Legislature(1995 - 1996)
02/07/1995 10:04 AM 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 7, 1995
10:04 a.m.
MEMBERS PRESENT
Representative Norman Rokeberg, Chairman
Representative Scott Ogan, Vice Chair
Representative Gary Davis
Representative Bill Williams
Representative Tom Brice
Representative Bettye Davis
Representative David Finkelstein
MEMBERS ABSENT
None
COMMITTEE CALENDAR
Overview by Department of Revenue, Dr. Charles Logsdon,
Chief Petroleum Economist
WITNESS REGISTER
DR. CHARLES LOGSDON
Chief Petroleum Economist
Oil and Gas Audit Division
Department of Revenue
550 W 7th Ave., Suite 570
Anchorage, AK 99501
Telephone: (907) 277-5627
ACTION NARRATIVE
TAPE 95-3, SIDE A
Number 000
CHAIRMAN ROKEBERG called the committee to order at 10:04 a.m.
Committee members present at the call to order were Representatives
Rokeberg, G. Davis, B. Williams, T. Brice and B. Davis. Chairman
Rokeberg declared there was a quorum present and the committee
would hear an overview from Dr. Charles Logsdon, Petroleum
Economist for the Department of Revenue.
Number 039
DR. CHARLES LOGSDON, Chief Petroleum Economist, Oil & Gas Audit
Division, Department of Revenue, stated today he planned to give
the committee a brief overview of the Alaska oil and gas taxation
system. Dr. Logsdon referred the committee members to a handout
that he had provided. He stated his plan for the day was to go
through the procedure the state uses to collect our share of the
petroleum production revenue. He referred to other materials that
would be given to the members that would help in their
understanding of the subject at hand, and stated the information
would help keep the members up to date on the issues discussed
today.
Number 075
CHAIRMAN ROKEBERG asked Dr. Logsdon when the information would be
published.
Number 077
DR. LOGSDON stated the publication is sent out on a monthly basis.
Number 090
DR. LOGSDON started with an overview of the current system. He
stated the first item that he would discuss was property tax.
Currently, all oil and gas production, transportation and hardware
is subject to a 20 mill property tax based on the appraised value
of that equipment. Dr. Logsdon stated that for all practical
purposes, what this means is that all of the equipment, pipelines,
wells, spare parts, etc., is subject to a property tax which is
assessed by the Oil and Gas Audit Division, of which he is a
member. Dr. Logsdon then mentioned Clyde Benson who is the state's
chief assessor, and stated that Mr. Benson is responsible for
assessing all of the property in Cook Inlet, the Trans Alaska
Pipeline and the North Slope.
Number 120
DR. LOGSDON began to explain the mill rate by stating that 20
mills is approximately 2 percent of the appraised value of the
property. He then stated the total value of all the oil producing
property around the state is around $15 billion.
DR. LOGSDON stated that much of this property is located within the
boundaries of organized boroughs and therefore is subject to paying
borough property taxes. Dr. Logsdon then explained the way in
which this situation works is the state establishes the assessed
value, and then becomes the value base the boroughs use to
determine their local property taxes on the same property. He said
the state's 2 percent of the appraised value sets a cap, and there
is a formula approach which is used to determine how much of that
will be returned to the borough in the form of a credit. This
would enable the companies to pay the boroughs the assessment,
which would be a credit against the 20 mills going to the state.
Dr. Logsdon further stated the state would split part of the money
between the local municipalities and themselves.
DR. LOGSDON then informed the committee members of the amounts of
money that this program is bringing into the state treasury. In
1994 the state received $61.5 million. The total amount of tax
assessed value in FY 94 was $315 million, indicating that the state
received $61.5 million and the numerous municipalities received the
rest of the monies. This trend shows that over time the local
municipalities have begun taking a bigger share of the property tax
money, but the state still receives $61.5 million. Dr. Logsdon
then asked if there were any questions from the committee members.
Number 180
CHAIRMAN ROKEBERG asked Dr. Logsdon if his office would provide the
information that was just reviewed. He agreed, and spoke briefly
of the Revenue Sources Book which outlines the department's income,
and the tax revenues. Dr. Logsdon stated that the book is very
detailed, but if you are interested in where the money comes from,
it is a valuable resource.
Number 200
REPRESENTATIVE G. DAVIS asked Dr. Logsdon about his knowledge as
far as the history of the tax, and any fluctuations in the 20
mills.
