Legislature(1993 - 1994)
02/11/1993 05:00 PM House O&G
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL & GAS
February 11, 1993
5:00 p.m.
MEMBERS PRESENT
Representative Joe Green, Chairman
Representative Pete Kott, Vice Chairman
Representative Harley Olberg
Representative Gary Davis
Representative Jerry Mackie
MEMBERS ABSENT
Representative Jerry Sanders
Representative Joe Sitton
COMMITTEE CALENDAR
Overview from Legal Department
WITNESS REGISTER
James Baldwin, Assistant Attorney General
General Civil Section
Department of Law
P.O. Box 110300
Juneau, Alaska 99811-0300
465-3600
POSITION STATEMENT: Gave an overview of the Department
Charles E. Cole, Attorney General
Department of Law
P.O. Box 110300
Juneau, Alaska 99811-0300
465-3600
POSITION STATEMENT: Provided information about the
Department
Bruce Botelho, Deputy Attorney General
Department of Law
P.O. Box 110300
Juneau, Alaska 99811-0300
465-3600
POSITION STATEMENT: Discussed tax categories
ACTION NARRATIVE
Tape 93-5, Side A
Number 000
CHAIRMAN JOE GREEN called the House Special Committee on
Oil and Gas to order at 5:06 p.m. Members present at the
call to order were Representatives Green, Kott, Olberg,
Davis, and Mackie. He welcomed everyone to the meeting and
noted the meeting was being teleconferenced. He commented
that James Baldwin from the Department of Law was present to
give an overview.
JAMES BALDWIN, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF
LAW, introduced Attorney General Charles E. Cole who gave a
brief overview of the Department.
CHARLES E. COLE, ATTORNEY GENERAL, stated when Governor
Hickel first came to Juneau the relationship between the
Department of Revenue (DOR) and the Department of Law (the
Department) was not what the Governor had in mind. He went
on to explain that he and Commissioner Rexwinkel of the DOR
addressed that issue and made good changes. He spoke about
the royalty litigation, which went on for a number of years
and was largely resolved. Through this, the Department had
developed massive information about oil transactions which,
he stated, was responsible for more than $600 million. He
said that out-of-state lawyers were retained for different
cases who brought different views for some major issues.
MR. COLE advised that the Department took a very close look
at those cases and then met with the taxpayer. Before any
negotiations were entered into they arrived at a figure by
unanimity and if everyone on the settlement team did not
agree then they went back and worked on the problem again
until everyone agreed. These meetings were held
professionally, courteously, and in good faith, and
oftentimes were requested by the taxpayer, he said, and
believed it was very important, at the conclusion of
negotiations, that all parties could sit down and laugh and
talk.
Number 256
CHAIRMAN JOE GREEN asked if a final agreement was also a
unanimity requirement within the Department.
Number 269
MR. COLE said unanimity prevailed throughout the entire
process, right down to the final signatures.
Number 280
CHAIRMAN GREEN inquired into the process by which settlement
was reached.
Number 294
MR. COLE responded,"Its magic. It is an art form. After 40
years of doing this you get an idea of what works and what
doesn't. We talk, debate the issues, and are very well
prepared."
Number 319
CHAIRMAN GREEN asked why the Department went to outside
counsel.
Number 330
MR. COLE stated attorney fees were not a large factor in
using outside counsel.
Number 332
CHAIRMAN GREEN asked, "It was not like a one-third percent
or anything like that?"
Number 334
MR. COLE replied in the negative. He stated there were some
exotic issues in one case, and outside counsel had been
obtained to test their evaluation of the issues, for
assurance that the state's analysis was correct and they
were on the right track. He stated $300,000 was an accurate
figure for the cost of outside counsel in that case.
Number 364
REPRESENTATIVE HARLEY OLBERG asked if the $300,000 was in
addition to the amortization of the $50 million.
Number 365
MR. COLE thought that had been recovered in the royalty
cases.
Number 382
CHAIRMAN GREEN asked if there was a possibility they might
be establishing a precedent in subsequent years.
Number 392
MR. COLE replied in the negative, because each case was
different. The sense he got from speaking with the
taxpayers was that they wanted to address the issues.
Number 403
REPRESENTATIVE OLBERG stated he read in BP's press release
that the settlement amount would not have a significant
effect on their year-end results because they had already
accounted for it. He inquired whether BP had prepared for
this type of a result.
