Legislature(2005 - 2006)
05/21/2006 04:24 PM Senate FIN
| Audio | Topic |
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| Start | |
| SB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE BILL NO. 2001
"An Act relating to the production tax on oil and gas and
to conservation surcharges on oil; relating to criminal
penalties for violating conditions governing access to and
use of confidential information relating to the production
tax; providing that provisions of AS 43.55 do not apply to
certain oil and gas subject to a contract executed under
the Alaska Stranded Gas Development Act; amending the
definition of 'gas' as that definition applies in the
Alaska Stranded Gas Development Act; making conforming
amendments; and providing for an effective date."
This was the second hearing for this bill in the Senate Finance
Committee.
4:25:03 PM
Co-Chair Wilken moved to adopt CS SB 2001(FIN), 24-GS2094\G as a
working document.
Without objection, Version "G" was ADOPTED as the working
document.
4:25:29 PM
Amendment #7: This amendment deletes Section 30 on page 29 lines
3 through 8 as well as all references to the provision of
Section 30 elsewhere in the bill. The deleted language of
Section 30 reads as follows.
Sec. 30. AS 43.55 is amended by adding a new section to
article 4 to read:
Sec. 43.55.890. Relationship to Alaska Stranded Gas
Development Act. During the period that a valid contract
executed under AS 43.82, as amended, is in force, AS
43.55.011 - 43.55.310 do not apply to oil or gas for which
a producer is obligated to make payments in lieu of taxes
or oil surcharges. A payment in lieu of taxes included
delivery of gas to the state in lieu of taxes.
Co-Chair Green moved for adoption of the amendment and objected
for purposes of explanation.
4:26:10 PM
SENATOR RALPH SEEKINS reviewed the history of the bill to
explain the reason for the amendment. The language being deleted
by this amendment had been originally included in the bill to
alleviate the concern on the part of Legislators and the
citizens of the State "as to whether or not" the provisions
crafted in this Petroleum Production Tax (PPT) bill might also
be "putting terms in place" for the separate and then unseen
Alaska Stranded Gas Development Act (ASGDA) legislation;
specifically that the payment in lieu of taxes language in the
ASGDA legislation "would be excluded from the PPT bill of
general applicability". Now that the ASGDA legislation had
become available, the determination was that the issue was moot
as "it was just a restatement of a truism that we know already
exists". Retaining this language would confuse the issue.
Senator Seekins stated that omitting this language would clarify
"on the record that the terms of that gas contract, if approved,
stand alone by themselves and … do not appear anywhere in this
law of general applicability for PPT".
Co-Chair Green removed her objection.
Co-Chair Wilken stated that the memorandum [copy on file] dated
May 20, 2006 to Co-Chair Green from Don Bullock, Legislative
Council, Division of Legal and Research Services, Legislative
Affairs Agency which addressed Section 30, was an important
factor in his decision to support the amendment; specifically
the paragraph at the bottom of page 3 that reads as follows.
The Attorney General's opinion offers that the contracting
away issue could be avoided by having the contract
recognize that future legislatures may make changes to the
tax. However, if the contract precludes future legislative
action, the art. IX, sec. 1 prohibition against contracting
away the taxation power would need to be resolved. The
enactment of sec. 30 in Co-Chair Green 2001 seems to be an
effort to provide legislative endorsement of contracting
away the state's power to tax under AS 43.55.
Co-Chair Wilken also appreciated the information on page 7 of
the memorandum that reads as follows.
Article IX, sec.1, Constitution of the State of Alaska,
prohibits the state from contracting away the power to tax,
but art. IX, sec. 4 allows the legislature to grant a
suspension or exemption from tax by general law. Section 30
of SB 2001 appears to provide a legislative endorsement of
a contract provision that contracts away the power to
impose a tax under AS 43.55. The legislative "endorsement"
of contracting away the power to tax does not make the
contracting away constitutional. Accordingly, I believe
that it is more likely than not that a court would find
that sec. 30 is void under art. IX, secs. 1 and 4 of state
constitution.
