Legislature(2011 - 2012)HOUSE FINANCE 519
03/28/2011 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB110 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 110 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
March 28, 2011
1:37 p.m.
1:37:36 PM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 1:37 p.m.
MEMBERS PRESENT
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas Jr., Co-Chair
Representative Anna Fairclough, Vice-Chair
Representative Mia Costello
Representative Mike Doogan
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Mike Hawker (alternate)
Representative Reggie Joule
Representative Tammie Wilson
MEMBERS ABSENT
ALSO PRESENT
Representative Alan Austerman; Senator Cathy Giessel; Rena
Delbridge, Staff, Representative Mike Hawker; Donald
Bullock, Legislative Counsel, Division of Legal and
Research Services, Legislative Affairs Agency; Bryan
Butcher, Commissioner, Department of Revenue; Bruce
Tangeman, Deputy Commissioner, Department of Revenue; Roger
Marks, Petroleum Economist, Logsdon and Associates.
SUMMARY
HB 110 PRODUCTION TAX ON OIL AND GAS
HB 110 was HEARD and HELD in committee for
further consideration.
HOUSE BILL NO. 110
"An Act relating to the interest rate applicable to
certain amounts due for fees, taxes, and payments made
and property delivered to the Department of Revenue;
relating to the oil and gas production tax rate;
relating to monthly installment payments of estimated
oil and gas production tax; relating to oil and gas
production tax credits for certain expenditures,
including qualified capital credits for exploration,
development, and production; relating to the
limitation on assessment of oil and gas production
taxes; relating to the determination of oil and gas
production tax values; making conforming amendments;
and providing for an effective date."
1:38:13 PM
Co-Chair Stoltze discussed that Rena Delbridge, Staff,
Representative Mike Hawker would provide an overview of the
proposed CS HB 110 (FIN) 27-GH1007\I (Bullock 3/27/2011).
Vice-chair Fairclough MOVED to ADOPT workdraft CS HB 110
(FIN) 27-GH1007\I (Bullock 3/27/2011).
Co-Chair Stoltze OBJECTED for purpose of discussion.
Representative Gara had several questions for the
Department of Revenue (DOR) related to the Fraser Report.
Additionally, he had read an article that called into
question some of the prior testimony by petroleum economist
Roger Marks related to the tax system in the United
Kingdom.
Co-Chair Stoltze relayed that the bill sponsor would be
available for additional questions at a later time. He
clarified that his office would relay the question to DOR.
Representative Gara communicated that he would like to
speak to Commissioner Bryan Butcher in person during a
committee meeting.
1:41:56 PM
RENA DELBRIDGE, STAFF, REPRESENTATIVE MIKE HAWKER,
discussed the proposed CS HB 110 (FIN) 27-GH1007\I (Bullock
3/27/2011). She informed the committee that two changes had
been made to the title to conform to Section 8 in the CS.
Sections 1 through 5 that related to interest rates had not
changed.
Representative Doogan wondered what specific changes had
been made to the title. Ms. Delbridge explained that the
terms "estimated," in Line 4 and "relating to the
determination of," in Lines 6 and 7 had been deleted from
the title.
Co-Chair Stoltze discussed that a redline version of the
bill would be provided.
Ms. Delbridge continued to address changes that appeared in
the CS. Section 6 limited the lowered tax rate eligibility
to the first seven years of sustained production. Section 7
included new language that clarified the "brackets" and had
been recommended by Donald Bullock, Legislative Legal
Counsel. She explained that the change did not alter the
net effect of the original brackets that had been proposed
by the governor. Section 7 of the House Resources Committee
(Resources) version had been deleted and Section 8 of the
CS restored a monthly progressivity tax calculation.
Sections 9, 10, and 11 were unchanged from the Resources
Sections 10, 11, and 12. Sections 12 and 13 in the CS
modified the issuance of tax certificates to occur within
one year instead of over two years. Sections 14 through 17
related to the well expenditure lease credit that increased
from 20 percent to 40 percent and a ten-year sunset on the
increase related to the North Slope. Section 18 was
unchanged from the Resources Section 18. Section 19 was
unchanged from the Resources Section 20. Section 19 from
the Resources version was not included in the CS.
1:45:26 PM
Representative Gara asked about the details of Section 19
that was included in the Resources version. Ms. Delbridge
responded that Section 19 had related to an increase in the
small producer credit from $12 million to up to $15
million.
