Legislature(2005 - 2006)HOUSE FINANCE 519
07/26/2006 10:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB3001 | |
| HB3003 | |
| HB3004 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB3001 | TELECONFERENCED | |
| *+ | HB3003 | TELECONFERENCED | |
| *+ | HB3004 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
July 26, 2006
10:13 a.m.
CALL TO ORDER
Co-Chair Chenault called the House Finance Committee meeting
to order at 10:13:18 AM.
MEMBERS PRESENT
Representative Mike Chenault, Co-Chair
Representative Kevin Meyer, Co-Chair
Representative Bill Stoltze, Vice-Chair
Representative Richard Foster
Representative Mike Hawker
Representative Jim Holm
Representative Reggie Joule
Representative Mike Kelly
Representative Beth Kerttula
Representative Carl Moses
MEMBERS ABSENT
Representative Bruce Weyhrauch
ALSO PRESENT
Representative Les Gara; Representative Ethan Berkowitz;
Representative Gabrielle LeDoux; Robynn Wilson, Director,
Division of Tax, Department of Revenue; William Corbus,
Commissioner, Department of Revenue
LEGISLATORS IN ATTENDANCE:
Representative John Coghill
Representative Harry Crawford
Representative David Guttenberg
Representative/Speaker John Harris
Representative Kurt Olson
Representative Ralph Samuels
PRESENT VIA TELECONFERENCE
Representative Eric Croft
SUMMARY
HB 3001 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.
HB 3001 was HEARD and HELD.
HB 3003 An Act relating to oil and gas properties
production taxes; providing for a production tax
adjustment to increase the amount of tax at high
oil prices and a production tax adjustment to
decrease the tax on the production of heavy oil;
providing for an exclusion of a certain amount of
oil and gas from the gross value at the point of
production; relating to the determination of the
gross value of oil and gas at the point of
production; and providing for an effective date.
HB 3003 was SCHEDULED but not HEARD.
HB 3004 An Act relating to oil and gas, and to the oil and
gas properties production (severance) tax as it
applies to oil; providing for an adjustment to
increase the tax collected when oil prices exceed
certain amounts and to reduce the tax collected
when oil prices fall below $16 per barrel;
providing for relief from the tax when the price
per barrel is low or when the taxpayer
demonstrates that a reduction in the tax is
necessary to establish or reestablish production
from an oil field or pool that would not otherwise
be economically feasible; delaying until July 1,
2016, the deadline for certain exploration
expenditures that form the basis for a credit
against the tax on oil and gas produced from a
lease or property in the state; amending the
powers and duties of the Alaska Oil and Gas
Conservation Commission; and providing for an
effective date.
HB 3004 was HEARD and HELD.
HOUSE BILL NO. 3001
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.
10:13:37 AM
Representative Hawker declared potential conflict of
interest because a member of his family is employed by the
oil and gas industry in Alaska; he requested to be excused
from participating & voting. Representative Foster
OBJECTED.
Representative Hawker asked that a roll call vote be taken
regarding his vote exclusion on HB 3001. Co-Chair Chenault
said it was not his intent to vote on any bills at the
current meeting.
Co-Chair Meyer noted his own conflict of interest but since
it is not the intent to move the bill, he reserved the
motion until the vote.
Representative Hawker withdrew his request, noting he would
not participate in the hearings until a Committee vote was
taken.
Representative Foster commented that it is inappropriate for
a member of the Finance Committee not to participate during
discussions on complex issues.
Representative Holm agreed, relating the oil industry
history with most legislative members.
10:19:24 AM
Co-Chair Chenault declared his own conflict, yet encouraged
members to participate during the committee process. He
encouraged Representative Hawker's participation.
Representative Hawker voiced his appreciation.
10:20:59 AM
ROBYNN WILSON, DIRECTOR, DIVISION OF TAX, DEPARTMENT OF
REVENUE, referred to a comparison matrix meant to highlight
two approaches to the Petroleum Production Tax (PPT). (Copy
on File.)
Ms. Wilson explained the four columns:
· CSSB 2001(FIN), version F;
· HCS SB 2001 (FIN), version X.A,
· Conference CS SB 2001, version C.A;
· Governor's bill, version A.