Number 408
MR. COLE said it was BP's contention that it would not make
a material difference in their tax statement, although they
did not say how much had been reserved for settlement. He
then asked to be excused.
Number 415
CHAIRMAN GREEN introduced James Baldwin and Bruce Botelho.
Number 421
MR BALDWIN gave a brief overview of the operations of the
Department. He explained the BP settlement was an income
tax case that involved questions of law, which could be
handled in a cost effective manner. For the upcoming fiscal
year he stated the Department would spend approximately $25
million to finance various areas of litigation, of which
approximately $18-19 million would be used to finance the
cost of outside counsel and experts.
MR. BALDWIN explained further the types of litigation being
handled were oil and gas tax, that being the severance or
production tax. In this area there were approximately $1
billion in outstanding appeals.
Number 472
CHAIRMAN GREEN asked if the $1 billion included the recent
settlement.
MR. BALDWIN reiterated the $1 billion was pending appeals.
He advised of the category known as "income and excise
cases," which covered the recent BP case. He clarified the
$1 billion was for oil and gas severance, which was a
different kind of tax. He added there was another category
of cases known as "royalty cases."
Number 480
BRUCE BOTELHO, DEPUTY ATTORNEY GENERAL, stated another
category was separate accounting, which encompassed the tax
years 1978 through 1981, and would also be in the $1 billion
plus range. Three tax categories included the production or
severance tax, a separate accounting income tax, and the
worldwide combination that went by a number of names, which
was the issue in the recent BP settlement, he disclosed.
Number 487
CHAIRMAN GREEN asked what separate accounting was and how it
varied.
Number 495
MR. BALDWIN said he would be glad to speak with any of the
committee members individually.
Number 500
MR. BOTELHO explained that separate accounting attempted to
put a fence around the state of Alaska, in that it was an
income generated solely and separately accounted for
activities of an oil and gas corporation in the state as
opposed to how income might be assessed looking at a
worldwide operation, which was really the worldwide
combination. It was a constitutional challenge to the
accounting income tax brought by the entire industry. The
Legislature was concerned about the constitutionality and
that the state would have to refund the billions that were
being generated by separate accounting. This led to
enactment of special legislation for the oil and gas
industry, the worldwide combination approach, which was what
the state relied on in addition to the severance tax, for
its income, he concluded.
MR. BOTELHO noted Greg Erickson was in the audience.
Number 519
MR. BALDWIN explained what Attorney General Cole stated
about the major settlement of the royalty-in-value part of
the case was not quite correct. This was known as the
Amerada Hess Case, which had been going on since the 1970's,
he said. In November, 1991, there was a major settlement in
the amount of $633 million, which provided a methodology for
fixing the value of the state's royalty oil. That
settlement included everything that happened from 1977 to
sometime in 1992, he added.
MR. BALDWIN alleged the settlement had the effect of setting
the price of the state's royalty oil into the future and,
therefore, had monumental significance in terms of the
state's revenue picture. What remains to be litigated was
how much the state should pay producers for cleaning and
conditioning natural gas liquids produced as part of the oil
flow of the North Slope fields, he disclosed.
MR. BALDWIN advised that another aspect of royalty cases was
the royalty-in-kind disputes, which concerned the state's
entitlement to a retroactive price adjustment on existing
royalty oil contracts. These contracts carried clauses that
tied the value of the oil to the outcome of the Amerada Hess
value settlement. The total value of those settlements was
approximately $300 million, he noted.
MR. BALDWIN disclosed settlements had recently been
concluded with Petro Star for approximately $2 million, and
Tesoro for approximately $94 million. The state was
currently in litigation with Chevron and multiple litigation
with MAPCO, he added.
Number 575
MR. BOTELHO interjected that the state by royalty and
statute was entitled to one-eighth of everything that came
out of the ground either in-value or in-kind.
Number 611
MR. BALDWIN said there were potential claims of $327
million, of which approximately $99 million had been
resolved and $47 million had been paid under protest. This
left a balance of $181 million in outstanding claims against
royalty-in-kind purchasers. He said his department planned
to spend approximately $6 million pursuing those claims and
that he did not see an inexpensive way out of this type of
litigation.
