approximately five
billion dollars. The 24 year cumulative difference at $60 per
barrel was approximately ten billion dollars.
9:54:50 AM
Mr. Dickinson stated that the two tax rate scenarios at $60 a
barrel as referenced by Ms. Nienhuis were depicted in graph form
on page 6 of the presentation. Initially the 20 percent and 25
percent tax rate at $60 a barrel would generate annual revenues
of approximately $2,000,000,000 and $2,500,000,000,
respectfully. "The two would fall off proportionately" as oil
volume declined.
9:55:30 AM
Senator Stedman characterized these revenue forecasts as
"ghastly looking numbers". However, the situation would appear
different where it viewed in terms of Total Government Take
verses industry take. The "fairness issue" is "the fundamental
issue in front of us".
9:55:58 AM
In response to Senator Stedman's remark, Ms. Nienhuis
distributed a graph titled "Total Government Take, Senate CS at
25/20 and 20/20, Low Volume Scenario" [copy on file], which
reflected the Total Government Take as a percent of the barrel
price, based on CSSB 305's 25 percent tax rate and SB 305's 20
percent tax rate at prices ranging from $15 to $65 Alaska North
Slope (ANS) prices per barrel.
Senator Stedman stressed that the State's royalty and property
tax system were "regressive". The State must have a progressive
tax system "to counteract" those systems. The PPT being proposed
would provide the necessary progressive tax system. Viewed on
its own, the PPT would appear "more egregious" than were it
viewed as an element of the overall State tax structure.
Senator Stedman understood the inclination to focus on the
revenue the tax would generate; however, he worried that
concentrating solely on the revenue might "lead [the State] down
the wrong road. And at the end of the day", an "incorrect
decision" about what would be in "the best interest of the
citizens" of the State for the sale of this commodity might be
made. Legislators should be mindful of the fact that royalties
and taxes have been used "as a selling mechanism".
9:57:07 AM
Senator Bunde addressed Senator Stedman's comments by voicing
that his "egregious concerns" were his grandchildren and what
they would utilize to support their government. He pointed out
that a barrel of oil could only be "sold once".
Senator Bunde understood that the oil industry was anticipating
oil prices to hover around $40 a barrel for the next several
years. Were that the case, some of the scenarios being reviewed
were optimistic rather than reality.
9:58:20 AM
Ms. Nienhuis acknowledged there being a variety of revenue
forecasts. The Department of Revenue's long-term forecast
anticipated that ANS oil prices would range between $25 and $50.
The Department's long term forecast is revisited every two years
and would next be reviewed in the fall of 2006. The federal
Energy Information Administration (EIA) long term forecast was
$58. Because, oil prices are "all over the board", the decision
was made to present "several different scenarios" to the
Legislature.
Senator Bunde characterized the barrel as being "either half
full or half empty" depending on the source.
9:59:15 AM
In response to a question from Senator Stedman, Ms. Nienhuis
stated that, while the "Total Government Take" handout, was not
part of today's presentation, it could be discussed.
Senator Stedman observed the information depicted on the Total
Government Take handout to indicate that at ANS prices between
$25 to $60 a barrel, the Government Take under either the 25 or
20 percent tax rate "stay relatively constant at approximately
60 percent".
Senator Stedman stated that the effort should be to maintain
that percentage going forward. It was his intention to ask Econ
One Research, Inc., the economic research and consulting firm
hired by the Administration, to update their Total Government
Take analysis to reflect CSSB 305 rather than previous versions
of the bill.
10:00:55 AM
Co-Chair Wilken recalled Senator Stedman previously developing a
chart [copy not provided] which compiled Econ One's analyses.
Thus, he asked whether Senator Stedman's intent was to update
that information.
Senator Stedman affirmed that to be his intent. The $60 ANS
price range projections presented today by the Administration
were "slightly less" than those presented in the Econ One's
analyses based on previous bill versions. The expectation would
be that when Econ One updated its numbers to reflect CSSB 305,
the numbers would be close to those presented by the
Administration. Updating Econ One's information would not be a
very cumbersome endeavor.
10:02:01 AM
Mr. Dickinson stated that, on numerous occasions, the
Administration and Econ One reviewed each other's statistical
modeling analyses. Both entities' modeling results were close
when identical information was utilized. Oftentimes, however,
graphs would differ because different variables were utilized.
Senator Stedman reiterated his recommendation that Econ One
replace its previous modeling analyses with that reflecting CSSB
305. This request should not be misunderstood as questioning the
material provided by the Administration; the intent would be to
have two modelings of the same bill version for comparison
purposes.
10:03:50 AM
Page 7
Effect of Progressivity
Annual Oil Severance Tax (Millions of 2005 Dollars)
Low Volume Scenario, $50, $60, and $70 per bbl
Governor's Bill as written, with House Progressivity, and
with Senate Progressivity
[This graph provides nine low volume scenarios depicting
how the Progressivity factors incorporated into the Senate
and House PPT bills would compare to the Governor's bill as
written, at ANS prices of $50, $60, and $70 per barrel. The
"Y" axis reflects the Severance Tax revenue and the "X"
axis reflects the years 2007 through 2030.]
