Legislature(2019 - 2020)BARNES 124
02/26/2020 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Presentation(s): Analysis of "fair Share Act" | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
February 26, 2020
2:10 p.m.
MEMBERS PRESENT
Representative Geran Tarr, Co-Chair
Representative Grier Hopkins, Vice Chair
Representative Sara Hannan
Representative Chris Tuck
Representative Ivy Spohnholz
Representative Dave Talerico
Representative George Rauscher
Representative Sara Rasmussen
MEMBERS ABSENT
Representative John Lincoln, Co-Chair
COMMITTEE CALENDAR
PRESENTATION(S): ANALYSIS OF "FAIR SHARE ACT"
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
RICH RUGGIERO, Chief Executive Officer
IN3NERGY
Houston, Texas
POSITION STATEMENT: Co-provided a PowerPoint presentation,
titled "190GTX Review Alaska Legislature February 2020."
CHRISTINA RUGGIERO, Managing Member
IN3NERGY
Houston, Texas
POSITION STATEMENT: Co-provided a PowerPoint presentation,
titled, "190GTX Review Alaska Legislature February 2020."
ACTION NARRATIVE
2:10:42 PM
CO-CHAIR GERAN TARR called the House Resources Standing
Committee meeting to order at 2:10 p.m. Representatives Hannan,
Talerico, Spohnholz, Hopkins, Rauscher, and Tarr were present at
the call to order. Representatives Tuck and Rasmussen arrived
as the meeting was in progress.
^PRESENTATION(S): ANALYSIS OF "FAIR SHARE ACT"
PRESENTATION(S): ANALYSIS OF "FAIR SHARE ACT"
2:11:52 PM
CO-CHAIR TARR announced the only order of business would be an
analysis of the Fair Share Act Initiative [2020 19OGTX Ballot
Measure].
2:14:47 PM
RICH RUGGIERO, Chief Executive Officer, IN3NERGY, explained that
both presiding officers of the Alaska State Legislature had
requested an analysis of the wording of the Fair Share Act
Initiative from the standpoint of IN3NERGY's experience in
writing legislation, regulation, and contracts. He said
IN3NERGY studied the initiative and, with its background in oil
taxation and AS 43.55, put together its analysis. He pointed
out that the slides of the PowerPoint presentation do not
contain everything that is in the memorandum [from Mr. Ruggiero
to Representative Tuck, dated 2/25/20, included in the committee
packet]; therefore, he encouraged the committee to ask questions
within each section, as needed.
2:16:50 PM
CHRISTINA RUGGIERO, Managing Member, IN3NERGY, directed
attention to a PowerPoint presentation entitled, "190GTX Review
Alaska Legislature February 2020" [hard copy included in the
committee packet]. She noted that slide 4 contained a glossary
to clarify that in the presentation, "19OGTX" would be called
"Initiative." She further noted that the oil producing asset
that meets the qualification criteria in Section 2 of the
Initiative would be referred to as "40/400."
MR. RUGGIERO further clarified 40/400 refers to 40,000 barrels
of oil per day (bopd) and 400 million in cumulative production.
He remarked that IN3NERGY does not know the definition of field
or a "non-unitized reservoir," and he said he would be
discussing that later. He explained that IN3NERGY wanted to
keep terms generic so as not to form opinions about what they
meant.
MS. RUGGIERO restated that the IN3NERGY analysis is based only
on the two-page Initiative and IN3NERGY's prior knowledge and
experience. She drew attention to slide 6, which provided a
summary of the Initiative, and she discussed the bullet points
on slide 6, which read as follows [original punctuation
provided]:
? Based on our petroleum fiscal policy experience we
conducted a review of 19OGTX, the Initiative, that
looks to raise additional revenue from production
taxes
? In general, the Initiative lacks necessary
specificity making it improbable that a common
interpretation could be reached. Alternative
interpretations of the Initiative are possible
? The Initiative seems to be written to satisfy a goal
of increasing revenue from production tax in the near
term. It does not contain any provisions which are
designed to encourage or incentivize investment and
production
? If the voters approve it, there will very likely be
an extended period of uncertainty within the petroleum
industry as all interested and impacted parties
attempt to push their interpretation of what is
written
MS. RUGGIERO addressed the bullet points on slide 7, a summary
of the Initiative, which read as follows [original punctuation
provided]:
? Producers pay the state 4 different types of taxes:
? Royalty
? Property Tax
? Production Tax
? Corporate Income Tax
? The Initiative only makes changes to the Production
Tax
? Creates increased gross minimum tax
? Creates a net tax on PTV
? Maintains the 'greater of' structure
? The Initiative eliminates the use of the GVR and
non-GVR per-barrel credits for assets that qualify
under Section 2
2:20:31 PM
MS. RUGGIERO moved on to slide 9, which addresses Section 1 of
the Initiative. Section 1, as shown on slide 9, read as follows
[original punctuation provided]:
Section 1. The uncodified law of the State of Alaska
is amended by adding a new section to read:
SHORT TITLE. This Act shall be know as the "Fair
Share Act."
