Legislature(1997 - 1998)
04/23/1998 10:04 AM House O&G
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* first hearing in first committee of referral
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HOUSE SPECIAL COMMITTEE ON OIL AND GAS
April 23, 1998
10:04 a.m.
MEMBERS PRESENT
Representative Mark Hodgins, Chairman
Representative Scott Ogan
Representative Norman Rokeberg
Representative Joe Ryan
Representative Con Bunde
Representative Tom Brice
MEMBERS ABSENT
Representative J. Allen Kemplen
COMMITTEE CALENDAR
HOUSE BILL NO. 440
"An Act relating to certain audits regarding oil and gas royalty
and net profits and to audits regarding costs relating to
exploration incentive credits and oil and gas exploration licenses;
and providing for an effective date."
- MOVED HB 440 OUT OF COMMITTEE
CONFIRMATION HEARING
OIL AND GAS CONSERVATION COMMISSION
Camille Oechsli - Anchorage
-CONFIRMATION ADVANCED
(* First public hearing)
PREVIOUS ACTION
BILL: HB 440
SHORT TITLE: OIL & GAS AUDITS/INCENTIVE CREDITS
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
Jrn-Date Jrn-Page Action
2/18/98 2357 (H) READ THE FIRST TIME - REFERRAL(S)
2/18/98 2358 (H) O&G, RESOURCES
2/18/98 2358 (H) 3 FISCAL NOTES (2-DNR, REV)
2/18/98 2358 (H) GOVERNOR'S TRANSMITTAL LETTER
4/02/98 (H) O&G AT 10:00 AM CAPITOL 124
4/02/98 (H) MINUTE(O&G)
4/21/98 (H) O&G AT 10:00 AM CAPITOL 124
4/21/98 (H) MINUTE(O&G)
4/23/98 (H) O&G AT 10:00 AM CAPITOL 124
WITNESS REGISTER
WILSON CONDON, Commissioner
Department of Revenue
P.O. Box 110400
Juneau, Alaska 998811
Telephone: (907) 465-2300
POSITION STATEMENT: Testified on HB 440.
KEVIN BANKS, Petroleum Market Analyst
Department of Natural Resources
3601 C Street, Suite 1380
Anchorage, Alaska 99503
Telephone: (907) 269-8800
POSITION STATEMENT: Testified on HB 440.
CAMILLE OECHSLI, Appointee
Oil and Gas Conservation Committee
1333 West 11th Avenue
Anchorage, Alaska 99501
Telephone: (907) 277-4242
POSITION STATEMENT: Testified as an appointee to the Oil and Gas
Conservation Commission.
ACTION NARRATIVE
TAPE 98-31, SIDE A
Number 0001
CHAIRMAN MARK HODGINS called the House Special Committee on Oil and
Gas meeting to order at 10:04 a.m. Members present at the call to
order were Representatives Hodgins, Ogan, Rokeberg, Ryan, Bunde,
Brice and Kemplen.
HB 440 - OIL & GAS AUDITS/INCENTIVE CREDITS
CHAIRMAN HODGINS stated that the committee would hear HB 440, "An
Act relating to certain audits regarding oil and gas royalty and
net profits and to audits regarding costs relating to exploration
incentive credits and oil and gas exploration licenses; and
providing for an effective date."
Number 0046
WILSON CONDON, Commissioner, Department of Revenue, stated that HB
440 would move the royalty audit function from Department of
Revenue back to the Department of Natural Resources. He stated
that it was there until 1980 when it was moved to the Department of
Revenue. He stated that the rationale for putting the audit
responsibility in the Department of Revenue was because they were
also auditing the production tax and both the royalty and
production tax are calculated on the basis of a net back
calculation. It was recommended by the legislative auditor that
those functions be combined. Since that time, the royalty
obligation and the production tax have headed in somewhat different
directions. He stated that the royalty obligation is a product of
a contract and it requires contract administration and enforcement
to deal with the royalty obligation. He stated that on the other
hand, taxation is the exercise by the state through the legislature
of the sovereign power of taxation and it goes about enforcing a
tax obligation in a somewhat different way then dealing with a
partner in a contract. The long litigation with respect to the
royalty obligation, led to a set of settlement agreements which use
a different approach then what is used in the tax arena for
determining the value of oil for royalty purposes as opposed to tax
purposes. The royalty obligation is one of the important elements
of contract administration from the Department of Natural Resources
and they believe it is important for the responsibility of all the
elements of contract enforcement to be put under the umbrella of
the contract administrator or the Commissioner of Natural
Resources.