Ms. Wilson pointed out that the handout provides a "limited"
matrix highlighting the differences between those versions
and discussing the ramifications. She indicated that the
bill is consistent with the Conference Committee substitute
and instead of using a statewide system, there would be a
few slightly different areas - the North Slope, Cook Inlet
special treatment and the 'other' areas. The matrix
identifies the tax rate, progressivity surcharge, credits
for annual loss, credit usage floor, gas (GRE) transition
credit, base allowance credit, new area development credit,
sunset of new area development credit, oil spill, and
transition payment for each.
Ms. Wilson discussed the separate Economic Limit Factor
(ELF) rate for Cook Inlet oil & gas. The Governor's bill
contains no progressivity surcharge; the Administration
believes that progressivity is not needed.
10:25:24 AM
Ms. Wilson referenced the annual credit loss at various
rates. She highlighted the credit usage floor & the
differences resulting, which the Conference Committee placed
at 22.8%. That version also provides for a 3% floor; the
cap credits could not be used to reduce the tax below 3% of
the gross & North Slope region. The floor was eliminated in
the Governor's version. She pointed out that gas (GRE) had
not been a feature in recent versions of the bill.
Ms. Wilson explained the transitional investment credit
(TIE). The Governor's bill maintains the language indicated
in the Conference Committee version and provides for reviews
of the 2 for 1.
10:28:28 AM
Ms. Wilson related that the base allowance credit of $12
million dollars, based on production, varies depending on
which bill version is considered. She pointed out that only
Version F (CSSB 2001 (FIN)) is not based on production.
10:29:52 AM
Ms. Wilson discussed development credits for some parts of
the State, not Cook Inlet. That credit amounts to $6
million dollars, available at $500 thousand dollars per
month, for areas not in the North Slope or Cook Inlet; the
language is consistent with the Conference Committee
substitute. The credit has a rolling ten-year sunset for
new area development.
Ms. Wilson addressed the oil spill component and the
transition payment, which is the same as the Conference
Committee version. She noted that the graph clarifies the
amendment.
10:31:49 AM
Co-Chair Chenault inquired about the difference about the
TIE credit in the Governor's bill and the Conference
Committee version. Ms. Wilson said there is no difference
and highlighted why it should be "corrected". A page number
change resulted with no progressivity included in the
Governor's bill.
Co-Chair Chenault requested Ms. Wilson explain the fiscal
impact.
10:33:54 AM
Ms. Wilson explained that fiscal note #2 by the Department
of Revenue includes funding for regulation & contractual
regulation writing for ten positions. During various
revisions, the number of audit positions has fluctuated.
Co-Chair Chenault asked about the increase to the new note
as compared to the others. Ms. Wilson offered to research
that information.
10:35:23 AM
Co-Chair Chenault pointed out that the plan before the
Committee brings the bill back to the original 20/20 as
proposed by the Governor and excludes the progressivity
surcharge.
HB 3001 was HELD in Committee for further consideration.
HOUSE BILL NO. 3003
An Act relating to oil and gas properties production
taxes; providing for a production tax adjustment to
increase the amount of tax at high oil prices and a
production tax adjustment to decrease the tax on the
production of heavy oil; providing for an exclusion of
a certain amount of oil and gas from the gross value at
the point of production; relating to the determination
of the gross value of oil and gas at the point of
production; and providing for an effective date.
10:37:13 AM
Representative Croft noted that he was available to discuss
HB 2003. Co-Chair Chenault stated that HB 3003 would be
heard at the next scheduled meeting.
HB 3003 was SCHEDULED but not HEARD.
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 3004
An Act relating to oil and gas, and to the oil and gas
properties production (severance) tax as it applies to
oil; providing for an adjustment to increase the tax
collected when oil prices exceed $20 per barrel and to
reduce the tax collected when oil prices fall below $16
per barrel; providing for relief from the tax when the
price per barrel is low or when the taxpayer
demonstrates that a reduction in the tax is necessary
to establish or reestablish production from an oil
field or pool that would not otherwise be economically
feasible; delaying until July 1, 2016, the deadline for
certain exploration expenditures that form the basis
for a credit against the tax on oil and gas produced
from a lease or property in the state; amending the
powers and duties of the Alaska Oil and Gas
Conservation Commission; relating to the conservation
surcharge and additional conservation surcharge on oil;
and providing for an effective date.
10:38:18 AM
REPRESENTATIVE LES GARA, sponsor of HB 3004, distributed
information from the Wood Mackenzie materials, which
indicates how Alaska ranks on company profitability & the
internal rates of return. Overall, Alaska has lower costs
than most places in the world; in Alaska, oil @ the $40/bbl
price, the industry's net is approximately 42%.