Ms. Delbridge discussed that Section 20 in the CS had been
unchanged from Section 22 in the Resources version. Section
21 was unchanged from Section 23 in the Resources version.
Sections 22 and 23 in the CS were new conforming amendments
that accommodated the ten-year sunset on the well lease
expenditure credit that had been added in Section 14.
Section 24 was unchanged from the Resources Section 28.
Section 25 was unchanged from the Resources Section 29.
Section 26 was unchanged from the Resources Section 30.
Section 27 was unchanged from the Resources Section 31.
Section 28 was unchanged from Resources Section 32. Section
29 dealt with applicability. Sections 30 through 36
addressed retroactivity and effective dates.
DONALD BULLOCK, LEGISLATIVE COUNSEL, DIVISION OF LEGAL AND
RESEARCH SERVICES, LEGISLATIVE AFFAIRS AGENCY, discussed
that one of the most significant effective dates in the CS
related to the 25 percent and 15 percent tax changes and
the two levels of progressivity that took effect January 1,
2013.
Representative Gara asked whether there had been any
additional changes related to the credits that were
included in the Resources version of the bill. Ms.
Delbridge responded in the affirmative and explained that
the Resources Section 21 that established a new credit for
30 percent of exploration outside of an existing unit or
within a unit formed after a certain date had not been
included in the Finance CS.
Representative Gara wondered whether, aside from conforming
language, all of the credit provisions were the same as in
the governor's original legislation. Ms. Delbridge replied
that she would follow up on the question.
Co-Chair Stoltze noted that the provisions were
substantially the same.
Representative Hawker clarified that the change was related
to the implementation of a 10-year sunset on the well lease
expenditure credit that increased from 20 percent to 40
percent.
Vice-chair Fairclough added that the 15 percent tax base in
the second tax bracket was limited to the first seven years
of production. The producer would then go up to the second
tier or first tier at the 25 percent rate. She explained
that the limit would apply to each individual well, the
producer of the well, and the time period that the well had
to recover its cost at the lower rate.
1:50:22 PM
Co-Chair Stoltze discussed his desire to adopt the CS but
did not want to move faster than the committee was
comfortable with. He believed there would be a vigorous
amendment process.
Representative Doogan asked for detail on the portions of
the Resources version that had not been included in the
current CS. Ms. Delbridge discussed that the current CS did
not include the Resources language that had lowered the
floor for the minimum tax. Section 17 of the Resources
version that provided a new credit related to wages paid to
Alaska workers in the Resources version was not included in
the Finance CS. Section 19 of the Resources version that
increased the small producer credit from $12 million to $15
million was not included. Language from the Resources
version that created a new credit for 30 percent of
exploration outside of existing units or within units
formed after a certain date was not included. Additionally,
Resources Section 24 that eliminated the distance from
existing unit boundaries in well requirements in order to
be eligible for the 30 percent credit was not included.
Co-Chair Stoltze appreciated the clarification.
1:53:04 PM
Ms. Delbridge relayed that the Finance CS maintained the
extension of the eligibility for exploration and small
producer credits from the current statute date of 2016 to
2021 that had been included in the Resources version.
Representative Doogan wondered about the additional changes
in the legislation that did not involve the Resources
version. Ms. Delbridge communicated that the CS limited the
benefits of the 15 percent base rate tier to the first
seven years after sustained production began and at that
point the production would be taxed at the 25 percent base
rate tier.
Representative Doogan asked for confirmation that at year
eight the 15 percent base rate tier would increase to the
25 percent base rate tier. Ms. Delbridge replied in the
affirmative and explained that after seven years of
sustained production a producer would be moved to the
higher bracket.
Ms. Delbridge continued to discuss the additional changes
in the Finance CS. She explained that the CS restored the
progressivity tax back from an annual calculation to a
monthly calculation. Additionally, the CS included a 10-
year sunset on the 40 percent well lease expenditure credit
that had been extended to the North Slope in both the
original and Resources versions of the bill.
Mr. Bullock discussed that the CS excluded an amendment to
AS 43.55.160 that provided instruction on how to determine
the production tax value. He explained that the governor's
bill had amended the section to address the new tax plan
that took out the monthly progressivity determination. The
proposed CS returned to the current status, including fixed
rates of 15 percent and 25 percent in 43.55.011(e), and the
progressivity rates in AS 43.55.011(g). The existing
43.55.160(a) that addressed the annual calculation and the
monthly calculation would work with the current version
without an amendment.