Number 210
DR. LOGSDON stated the value has been relatively stable. In other
words, over the life of the tax there are two things going on;
there are some very large expenditures upfront (obviously those
began to depreciate) and as an asset begins to depreciate away, the
taxable base becomes lower. However, the investment in the North
Slope has become greater. There are additional investments being
made, and to a certain extent they intended to offset each other.
Dr. Logsdon then stated, one thing we will find with regard to the
property taxes, is that it is a much more stable revenue source
since the property tax is not directly sensitive to oil prices.
DR. LOGSDON went on to say there were indirect effects on the tax
base. Obviously the lower the price, the fewer drilling rigs will
be active. This may cause the company to take the drilling rig out
of the state, or there would be a certain factor that would apply
to a piece of equipment like a drilling rig. In other words,
having the drill active or inactive would have an effect on the
amount that is assessed for taxation. Basically, this has been a
pretty stable source of revenue for the whole pot. Dr. Logsdon
said, as mentioned before, the amount that has been going into the
state coffers shows a trend that has been going down. He stated
the state reached its peak in the early 80s at about $150 million
and in 1993 it was down to 66 million and that is about what the
level was in 1994.
DR. LOGSDON then explained that much of what occurs is driven by
the value of the pipeline. He further explained, when they started
out, the cost base was about $9.6 billion; at this time the value
of the pipeline for our present purposes was down in the 4
billions, so the pipeline is worth about half of what it was when
it was carrying a full load of oil back in the early 80s, and this
has probably been the biggest factor on the overall size of the
pie.
DR. LOGSDON went on to say the other thing that is shrinking the
state's share is, of course, the municipalities. He stated that
they relied very heavily on the revenues obtained from the property
taxes as a constant source of their annual income, and they have
started to take an ever increasing portion of that revenue.
Number 250
CHAIRMAN ROKEBERG asked about the appreciation scales and how they
are established under state law.
Number 252
DR. LOGSDON said he did not have a great deal of expertise on this
issue, but he was willing to give the Chairman a brief summary of
what he did know. He stated that the pipeline is assessed using a
net income type of approach rather than a depreciated original
cost. He continued that the equipment will be assessed on a
straight line with an economic life that would be appropriate to
the type of facilities that are being discussed. One other feature
of economic life that is becoming an issue is, how much longer is
oil going to be flowing off of the Slope? This becomes a key
parameter in the discussion with the taxing entities and the
property owners.
Number 280
CHAIRMAN ROKEBERG asked about the statutes written for the tax, and
asked if they targeted just the petroleum industry.
Number 290
DR. LOGSDON replied that this is a very specific oil & gas
production, transportation, and hardware tax.
Number 295
CHAIRMAN ROKEBERG then asked if it was true that for a number of
years the state provided all of the auditors for the appraisal, and
that just a few years ago the North Slope Borough took over that
responsibility.
DR. LOGSDON replied the North Slope had taken over much of that
responsibility.
Number 310
CHAIRMAN ROKEBERG followed up his previous question by asking if
the function that was previously carried out by the state was
shifted over to the North Slope.
Number 312
DR. LOGSDON responded that the state had always used contractors.
He said the department uses the firm "PRITCHARD & ABBOTT" out of
Austin, Texas. He stated this firm does much of the appraisal
work, and explained his answer by stating the localities in Texas
have a long tradition of property and reserves taxes. He agreed
that much of the auditing however, is being completed by the North
Slope Borough.
Number 337
CHAIRMAN ROKEBERG asked if the outside appraisers or the in-house
staff make the ultimate evaluation decisions on the hardware.
Number 346
DR. LOGSDON responded that the state retains the responsibility for
assessing the property.
Number 350
CHAIRMAN ROKEBERG then asked if there were limitations on the
ability of the municipal governments to increase or decrease their
share of the revenues.
Number 353
DR. LOGSDON stated he was not an expert in that particular field,
and added that he assumed the amount that the municipalities
received was due to their populations.
Number 368
DR. LOGSDON stated he could now move to a subject in which he had
more expertise. He began to brief the members of the committee
about the severance tax. He said the severance tax is the state's
biggest money maker and it is levied on all production of oil and
gas in the state of Alaska with the exception of public or
government royalty production. He stated there was a small amount
of this on the Kenai, but was very minor. Dr. Logsdon then stated
the rates would vary depending on how old the field was, and was
going to be subject to the Economic Limit Factor (ELF).