Representative Gara provided members with another handout on
HB 3004: "The Alaska Fair Share Bill". (Copy on File). HB
3004 provides a modification to current law. There are many
ways to reach that goal, but initially, a revenue goal at
various price schemes must be determined. Numbers are
moveable to attain the goal. He agreed with Dr. Van Meurs
that investment decisions are affected with monetary reward
for investment. Once oil companies are given a "carrot of
the credit", they may attempt to reduce their tax rates by
taking advantage of that rule.
10:42:36 AM
Representative Gara referenced Page 3 of the handout, gross
taxation as straightforward.
· Current law taxes a percentage of the sale value of oil
· Sale value is easier to verify than the company profits
10:44:00 AM
Representative Gara advised that the Petroleum Production
Tax (PPT) bets Alaska's future on high prices. According to
the U.S. Energy Information Administration, the long term,
annual-average world oil price is forecasted at $47/bbl
through 2025.
10:44:11 AM
Representative Gara noted that according to British
Petroleum (BP), they anticipate prices will stay at about
$40/bbl average. He highlighted gas field costs.
10:45:02 AM
Representative Gara addressed additional PPT revenue at
$40/bbl. According to Econ One:
· Governor's PPT: $490 million over status quo
· House PPT: $588 million over status quo
· Senate PPT: $492 million over status quo
10:45:31 AM
Representative Gara stated that the PPT gas credits and
deductions largely erase the PPT revenue benefits. Ten
years of additional PPT revenue at $40/bbl equals:
· Governor's PPT: $4.9 billion over status quo
· House PPT: $5.88 billion over status quo
· Senate PPT: $4.92 billion over status quo
10:46:20 AM
Representative Gara thought that gas field credits and
deductions should be taken from gas taxes, not oil taxes.
10:46:28 AM
Representative Gara referenced Page 11 of the handout from
the report, indicating that Alaska is a more profitable
world market place for the industry to invest. The graph
indicates risks and rewards shown for 2004. Even at
$22/bbl, the global average rate of return is about 19%,
while in Alaska, that number reaches 24%; a gap that
continues to rise as prices increase.
10:47:04 AM
Representative Gara discussed a straightforward fix to the
current system and presented information on how the current
system works.
10:47:31 AM
Representative Gara explained the intent and effect of the
Economic Limit Factor (ELF), a system designed to promote
development of less profitable small and older fields. He
questioned if the option had provided producers with more
benefit than needed. The ELF ranges between 0 & 1 depending
upon a combination of factors. Generally speaking, they are
the size of a field and the field's per well production.
10:48:36 AM
Representative Gara discussed the ELF and production tax.
The 15% oil production or severance tax varies because of
the ELF. At the simplest, the ELF is a number between 0 &
1. (Production tax = ELF X 15). He suggested that ELF
ignores economic reality - A field that pays 0% in
production taxes, pays that rate at $20/bbl, $40/bbl, or
even $100/bbl of oil.
10:48:58 AM
Representative Gara addressed the need to make changes,
despite the name "economic limit factor". The numbers
ignore the largest, single economic determinant - the price.
10:49:56 AM
Representative Gara stressed that only three fields in
Alaska currently pay a production tax:
· Prudhoe Bay pays about 12%
· North Star pay about 6%
· Alpine pays about 12%
He pointed out that Alaska currently is charging a zero
percent tax on some of the largest oil fields in the
country. Most of the State's production is at zero per cent
fields. The ELF is "out of whack" & needs to be multiplied
in order that Alaska can receive a fair share.
10:51:26 AM
Representative Gara addressed additional flaws with the ELF
because it provides a tax rate based on a particular field -
the Tarn field, a satellite to Kuparuk. In determining the
ELF rate, the fields are not combined. He enumerated cost
savings of that measure at Tarn. That field is the nation's
th
67 largest oil field with only two drilling sites and three
ten mile pipelines to Kuparuk's facilities. They pay 0%
production tax.
10:52:15 AM
Representative Gara continued, the ELF is decreasing each
year. In 1993, the average North Slope production tax was
13.5% and in 2004, it had fallen to 7.5%. If Alaska does
nothing, it would fall to approximately 1.5% by 2015.