Co-Chair Stoltze asked whether the objection to the
adoption of workdraft CS HB 110 (FIN) 27-GH1007\I (Bullock
3/27/2011) was maintained.
Hearing no further objection the CS was ADOPTED.
1:57:32 PM
AT EASE
1:59:03 PM
RECONVENED
BRYAN BUTCHER, COMMISSIONER, DEPARTMENT OF REVENUE,
discussed that DOR had not had ample time to thoroughly
read the CS, but would be happy to discuss any other
questions the committee had.
Co-Chair Stoltze communicated that there would be time to
digest the changes to the bill.
Representative Gara asked whether the commissioner
remembered telling the Resources Committee that the Fraser
Report (a survey of oil company executives) showed that
only 56 percent of the executives saw Alaska's oil tax
system as a non-deterrent to investment and 44 percent saw
it as a deterrent. Commissioner Butcher responded in the
affirmative.
Representative Gara relayed that his office had spoken with
the author of the report who had explained that the
pertinent information on oil tax and royalties was located
in the fiscal terms section. He discussed that the fiscal
terms section showed that 74 percent of companies found
Alaska's oil tax system as a non-deterrent to investment.
He expounded that DOR had mistakenly referenced an
incorrect section of the report. Commissioner Butcher
agreed that DOR had been trying to present its focus on the
tax regime. However, he discussed that DOR's testimony had
not been related to production tax and the department felt
it had provided a snapshot that depicted how the oil
industry viewed Alaska. He relayed that the tax regime in
Alaska was extremely low and there was no state sales or
income tax. He reported that out of all of the states that
had been studied the only states the industry rated as
having a works tax regime than Alaska were California, New
York, and Florida. He reiterated that the survey provided a
snapshot which showed that the general view of Alaska was
much more pessimistic than it deserved to be. He discussed
that the department had discontinued using the Fraser
Report and the Wood Mackenzie Report, which rated Alaska's
fiscal situation as 129 out of 141, and had begun to narrow
its focus to specific items that were known such as the
decline, the lack of exploration, etc.
Representative Gara discussed that "tax regime" was the
Fraser Report's definition of personal taxes, corporate
payroll and capital taxes; however, the report indicated
that there was a much higher number than DOR had previously
testified that saw Alaska's oil royalty and production tax
system as favorable. Commissioner Butcher answered in the
affirmative, but noted that DOR had been attempting to
present something a bit different.
Representative Gara discussed that DOR had characterized
the Alaska tax system as out of whack; however, when the
Fraser Report ranked Alaska's production taxes it put more
than half of the jurisdictions that had been surveyed as
less competitive than Alaska in terms of production taxes
and royalties. Commissioner Butcher replied that the more
DOR had dug into the issue it had discovered that there was
never an apples to apples comparison. In addition to the
Fraser Report, the department had pulled the Wood McKenzie
report that had been much more negatively weighted towards
Alaska compared to other reports. He explained that there
were a significant number of variables to consider and DOR
did not want to lose the focus on what the decline and
exploration activity had been in the state.
Representative Gara responded that the department had
presented the wrong chart to the Resources Committee and
the chart that applied to Alaska's oil taxes ranked the
state much more favorably. He emphasized that DOR should
have corrected its mistake and presented the appropriate
chart to the House Finance Committee.
Vice-chair Fairclough believed there did not appear to be a
way to compare one Fraser Report to another to determine
whether respondents had changed their views. There was not
a defined set of criteria to provide a consistent look at
something. She believed that Wood Mackenzie polled from the
same type of people on a continuous basis. She discussed
that the Fraser Report had been pulled because its accuracy
had been brought into question. She added that respondents
were paid $1000 for their response and it did not provide a
consistent message given that there was no way to know who
the respondents were. She had heard the administration
voice that there was a different look each time the
information was presented and that sometimes it looked
favorable and other times it did not. She hoped that the
committee would listen to Alaskans who were telling them
that there was job loss and that there was production loss
in the service industry that supplied labor and materials
to North Slope production.