Number 0423
CHAIRMAN HODGINS stated that it shows there would be a negative
fiscal note.
Number 0488
COMMISSIONER CONDON stated that is a matter that he just learned
about and he is sure that between the Department of Revenue and the
Department of Natural Resources, a set of arrangements can be made
to make it a zero fiscal note. He stated that he cannot do that
today but pledges that is what they will do. They will find a way
to take care of the $31,000.
Number 0506
REPRESENTATIVE SCOTT OGAN stated that the bill is more than a
transfer. It is a change of policy from "the Department of Revenue
shall order reports" to the "Department may conduct audits". He
stated that he sees this as a major policy shift and not just to
simple transfer functions. He asked if that is a good policy call.
Number 0705
COMMISSIONER CONDON replied that they believe they have interpreted
the statute correctly. The Department of Revenue conducts audits
when Department of Natural Resources asks them to do so. He stated
that they have interpreted the "shall" to mean that they will do it
if asked to do so. He stated that in terms of the way the
department has applied this statute is that they have conducted the
audits when the Department of Natural Resources believed they
wanted to have one. Currently, the way audits work, is the
Department of Natural Resources asks the Department of Revenue to
do an audit and there are three different areas that they do audits
in; regular production tax obligation, exploration and incentive
credits and profit share leases. In the determination of regular
royalty obligation it is just an audit of the net back from the
disposition point to the point of production and the application of
the terms in the lease. He stated that in respect to the
exploration incentive credit he is not fully familiar with those
audits. He stated that with the profit share lease not only do
they do net back audit but also the upstream expenses to determine
the profit. Once an audit is completed, it is sent to the royalty
accounting and auditing group in the Department of Natural
Resources which has its own audit staff. He stated that the audit
staff looks at the audit and they make a judgement on whether they
have correctly applied the interpretive policies that they have
made with respect to terms of the lease. The Department of
Natural Resources in turn deals with the lessee.
Number 1041
COMMISSIONER CONDON stated that this bill would change all of that
as it would put the responsibility solely on the auditors in the
Department of Natural Resources instead of two groups of auditors
passing audits back and forth.
Number 1106
REPRESENTATIVE OGAN asked if this bill reflects the settlement
agreement.
Number 1136
COMMISSIONER CONDON stated that there are three settlement
agreements that govern North Slope oil production. They are ARCO,
B.P. and Exxon and each of them uses a slightly different approach
to calculate a definition value for North Slope oil and each of
them uses a slightly different approach for the marine
transportation element. He stated that the other North Slope
producers have either picked one of those settlement agreements to
calculate their royalty obligation. He stated that each of the
settlement agreements are different and are public records.
Number 1322
REPRESENTATIVE OGAN stated that the settlement agreements are
probably laborious to read and he asked if there was a way that he
could provide an executive summary of them. He asked if this
legislation reflects part of what is in that settlement agreement.
Number 1343
COMMISSIONER CONDON stated that this legislation does not reflect
what is in the settlement agreement. The settlement agreement and
the approach they represent, makes this legislation a good idea
because what is done to come up with a value under the royalty
settlement agreement "is not -- it is certainly figuring out a
destination value and a set of transportation charges but the
elements that go in the calculation are different and so you do not
get a material benefit of having the same auditors dealing with the
royalty settlements and the tax, as was once believed would be the
case." He stated that there is the inefficiency of having the
Department of Revenue doing these audits and the law is such that
a certain amount of information is not disclosed to the Department
of Natural Resources who has the obligation to deal with the lessee
and enforcing the obligation. He stated that it makes sense to put
it all under the Department of Natural Resources to give them the
authority to get whatever information they need to do their job.
Number 1545
REPRESENTATIVE CON BUNDE stated it sounds like there are two
competing ideas. One can be described as checks and balances with
the two departments and the other is stream lining and efficiency.