10:54:29 AM
Representative Gara stated that current fields are
profitable at oil prices of $20/bbl. He shared a viewpoint
that the State of Alaska should offer two separate taxation
systems - one for the existing fields and one for the new
fields. The existing fields were designed to be profitable
at $15-$20/bbl price. Presently, the State is encouraging
more expensive development & it may be that the fields
developed from here on out will be tested at higher prices
to be profitable.
10:55:47 AM
Representative Gara pointed out that Alaska Oil and Gas
Association (AOGA) has indicated that $12.82/bbl is a "high
end estimate" of what producers need to find, produce and
transport for the Alaska North Slope (ANS) oil. BP and
ConocoPhillips report their Alaska profits, while Exxon does
not.
In 2002, the lowest recent annual oil price was reported @
$24.72/bbl. At that price, ConocoPhillip took in
approximately a 30% company profit margin; BP assumed
approximately 24% profit. In 2005, oil was reported @
$53.48/bbl price; ConocoPhillips took in approximately 43%
company profit margin & BP received 53% profit.
10:57:43 AM
Representative Gara referenced Page 27, a distribution from
Department of Revenue indicating revenue between the State
and the oil companies at various prices, generated in prior
years.
In 2005, they estimated corporate net revenue @ $5.2 billion
dollars for Alaska oil & the State's share @ $3.2 billion
dollars. The Department of Revenue can estimate what the
company's excess cash is but do not know the company's
depreciation schedule.
10:59:05 AM
Representative Gara said based on sales value of the ANS oil
produced last year at about $13 billion dollars, their net
revenue was approximately $5.2 billion dollars. In FY05,
the profit margin was approximately 40%.
He noted that with last year's profit, North Slope profits
grew to an estimated $2.7 billion more than the State's
share.
11:00:10 AM
Representative Gara added in FY06, ANS prices averaged
approximately $62/bbl and at that price:
· Producer gross revenue: = $16.8 billion dollars
· Estimated Producer net profit: = $6.9 billion dollars
· Profit margin: = 41%
· Exceeds State share by: = $2.7 billion dollars
He commented that HB 3004 could equalize shares better
between the State and the industry. He highlighted Page 31
of the handout. The goal is to equalize shares, leaving
Alaska with a fair share. He pointed out that in Norway,
they take 70% of profit price.
11:03:34 AM
Representative Gara explained that HB 3004 leaves a healthy
company profit margin with the North Slope producer's margin
at:
· @ $20/bbl price = 11.2%
· @ $26/bbl price = 21.6%
· @ $40/bbl price = 29.4%
· @ $60/bbl price = 33.5%
· @ $80/bbl price = 35.3%
11:04:12 AM
Representative Gara addressed the "mechanics" of HB 3004.
He explained in the bill, there would be a minimum 5% base
tax and all fields would be required to pay that amount;
whereas, in the Governor's, the base tax would increase on
fields paying 0% by changing the ELF formula. In both HB
3004 & the Governor's proposal, the current law base tax
would remain the same for the larger fields. Both HB 3004 &
the Governor's proposal, differ from "Shelf the ELF"
efforts, which impose a flat 15% tax on all fields.
11:07:09 AM
Representative Gara continued, under HB 3004, the base tax
rate remains the same on the three Alaska fields that pay
more than 5%:
· Prudhoe Bay 12.38%
· Alpine 11.93%
· North Star 6.10%
HB 3004 addresses the price factor. The Governor's proposal
and the Fair Share bill start with a modest tax and
progressivity at $20/bbl. As the price rises, so does the
production tax. The second reform bases the production tax
on the price on company profitability and again as the price
rises, so does the production tax. He pointed out that BP
profits, above the $20/bbl are in excess of their financial
needs; company upside reward protected with a 27.5% maximum
tax and as the price of oil falls below $16/bbl, so does the
tax.
11:09:19 AM
Representative Gara pointed out that Page 36 shows the
average effective tax rate under the Fair Share bill. If
the price of oil is $20/bbl, the tax would be 9%; @ $40/bbl,
the tax would be 18%; @ $60/bbl, the tax would be 21.4% and
@ $80/bbl, the tax would be 23.2%. The status quo price for
all barrel prices is 7.8%.
11:09:59 AM
Representative Gara added that if oil prices fell below
$10/bbl, HB 3004 waives half the production tax and defers
payment of the other half until the price rise above $16/bbl
price.
HB 3004 extends the 20% - 40% tax credit for new exploration
as established in SB 185. The bill could amend language
allowing credit for expenses to extend the life of existing
fields, although existing incentives might not justify the
credits.