2:08:01 PM
Representative Hawker had a copy of the Fraser Report in
question and believed that the entire report should be
taken with a grain of salt. He read from the survey
methodology that "names of potential respondents were taken
from publicly available membership lists of trade
associations. Some Canadian trade commissioners abroad
provided names of individuals in their host countries. Some
trade industry associations assisted by providing contact
information with individuals of member companies." He
relayed that there were a total of 645 responses, but they
only represented 364 different companies. He emphasized
that only three out of every five respondents indicated
that they held a managerial position or were officers of
companies. He read from a copy of the solicitation for the
2011 Global Petroleum Survey: "please note that if you
complete the survey and provide us with your contact
information, at the end of the questionnaire you will be
entered into a drawing for $1000."
Co-Chair Stoltze appreciated the clarification.
Representative Doogan hoped that the Fraser Report
discussion was at an end and noted that the administration
should not have presented the report if it was not a
reliable form of information. He asked for clarification on
the department's response to Question 7 in its March 28,
2011 letter that was provided to the committee (copy on
file). He wondered whether the legislature would not have
the full cost of HB 110 until 2014. Commissioner Butcher
replied in the affirmative.
Representative Doogan thought costs to the state that were
indicated by DOR for 2014 were between $1.3 billion and
$1.5 billion plus additional costs that had not been
determined. Commissioner Butcher replied in the
affirmative.
Representative Doogan asked why it was not possible to
figure out what the additional costs would be. Commissioner
Butcher discussed that it was impossible to determine
whether there would be a net positive or net negative in
2014 related to a change in interest rate. There would be a
15 percent tax rate for areas that were not currently being
developed. The state was currently not receiving any
revenue from the areas; however, when development occurred
the number would become positive.
Representative Doogan surmised that it would be a good
thing if it happened at all. Commissioner Butcher answered
in the affirmative.
Representative Doogan asked about item 9 in Question 7
related to the expansion of exploration credits that was
listed as indeterminate in the March 28 letter from DOR.
Commissioner Butcher responded that the exploration credit
item had been added in the House Resources Committee and
that DOR considered it as an indeterminate cost because the
department did not know to what degree the credits may or
may not be used. The number would be zero in the event that
the exploration credits were not used; however, it would be
an undetermined number in the event that the credits were
used.
Co-Chair Stoltze noted that there would be a committee
discussion related to the fiscal impact of the CS. He
encouraged Representative Doogan to continue with
additional questions.
Representative Doogan asked about items 10 and 12 that were
listed as indeterminate in Question 7. Commissioner Butcher
responded that item 10 related to the extension of the
small producer credit from 2016 to 2021. The department had
no idea what activity would be used for the credit. Item 12
that added a credit in the amount of producers' wages and
compensation paid to Alaska resident workers that exceeded
80 percent, was not in the current CS. The cost was
indeterminate because it had been nearly impossible to
determine how the credit would be used. He explained that
many companies had a small number of employees and a large
number of contractors that could potentially manipulate the
system so that over 80 percent of the company's five
employees would be Alaska workers, and it was next to
impossible to determine what impact it would have on the
state.
2:14:48 PM
Representative Doogan asked whether it was really
impossible to estimate what the additional costs would be
in the event that all of the provisions listed in Question
7 were included in the bill. He understood that the items
were not all included in the CS and that it would be
necessary to make that distinction as well.
Commissioner Butcher supposed that DOR may have been able
to come up with a no-clue guess for five to ten years in
the future. He used the 2016 to 2021 language from the bill
as an example and explained that DOR would have to try to
estimate the amount of credits that would be used five
years from the present date and going out to ten years
without any knowledge about what bill the legislature would
decide to pass. He added that it had been too difficult to
come up with a number in the time that the department had
been given.
Representative Doogan expressed his desire for the
department's best guess regarding the potential cost of the
bill prior to its departure from committee. He believed the
claim that it was impossible to be certain what the costs
would be was not a persuasive argument given that fiscal
notes were frequently a best guess. Commissioner Butcher
responded by providing an example related to the small
producer credit from 2016 to 2021 that was likely to be a
very small number. A 15 percent bracket for areas that were
not currently under development could have been in the
hundreds of millions to billions of dollars depending on
the areas such as Great Bear or the Brooks Range. He opined
that the indeterminate negatives would be much smaller than
the indeterminate positives. The department could not
provide a prediction on what the exact production would be
in different areas in the future as a result of the
legislation.
Representative Doogan understood that it was difficult to
determine an estimate but he expected the department to
provide a verifiable price tag on the legislation.
Commissioner Butcher responded that he would look at the
data but he did not have a crystal ball and could not
estimate what the production would be with an acceptable
validity.