However, if sec. 30 or a contract provision of the type
authorized in sec. 30 is not held invalid, art. 1, sec. 15,
Constitution of the State of Alaska, and art. 1, sec. 10,
Constitution of the United States, would prohibit a
subsequent legislature from passing a law that impairs the
obligations in that contract.
Co-Chair Wilken concluded that these three paragraphs were
instrumental in compelling him to support the amendment.
4:30:54 PM
Senator Seekins noted that the information in the third
paragraph supported his earlier remarks in that the deletion of
Section 30 would have "no affect on the issue; it would simply
remove this reference" to the ASGDA contract from the PPT bill.
Without further objection, Amendment #7 was ADOPTED.
AT EASE 4:31:24 PM / 4:32:32 PM
Co-Chair Green noted the adoption of Amendment #7 would require
eliminating the reference to the ASGDA from the bill's title.
This issue would be addressed later in the meeting.
4:33:04 PM
Amendment #8: This amendment inserts language following
"multiplied by the price index determined under (h) of this
section" in subsection (g) of AS 43.55.011 added by Section 5,
on page 4 line 13. The amended language reads as follows.
(g) In addition to the taxes levied under (e) and (f)
of this section, during each month for which the price
index determined under (h) of this section is greater than
zero, there is levied on the producer of oil or gas a tax
for all oil and gas produced during that month from each
lease or property in the state, less any oil and gas the
ownership or right to which is exempt from taxation or
constitutes a landowner's royalty interest. Except as
otherwise provided under (i) of this section, the tax
levied under this subsection is equal to .1 percent of the
production tax value of the taxable oil and gas as
calculated under AS 43.55.160, multiplied by the price
index determined under (h) of this section. However,
application of this subsection may not, when added to the
tax levied under (e) of this section, impose a tax levy of
more than 50 percent of the production tax value of taxable
oil and gas as calculated under AS 43.55.160.
This amendment also deletes the language following "divided by
the" of subsection (h) of AS 43.55.011 on line 17 and inserts
new language. The amended language of the subsection reads as
follows.
(h) For purposes of (g) of this section, the price
index for a month is calculated by subtracting 35 from the
number that is equal to the quotient of the production tax
value of the taxable oil and gas produced during that
month, as calculated under AS 43.55.160, divided by the sum
of (1) the number of barrels of that oil less three-
quarters of the number of barrels of the taxable oil
produced during that month from leases or properties in the
Cook Inlet sedimentary basin, and (2) two-thirds of the
number of barrels of oil equivalent of that gas, less (A)
one-sixth of the number of barrels of oil equivalent of the
taxable gas produced during that month from leases or
properties in the state located south of 68 degrees 15
minutes North latitude outside the Cook Inlet sedimentary
basin, and less (B) one-third of the number of barrels of
oil equivalent of the taxable gas produced during the month
from leases or properties in the Cook Inlet sedimentary
basin. For purposes of this subsection, a barrel of oil
equivalent is the amount of gas that has an energy content
of 6,000,000 British thermal units. The department by
regulation shall establish sampling, testing, and averaging
methods for determining the energy content of a producer's
gas produced during a month.
This amendment also inserts language following "expenditures for
the calendar year" of subsection (f) of Sec. 43.55.160.
Determination of production tax value of oil and gas., added to
article 1 of AS 43.55 by Section 25, on page 25 line 17. The
amended language reads as follows.
(f) In place of the adjusted lease expenditures for a
month under (a) of this section, a producer may, at any
time, elect to substitute, for every month of a calendar
year, 1/12 of the producer's adjusted lease expenditures
for the calendar year. An election made under this
subsection applies to calculation of the tax under AS
43.55.011(e) and (g).
Co-Chair Green moved for the adoption of Amendment #8 and
objected for discussion.
4:33:15 PM
DAN DICKINSON, Certified Public Accountant, formerly, Director,
Tax Division, Department of Revenue, and secured as a Consultant
by the Office of the Governor, addressed the first and third
components of the amendment.
Mr. Dickinson stated that the first component resembled language
included in the version of SB 305, relating to the establishment
of a PPT system, passed by the House of Representatives during
the regular session and similar to language adopted by this
Committee during its first hearing on this bill. This language
is being proposed because it was considered "appropriate" to
include the entirety of conforming amendments in the bill.