He asked why in 1980 was there a legislative audit that got "us" to
the checks and balances position. He said, "Maybe you can help me
understand why we should come back."
Number 1568
COMMISSIONER CONDON replied that there are many historical reasons
why this happened. He stated that he started working in this area
in 1972 and had the responsibility of dealing with the litigation
that dealt with both taxes and royalties in one lawsuit in respect
to the Cook Inlet production that began in the end of 1965. He
stated the litigation continued to the end of 1975 and then was
settled. He stated that he was an early advocate as a consequence
of his responsibility to the Department of Law at the time of
combining royalty and production tax administration. He stated
that before he came to work for the state in 1967, the state had
attempted to combine the administration of royalty and production
tax and actually place that responsibility in the Department of
Natural Resources. He stated that it did not work, he advocated
combining tax and royalty. He said "You can combine that with the
fact that people in the Department of Revenue were as we all are
from time to time, in bureaucracies imperialistic, though it would
be a great thing to combine these. So you would have a combination
of some eager lawyers who think they know the right answer together
with some bureaucratic imperialists talking to a legislative
auditor about what they think might work and low and behold they
were able to convince the auditor that this is a great idea and the
auditor put it in the audit report and the legislature generally
believes what its auditor tells them and so that is how the
responsibility got put in the Department of Revenue." He stated
that he has learned what happens when there are two different
organizations that have to pass things back and forth. He stated
that he does not believe that there is that much to be gained in
checks and balances rather an awful lot is lost in terms of
accountability and efficiency. He stated that putting it under the
responsibility of the Department of Natural Resources and
eliminating the departments' ability to point fingers will bring
about a better system.
Number 2023
REPRESENTATIVE NORMAN ROKEBERG stated that the fiscal note from the
Department of Revenue is very positive in the sense that it is
lower then the Department of Natural Resources. He asked if anyone
could talk to that.
Number 2138
COMMISSIONER CONDON replied that Mr. Banks may be able to talk to
that. He stated that the net of all the fiscal notes "is a minus
two hundred and whatever from our department, the same amount going
to DNR [Department of Natural Resources] and then another $31,000
that DNR has put as a net cost to this fiscal note." He stated
that he was unaware that was the figure until last night and the
two departments would figure out a way for this to be a net zero
cost.
Number 2203
REPRESENTATIVE ROKEBERG stated that it is clear that the
bureaucratic imperialists have been at work here; something that is
intended to remove duplicative services and be more efficient but
is going to cost more money is very strange.
Number 2219
COMMISSIONER CONDON replied, "I could not agree with you more and
I pledge to fix that."
Number 2246
KEVIN BANKS, Petroleum Market Analyst, Department of Natural
Resources, stated that he can't say much except to say that he
would like to see this happen and he would work with the
Commissioner to make sure that the fiscal impact is what it should
be. He stated that he would be happy to provide highlighted copies
of the settlement agreement, especially the areas where they
particularly affect the need for auditing.
Number 2347
REPRESENTATIVE BUNDE made a motion to move HB 440, with the
attached but soon to be revised fiscal note with individual
recommendations. He stated that he would like to make the comment
that if we seem suspicious it is because they are but they would
appreciate the endeavor if it accomplishes what it says it will.
Number 2443
CHAIRMAN HODGINS asked if there was an objection. Hearing none, HB
440 moved out of the House Oil and Gas Special Committee.
CONFIRMATION HEARINGS - Oil and Gas Conservation Commission
Number 2507
CHAIRMAN HODGINS stated that the committee would now consider
Camille Oechsli for the Oil and Gas Conservation Committee.
Number 2532
CAMILLE OECHSLI, Appointee, Oil and Gas Conservation Committee,
stated that she has lived in Alaska for twenty years worked for the
court system, left to go to law school and worked for both the
public defender agency and the Department of Law. She stated that
it was at the Department of Law were she began working at the Oil
and Gas matters representing the state's interest with respect to
taxes and oil and gas leasing. She stated that in 1975 she began
representing the Oil and Gas Conservation Commission as a result of
a lawsuit that was filed against them. She stated that as a result
she had the fortune of working with the commission members as well
as every commissioner back to the days of Chairman Chaterton [ph].