2:18:45 PM
Representative Costello wondered whether DOR had looked at
the levels of production that were needed in order for the
present legislation to result in revenue that would surpass
funds generated from ACES. She recounted testimony from a
DOR presentation that for HB 110 to surpass the revenue of
ACES that the state would need a 5 percent increase in
production at $80 a barrel, a 10 percent increase at $100 a
barrel, and a 15 percent increase at $120 a barrel. She had
found the presentation helpful because it was not possible
to predict what would happen. She noted that companies had
testified that they would take another look at their
inventory and consider investing in Alaska when the bill
passed. Commissioner Butcher replied that the department
had worked to look at as many angles as possible, but
unfortunately it was extremely difficult because of the
multiple variables involved that included tax, price of
oil, and how production might increase or decrease. He
explained that when numbers were indeterminate the
department worked to avoid providing the committee with
guesses that could have been misleading. He provided an
example that DOR could put an estimate in the fiscal note
that 15 percent over the next five years would bring in
$600 million to $1.2 billion in revenue. He explained that
DOR was working to provide the committee with the most
precise information possible and did not want to mislead
them with a guess.
Representative Gara wondered whether the department would
incorporate its new price estimates in the existing fiscal
note dated January 18. He elaborated that DOR had recently
raised its forecast for the price of oil and that with a
higher price in oil the loss in tax revenue between ACES
and the proposed legislation would be greater. The fiscal
note showed that the price of oil was estimated at $1.3
billion in FY16; however, with the revised figures the
number would be greater that year. Commissioner Butcher
answered in the affirmative. He added that just as it saw
increased revenue coming into the state and potentially
more revenue in the Constitutional Budget Reserve (CBR),
the increased price of oil would result in a larger short-
term potential loss in revenue.
Representative Gara wondered whether the department could
provide an estimate of the fiscal cost to the state for
reducing the tax from 25 percent down to 15 percent for
fields that were going to move forward regardless of the
tax decrease. He explained that ConocoPhillips had
announced its desire to move forward on NPRA [National
Petroleum Reserve-Alaska] development with the approval of
the Army Corps of Engineers. He believed there was evidence
that Great Bear and fracking technology would result in
increased production. He relayed that there had also been
discussion about delayed but eventual production at Umiat.
Commissioner Butcher responded that from the department's
perspective that it was premature to make assumptions about
the future. He used shale and Great Bear as an example and
explained that it was promising, but the cost of drilling a
well in Alaska was three times more than in North Dakota.
He discussed that it would be much harder to have an
economic small volume well in Alaska than it would be in
North Dakota. He relayed that it did not make sense for the
department to try to make an assumption about potential
development that could occur under the current tax when it
was not sure what would occur under a 15 percent tax.
2:23:46 PM
Co-Chair Stoltze remarked on the impact of environmental
policy regarding fracking.
Representative Gara disagreed with the department's stance.
He believed that DOR would start taxing fields at 15
percent that would have been developed and taxed at 25
percent and that it would cost the state a significant
amount of money.
Vice-chair Fairclough relayed that Representative Gara's
statement may have been accurate for a future field that
currently did not have a permit; however, there were
existing producers that were caught in the middle of the
present debate and had been negatively impacted. She
discussed that there had been testimony the prior week
related to companies that had entered Alaska's regime under
the Petroleum Production Tax (PPT) and had been caught off
guard when ACES had been implemented. She relayed that
there were currently uneconomical fields that had been
forced to produce due to debt in excess of $140 million.
The fields would begin operating in order to recover
shareholders investments based on a regime that no longer
existed.
Representative Gara remarked that they disagreed on the
issue.
Representative Guttenberg wondered when the department
would provide the committee with updated fiscal notes. He
thought that DOR could provide projections that used the
current tax system compared to the proposed tax for fields
that were known to be coming online. He had received a
letter from Professor Reynolds, an oil economist at the
University of Alaska Fairbanks who projected oil would
increase to $200 or $300 based upon world-wide production
levels and decline. He was concerned about the department's
overall inability broadcast and to forecast way out into
the future when it talked about the bill's focus on
changing behavior and making things more economical and the
relationship with world competitive costs. Over the years
the legislature had received reports from Wood Mackenzie
and Gaffney, Cline & Associates that discussed the
expensive but lucrative nature of doing business on the
North Slope. The whole premise of the bill was that there
would be a change of behavior; however, it appeared the
department was asking legislators to take a leap of faith
and that it had no ability to make projections about new
wells, exploration, and the location of new fields.