11:12:05 AM
Representative Gara pointed out the incentives for heavy
oil. It exempts heavy oil [less than 20 American Petroleum
Institute (API) gravity] from any of its measures. Heavy
oil, like that contained in the West Sak reservoir, requires
more expensive drilling and production measures.
Alternatively, approaches to heavy oil should also be
considered.
11:12:53 AM
Representative Gara spoke to fair tax relief. HB 3004
allows taxpayers production tax relief and borrows from
2003's Royalty Relief Law (HB 28). If production tax relief
was needed for fields to be economically feasible, the
Department of Revenue has power to waive all additional
production tax and royalties for that field.
11:14:37 AM
Representative Gara discussed major development incentive
and facilities access. He pointed out that the former
Division of Oil and Gas Director, Mark Myers stated that
facilities access is one of the most important things Alaska
can do to encourage new development. HB 3004 clarifies that
if there is excess capacity at a facility, the facility
owner shall make it available to independent producers at a
reasonable rate. That standard is currently used by the
Regulatory Commission of Alaska (RCA) in telecommunications.
Co-Chair Chenault asked if capacity availability was a large
concern for Alaska at present. He thought that the problem
with the North Slope was not re-injecting the volume of gas
received from existing wells. He agreed to open access but
thought that gas facilities were limited by the number of
production wells.
11:18:59 AM
Representative Gara acknowledged that if all wells were
operating at full capacity, then the concerns expressed by
the small producers that fair access was being denied, would
not be correct. He said it is difficult to discuss since
the small producers do not want to go public. He proposed
having a hearing on facility access, to make the North Slope
more "friendly" for development.
11:20:26 AM
Representative Gara discussed that giving companies more
profit does not guarantee more investment. He maintained
that Alaska is giving away way too much money while under-
taxing the industry.
11:21:20 AM
Representative Gara emphasized that providing extra revenue
to oil companies does not equal additional investment. He
enumerated revenues generated by the three major oil
producers in Alaska.
· FY02 @ $21.78/bbl generating $1.7 billion dollars
· FY03 @ $28.15/bbl generating $2.9 billion dollars
· FY04 @ $31.74/bbl generating $3.5 billion dollars
· FY05 @ $43.44/bbl generating $5.2 billion dollars
11:22:09 AM
Representative Gara wondered what will happen if the State
does nothing, while encouraging the other options:
· Adding new exploration credits
o Dr. Van Meurs recommended that a gross tax could
be modified to achieve desired revenue level and
the credit would attract investment by companies
seeking to reduce their tax burden
· Heavy oil - Alaska could impose a modified tax,
allowing companies to apply for royalty and tax relief
o Dr. Van Meurs recommended "stopping the bleeding"
on lost revenue of existing fields should be the
priority and perhaps applying new rules only to
existing fields
11:24:42 AM
Representative Gara concluded that reform is needed by any
measure. He pointed out that production tax effectively
exempts huge fields. The exemptions apply even at prices
where oil companies earn windfall profits and at average &
high prices, corporate profit shares vastly exceeds Alaska's
share. Corporate profit margins are larger in Alaska than
less safe places in the world.
Representative Gara stated that Alaska can make the ELF work
better; he concluded his testimony.
11:26:24 AM
Co-Chair Meyer mentioned a statement regarding the vastness
of profit margins, but worried about investment decline.
Representative Gara agreed but pointed out that as profits
increase, oil companies have not been investing more in
Alaska. He felt that the geology of the land was more
important than the tax rate, noting that the producible oil
in Alaska will be produced. He did not agree with
increasing subsidies over the next five years. If Alaska
oil fields are slated for exploration and development over
the next twenty years, giving away more money now so that it
happens next year as opposed to 2012, does not make good
sense & does not help the State. Alaska has been much more
attractive in terms of tax rate and profit margins than
anywhere else in the world. He added that it would benefit
the State to have oil come on line in 15 years, benefiting
the next generation and creating a stable revenue stream.
11:29:21 AM
Co-Chair Meyer hoped that down the road, the State would be
using more alternative energies. He disagreed with holding
off on producing oil in the next twenty years. He
reiterated the difficult geology in Alaska for company
exploration, which adds expense.