Mr. Dickinson explained that this graph depicted how the
Progressivity factor, which becomes effective when ANS oil
prices exceeded $50 under CSHB 488 and $40 under CSSB 305, would
compare to the provisions of SB 305, which, as written, does not
contain a Progressivity component. The bottom line on the chart
represents the revenue for both the Governor's bill and the
House bill at $50 a barrel, as the House's progressivity factor
would not generate any additional monies at that price. The
second line from the bottom on the chart would reflect the
revenue generated at $50 a barrel under CSSB 305 and its
Progressivity factor, which "kicks in" at a $40 ANS price.
Mr. Dickinson noted that the lower of the next set of three
lines was SB 305 at a $60 ANS price with its flat 20 percent tax
"regardless of the profits". Above it, in close proximity to
each other, were graph lines depicting the revenues generated
under CSHB 488 and CSSB 305. It is apparent that at $60 ANS, the
House and Senate bills and their progressivity elements would
generate "quite a bit more money" than the Governor's bill at
that price.
Mr. Dickinson noted that the top two lines of the chart
represented the revenues generated by CSSB 305 and CSHB 488 with
their progressivity elements at $70 ANS. The line representing
the Governor's bill at $70 ANS rests on top of the graph line
depicting the revenue generated by CSHB 488 at $60 ANS with
progressivity. "In other words", the revenue generated by SB 305
at $70 ANS without progressivity would equate to the revenue
generated by CSHB 488 at $60 ANS with Progressivity.
Mr. Dickinson noted that while the revenue generated by the
Governor's bill would rise and fall with the price of ANS oil;
the progressivity features of the House and Senate bill, while
different and triggered at different ANS prices, would generate
substantially more revenue.
10:09:26 AM
Page 8
WTI & ANC Crude Prices: Jan 1988 - Feb 2006
[This chart compares the WTI price, which averages
$25.01/barrel, to the ANS price which averages
$22.70/barrel. The vertical axis represents the price per
barrel for the time frame of January 1988 through January
2006 in two year increments as depicted on the horizontal
axis. While WTI prices are consistently slightly higher
than ANS prices, the markets mirror each other's rises and
falls.]
Mr. Dickinson advised the Committee that the House Progressivity
feature was triggered by the West Coast Intermediate (WTI) price
of oil rather than the ANS price utilized as "the key driver" of
the Senate's Progressivity feature.
Mr. Dickinson stated that, regardless of whether the
Progressivity feature was good or bad, either of these two
markets would be "viable broad indicators" of price as they
reacted to the same market influences, and, as indices, they
tend to trend together.
Mr. Dickinson compared the WTI and ANS oil trading markets. WTI
"is widely traded". The general sense is that the WTI market is
"immune from any kind of manipulation" as it is a "very
transparent widely reported figure. ANS, on the other hand, is
just this one stream of oil, there are literally on average
maybe two or three sales a month", some months go without a
sale. While the ANS price is reported daily, that price is
simply the "WTI price adjusted at the market differential". The
market differential is the last ANS sale as compared to the WTI.
Mr. Dickinson stated that the two markets might move together
with a WTI price two dollars higher than the ANS price. An ANS
sale is made at a price $1.50 less than the WTI price. This
would result in an ANS market adjustment of 50 cents to align
the two markets going forward. Because the ANS price is based on
the WTI, the recommendation would be to utilize WTI as the long
term market marker.
[NOTE: The "Schematic Comparison of Tax of Gross Prior to
netting out costs at various (INCLUDING VERY HIGH!!!) Oil
Prices" chart on page 9 is discussed at Time Stamp 10:17:36 AM.]
Page 10
WTI - ANS Differential: Jan 1988 - Feb 2006
[This chart indicates that, during times of falling oil
prices, ANS oil prices often experience a steeper fall than
the WTI price.]
Mr. Dickinson informed the Committee that at times when the WTI
price dropped, the ANS price might drop further due to a lower
confidence factor. This would increase the price differential
between WTI and ANS. At one point in the past year, these
differences reached an "unprecedented" level which was worrisome
to some individuals. These situations could be built into the
modeling; however, the overriding issue is that "generally", the
ANS price would continue to be approximately two dollars lower
than the WTI price. The "features" of the WTI would make it a
better marker of the index. On the other hand, in terms of
"calculating the wellhead value", ANS should be utilized.
10:13:47 AM
Senator Stedman stressed the importance of this information in
the discussion about the Progressivity trigger. The Senate
Resources Committee amended the bill to change the trigger from
WTI to ANS West Coast. The issues associated with using ANS West
Coast should be recognized. WTI, being more fluid and having
higher volumes, would be "less likely to be manipulated". It is
also commonly utilized in the global financial market.
Senator Stedman shared the belief that the use of ANS would
include some inherent risks to the State. Further discussion on
this issue should occur.
Co-Chair Green asked whether utilizing ANS would require an
adjustment to be made to the Progressivity trigger point.
Senator Stedman declared that consideration should be given to
adjusting the $40 trigger point to account for the two dollar
difference between WTI and ANS.