2:28:52 PM
Co-Chair Stoltze replied that the department would have the
fiscal notes ready the following day.
Commissioner Butcher responded that the department would
provide a fiscal note to the committee after it had
reviewed the CS. He added that DOR had made it known that
the U.S. Department of Energy had reported that the state
was not close to a mature field. There had been next to no
exploration on 75 percent of state land, which was the
focus of the 15 percent tax. He relayed that questions
related to geological information should be directed to the
Department of Natural Resources (DNR).
Representative Wilson wondered whether the state was trying
to make it more economical to extract the oil that was
becoming harder to get. She believed the bill was about
increasing activity and not about changing behavior. She
discussed that activity could increase as a result of new
technology. Commissioner Butcher replied in the
affirmative. In discussions with DNR the department had
learned that the giant Prudhoe field and the majority of
the most easily obtained oil had already been produced. The
state was looking at heavy oil, infrastructure, challenges
away from the Prudhoe Bay field and TAPS [Trans Alaska
Pipeline System], and issues that were continuing to spur
production that were much more cost intensive and complex
than they were 30 years earlier.
Representative Wilson opined that there appeared to be a
gap in the correlation between explorers and producers in
the state. She knew that the number of explorers had
increased in Alaska. Commissioner Butcher agreed. He
elaborated that it was necessary to explore in order to
develop and produce, but without production the state would
not receive what it hoped to from its natural resources.
Representative Wilson ascertained the system was not
working and that the purpose of the bill was to sustain
Alaska's oil fields for a longer period of time than would
occur without any action. Commissioner Butcher responded in
the affirmative. He elaborated that there would be a short-
term reduction followed by a long-term gain.
2:32:27 PM
Representative Doogan wondered whether DOR had information
to indicate that in five years there would be an equivalent
amount of oil in the pipeline to match an expenditure of $5
billion to $10 billion. He discussed that there was a rough
idea of what the costs would be that depended on items
which could not be nailed down presently; however, the
committee had been given no idea about what the benefit
might be. He was not aware of any guarantees from oil
companies that giving them $1.5 billion a year for the next
five years, for example, would result in anything like the
kind of oil production that would balance out the
expenditure. He thought the committee would be provided
with estimates, but there had been none provided in any
presentation, committee meeting, or public hearing.
Commissioner Butcher responded that there were almost an
infinite number of possibilities that the department would
be happy to run at a member's request. He reiterated that
he did not have a crystal ball and could not read the
future. He stated that the bill was the governor's attempt
to change that Alaska did not have the same amount of
exploration that other areas had been experiencing. He
stressed that it would be great if the bill was successful;
however, a change in the law would likely be discussed in
the future if it was unsuccessful. The department
considered the bill to be a positive step forward and it
hoped it was the correct solution.
Representative Doogan could not believe that the committee
was discussing a bill that could potentially give the oil
industry somewhere in the range of $1.5 billion or more per
year without any concrete evidence that it would have a
desirable outcome. He had not heard anything that had made
him want to vote in favor of the bill and believed the
department was asking the legislature to "throw the money
up in the air and hope that some of it lands where we want
it to." Commissioner Butcher responded that the department
believed the industry would perceive the bill as a material
change and as something that would make them reevaluate how
they viewed Alaska. The department had not received a
guarantee from companies that they would increase
development; however, he added that because of all of the
variables in the future, he would be a little concerned if
he were on the board of directors and the company had made
guarantees about investment. He did not believe that ACES
would have passed in 2007 if the state had looked for
guarantees four years in the future regarding the price of
oil and the positive or negative impact the price would
have on exploration in the state. He expounded that it
would not have been possible to see what Texas, Oklahoma,
North Dakota, and other areas would do in the future. He
opined that in order to move forward it was necessary to
make an assumption and take a look at it a few years later
to determine what worked and what did not and to take
appropriate action.
2:37:31 PM
Representative Hawker expressed concern that the committee
was debating the bill.
Co-Chair Stoltze communicated that the topic was important
and did not want to stifle the conversation.