Number 619
CHAIRMAN GREEN understood that at times the state would be
suing a company and also be a partner with that company in
another lawsuit against a different company.
Number 624
MR. BALDWIN said, "It is a lawyer's dream and a taxpayer's
nightmare." He went into the Tesoro settlement and stated
that they structured settlement so Tesoro could continue
operating. One of the ways this was done was to take over
their rights to claim against another purchaser of the oil,
he explained.
Tape 93-5, Side B
Number 000
MR. BALDWIN spoke about the Federal Energy Regulatory
Commission. He explained that as a seller of oil the state
must be watchful of the pipeline's tariffs. This activity
was undertaken in Washington D.C., and attorneys from
Washington, D.C. were hired and interfaced with attorneys in
the state. The value of oil was determined by netting-out,
among other things, the price of transporting that oil in
order to get maximum dollars into the state treasury, he
disclosed.
MR. BALDWIN noted that Endicott Pipeline had been settled
recently. In that instance, a tariff had been instituted
some years ago, the state protested, and settled with the
carrier at a lower rate. Because of this, the state was now
entitled to additional tax and royalty. "We basically
watchdog the carriers and their filings," he said.
MR. BALDWIN spoke on the Trans Alaska Pipeline Service
(TAPS) settlement and stated that when it was entered into
years ago it was worth an initial payment of $250 million in
refunds. He directed members to his handout, and stated
that continued monitoring of filings occurred. Through that
monitoring activity, the upcoming effect of the new filing
had been recently reported to the legislature, he said. The
total for the calendar year would be an approximate $80
million increase in revenues because of a change in the
tariff structure, he added.
Number 105
MR. BOTELHO talked about corrosion on the pipeline and noted
that prudent costs were not imposed or included as part of
the tariff rate base. He pointed out the lawyers had first
determined the corrosion problem and continued to work with
the TAPS owners, as well as Aleyska Pipeline Service Company
cooperatively, to ensure a pipeline corrosion correction
plan was in place.
Number 131
MR. BALDWIN stated that in the upcoming fiscal year they
would spend $1.5 to $2 million on monitoring activities. A
major part of this was hiring an expert to do a corrosion
monitoring program as part of the alternate dispute
resolution process currently engaged in with the pipeline
carrier. He talked about oil and gas litigation, including
entitlement to land underlying the Beaufort Sea. This case
had significant revenue implications for the state, however,
the extent of potential to be realized from it was unclear,
he noted.
MR. BALDWIN advised the state was engaged in litigation, and
had been for quite some, time with a well financed and
serious adversary in the form of the federal government.
There was an escrow fund, which would be a potential source
of recovery for the state, of over $1 billion. A Special
Master's decision was forthcoming, and everyone expected the
case to go to the U.S. Supreme Court, he alleged, with an
expected cost of approximately $500,000 for the next fiscal
year. Litigation was also pending out of the district
attorney's Anchorage office, dealing with the oil export
ban, he added, and pointed out that case had both in-house
and outside counsel.
Number 200
CHAIRMAN GREEN asked if there was an act in legislation that
would help.
MR. BALDWIN advised that the Congressional Delegation had
historically attempted to have the ban lifted. There was
hope in the Bush Administration that an executive order
might have been issued that would arguably give some
authorization for export of crude oil itself. The
Department of Law's efforts were aimed solely at challenging
the underlying authority of the executive branch of the
federal government to impose the ban, he said. "We have one
claim in the US Court of Claims in Washington D.C., but we
do not feel we have a very good chance of pursuing it
there," he added.
Number 234
CHAIRMAN GREEN inquired into the length of the Department's
presentation.
Number 241
MR. BALDWIN directed the committee to the handout, which
related to the Department's budget.
Number 268
CHAIRMAN GREEN commented that the handout was impressive.
He stated that many of the committee members were new to the
process and would come to Mr. Baldwin with questions.
Number 283
MR. BOTELHO stated at times outside counsel were brought in
to explain specific cases and, if the committee desired,
they could also address the committee.
ADJOURNMENT
Number 310
CHAIRMAN GREEN stated for the record that Jeff Logan and a
representative from Exxon were at the legislative
information office in Anchorage. He thanked everyone for
coming, and adjourned the meeting at 6:07 p.m.
| Document Name | Date/Time | Subjects |
|---|