Mr. Dickinson stated that the effect of this provision would be
to limit the percent of the value of the barrel the State would
receive under the current Progressivity element. For example,
were the price of oil to increase to $300 or $400 dollars per
barrel, a situation could arise "where this tax took 110 percent
of the value of the barrel".
Mr. Dickinson stated that, even at the 50 percent limitation
proposed in the amendment, "the PPT would take 50 percent of the
value of the barrel; the other 50 percent would have to account
for the producer's profits, the producer's return, plus their
royalty payments, their federal income tax payments, their State
income tax payments and their property taxes. Even a 50 percent
split here is not a 50 percent split of the economic rents, it
simply says mechanically the Progressivity factor will, at this
point, stop increasing".
Mr. Dickinson calculated that the discrepancy "would even out"
at approximate prices of $180 to $190 per barrel. This should be
a consideration, as the prices experienced over the last two
years were certainly not forecast by many.
4:35:11 PM
Mr. Dickinson stated that the third component of the amendment
addressed the section of the bill "dealing with the mechanics of
annualization"; or, the process involving matters such as annual
payments. The language would specify that Progressivity payments
would "be included in those mechanics".
Mr. Dickinson reiterated that both of these components had been
included in the version of SB 305 passed by the House of
Representatives.
Mr. Dickinson then addressed the portion of the amendment that
would insert language to AS 43.55.011(g). A significant portion
of this provision is a reiteration of the concepts of AS
43.55.160 pertaining to the net calculation formula. That
calculation is "the total net value and you divide through by
the barrels and gas that created that". An issue of concern to
this calculation is that "there have been a number of revenue
exclusions that remove barrels from the calculation of the net
value or remove amounts of gas".
Mr. Dickinson continued that as a result of the various revenue
exclusions, a producer could elect to "shrink the pot" by
removing "one-third of the North Slope gas revenues, … two-
thirds of the Cook Inlet gas revenues, … three-quarters of the
Cook Inlet oil revenues; and … one-half of gas revenues between
the Cook Inlet and the North Slope". Thus, a distortion would be
created after the calculation was divided "through by the total
number of barrels".
Mr. Dickinson concluded that the language in this portion of the
amendment would "simply repeat the steps" specified in AS
43.55.160, explaining that in computing the "dollar per barrel
equivalent, you basically do the same steps for the
denominator".
4:37:53 PM
Mr. Dickinson continued addressing the last two sentences of
language this portion of the amendment would insert to
subsection (g), which reads as follows.
For purposes of this subsection, a barrel of oil equivalent
is the amount of gas that has an energy content of
6,000,000 British thermal units. The department by
regulation shall establish sampling, testing, and averaging
methods for determining the energy content of a producer's
gas produced during a month.
Mr. Dickinson explained that this language would change the gas
to oil conversion methodology utilized in the Progressivity
element of the bill from the current Million Cubic Foot (MCF)
"volumetric" measurement to an energy equivalence methodology
based on the British thermal unit (BTU). The BTU conversion
methodology was commonly utilized in other international
Progressivity factors. In adopting this methodology, a separate
formula would be applied to convert "between the volumes and the
BTUs".
4:38:50 PM
Mr. Dickinson reviewed the information depicted in an untitled
six page handout [copy on file] dated May 21, 2006 which
depicted several Progressivity scenarios. The first scenario
titled "Progressivity Base Case - Oil Only" demonstrates the
additional revenue the State would receive with the adoption of
the Progressivity provision of this amendment.
4:39:52 PM
Mr. Dickinson stated "the most illustrative" point is depicted
on the second page of the handout that shows the affect of a
50/50 oil and gas mix on Progressivity. He chose to illustrate
this percentage mix because Econ One Research Inc., the
consultants hired by the Legislature, had previously utilized
the 50/50 mix scenario in one of their presentations. However,
he stressed the point "that no producers have anywhere near a
50/50 mix".