10:15:14 AM
Senator Stedman referred the Committee back to the "Effect of
Progressivity" chart on page 7 which reflected the differences
between the Progressivity factors included in the House and
Senate bills as compared to SB 305 which does not contain a
Progressivity factor. He suggested that the information
pertaining to the Senate and House bills be "rechecked" as the
differences were not what he had expected. In addition, he asked
that the chart be reformatted to consistently depict the
different pricing scenarios for the Senate in one color, the
House in another color, and the Governor's bill at another
color.
Senator Stedman reiterated that once Econ One revised its
information comparing the Progressivity relationship between the
House bill and the current version of the Senate bill, any
needed modifications or errors in either bill might become more
evident.
10:16:31 AM
Co-Chair Wilken asked whether the differences between the
House's Progressivity rate being based on WTI and the Senate's
being based on ANS might be evident on the April 3, 2006
"Comparison of PPT Bill Versions - Highlights" summary sheet
[copy on file] provided by the Department of Revenue.
Mr. Dickinson stated that the differing Progressivity factors
are depicted on the fourth line item on the sheet, titled
"progressivity surcharge.
Co-Chair Wilken acknowledged.
Mr. Dickinson agreed that the color coding suggested by Senator
Stedman made good sense. Several of the Department of Revenue's
material incorporated that approach.
10:17:36 AM
Page 9
Schematic Comparison of Tax on Gross Prior to netting out
costs at various (INCLUDING VERY HIGH!!!) Oil Prices
[This chart depicts how the tax on gross revenue would look
under the House, Senate, and Governor's PPT bill proposals
at prices ranging from $10 a barrel to $170 per barrel.]
Mr. Dickinson stated this graph depicted how "truly
extraordinary" high prices would affect the tax on gross revenue
under the House, Senate, and Governor's bills.
Mr. Dickinson specified that, at "very high prices", the
difference between basing the tax on net and gross revenue would
be immaterial. The revenue generated by a $160 barrel price
gross, which would equate to a net of approximately $150, as "a
percentage, is very close". He pointed out that rather than the
focus being on the outcome of barrel prices at the lower end of
the chart, the focus should be on the outcome of prices
exceeding $100 per barrel. While oil might not achieve that
price, people should be aware of what might happen were prices
to escalate to that level.
Mr. Dickinson continued that, regardless of price, SB 305 with
no Progressivity element would simply apply a 20 percent tax on
a company's profits. At $100, the rate of tax charged under the
CSHB 488 with its 20 percent tax rate and a $50 Progressivity
component, would "essentially double" and then stay relatively
flat. At $110 per barrel, CSHB 488 would basically collect "50
percent of the value". The producer would be required to pay
royalty, federal taxes, and other obligations with the 50
percent they garnered.
Mr. Dickinson stated that CSSB 305 with its 25 percent tax and
$40 Progressivity factor would impose a slightly higher tax rate
until approximately the $85 to $110 price range when both the
House and Senate tax percent takes would be approximately the
same. However, it should be noted that at approximately $110 a
barrel, some feature in the House bill would cause that tax rate
to climb dramatically while the Senate tax percentage would
continue a steady upward climb. The trends depicted on the graph
would be expected to continue through the $200 per barrel price
range.
Mr. Dickinson exampled how the tax rates that would be imposed
under CSSB 305 and CSHB 488 and SB 305 were oil prices $200 a
barrel. At that price, deductions for expenses would be "a
fairly minimal percentage". The 20 percent tax on oil priced at
$200 a barrel under SB 305 would equate to a total tax of $40.
The tax collected under CSHB 488 would be approximately 50
percent or $100. The tax collected under CSSB 305 would be
approximately 45 percent or $90. "Real differences" in the tax
collected would surface when prices exceeded approximately $100
per barrel.
10:21:19 AM
Co-Chair Wilken stated that the price range depicted on the
horizontal axis might appear "absurd" but there might be "short
periods of time" when they could be realistic. To that point, he
asked whether the Senate Resources Committee had discussed the
Progressivity factor in consideration "of the cost of getting
that oil out of the ground", for, when oil prices increase from
$40 a barrel to $120 a barrel, the cost of extracting that oil
and shipping it to market does not triple. Therefore, he queried
as to whether a study has been conducted that would specify how
much it would cost to extract oil when prices were, for example,
$40 a barrel or $120 a barrel.
Mr. Dickinson understood that Roger Marks, Petroleum Economist,
Department of Revenue has touched on this issue when he
presented to the Committee. When oil prices were $120 per
barrel, producers would extract oil they previously would not
have. For instance, the cost to extract oil in an area might
amount to $30 a barrel. While a producer would not extract that
oil when barrel prices were $40, he might extract it when prices
increased to $120 a barrel. The reason that extraction costs
increase "as the long term forecasted price goes up is because"
oil that is more expensive to extract would be extracted. There
is also the "direct effect" on fuel costs and other expenses
which might increase as prices do. "At low prices, you pick the
low hanging fruit, and as prices get higher, you get more and
more complex arrangements, more and more expensive arrangements
to get the oil out of the ground."
Mr. Dickinson stated that heavy oil had an eight dollar
development cost as compared to a five dollar development cost
for regular oil. A graph depicting this information could be
developed. While this is a viable point, a limited amount of
data was available.