She stated that she had the unique opportunity of getting
acquainted with the history of the commission, the processes by
which they make decisions, looking at budget issues as well
personnel issues. She stated that the Oil and Gas Conservation
Commission is a regulatory commission and it represents the state's
interest. It is a commission that is mandated by state statute and
charged with the protection of the state's interest, protecting
against waste, maximizing ultimate recovery and protecting the
correlative rights of other owners of oil and gas.
Number 2729
MS. OECHSLI stated that as a result of her work as a lawyer some of
those skills translate into the adjudicatory arena with the two
other commissioners to decide issues and request expectations that
would otherwise be dictated by the regulations. She stated that it
is a narrow focus, they do not deal with any issues related to
whether or not leases get issued it is only with respect to the
actual drilling and production of Oil and Gas.
Number 2743
REPRESENTATIVE BUNDE stated that it is a large step from public
defender to the Oil and Gas Commission. He asked what her
motivation and previous skills are that would be most productive
for Alaska.
Number 2853
MS. OECHSLI replied that when she first arrived in Alaska she was
an elementary teacher and then was encouraged to apply for the
position of clerk of the District Court and was able to exercise
independent judgement in an adjudicatory function as an acting
magistrate. She stated that the her work with the public and the
work in the general issues that came before the court, being in a
small community, included everything from coroner duties and law
recording to traditional criminal and civil calendars. She then
went to law school and became interested in natural resources
issues and became assistant public defender. She stated that in
this position she had a lot of contact with people and court time.
She stated that the system worked very successfully, she felt her
skills as a negotiator where very effective in that she was working
with people with different interests, trying to reach a consensus.
She stated that when she went to work for the Department of Law, it
was because of her court room experience that she was recruited to
work with the oil and gas section since the state was facing
litigation on a number of fronts. As a result, she has an exposure
to a number of the oil and gas issues. She stated that the
combination of that exposure and the skills that she has learned as
a teacher to being a negotiator has come into play.
REPRESENTATIVE JOE RYAN stated that if Senator Taylor was Ms.
Oechsli mentor and Governor Knowles appointed her, obviously she
must be qualified to do the job because there is no political
influence involved.
Number 3308
REPRESENTATIVE ROKEBERG asked if she could describe to the
committee the scope of her activity when she was representing the
Oil and Gas Conservation Commissioner.
MS. OECHSLI replied that it was with respect to a large employment
lawsuit the basis of which was an underlying whistle blower
complaint against the commissioner.
Number 3404
REPRESENTATIVE ROKEBERG asked how did she perceive her role and who
is she representing as the commissioner on the board.
Number 3421
MS. OECHSLI replied that with respect to her role as commissioner,
all three commissioners have a statutory mandate to follow the
obligations set out by the legislation created that enacted the Oil
and Gas Conservation Act. She stated that the regulations that
were promulgated in respect to that, deal precisely with issues
like permitting disposal flaring enhanced recovery processes. She
stated that in respect to the way that the system is set up, if
that criteria is met there is no discretion on the commission's
part to change it. If someone requested an exception then the
commission would view that in an adjudicatory setting. She stated
that information would be presented at a public hearing and the
decision would be made with the input of all three commissioners.
Number 3551
REPRESENTATIVE ROKEBERG asked what is her perception of who she is
going to be representing on the commission. He stated that isn't
the charge of the commission to conserve the natural resources and
to produce them at a maximum benefit to the state.
MS. OECHSLI replied yes that is correct. The state is the primary
interest group that the commission represents.
REPRESENTATIVE ROKEBERG asked "and who is the state?"
Number 3631
MS. OECHSLI replied all of us.
Number 3637
REPRESENTATIVE BUNDE made a motion to move Ms. Oechsli's name
forward.
Number 3653
CHAIRMAN HODGINS asked if there was an objection. Hearing none,
Ms. Oechsli's name is forwarded out of the House Special Committee
on Oil and Gas.
ADJOURNMENT
Number 3708
CHAIRMAN HODGINS adjourned the House Special Committee on Oil and
Gas meeting at 10:35 a.m.
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