4:40:06 PM
Senator Bunde understood that the top line on the 50/50 mix
graph depicted the level of Progressivity tax attributed only to
oil at various barrel prices and that the bottom line depicted
the tax resulting from the 50/50 oil and gas mix.
Mr. Dickinson affirmed. The Progressivity tax would not be
triggered, under the 50/50 oil and gas mix, until the price of
oil was approximately $90 per barrel. It would also increase at
a much slower rate after that point as compared to the tax based
solely on oil. He reiterated that the use of a 50/50 split was
strictly a "mechanic notion" and would be unlikely to occur on
the North Slope under current production conditions.
4:41:17 PM
Mr. Dickinson stated that the handout also exampled a 90 percent
oil and ten percent gas mix. This would more accurately reflect
the mix that could occur on the North Slope.
4:41:41 PM
Mr. Dickinson stated that the last page of the handout exampled
calculations specific "to converting some of the [gas] volumes"
and other steps that would be required by the adoption of this
amendment. He informed, "You will still find that a producer
that has gas will probably have a slightly smaller Progressivity
factor than a producer that has oil". While this would be the
historical trend, instances would arise "when those
relationships can reverse". The purpose of the graphs was to
provide "a sense of the distortion" that would accompany a mix
of oil and gas calculation that would occur despite the effort
of this amendment to "correct that and have the Progressivity
be, I think, what Members intend, when they are looking at a net
Progressivity".
4:42:39 PM
Mr. Dickinson, in response to a question from Senator Stedman,
affirmed that the "mix" presented in the third scenario was ten
percent gas and 90 percent oil. At the $50 per barrel price,
"after the netting out of costs, you'd have about $35 for oil
but you'd be showing a loss of about $10 for the equivalent of
gas".
4:43:32 PM
Mr. Dickinson noted that the information in the handout also
included a scenario that reflected a 90 percent oil and ten
percent gas mix absent the "GRE".
Senator Stedman concluded that the language being proposed in
this provision would address the conversion distortion issue.
4:43:48 PM
Mr. Dickinson affirmed.
Co-Chair Green removed her objection to the adoption of the
amendment.
Without further objection, Amendment #8 was ADOPTED.
4:44:24 PM
Amendment #9: This amendment deletes "6.67 percent" and inserts
"11.25 percent" to the language of AS 43.55.011 (f)(3)(B), added
by Section 5 on page 4 line 4. The amended language reads as
follows.
(B) notwithstanding (2) of this subsection,
for gas the tax is equal to 11.25 percent of the gross
value at the point of production of the gas.
Co-Chair Green moved for adoption and objected for explanation.
Mr. Dickinson informed of "a special rate craved out for private
royalty interests" in the PPT. The provisions of AS 43.55.011(f)
addressed the concern that, over time, the parties of the
"contractual relationship" might "figure out mutually beneficial
ways that in fact would leave the tax collector in a position"
that had not been anticipated. Thus, if the State was to
determine that the process had been manipulated to reduce the
taxpayer's tax liability under this section the rate would
revert to the normal PPT rate. However, because three separate
valuations pertaining to the gas tax rate are included in the
bill, the provision of subparagraph (B) was inserted with the
percentage of 6.67 specified. The accurate percentage rate has
since been determined to be 11.25 percent. This issue only
pertains to "a fraction of one percent of the total leases".
Co-Chair Green removed her objection.
There being no further objection, Amendment #9 was ADOPTED.
4:47:02 PM
Amendment #10: This amendment makes grammatical changes through
the deletion of the commas and insertion of "and" in the phrase
"direct, ordinary, and necessary" where it appears in the
language of subsection (c)(1) of Sec. 43.55.160. Determination
of production tax value of oil and gas., added to article 1 of
AS 43.55 by Section 25 on page 20, line 20. The amended language
reads as follows.
(c) For purposes of this section,
(1) a producer's lease expenditures for a period
are the costs upstream of the point of production of oil
and gas that are incurred on or after April 1, 2006, by the
producer during the period and that are direct and ordinary
and necessary costs of exploring for, developing, or
producing oil or gas deposits located within the producer's
leases or properties in the state or, in the case of land
in which the producer does not own a working interest,
direct and ordinary and necessary costs of exploring for
oil or gas deposits located within other land in the state;
in determining whether costs are direct and ordinary and
necessary costs of exploring for, developing, or producing
oil or gas deposits located within a lease or property or
other land in the state,
(A)…
Co-Chair Green moved for adoption of the amendment and objected
for purposes of explanation.