Representative Hawker disagreed with the statement that
there had been no testimony about a potential upside to the
bill. He opined that there had been assumptions made about
prior testimony that was not black and white. He discussed
that the $1.5 billion cost listed in the fiscal note was a
worst case scenario that did not factor in any additional
production into the pipeline. He believed it was a problem
with the fiscal note that did not accurately characterize
the debate that members had heard. He had listened to
testimony from Brooks Range, Great Bear, Repsol, BP,
ConocoPhillips, and from Pioneer about projects that the
companies were ready to undertake provided that they were
given relief in the out-year taxation on operations. He
elaborated that Repsol was sitting on billions of dollars
and that they had told the Petroleum News that it was great
to have exploration credits but in order for them to
undertake production they needed the state to reconsider
the out-year taxation or the progressivity and bracketing.
Brooks Range and Great Bear had both testified that they
needed capital in order to pursue their investment
opportunities and were also dependent on a change to the
out-year taxation. He relayed that Pioneer had discussed
that the expansion of its Oooguruk project was dependent on
a change to the high out-year taxation that was not
competitive worldwide. A ConocoPhillips press release had
stated that the company's commitment for additional capital
expenditure was contingent upon the outcome of the
legislation. Claire Fitzpatrick with BP had testified that
she was competing for capital with her peers from around
the world.
Representative Gara wondered how much production would need
to increase in order for there to be no loss under the
proposed legislation when the price of oil was $100 per
barrel. He asked whether the commissioner had said that a
10 percent increase in production would be needed.
Commissioner Butcher did not have the number with him. He
added that the price of oil was not the only variable
involved.
Representative Gara asked for an estimate regarding the
necessary increase in production. Commissioner Butcher
could not provide an estimate at the time.
Representative Gara thought the commissioner had provided
the number earlier in the meeting. He wondered where the
department had received its information that production
would increase enough to offset the cost of the
legislation. He had heard prior testimony different than
Representative Hawker. He elaborated that Exxon and BP had
testified that they would not drill a single new
exploration well with the passage of the bill.
ConocoPhillips had not been able to confirm whether it
would or would not build a new exploration well with the
passage of the bill. He emphasized that none of the big
three oil companies had guaranteed that they would increase
production with the passage of the bill. He stressed that
the department was asking the legislature to pass a bill
that required an increase in production that no one had
guaranteed. He stated that the commissioner had said that
smaller explorers in places such as Umiat and Great Bear
were too speculative to consider. Commissioner Butcher
responded that he had not said that they were too
speculative. He had said that they were far enough out
there and there were enough questions that the department
did not know definitively whether they would occur under
the current tax regime. He believed that proposed changes
would make a definite change in how companies looked at
Alaska and the administration would not have introduced the
legislation if it did not believe that the bill would
result in a material change. He thought the industry had
room to be more forthcoming about how the bill would impact
oil investment in the state; however, just because
companies had not provided guarantees about increased
development did not mean that the bill had no relevance as
a game changer moving forward.
BRUCE TANGEMAN, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
added that there had been a lot of talk about trying to get
back to a certain number. He contended that the
administration would not have introduced the legislation if
it had believed that the state was at that number. The
department believed that the pendulum had swung too far and
that the current number had caused the present situation
that included no exploration and oil at over $100 a barrel.
He explained that trying to get back to a certain number
meant that it would be necessary to assume that the state
was at the "sweet spot" number. The department presumed
that the state was not at the number. If the state was at
the sweet spot number, Alaska would have been experiencing
booming exploration like other areas in the U.S. He
explained that DOR was not trying to get back to a number
that it saw as too big, but it was trying to lower the tax
structure in order to increase production in the pipeline.
Representative Gara responded that his problem with the
approach was that it was based on "a hope, a wing, and a
prayer." He stressed that the department was asking the
legislature to give money away in hopes that it would come
back, with no assurance from any company that it would
happen. He could understand providing better and stronger
exploration credits if the goal was to increase
exploration. Likewise, if the goal was to make moderate
size fields economic, it would make sense to increase
production facilities. He did not believe that the
department had introduced any evidence that companies would
stem the production decline or increase production to the
necessary levels that would be required under the proposed
legislation.
2:45:37 PM
Mr. Tangeman replied that the bill was not heavy on
changing tax credits but heavy on changing the current tax
system. Companies had been taking advantage of the tax
credits for exploration; however, the producers were seeing
an incredibly high tax rate on oil production and had
experienced difficulty locating partners. The only
adjustments to the tax credits were the increase from 20
percent up to 40 percent for infield credit and movement
from two years down to one year. The goal of the
legislation was to change the tax system to increase
producers' interest in investing in oil development.