DR. LOGSDON explained that the ELF is a very complicated formula
that was to try to make the severance tax progressive. It is a
factor between 0 and 1 which is intended to reduce the rate of
taxation based on how productive the oil field is. Dr. Logsdon
stated there were two main factors in determining this: The size
of the oil field, and how productive the wells are. He stated the
larger the field is and the more productive the wells are, the
higher the tax will be. This means that it will be closer to the
factor 1 on the scale. Dr. Logsdon then asked the members to
consider the age of the field as another factor in this equation.
He commented that one of the main incentives is that we tend to
give a reduction in the tax rate for the first five years of
production. The cut in the tax rate leaves the rate at 12.25
percent for the first five years. We do this to sweeten the deal
to allow a more rapid recovery of costs because the tax rate is
lower early on.
DR. LOGSDON said this came into effect in June 1981, so any field
that was producing prior to 1981 is going to pay a 15 percent tax
rate. Fields like Kuparuk, Endicott, and all of the other fields
that came into production after 1981 received five years of
production at the 12.25 percent nominal rate.
DR. LOGSDON continued, they have an 80 cents per barrel floor on
the oil side. This 80 cents, at the 15 percent rate totals $5.33
per barrel. So, if the value of the oil at the wellhead is less
than $5.33 per barrel, the cents per barrel floor kicks in and the
state gets 80 cents per barrel instead of the rate times the value.
Dr. Logsdon observed that this situation has actually occurred a
couple of times in 1986 when the price of oil was at $10 per
barrel. He reminded the members that the nominal rate was subject
to the ELF, and there were not many fields that actually paid the
full rate, and in fact, Prudhoe Bay produced a little bit more than
310 million barrels of oil in the 1994 calendar year. With the
nominal tax rate at 15 percent, multiplied by the ELF, you come up
with 14.79 percent. He then observed that a big field with
relatively productive wells like Prudhoe Bay will have an ELF that
is very close to 1. Contrast that with a very small field like
Lisburne: Lisburne produced six million barrels of oil, and it was
all produced tax free in the 1994 calendar year. The other big tax
fields like Kuparuk produced 97 million barrels of taxable oil, and
the state took just about 13 percent. Dr. Logsdon mentioned
several other oil fields that produced oil at high levels.
Number 460
DR. LOGSDON continued by stating the key factor of the ELF is
production at the economic limit. We currently allow a 300 barrel
of oil per well, per day that is tax free. However, once you get
above 300 barrels per day the tax rate begins to go up. In 1989,
the field size factor was introduced and it accelerated the way in
which the tax goes up as the field size gets bigger, with other
things being equal. Therefore, if you had an oil field with wells
that was producing 1,000 barrels per day, and your total production
was 100,000 barrels per day, your tax rate would be higher than if
the well productivity was the same, but the field was twice as big.
This law, when it was passed in 1989, raised the taxes on fields
that produced about 115,000 barrels per day. If you produced at a
rate less than 115,000 barrels a day, you got a tax break. What
that meant in terms of the ELF was the tax rate on Prudhoe Bay
stayed at about 15 percent. Most other fields saw their tax rates
go down.
Number 490
DR. LOGSDON explained the ELF in greater detail by mentioning that
it has been around for a while in one form or the other and there
have been many papers done on it. He then wanted to give the
committee a history of the severance tax rate schedule. Whereas
property tax in America is traditionally a tax type reserve for the
localities used to fund schools, a severance tax or a production
tax, is traditionally developed in America as a statewide tax.
Almost every state in the union has an oil and gas production tax,
he believes that as many as 35 states have an oil and gas severance
tax. Alaska became a state in 1959, and we had a severance tax
that started as a very simple 1 percent levy on gross value.
Number 520
DR. LOGSDON said, as we became a state and began to take
responsibility for the provision of the number of things that we
relied on the federal government for in the territorial days, it
was clear that the state needed additional revenue. At that time
we had development on Cook Inlet, a growing oil industry, and those
were the places we looked to for revenue. Dr. Logsdon then made
reference to the flood in Fairbanks in 1967. He recalled that the
state needed emergency money and it was decided that this was an
emergency that was worthy of an additional percentage point in the
tax.