Co-Chair Meyer referenced comments regarding "stopping the
bleeding", pointing out that through administrative action,
the Governor had incorporated some of the marginal fields
into Prudhoe Bay. He thought that would be additional
revenue the State receives. Representative Gara responded
that given oil prices, it could have amounted to $200
million dollars. He credited the Governor for that action
and recommended that it happen at Alpine and Kuparik also.
11:32:40 AM
Co-Chair Meyer asked in reference to geology what is a stand
alone or satellite field. Representative Gara explained
that the Department of Law and the Department of Revenue
have indicated that the fields being taxed as independent
stand alone fields at a zero percent tax rate, under the
current statute should be defined as part of the overall
field. However, the interpretation approved the leases on
those fields, the Department has allowed them to be stand-
alone and zero percent fields. The definition is loose
enough that there is room for argument on both sides. The
law states that if they are an integrated economic unit, it
should be one field; he did not think that it should be a
continuous pool of oil. Leaving more money on the table for
oil companies will not work.
11:35:17 AM
Co-Chair Meyer commented that if the profits were so large
for the oil companies currently in Alaska, why every company
in the world wasn't attempting to explore in this State. He
asked if profits made by the oil industry had been compared
to other industries such as soft ware or pharmaceutical.
Representative Gara responded that there are no other
industries that generate 40% profit margins outside of oil
in Alaska; adding that 20% profit margins in the
pharmaceutical industry would be huge.
11:37:19 AM
Co-Chair Meyer was not sure. He pointed out that 40% was at
the current high oil prices and is not normal. He added
that HB 3004 is "truly" not a gross bill.
Representative Gara responded that HB 3004 could bring the
State back to the "good part of a net bill, not the bad
part". The good part provides that there is a tax that is
higher when profits are high and lower when profits are low.
It would not discourage investment when profits are low and
results in a fair share when profits are on the table. The
bad part of a net bill is that it only taxes a percentage of
profits. He did not have confidence that the industry will
honestly report profits in a real manner. Tax advice always
pushes the margin. The industry has a duty to push the
margins for their shareholders, which is the danger of
taxing profits. The State will be paying about $4 billion
dollars for gas field development after the pipeline is
built out of oil taxes. The big expense is the actual
pipeline. Putting gas deductions on an oil tax is a "big
danger" created in the PPT system. He recommended that oil
tax should have oil deductions and gas taxes should have gas
deductions.
11:41:35 AM
Representative Holm asked Representative Gara the intent of
using "fair". He worried about a reduction of oil moving
through the pipeline.
11:43:14 AM
Representative Gara defined "fair", referencing a quote from
the Alaska State Constitution that the "citizens of the
State are entitled to the maximum benefit from their
resources". That means maximum long-term revenue. To
provide that combines a high enough tax, but a low enough
tax to spur future development with a goal of not only
spurring new investment. He reiterated, "Fair share" should
lead to the maximum revenue possible. He acknowledged it is
more difficult to develop new fields; right now, Alaskans
know the amount generated on the North Slope.
11:46:19 AM
Representative Gara stated that the goal of the bill is to
encourage new investment & make sure that Alaska receives a
fair share. Encouraging investment does not happen just by
giving money to the industry what the State has done for
years; that have not sparked tremendous new investment. He
encouraged investments that will cause companies to do
things that they would not otherwise; he mentioned severance
tax relief.
Representative Gara discussed various tax breaks for
different types of development. He maintained that spurring
new investment can happen, once the industry knows what they
can expect in the future.
11:48:39 AM
Representative Holm asked about the lost production at
today's prices. He maintained that the State receives
royalty, severance and income tax from the industry; he
wondered how tax reinvestment could happen in Alaska unless
a decline in production stopped.
Representative Gara replied it is not possible to stop the
decline. The goal is to produce long-term investment, stem
decline and stabilize the industry. He recommended the
following strategies:
· Tax relief when needed
· Facilities access
· Investment exploration credit
· Access to smaller producers
11:53:05 AM
Representative Holm emphasized that capitalism has raised
more people's economic status in the world than any other
system. Capitalism means that people take money and invest
their own money into facilities that provide jobs and
benefits. Oil companies provide 80%-90% of all the money
coming into the State; he highlighted benefits unrelated to
those dollars. Representative Holm commented that the
Legislature should not "kill the golden goose". He thought
that a company will not make investments based upon a 24-
month price increase. He maintained that higher taxes would
change the world market and be detrimental to Alaska.