Mr. Dickinson noted that, although there have been "five years
of relatively high prices" including two years of very high
prices, few "investments to extract more challenging barrels
have occurred on the North Slope.
Co-Chair Wilken qualified that his question regarding the cost
of extraction relative to the price of oil per barrel pertained
to extracting oil in existing fields rather than fields which
are more expensive to develop.
Co-Chair Wilken voiced being comfortable with the prospect of
the State being able to share in profits as they increased, as
would be allowed by the Progressivity element. Revenue generated
under SB 305, without a Progressivity element, does not allow
that. Further discussion on the incremental costs to the
producers as oil prices increase would be appreciated.
Mr. Dickinson responded that the extraction costs relative to
the price of oil in existing fields could be provided "fairly
easily".
10:25:22 AM
Senator Dyson stated that he had previously asked the same
question. "It seemed intuitive to me that production costs would
not go up lock step with the price…" Another factor presented by
one of the major oil producers was that "at the higher prices,
not only are you going after more expensive deposits, but the
competition for resources goes up". Rig day rates and labor
costs would increase because of supply and demand. While he had
considered increased costs associated with higher fuel costs and
the extraction expenses of the "more difficult" oil, he had not
considered the effect of supply and demand. Nonetheless, the
increased costs percentages should not match the increase in
barrel price percentages.
10:26:13 AM
Senator Stedman, when comparing the House, Senate and Governor's
PPT bills' tax percentages at high oil prices as depicted on
page 9 to the Low volume Progressivity chart on page 7, noted
that the House take depicted on page 7 at $70 a barrel was
higher than the Senate take, but the Senate take was higher than
the House at that price on the page 9 chart. These calculations
should be rechecked.
Senator Stedman, referring to the chart on page 9, understood
that during "their economic planning", the industry included
projections based on high, medium and low prices. The high price
scenarios would include mechanisms allowing those scenarios to
be viewed in terms of today's dollars. To that point, the hefty
increase in the House percentage take, as reflected on the chart
at prices near the $100 range, might be "problematic in the
impact on the economic modeling"; specifically when compared to
the "fairly predictable incline going forward" that would be
incurred under CSSB 305. Its impact would be easier to factor
into the industry's economic modeling analyses. This question
should be posed to the industry economists who would be
testifying before the Committee in a few days.
10:28:05 AM
Mr. Dickinson appreciated the point being made by Senator
Stedman. "This slide is very schematic" and was meant to
emphasize how the three versions of the PPT would be affected by
high prices. The information was based on gross dollars without
consideration of expenses. The Committee should not place "too
much emphasis" on the lower barrel price schematics.
Senator Stedman also expected the industry to argue that the
Progressivity element would remove some of the industries'
"windfall or unexpected upside, and indirectly … that's true".
However, the Progressivity factor would serve to maintain a
balance "going forward so that one side doesn't advantage or
disadvantage the other".
10:29:33 AM
Page 11
Transition Provision
Governor's bill
* 5 year lookback, deductible over 6 years
House CS
* 3 months of capex and opex
Senate COMMITTEE SUBSTITUTE
* 5 year lookback, 2 for 1 recoupment
ROBYNN WILSON, CPA, Director, Tax Division, Department of
Revenue, testified via teleconference from Anchorage and
reviewed the transition provisions in the bills.
10:31:20 AM
Page 12
Transition Treatment
· Governor's bill
*Allowable deduction if oil > $40/bbl
· House CS
*Deduction over 9 months
*No oil price test
· Senate CS
*Credit-no oil price test
*Sunsets 31/31/2013
Ms. Wilson noted there would be "no oil price test" under the
provisions of either the House or Senate bills. CSSB 305 would
terminate the transitional deductions on March 31, 2013.
10:32:13 AM
Page 13
Transition Provision
Annual Oil Severance Tax (Millions of 2005 Dollars)
Low Volume Scenario, $40, $60, and $80 per bbl
Governor's Bill, with House Transition, and with Senate
Transition
[This graph compares the severance tax revenues the State
would receive from SB 305, CSHB 488 with its transition
provisions and CSSB 305 with its transition provisions, at
$40, $60 and $80 per barrel oil prices. The vertical axis
depicted projected severance tax revenues for the years
2007 to 2014 as depicted on the horizontal axis.]
Ms. Wilson noted that the revenue graph lines within each price
set were fairly close together. Most importantly, this graph
impressed the point that "the difference between specific
transition provisions matters some, but it doesn't matter nearly
as much as the price of oil".
Ms. Wilson noted that only two lines appeared on the graph at
the $40 per barrel price, as the severance tax revenues garnered
under SB 305 and CSHB 488 would be the same and thus were
reflected as one line. The other line would represent the tax
garnered under CSSB 305 at that price.
10:33:49 AM
Ms. Nienhuis informed the Committee that the House transition
provision time frame was nine months and thus would occur in
both fiscal year (FY) 2006 and 2007. Since this analysis began
with the year 2007, the House FY 2006 revenue was included in
the 2007 revenue.