Number 530
DR. LOGSDON stated that it became clear in the early 1970s that a
flat tax of this kind could act as a disincentive to developing
petroleum properties, it did not recognize the fact that not all
oil fields are created equal. Some oil fields have a greater
ability to pay the tax. Because severance taxes are basically
assessed on a cents per barrel basis or levied on the gross, there
is no recognition of profitability as such, it is the entry fee to
develop oil within the boundaries of the state. So what you ended
up with is a stepwise tax. In other words, you'd pay so many
percent on the first couple hundred barrels per day, and then as
production levels increased, the rate of taxation would go up again
on the next couple of hundred barrels. So from very early on there
was a graduated step-schedule of taxation based on well
productivity. When Prudhoe Bay came on line this was a whole
different level of oil production than the state had seen in prior
times, and there was a great desire to make sure that the state
benefitted from what was, even at the prices of that time (in the
3- 4- or 5-dollar per barrel range) likely to become a very
valuable mineral development.
DR. LOGSDON continued that we couldn't just move in and raise oil
prices without looking at the oil fields under production in Cook
Inlet. This was an entirely different situation than what was up
on the North Slope which was the bonanza. As a result we got the
ELF.
Number 558
DR. LOGSDON commented, the ELF did not have any exponents on it at
all. It was simply a fraction which scaled the tax rate based on
how much above 300 barrels per day you produced from each well on
the property. The first exponent which was 1.5333 simply took a
curve which went up towards 1 fairly rapidly and leveled off at the
higher rate of well productivity. The function of the final
addition, put into place in 1989, was done to remedy what the
people thought was the problem with the legislation that was passed
in 1981 which put a 10-year stop-the-clock deal on a 15 percent at
Prudhoe Bay, because after 10 years the tax rate was scheduled to
drop. It turned out in that the 10-year provision resulted in a
large drop in revenues. This was probably premature due to the
fact Prudhoe Bay didn't start to decline until 1989. He stated he
was sure all of the members of the committee were probably aware of
the difficulties that occurred with the modifications made to the
ELF. He stated they wanted to ensure the tax rate at Prudhoe Bay
stayed close to the 15 percent level, while the rate on the
marginal fields was dropped to encourage development of some of the
marginal fields. That, he stated, is a brief overview of the
severance tax, and said he would provide the members with
information that was available through his office about some of the
more technical aspects of the ELF.
Number 595
CHAIRMAN ROKEBERG stated to the committee that it would be
beneficial to pursue more information on this subject. He then
asked Dr. Logsdon if he could comment on the size and number of
wells, and how those factors relate to the ELF.
Number 606
DR. LOGSDON responded that based on the typical geology of the
North Slope, generally speaking if you have an oil field that
produces 30,000 barrels per day or less, it has been their
experience that the field is not going to pay much in the way of
severance taxes. That is a function of both the fact that 30,000
barrels per day is going to decrease the sensitivity of the ELF,
and secondly, fields of that size tend to have wells that are not
very productive. There are some instances where there have been
very productive pockets of oil where you would have up to 5 million
barrels of oil that you could do with a step out and average up to
6000 barrels per day. However, these pools do not average that for
very long, and that pool of oil is depleted very quickly. In that
case, the field size factor is small enough so that even though
they are very productive, they will not pay any taxes. However,
once you get into the larger fields, for instance a field with 100
million barrels in it, you find a tax rate that is very dependent
upon how productive the wells are. A field like Point McIntyre
which produces about 130,000 barrels per day, has a very high ELF
probably in the .8 to .9 range. They are very productive and have
a high tax rate. Once you get a field that has above 1 billion
barrels in the field, even with wells that are not very productive,
the field size factor will overtake production and you will pay a
very high tax rate. This is a rough gauge as to how sensitive the
tax rate is.
Number 655
CHAIRMAN ROKEBERG asked if the number of wells make a difference on
the ELF. He also asked if a company can set up more wells to lower
the ELF.
Number 660
DR. LOGSDON responded that you must look at the cost of drilling
extra wells, against the tax savings. He then stated this was an
issue, but the answer is yes. There is an incentive, albeit a
small one, to build more wells.
Number 670
CHAIRMAN ROKEBERG then followed up by asking whether or not there
is a disincentive in not drilling more wells for an existing field.
Number 680
DR. LOGSDON stated that this was an interesting issue. With modern
technology, the companies are capable of having multiple pumps from
a single well bore. He stated this was a difficult issue due to
the fact there is a debate as to what the definition of a well was.
For example, you could have a single well, but if you ran five
separate tubings through it, is there one well or five? Dr.