Representative Gara argued that he had not "taxing the
industry at the highest possible rate". The remaining
profits margins have been quite healthy. He agreed that
capitalism is a system that works and that it is important
not to kill the goose that lays the golden egg, but that it
is also important that the goose not take all the gold. It
is important is to draw the balance.
11:56:16 AM
Representative Joule thought that access to facilities
should be discussed at greater length and recommended the
Committee pursue that issue.
Representative Gara agreed with Representative Joule. Co-
Chair Meyer also agreed & thought that smaller oil companies
team up with major companies to achieve access.
11:58:35 AM
Representative Kelly indicated appreciation for
Representative Gara's presentation, noting that the
Legislature only has short time to make these important
decisions. He referenced Dr. Van Meur's comments regarding
gross. In response, Representative Gara pointed out that
the Legislature has not been interested in tax reform.
Representative Kelly asked had the gross been implemented
earlier, would Alaska be at the place they currently are.
Representative Gara concluded that Alaska would not be here
if the proposal had been accepted, believing the proposal
was similar to the one proposed in HB 3004. He indicated
that the progressivity feature could make the tax law more
stable in the future. Representative Kelly agreed that
separating gas and oil was attractive and necessary and
disallowed expenses should be defined. He asked if
Representative Gara had compiled that list. Representative
Gara replied that gas was number one; some items will
require Court challenges as they might be illegal. He
encouraged that language be added that only "direct Alaska
costs" be deducted. He recommended that the Department of
Revenue help create the list.
12:04:44 PM
Representative Kelly inquired about disallowed costs, using
examples of rebuilding Prudhoe Bay. Representative Gara
explained that to make a profit tax work, allowable expenses
need to be defined at Prudhoe Bay. He addressed subsidies
and severance tax relief and suggested a method for allowing
deductions. Currently, the numbers considered are
arbitrary.
12:07:30 PM
REPRESENTATIVE GABRIELLE LADOUX said she prefers a gross tax
as it appears simpler, suggesting that most of the country
operates on a profit system. Representative Gara agreed, it
is fine to tax profits in some areas, but not on oil and not
the way the Governor purposes. He suggested weighing the
benefits and burdens of a profit tax and expressed shock
that gas was being included in the oil tax bill - not
"revenue neutral".
12:10:10 PM
Co-Chair Meyer commented on the "gaming" aspect of a profit
tax and thought a gross tax could have the same potential.
Representative Gara agreed it is okay to tax profits in many
areas. He pointed out that around the world, most taxation
on oil is determined by the profits and worried there would
be no way to determine company profits for taxation. A
severance & production tax relief system is not "gamed" and
that there exists clear evidence to that effect. He
referenced past royalty taxes.
Co-Chair Meyer maintained that gaming was possible under any
system and that is why auditors are used. Representative
Gara disagreed, explaining that the gaming in a profits tax
does not profit access to a companies books; they tell the
State what the profits are and if the State does not
challenge them, the State never sees what their profits
truly were. There is no way to guess their profits
accurately because they do a federal tax return, which does
not itemize the Alaska profits. There is a lot of room for
gaming in that system.
12:13:18 PM
Co-Chair Meyer said he appreciated inclusion of incentives
for heavy oil in Representative Gara's bill but questioned
how much was recoverable. Exploration is very costly;
perhaps only one of ten wells is recoverable. Exploration
is risky and costly. He asked if there were incentives
included to recover heavy oil.
Representative Gara replied that heavy oil is a flexible
system and that needs change. He proposed that current law
be left in the bill to address heavy oil & then on large
heavy oil fields, there should be a tax; most fields would
not include a production tax. If a tax break is needed, it
would need to be proven.
Co-Chair Meyer inquired how gaming on heavy oil could be
prevented. Representative Gara explained they would need to
provide geological evidence and unless a hearing is
scheduled, there is not much available evidence.
12:17:26 PM
Representative Kerttula pointed out that no other state uses
the profit sharing system. Representative Gara understood
that most states use a gross value tax system and that
worldwide, many countries own their own wells.
12:18:19 PM
Co-Chair Chenault understood in those systems, they pay for
all exploration and most costs.
Representative LeDoux inquired about the hearings for tax
break petitions. Representative Gara said that process is
already in place and would be the same one used to hear
royalty relief applications. Representative LeDoux asked if
there was a right to appeal. Representative Gara understood
there is always a right to appeal any agency decision.