Ms. Nienhuis noted that this information was also depicted in
the table titled "Slide 13, Transition: Governor's Bill as
written, with House Transition, and with Senate Transition, Low
Volume" on page 3 of the handout she had earlier provided. She
reminded that the transition credit provisions would terminate
in 2013.
10:35:05 AM
Mr. Dickinson, referring to a table on Slide 16, pointed out
that because "the Senate bill has no dollar floor" on the price
of oil, credits would be allowed "in a lower price environment".
Therefore, in a low price scenario, CSSB 305 would generate less
revenue than either SB 305 which does not allow deductions to
occur until oil prices exceeded $40 a barrel or CSHB 488 which
does not provide "any transition expenditures". The
"relationships would flip" at higher prices because while CSSB
305 would allow a credit, it would be less than that allowed
under SB 305 because "it would be tied" to the two for one
investment reimbursement. The belief is that "not every company
will be spending twice as much in that future period as they did
in the past". As reflected in the chart on page 13, while CSSB
305 would yield higher revenue than SB 305, the revenue
generated by CSHB 488 would exceed both those because it does
not contain a transitional investment expenditure allowance.
10:36:48 AM
Mr. Dickinson reiterated that the transition provisions would
expire by the year 2014. However, the transitional provisions
included in SB 305 could extend beyond that date, were prices to
fluctuate above and below $40 a barrel.
Senator Stedman asked for further information about "how to
handle the impact of the two for one as far as expectations of
use".
10:37:30 AM
Mr. Dickinson understood the modeling included an estimate that
"70-percent of the amount of the investment would be reclaimed".
Senator Stedman asked therefore whether a 40 percent or 90
percent usage would significantly impact the modeling. The two
for one recoupment language was suggested by Dr. Pedro van
Meurs, a consultant to the Governor, and added to the Senate
Resources bill "late in the day". While it was considered to be
"a well crafted concept", its impacts have not been thoroughly
discussed.
Mr. Dickinson replied that "sensitivity figures" in this regard
could be developed.
10:38:38 AM
Page 14
Base Allowance
· Governor's bill
*Up to $73M standard deduction
· House CS
*Up to $12M credit (= $60M deduction)
· Senate CS
*5000 barrel plan
Ms. Wilson stated that the base allowance formula in CSSB 305
was referred to as the 5,000 barrel plan. The bill included a
production per day formula, factored at 20 percent. As a result
of this formula, a percentage of each day's production would be
tax free until production exceeded 30,000 barrels. On low
production days, the allowance percent would be higher than that
of high production days.
Ms. Wilson noted that the bill incorrectly specified an
allowance for up to 55,000 barrels a day. The correct amount
would be 30,000 barrels a day. That would be the point at which
the deduction would be disallowed. The Senate Resources
Committee adopted an amendment that lowered the amount from
55,000 to 30,000 barrels; however, the change had,
inadvertently, not been reflected in the committee substitute.
Ms. Wilson communicated that the maximum 100 percent deduction
would be allowable at a 5,000 barrel per day or less production
level, as depicted in the "Illustration of base allowance at
various production levels" graph on page 16.
Ms. Wilson stated that while CSSB 305 "provides a deduction
based on production", SB 305 would provide a $73 million dollar
standard deduction. The House followed SB 305's lead, but
substituted a credit for the specified dollar standard
deduction. Thus, the 20 percent credit rate included CSHB 488
would allow a maximum credit of $12 million or approximately $60
million in standard deductions.
Co-Chair Green understood that the allowance language should be
corrected to 30,000 barrels rather than 55,000 in CSSB 305.
Ms. Wilson affirmed a correction would be required.
Co-Chair Green understood that this change was the result of an
amendment adopted by the Senate Resources Committee.
Ms. Wilson affirmed.
Mr. Dickinson noted that the reason for the barrel reduction was
that, under the formula, any amount between 30,000 and 55,000
barrels a day would result in "a nonsense formulation".
10:41:41 AM
Page 15
Base Allowance Sunset
· Governor's bill
*No sunset
· House CS
*Sunsets 3/31/2016
· Senate CS
*Sunsets 12/31/2013
Ms. Wilson reviewed the base allowance terminate dates.
10:42:17 AM
Page 16
Illustration of base allowance at various production levels
[This graph depicted the percentage of allowance provided
at various daily barrel production volumes under CSSB 305.
A 100 percent deduction would be allowed on a 5,000 barrel
or less per day production. No allowance would be provided
when production exceeded 30,000 barrels a day.]
Ms. Wilson reviewed the graph.
10:42:52 AM
Page 17
Base Allowance, or Credit
Annual Oil Severance Tax (Millions of 2005 Dollars)
Low Volume Scenario, $20, $40, and $60 per bbl
Governor's Bill as Written, with House Credit, and with
Senate Deduction Provisions
[This chart depicted how the base allowances and credits
included in SB 305, CSHB 488, and CSSB 305 would affect the
Severance Tax paid to the State at $20, $40, and $60 per
barrel prices for the years 2005 through 2030.]
Ms. Wilson stated that this graph depicted the affect of the
base allowance/credits on the Severance Tax under the provisions
of the bills at three different price levels. At all three price
ranges SB 305 would provide the lowest Severance Tax revenue.