Logsdon gave a preliminary answer to this question by stating it
would depend on how those tubings were completed on those wells at
the bottom to determine whether you could claim one or five wells.
He then stated they have looked at the impact on incentive of
basing the tax rate schedule on well productivity which is just
really a function of how much oil there is, and how many wells.
The formula for that would be total production divided by the
number of wells equals production per well.
DR. LOGSDON said there was one other minor issue that came up after
the ELF debate. The question was, "What happens if the companies
pump something into the wells to help in the retrieval of the
remaining oil?" He stated the ELF would automatically go up due
to the fact there would be an increase in production. So far they
have not been able to demonstrate this has a tremendous effect,
mostly because of the fact it is the price of the oil that makes
the most difference on the revenue side than these minor changes on
the cost side. This never is clear cut, and is always disputable.
REPRESENTATIVE G. DAVIS asked Dr. Logsdon if there has ever been
any dispute concerning overlapping fields.
Number 719
DR. LOGSDON responded that the Department of Revenue has tried to
provide the correct tax and to ensure the taxpayer contributes the
proper amount. If the oil company can provide a reasonable way of
ensuring an accurate accounting for all of the oil and the
department could allocate it, there should not be a problem.
Generally speaking, it hasn't been a real problem because there are
numerous private interests in each of those fields. So, to a
certain extent, we could rely on the owners themselves, but it is
easier to keep track of if the developments are separate. For
example, if you have two fields, one right on top of the other, and
there is one well that is drawing oil out of both wells, then it is
difficult to determine which oil came from which field. He stated
these are just hypothetical issues right now, but they are issues
for the future. He then stressed the tax is based on production
and not revenue.
Number 783
REPRESENTATIVE OGAN asked for a brief discussion as to the source
of the oil disputes.
Number 800
DR. LOGSDON replied the disputes begin on the value side of this
equation. The tax base is the value of the oil in the ground. The
price side is disputable because they did not have a reliable
on-sight measure of the value of the oil at the point where they
tax it, which is the point where the oil is extracted. On the
North Slope, the oil is transported through the pipeline, then it
is loaded onto tanker vessels to be transported to the refinery.
This all adds to the cost. This creates a problem in setting a
value for tax purposes. The companies' main point of disagreement
came from the process of determining the value of the oil. This is
where the dispute started. On the royalty side there are many
other issues in addition to what the value of the oil is, what the
transportation costs are, and what the appropriate transportation
costs are. On the royalty side there is also a dispute over the
cost of the deduction for cleaning and dehydrating. This is a
fairly typical deduction in a royalty situation.
DR. LOGSDON said there is an issue affecting both the tax and the
royalty. The first is, whether it is appropriate to use the
netback method which is the one that the state opted to use. The
real dispute occurred because funny things happened to the price of
oil in the late 1970s when oil prices went way up, and there was no
way to establish the true value of the oil. The problem occurred
because they couldn't establish a price for the oil at the
wellhead.
DR. LOGSDON then explained what was meant by the netback approach.
He stated that you take the price of oil on the market and subtract
out the allowable transportation costs to back in to what the oil
was worth when it came out of the ground. So we are back at the
problem of determining what the appropriate deduction for
transportation was; recognizing that the different companies had
approached the decision in different ways. Also, at the time there
was no agreed upon tariff for use of the pipeline. This was
essentially a monopoly and subject to regulation by the FERC, and
the state and companies went to court to argue for the appropriate
methodology for establishing an appropriate tariff. What this
boiled down to was, how rapidly should the investors be compensated
for the capital that they had put at risk, and the rate of return
that the investors should have. The state agreed to a front loaded
capital recovery program. In other words, they gave the companies
a higher rate of return in the first few years of production so
they could recover their capital costs very quickly. As a result,
with those costs regained upfront, there should be an incentive to
reinvest that money and increase production. So, in a nutshell,
the disputes lie in value or transportation.
Number 960
REPRESENTATIVE OGAN asked if it was a fair assessment that everyone
is now following the same procedure.
Number 970
DR. LOGSDON answered that big chunks of the dispute have come off
of the table. He followed up by stating this was a function of the
fact that most of the biggest pieces of the dispute were not
knowable back in the early 1980s when there was this price
explosion. But fortunately, the "Market Paradigm" on the price
side of the equation is in on the rise. There is now a
proliferation on the value of oil due to factors around the world.