12:20:10 PM
Representative Kelly reiterated the time constraints
surrounding the issues and foresaw difficulties from the
investor's perspective. He recommended splitting the oil
and gas issues. Representative Gara responded that he is
reluctant to use a net formula. If gas deductions were
eliminated and taxes were based on world averages, he would
then consider it. He believed that Senator Wagoner's bill
comes the most close to addressing that consideration. He
was reluctant to give credit to Point Thompson.
Representative Gara maintained that he is willing to
negotiate.
Representative Gara noted that the reason he was pushing the
gross is to determine a credit system with desired needed
revenue. Determining that criteria, the Legislature could
craft an acceptable bill. He opined that a gross tax would
be easier and better than nothing and recommended taxing
existing oil as a solution.
12:25:27 PM
Representative Holm asked why there was such a significant
difference between the fiscal note for HB 3001 and HB 3004.
Representative Gara replied that he had not viewed notes.
Ms. Wilson interjected that the key difference between the
two fiscal notes would be the number of auditors - four in
HB 3001 and eight in HB 3004. Representative Holm pointed
out that it takes fewer auditors to implement a gross than
net tax bill. Ms. Wilson agreed.
12:28:44 PM
Representative Joule pointed out Legislative reluctance to
change and accepting new tax. He believed that staffing
issues were important because more auditors could stop some
gaming potential. He noted the tension between Department
of Revenue and Department of Natural Resources.
12:31:53 PM
Representative Kerttula questioned if current audits found
non-allowed evidence, in the operating agreement. Ms.
Wilson responded, currently, the upstream costs are not
audited. Representative Kerttula noted that she would be
surprised if current wording allowed non-acceptable items.
Ms. Wilson referred to Page 160©, "substantial weight
should be given to industry standards if consistent with the
principles of the rest of the bill". Representative
Kerttula noted that she would check with the Department of
Natural Resources regarding areas that should not be allowed
in the operating agreements. Ms. Wilson noted that right
now, the only things being audited were the transportation
costs.
12:35:36 PM
Representative LeDoux commented that to date, the producer's
word has been accepted to date. She wondered where the
burden of proof is and if it would change in the future.
Ms. Wilson responded that it lies with the taxpayer. The
bill does not change the burden of proof requirement and
that the audit powers under the Administrative Section
#43.05 are broad.
Representative Gara emphasized that lack of enough auditors
causes inaccurate results; he questioned how frequent audits
currently happen.
Representative LeDoux commented that the State can follow an
audit procedure paper trail. Ms. Wilson said that was
correct and that the State has the authority to do that.
Undertaking an audit is a judgment call depending on the
risk involved and the potential revenue.
12:40:48 PM
Representative Kelly asked about the problems associated
with separating the PPT oil from gas. Ms. Wilson responded
that there are asset allocation issues that could create a
burden on record keeping and auditing. Representative Kelly
inquired how that is currently done. Ms. Wilson replied at
this time, it is not an issue. Representative Kelly thought
it would be worth the risk to consider combining the two
issues.
12:43:21 PM
REPRESENTATIVE ETHAN BERKOWITZ asked about current auditing
discrepancies. Ms. Wilson advised that some are
mathematical errors or could be a different interpretation
of law. She did not know the dollar amount.
Representative Berkowitz was curious about the incidence of
resulting conflict. Ms. Wilson deferred that query until
she could get more information.
12:45:17 PM
Co-Chair Chenault referred to Page 26, State profits from BP
and ConocoPhillips and asked why BP's were greater.
Representative Gara guessed that the BP's portfolio was
higher and perhaps ConocoPhillips was operating on a larger
portfolio of smaller fields.
Co-Chair Chenault referenced the severance tax
relief/royalty tax relief and asked if royalty relief
actually came from the royalty share. Representative Gara
said it does. Co-Chair Chenault inquired if Representative
Gara's bill proposes severance tax versus royalty tax
relief. Representative Gara responded that it gives the tax
payer the option. Production tax relief is proposed in HB
3004.
12:47:56 PM
Representative Joule addressed the comparison of the net to
the gross and asked about the "shelf life length" on the
gross. Representative Gara explained that the reference to
shelf-life expired about five years ago because it included
no progressivity feature. Including such a feature, changes
as the world price of oil changes & provides a more stable
system. He acknowledged that any system will experience
some flaws.
HB 3004 was HELD in Committee for further consideration.
ADJOURNMENT
The meeting was adjourned at 12:50 P.M.
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