4:47:14 PM
Mr. Dickinson explained that this amendment would address an
issue pertaining to the term "ordinary and necessary" as defined
in AS 43.55.
Co-Chair Green clarified that "the phrase 'ordinary and
necessary' is a term of art used as a phrase not as two
characteristics".
Mr. Dickinson affirmed. The intent of the term "ordinary and
direct" without a comma after "ordinary" would identify a cost
as being "direct and ordinary and necessary".
Co-Chair Green withdrew her objection.
Without further objection, Amendment #10 was ADOPTED.
4:49:18 PM
Amendment #11: This amendment changes the title of the section
added to the uncodified law of the State of Alaska by Section 28
on page 34 line 25, by deleting "REGULATIONS AND". The amended
title is "TRANSITION: RETROACTIVITY OF REGULATIONS." This
amendment also deletes the language of subsection (a) of the
section. The deleted language reads as follows.
(a) The Department of Revenue may proceed to adopt
regulations to implement the changes made by this Act. The
regulations take effect under AS 44.62 (Administrative
Procedure Act), but not before the effective date of the
law implemented by the regulation.
Co-Chair Green moved for adoption of the amendment and objected
for an explanation.
4:49:34 PM
Mr. Dickinson deferred to Robert Mintz.
4:49:43 PM
ROBERT MINTZ, Attorney with Preston Gates Ellis law firm, and
former Assistant Attorney General, Oil, Gas & Mining Section,
Civil Division, Department of Law, secured as a consultant to
the Department of Law, explained that Section 38 currently
contains two subsections pertaining to regulations to implement
the PPT tax provisions. The PPT method was initially proposed to
become effective July 1, 2006 and therefore language was
included to allow the Department of Revenue to begin the
regulatory drafting process prior to that date. The enabling
language was no longer necessary because the current version of
this bill has an immediate effective date.
Co-Chair Green noted that after the word transition, on the
amendment should be a colon not a semicolon.
Co-Chair Green removed her objection.
Without further objection, Amendment #11 was ADOPTED.
4:51:43 PM
Amendment #12: This conceptual amendment deletes "providing that
provisions of AS 43.55 do not apply to certain oil and gas
subject to a contract executed under the language through Alaska
Stranded Gas Development Act;" following "tax" in the title of
the bill on page 1 lines 3 through 5. The amended language reads
as follows.
"An Act relating to the production tax on oil and gas and
to conservation surcharges on oil; relating to criminal
penalties for violating conditions governing access to and
use of confidential information relating to the production
tax; amending the definition of 'gas' as that definition
applies in the Alaska Stranded Gas Development Act; making
conforming amendments; and providing for an effective
date."
Co-Chair Green moved for adoption.
In response to a question from Co-Chair Green, Mr. Mintz
explained that the language "amending the definition of gas as
that definition applies in the Alaska Stranded Gas Development
Act" as denoted on lines 5 and 6 of the title should be retained
because the Alaska Stranded Gas Development Act (ASGDA)
incorporated the definition of gas from the production tax
statute. Amendment of the definition for statutes pertaining to
the PPT bill would also amend the definition in ASGDA.
Without objection, Amendment #12 was ADOPTED.
Co-Chair Wilken offered a motion to report CS SB 2001, 24-
GS2094\G, as amended, from Committee with individual
recommendations and accompanying fiscal notes.
There being no objection, CS SB 2001 (FIN) was MOVED from
Committee with zero fiscal note #1 from the Department of
Natural Resources and a new $1,174,200 fiscal note dated May 21,
2006 pertinent to the Department of Revenue from the Office of
the Governor.
AT EASE 4:53:50 PM / 4:53:59 PM
Co-Chair Green expressed appreciation for the efforts of the
Committee and others involved in developing this legislation.
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