The Senate and House bill revenues would be aligned after the
year 2016 because the base allowance provisions would terminate
at that time.
10:43:41 AM
Ms. Nienhuis noted that at $20 a barrel the impact of the
allowances would be insignificant. However at $40, the House
credit would increase revenues by 13 percent and the Senate's
deductions would increase revenues by 18 percent over that
resulting from SB 305, which does not include any of these
provisions. At $60, the House credit would be six percent more
and the Senate deduction would be eight percent more.
10:44:12 AM
Senator Stedman suggested that a table be provided which did not
include other things such as SB 305's "$14.6 million per year
into perpetuity" credit or the House or Senate bill's deductions
or credits. For example, one of the concerns raised is that,
under CSSB 305, capping the barrel allowance at 30,000 barrels
per day as opposed to the original 55,000 barrels per day might
have "created more of an impact on industry than was
anticipated".
Mr. Dickinson thought that the chart on page 17 might address
Senator Stedman's concerns. As depicted on the chart, the
provisions of CSHB 488 appear to have the same effect on the
severance tax as SB 305; however, when the House provisions
expired in the year 2016, the affect would resemble that of CSSB
305. "The point is that the effect of the Senate's provisions is
very very small." When the House credits expired and "basically
no deductions at all" were to occur, the dollar volumes at that
point would be very close to those of CSSB 305. Only a "handful
of very small companies" producing less than 5,000 barrels a day
would benefit from CSSB 305's 5,000 barrel a day deduction. "The
dollar amount of that" deduction is fairly small." This might be
more apparent were the graph designed differently.
10:46:57 AM
Senator Stedman acknowledged that after the year 2017 when the
allowance provisions of both the House and Senate committee
substitutes expired, the two graph lines would trend together.
At that point this would be "a null issue". However, the concern
is that perhaps CSSB 305 "took too much off the table in this
particular area". This Committee should further review this
issue.
10:47:41 AM
Co-Chair Green understood therefore that the concern was whether
30,000 barrels or 55,000 barrels would be the appropriate
number.
Senator Stedman affirmed. The concern was that this change "took
too much off the table". There might not be much difference
between the impacts of CSSB 305's barrel allowance and there
being "no allowance at all".
10:48:21 AM
Senator Stedman stated that having this information would assist
in determining whether including an allowance was necessary.
Mr. Dickinson acknowledged that the information being reviewed
does not provide that information. Such information would
provide a good visual comparison.
Page 18
Payment Safe Harbor
· Governor's bill
*90% with annual true-up
*No interest if 90% test met
· House CS
*90% with annual true-up
*Interest due on true-up amount
*Penalty if 90% not met
· Senate CS
*95% with quarterly true-up
*No interest if 95% test met
Ms. Wilson stated that unlike current production law which
required producers to pay 100 percent of the tax, the PPT would
provide producers the option to estimate such things as capital
expenditures. CSSB 305 would allow a producer to pay 95 percent
of his tax each month with a calendar quarterly true up. No
interest would be due were those conditions met.
Ms Wilson stated that both SB 305 and CSHB 488 would require a
90 percent safe harbor monthly payment. However, CSHB 488 would
impose penalties if less than 90 percent was paid and it would
charge interest on the annual true up amount. SB 305 would not
impose interest if less than a 90 percent safe harbor was paid.
10:51:02 AM
Page 19
Spill Surcharges
AS 43.55.201, AS 43.55.300
· Governor's bill
* No change to total 5 cents
* No change to split (2/3)
· House CS
* No change to total 5 cents
* Changes split to 1/4
· Senate CS
* Increases total to 6 cents
* Changes split to 1/5
Ms. Wilson stated that while SB 305 would continue existing
spill surcharges, the House and Senate committee substitutes
made changes in that regard. CSSB 305 would increase the current
five cent per barrel fee to six cents per barrel. In addition,
it would change the current split, which was three cents payable
and two cents suspended, to five cents payable and one cent
suspended. CSHB 488 would continue the five cent per barrel fee
but would change the split to four cents payable and one cent
suspended.
Senator Bunde asked Senator Stedman, who was a member of the
Senate Resources Committee, what prompted the decision to change
the split.
Senator Stedman deferred to Co-Chair Wilken who had more
historical knowledge about the spill surcharge fee split.
Co-Chair Wilken explained that the five cents per barrel
currently collected was deposited "into a pot": three of the
five cents was utilized to support department operations and the
remaining two cents supported clean-up activities. When the fund
balance reached $50 million in 1995, "the two cent infusion was
halted". Since that time, the Department has "whittled" the
money down and the pot is currently empty. This effort would
assist in reconstituting the spill mitigation fund and provide
money to the Department to support prevention, education, and
response efforts. These funds have commonly been referred to as
"4/70" funds.
Co-Chair Wilken was unsure why the decision was made to increase
the fee to six cents.
Mr. Dickinson communicated that the Senate Resources Committee
made that decision.
Senator Bunde understood the mechanism, but was seeking an
explanation for the increase to six cents.