We no longer need to try to back into values through complicated
methods or overly simplified methods. Also, in the Department of
Revenue we have made a major overhaul of our regulations that cover
the severance tax. The previous regulations were in many cases 15
years old. A lot has changed in the industry since then. We have
made a huge effort in making those regulations more current, and
together with the rest of the industries. Now the disputes are
much more manageable, and I don't see us getting to the point that
neither party can act.
TAPE 95-3, SIDE B
Number 000
CHAIRMAN ROKEBERG asked if it was Dr. Logsdon's group that put out
the new regulations.
Number 012
DR. LOGSDON stated it was his office that put out the new
regulations, and he was hopeful that they would help to reduce the
massive amount of paperwork that moves through his office. He then
estimated that it would take six months to accomplish this goal.
Number 032
CHAIRMAN ROKEBERG then asked if there was a need for a statutory
change by the legislature to help find a solution.
Number 034
DR. LOGSDON responded that he was not prepared to discuss that
issue.
Number 036
REPRESENTATIVE G. DAVIS asked if the tax returns mentioned earlier
were quarterly returns. Dr. Logsdon stated Representative G. Davis
was correct.
Number 045
REPRESENTATIVE GREEN asked Dr. Logsdon if there was a process by
which some of the smaller problems that occur in this field could
be resolved very quickly.
DR. LOGSDON stated, there are provisions in place to ensure the
department has the ability to talk to the taxpayer about certain
developments, or any other changes in what they are doing which
might have some tax consequences. Therefore, there is the
opportunity for informal conferences, and ultimately you can ask
for a formal hearing if there was some aspect of the regulation
that you wanted to challenge in court.
Number 094
CHAIRMAN ROKEBERG asked if there was a stipulation as to the
valuation of the prices.
Number 100
DR. LOGSDON answered they use the SPOT price method. If there is
a West Coast delivery, then we will use a West Coast SPOT. The
same is true for a Gulf Coast, or Midwest delivery. There are
timing issues that have become a problem. Should the value of the
oil be based on the time at which it was loaded for transport, or
do you value it at the time at which it was delivered. These are
very major theoretical problems. Dr. Logsdon stated my
recommendation is that we do need the ability to ensure these SPOT
prices are being carried out fairly.
REPRESENTATIVE GREEN asked how the department would handle a
situation where a company delivers oil to its own refinery.
DR. LOGSDON stated they would assess that situation on a SPOT price
in that market. There are regulations providing factor adjustments
for other specific markets. There will be some questions raised
about valuation of the oil if ANWR is opened. Hopefully, we would
be able to find a publicly quoted SPOT price for a Pacific Rim
delivery. Dr. Logsdon then responded to a comment by Chairman
Rokeberg that these prices would most likely be found in Plats Oil
Gram. He then went on by stating that, on the royalty side, they
have a market basket which use the same source to develop the value
for royalty purposes. Based on the way the contracts are written,
they tend to look a lot like a standard lease; it is the state's
ownership interest and not a tax. The state has a 12.5 percent cut
off the top, the state can either take in barrels, or in value.
Not all of the leases are 12.5 percent, some are as high as 20
percent. The rates on the North Slope for instance come close to
that 20 percent level. There are also some profit share leases
like those at Endicott in addition to the fixed royalty. These are
calculated to recover all of the development costs and operating
expenses with interest. He stated they are hopeful the development
account at Endicott would be paid off soon. He then stated, if the
members wanted to think of royalties as being at 12.5 percent, that
is a fair estimate. However, with the new regulation, we are
focusing on the monthly SPOT price. On the royalty side there are
some different deals. The deal that we did with ARCO uses the
market basket theory. For instance, on the West Coast there are
six different kinds of crude oil, each with a different weight.
You take the SPOT price average for each of those crude oils,
average it and that becomes the value of the basket. Depending on
the company, you may or may not make an additional factor
adjustment to that value. On the ARCO side, there is no factor
adjustment. However, ARCO does have a direct formula for the
transportation cost allowance. When the formula is figured out it
comes to about 3.5 percent of the market value, which is then
subtracted from the basket value to get a price for Valdez. And
then you subtract the pipeline to get a wellhead price.
Number 258
CHAIRMAN ROKEBERG asked if there were negotiated formulas under the
regulations.
Number 274
DR. LOGSDON responded that they were negotiated as part of a
settlement. They are used monthly to determine ARCO's royalty to
the state.