Representative Gara found that the most implausible part of
the bill was the assumption that companies were taking
advantage of the tax credits and spending a significant
amount on exploration, but that they had not thought about
the cost of the production tax rate. He believed that
exploration companies talked to producers to determine
their interest in development prior to undertaking
exploration. He believed that it was an "insanely illogical
world" that the department had presented.
Commissioner Butcher responded that the department had used
examples of companies such as FEX that went out, obtained
leases, explored, made a discovery, and then could not find
a deeper pocketed company to help them develop and produce
the oil. He did not believe that companies were acting
naïvely, but that it was a much graver situation than
companies realized when they began. Some companies, such as
FEX had begun work prior to ACES and once they had made a
discovery ACES had passed and they were not able to locate
a developer.
Co-Chair Thomas compared the inability to see how the bill
would impact the state in the future to commercial fishing
and the unforeseen changes in expenditures and pricing that
impacted fishermen on an annual basis.
Vice-chair Fairclough believed that the film credit bill
was a true example of operating on a hope, a wing, and a
prayer because no one had demanded specifics on its future
performance. She discussed that many committee members had
voted for film credits and believed that it would draw
industry. She relayed that the film industry had not
contributed directly to state coffers. She discussed that
the bill would be before the legislature again to determine
whether the credits generated revenue for the state. She
stressed that oil and gas credits had provided the backbone
and lifeblood for Alaskans and state government for
decades. Every person in the State of Alaska had benefited
when companies took advantage of the oil and gas credits.
She emphasized that she would rather bet on oil and gas
than on film credits that may shut the state down in the
future. She believed that it was important for the state to
help "pony up" a portion of the risk on development that it
benefited from 100 percent.
2:51:46 PM
Representative Gara referred to a March 15, 2011
presentation by Roger Marks that related to marginal tax
rate in the United Kingdom. He relayed that Mr. Marks had
listed the United Kingdom at a 50 percent marginal tax rate
at when oil was $100 a barrel. A recent newspaper article
had reported that the U.K. charged an 80 percent tax rate
for legacy field and that it charged a different rate for
new fields. He asked whether the 80 percent tax on legacy
fields had been reflected in the chart.
ROGER MARKS, PETROLEUM ECONOMIST, LOGSDON AND ASSOCIATES,
responded that the U.K. did have some "vintaging" and older
fields did pay a higher rate. He discussed that PFC Energy
had done an analysis on international tax rates for the
administration in 2007 and based on its extensive database
had reported that there was very little production going on
in fields that were subject to the old vintage tax rates
and it had been the company's decision to not include the
data in its report. He expressed that Representative Gara
was correct, but very little current activity was subject
to the higher rate. He would be interested to know if
Representative Gara had found different information.
Representative Gara did not know what barrels were paying
the 80 percent rate and hoped that Mr. Marks would have
included a breakdown on the barrels that paid the higher
rate. He added that according to the newspaper the UK was
raising its oil tax rate significantly as of the current
month.
Co-Chair Stoltze asked which newspaper Representative Gara
was referring to.
Representative Gara cited the New York Times as his source.
Representative Doogan wondered whether Mr. Marks had used
the word "vintaging." Mr. Marks responded in the
affirmative.
Representative Hawker discussed an earlier statement that
the big three oil companies would not invest more money in
new exploration. He opined that the comment may have been
true but that it was only half of the story. He expressed
that 90 percent of the state's future production would come
from legacy fields and that BP, ConocoPhillips, and
ExxonMobil corporations were all heavily invested in these
areas. He thought it was a putdown to refer to BP as
British Petroleum and clarified that the company's correct
name was BP Alaska. He discussed that with the exception of
Badami that BP had never discovered oil in Alaska. The
company's business profile was to buy oil producing assets
from exploration companies. He emphasized that both Exxon
and ConocoPhillips had provided testimony regarding legacy
field development projects that they would like to move
forward on. He believed that it was a disservice to
mischaracterize the debate by using only a portion of the
testimony that had been provided by the companies.
HB 110 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
2:58:25 PM
The meeting was adjourned at 2:58 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 110 WORK DRAFT HFIN-I VERSION.pdf |
HFIN 3/28/2011 1:30:00 PM |
HB 110 |
| HB 110 DOR Response 03282011.pdf |
HFIN 3/28/2011 1:30:00 PM |
HB 110 |