Senator Dyson, also a member of the Senate Resources Committee,
added that this money was reflected in the State's Operating
Budget. Several departments which had utilized the 4/70 fund in
the past, were now seeking general fund money to support
operations the 4/70 fund had previously supported. The
reconstitution of this account would support a variety of
funding needs.
Senator Stedman stated that further information on the decision
to increase the fee to six cents could be provided.
10:55:26 AM
Page 20
Spill Fees
[This graph depicts the affect of the one penny change in
the collected Spill Prevention Fee amount under the Low
Volume scenario and the High Volume Scenarios.]
Ms. Wilson stated that the collection of one penny a barrel
would equate to approximately three million dollars a year.
Under the Low Volume scenario, the one penny fee would end in
the year 2030. The High Volume scenario fee collection would
continue. She noted that the rises in the High Volume scenario
line depicted small new fields coming on line.
Senator Stedman noted that even though the PPT discussion has
concentrated on billions of dollars, it should be noted that the
impact of this penny a barrel should not be discounted as the
money generated would really add up.
Mr. Dickinson defined the Spill Fees chart as being "multi-use",
as it could represent the affect of any one penny movement in
price.
10:56:52 AM
Page 21
Other differences
· Credits refundable?
* Up to $10M in House CS only
· Abandonment
* Governor's bill: no specific provision
* House CS: No credit available
* Senate CS: No credit available for old production
· Catastrophic oil spill expenses not deductible under
House CS
· SB 185 credits: extended 10 years in House CS
Ms. Wilson state that this information identified notable
differences between the three bill versions. It also addressed
questions that have been raised such as which bill(s) would
refund credits and how they addressed abandonment, catastrophic
oil spill expenses and previous petroleum tax legislation
credits.
10:58:35 AM
Page 22
Private Royalties
· State and federal royalty interests are tax free so a
producer typically pays tax on 7/8ths of its
production from these leases.
· Private royalty interests are not tax free, so
producer typically pays tax on 8/8ths of its
production from these leases.
Mr. Dickinson stated that State and federal royalty interests
were tax exempt under the current production tax statute. Thus,
a producer would pay tax on, for instance, 7/8ths of their
production from a State or federal lease.
Mr. Dickinson communicated however that "private royalty
interests are not tax free". Therefore, a producer having a
private royalty they must pay a production tax on 8/8ths of
their production. Therefore, the issue is that the law specified
an exception for State and federal leases but not for private
leases.
11:00:20 AM
Page 23
Private Royalties
· Existing law authorizes producer to pass production on
to royalty owner
* Royalty owner bears no responsibility as a tax
payer.
* More difficult to calculate under PPT
· CS establishes new tax rate on existing private
royalty leases, (excludes private lessor's royalty
interests from PPT)
Mr. Dickinson pointed out that existing law, which is a matter
of public policy and does not affect the State's actual take,
specified that "when in a private royalty situation, the lessee
is settling up with a lessor and paying their royalties, they
can deduct severance taxes that they pay. The producer is
responsible for the severance tax but they can deduct it from
the settlement they make to the royalty owner … The royalty
owner bears no responsibility" to the State as a tax payer, as
the production tax was applicable only to the producer. The
problem is that under the provisions of the PPT, the tax would
be on net value rather than the gross value at "the point of
production at each point". Thus, the tax on a lease specific
private royalty value would be more difficult to calculate, as
all "exploration interests" of the producer would be factored
in.
Mr. Dickinson also noted that currently, "the royalty owner gets
their settlement free and clear of any costs". However, under
the PPT, upstream costs would be deductible. So, what was "a
relatively simple matter" under existing production laws would
be "controversial" under the PPT.
Mr. Dickinson emphasized however, that, even though this issue
is of importance to private royalty owners, it does not "have a
large affect on State revenues". Even though the number of
private royalty leases might increase, "statistically" the
number of private leases would continue to be a small segment
overall. However, in order to address this issue, "the amount of
the pass through" could be adjusted to address the impact the
PPT would have on private royalty leases.
Mr. Dickinson stated that in response to this concern, CSSB 305
incorporated "a new rate on existing private royalty leases".
Because the PPT would be based on gross value at the point of
production instead of net, CSSB 305 decreased the private
royalty tax rate to five percent on all existing leases with the
exception of Cook Inlet where the rate would be 1.5 percent.
This new tax rate would be easy to calculate and should address
industry concerns.
Mr. Dickinson advised however, that two issues remained. The
first being that "private royalty owners are excluded from the
PPT", and the second being that the PPT does not "address what
would happen" with future private royalty leases. While CSSB 305
included language requesting that the Commissioner of the
Department of Revenue issue a recommendation in this regard, "it
doesn't say how that would become law". The uncertainty as to
what the tax rate would be would be of concern to someone
holding a private royalty interest or when a lease was being
renegotiated. Currently the tax in these cases is zero.
11:03:46 AM
Co-Chair Wilken asked that a "real world example" of this issue
be provided in a subsequent meeting.
Mr. Dickinson agreed.