Number 293
DR. LOGSDON proceeded to move to the flip chart where he
demonstrated the mathematical equations for the committee members.
He worked through the market schematic, as well as the formula used
for determining the tariff rate.
TAPE 95-4, SIDE A
Number 000
DR. LOGSDON continued his presentation on the flip charts. He
displayed the formula for the ARCO value formula and the royalty
severance tax.
Number 150
DR. LOGSDON returned to his seat at the front of the committee to
provide the committee members with some extra information on the
tax system. First, he mentioned a conservation tax, which is
assessed at the rate of 4 mills per barrel of oil, or 4 mills per
50,000 cubic feet of natural gas. This tax is not levied on the
public royalty production. Much of this tax is used to fund the
oil and gas conservation commission. This is a common occurrence,
and it brings in about $2 million per year. The corporate income
tax is also known as a worldwide apportionment. This tax is not
directly sensitive to the price of oil, so in theory should be more
stable than the other taxes. This is tailored to specifically
address the petroleum producing companies by the way the three
factor formula is derived. The oil and gas companies are subject
to a three factor apportionment method that is different from a
general corporation's. Dr. Logsdon said we have something called
the percentage of corporate sales and tariffs from Alaskan
operations. This is different than the factor approach used by the
other corporations. The maximum marginal rate is 9.4 percent, the
average rate they pay is closer to 1.5 percent. This is because
Alaska represents a big chunk of the net income of our three
biggest companies.
Number 203
DR. LOGSDON continued his discussion of the tax structure by
informing the members of a production tax surcharge. This tax is
used to set up a fund to cover the cost of an emergency occurring
in the oil industry. This tax was set up at 5-cents per barrel,
for every taxable barrel after the Exxon Valdez disaster.
DR. LOGSDON commented on how the state measured up to the rest of
the United States. He said that Alaska is just like the rest of
the United States, at the margin, as far as the oil companies are
concerned. He then said that our system isn't that unfair. We
have very large development costs, and to get to a point where
there is some income is more difficult in Alaska. That is
especially so when oil prices are lower. He then referred to some
pie charts that he had brought with him to show the members of the
committee.
DR. LOGSDON commented that the most tax friendly area on the planet
is the United Kingdom. Their rates are almost 15 percent better.
Dr. Logsdon mentioned that for the first time royalties fell below
$100 million in 1994, and he stressed the real factors which
determine how much the state will get in royalties is how many
barrels are produced each year, and how much they can be sold for.
Number 300
REPRESENTATIVE OGAN asked if there was an investment credit on the
corporate income tax.
Number 307
DR. LOGSDON replied that the main credit is called the exploration
incentive credit. This is given at the discretion of the
Commissioner of the Department of Natural Resources. The state, on
a qualified lease, (i.e., a lease that the commissioner wants to
have granted and believes that there is a possibility for a good
return of the investment) can grant up to 40 percent of the cost of
drilling that exploration well. This can be credited against the
company's royalty obligation or severance tax.
Number 320
CHAIRMAN ROKEBERG asked if this was done only at the request of the
commissioner.
Number 328
DR. LOGSDON stated this was done at the request of the
commissioner. He later commented that he didn't know if they were
always granted, but it was his impression that most of the
recommendations are granted, and told the Chairman that it was a
discretionary issue. Dr. Logsdon also mentioned that he didn't
know the total dollar amount that could be given as part of this
credit. However, he did say that the state is not willing to dump
$40 million into an exploratory well somewhere offshore.
Number 352
CHAIRMAN ROKEBERG then asked about the idea of review of incentives
and if Dr. Logsdon would comment on that issue.
DR. LOGSDON replied there are a number of things that can be
addressed in this issue. Our position is, we are going to protect
the revenue stream. He then reported the decisions made in this
field are relatively good decisions. He said you want to give
incentives, but you don't want to give away the farm. He continued
that he believes we are in a mode of declining production, and we
must be concerned as to where the state's money will come from in
the future. One recommendation that Dr. Logsdon made was that he
believed it was necessary to insure the integrity of the pipeline.
Number 427
CHAIRMAN ROKEBERG thanked Dr. Logsdon and stated for the record
that Representative Ogan joined the committee at 10:10 a.m., and
Representative Finkelstein joined the committee at 11:00 a.m. and
left at 11:15 a.m.
ADJOURNMENT
Chairman Rokeberg adjourned the meeting at 12:00 p.m.
| Document Name | Date/Time | Subjects |
|---|