11:04:13 AM
Page 24
Private Royalties - Settlement
· New Formula for Settlement in Gov's Bill:
* Total tax paid by producer/Total non-royalty bbls *
Private royalty bbls
· New Formula for Settlement in CS:
* Total tax paid by producer/total gross value at the
point of production * Private royalty bbls
Mr. Dickinson stated that another private royalty concern would
be to cement a formula on other things such as "overriding
royalty interests" and situations in which the royalty tax might
be unclear. SB 305 addressed this issue by including "a formula
for allocating this share". After working with the Alaska Oil
and Gas Association (AOGA), a new formula was included in both
the House and Senate committee substitutes. This formula was
acceptable to AOGA and to the Administration. The formula, which
would be a "fair allocation" based upon the total tax and the
royalty and non-royalty variables, "would allow the lessee to
pass on to the lessor a fair amount of the tax". Further details
in this regard could be provided.
11:05:19 AM
Mr. Dickinson distributed a three page handout [copy on file]
which updated information regarding the current and proposed
Point of Production process in Prudhoe Bay as discussed during
the April first PPT hearing. The diagram on the first page of
the handout depicted the current point of production in Prudhoe
Bay. Well fluids were sent to a separation facility, referred to
as a flow station or gathering center. One of the "streams of
oil" emitting from that facility flowed through a Lease
Automatic Custody Transfer (LACT) Meter into the Trans Alaska
Pipeline (TAPS). The point at which the oil moved from the LACT
Meter to TAPS is currently recognized as the point of production
for the oil tax as well as the point of production for royalty.
The handwritten notation on the diagram "COTP Point of
Production for Oil" was added between the Separation Facility
and the LACT Meter point to specify where oil utilized on the
North Slope for production purposes was taxed. This would
address the crude oil topping plant (COTP) process that "takes
and refines oil" and, like a gas station, provided it to trucks
working on the North Slope. The COTP is currently defined in
statute as a point of production because the oil was processed
and transited through a metered sales line.
Mr. Dickinson continued. The fluids flowing from the separation
facility also flow to a Central Gas Facility (CGF). Currently
the inlet to the CGF is considered to be the Point of Production
for gas. A "series of processes" occur within the CGF, and all
products processed in the CGF are considered gas. One stream of
gas emitting from the CGF is referred to natural gas liquids
(NGLS). NGL is transited to the LACT Meter and is added to the
oil stream which is sent through TAPS. "Those NGLS are currently
defined as gas even though, in other many respects they are
treated as oil."
Mr. Dickinson stated that another stream of gas emitting from
the CGF could be divided into two streams. One of those streams,
amounting to approximately 8.5 billion cubic feet a day, is re-
injected into the ground and as "a consequence" is considered
"to never have been produced". It is viewed as residual gas. The
other stream is "the gas that is sold". There are currently only
a limited number of uses for that gas on the North Slope: some
is used at nearby TAPS pump stations and some is used by
industry on the North Slope.
Mr. Dickinson reviewed the Point of Production proposed in the
PPT. Three changes would occur to the current process. The first
would be that oil used on the North Slope would no longer be
taxed. "Practically all" of the 20 oil and gas producing states
in the United States do not tax gas used to the process of
producing oil and approximately one third of those states do not
tax oil used to produce oil. The decision to not tax this oil
was made in consideration of the overall profit the State would
realize under the PPT. In summary, the COTP point of production
for Oil was eliminated.
Mr. Dickinson communicated that the second difference in the
Point of Production process, as proposed in the PPT, would be
the elimination of the point of production before gas entered
the CGF. "That point would be after the fluids have moved"
through the CGF. The new point of production for NGLS added to
oil and moving through TAPS would be the LACT Meter. Under the
PPT, those NGLS would be defined as oil. This would not be an
issue, as the PPT would simplify the tax system by taxing both
oil and gas at the same rate.
Mr. Dickinson pointed out that under the PPT, the point of
production for Gas would be downstream of the CGF. It is
important to note that other new facilities like the CGF that
smaller producers might build would be upstream of the point of
production. Those expenses would be considered qualified capital
expenditures which would qualify for a 20 percent credit. Under
CSSB 305, every dollar spent to operate those facilities "would
be reduced 25 cents". The effort would be to treat processing
activities occurring on the North Slope like other activities
that are "important for finding, developing and producing gas".
Mr. Dickinson reiterated that the point of production of gas
would be upstream of the gas treatment plant, as that activity
was viewed to be a component of the transportation and sale of
gas associated with a gas pipeline.
Mr. Dickinson addressed the Goal information on the last page of
the three page handout. The PPT endeavored to support two goals.
One was "to simplify definitions so we won't have low value-
added conflicts" over such things as what would be considered
gas and what would be considered oil and what would be
considered a gas processing plant. The second goal was to
"incentivize all production activity" through such things as
moving processing activities upstream of the point of
production. One area in which new conflict might arise would be
the situation where a single plant might be built which had
"both gas treatment and gas processing in it". The conflict
could arise in determining "where one process stops and the
other begins". However, the belief is that the PPT definitions
would address that and other situations. Overall, the process
would be simplified and production would be incentivized.
Senator Stedman asked that the concept of making credits
available on gas processing be further addressed.
Co-Chair Green reviewed the schedule for future PPT hearings.
The bill was HELD in Committee.
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