Notwithstanding Any Other Statutory Provisions to the
Contrary, the Oil and Gas Production Tax in AS 43.55
Shall Be Amended as Follows:
MS. RUGGIERO covered the bullet points shown on slide 9, which
read as follows [original punctuation provided]:
? Titled the "Fair Share Act" , there is no language
to define what constitutes a fair share of certain oil
revenues for Alaska. Without a defined goal, where
ambiguity exists numerous interpretations will be
possible
? With the inclusion of the term "Notwithstanding" it
appears the language of the Initiative is to override
existing production tax calculations contained in AS
43.55 for assets that qualify under Section 2
? The only direct reference to a particular part of AS
43.55 and changes to it are in Section 4 paragraph
(a), the per barrel credits
2:22:05 PM
MR. RUGGIERO, in response to Representative Tuck, said "Fair
Share Act" appears in the title but, to his understanding, not
anywhere in AS 43.45. In response to a follow-up question, he
emphasized the ambiguous nature of the Act and reasserted that
the result would be litigation, and one of the determinations
that would need to be made would be what "Fair Share" meant.
2:24:22 PM
MR. RUGGIERO, in response to a question from Representative
Rasmussen, clarified his observation that while the Act would
raise taxes, it does not include language that "incentivized
anything." He said usually there would be credits as
incentivization, but outside of those already in AS 43.55, there
is no further incentivization. He said that when an investor
does not know how the investment dollar will be treated, that
has "a significant negative impact on economics." He said that
during his "big oil days," this [Act] would have given him
pause, and he would have asked his "folks" to "hold off on
anything that we weren't committed to until we found out exactly
how this was going to work if this initiative passed." In
response to another question from Representative Rasmussen, he
said based on the research of IN3NERGY, there is no chance of
increasing oil production in the immediate future, which he
speculated meant a couple of years before there was any
certainty about "what's going to happen here."
2:27:15 PM
CO-CHAIR TARR, in response to Representative Rauscher, explained
the origin of the short title of the Initiative.
2:28:25 PM
MS. RUGGIERO, in response to Representative Spohnholz, said no
incentives were being offered through the Initiative.
MR. RUGGIERO, in response to a follow-up question, confirmed
that any incentives already in AS 43.55 would remain; the
Initiative does not add any new incentives.
2:30:19 PM
MR. RUGGIERO, in response to Representative Rasmussen, said the
"existing language" creates the right incentives, as evidenced
by the number of tax credits created. People spent money as a
result of the incentives. He clarified that "the business
uncertainty" would cause either a slowing down or halting of
spending by "various parties." In response to a follow-up
question, he confirmed that even with the existing incentives in
place, he thinks the Initiative would have a major [negative]
impact on the business decisions that would be made.
2:32:00 PM
MR. RUGGIERO returned to the PowerPoint presentation, to slide
11, which addresses Section 2 of the Initiative and the
applicability of the new law. He remarked that he was "adding
up all the ambiguity." Section 2, as shown on slide 11, read as
follows [original punctuation provided]:
*Section 2, Applicability. The provisions in Sections
3 and 4 only apply to oil produced from fields, units,
and nonunitized reservoirs north of 68 degrees north
latitude that have produced in excess of 40,000
barrels of oil per day in the previous calendar year
and in excess of 400,000,000 barrels of total
cumulative oil production. For other oil production,
the tax shall be unchanged by the Act.
MR. RUGGIERO covered the bullet points on slide 11, which read
as follows [original punctuation provided]:
? This section is used to define which North Slope oil
and gas assets will be subject to the new taxes in the
Initiative
? It applies to "fields, units and nonunitized
reservoirs"
? Producing assets qualify if they have produced in
excess of 40,000 bopd and have produced more than
400,000,000 barrels over the life of the asset
(hereinafter referred to as "40/400 Assets")
? While we believe the description was to isolate
three fields, the above language is not
straightforward and raises several questions
MR. RUGGIERO said he cannot reason why the drafters of the
Initiative would use terms that were not used in AS 43.55. He
moved on to slide 12, which highlighted "fields, units, and
nonunitized reservoirs" and covered the following [original
punctuation provided]:
? AS 43.55 primarily uses "leases and properties"
throughout to refer to oil and gas operations in the
state. We did not find any usage of the phrase
"fields, units or nonunitized reservoirs" in any
statute or regulation governing the taxation of oil
and gas
? We are unable to discern why terms not common to AS
43.55 would be chosen to assess against the
qualification criteria
? It is unclear whether it defines three types of
assets, i.e. fields, units and nonunitized reservoirs,
or whether that term is to be interpreted as a
singular grouping. Likewise, there is no reference to
determine what the intended definition(s) is(are) for
fields, units and nonunitized reservoirs
MR. RUGGIERO said IN3NERGY made the assumption that the drafters
of the Initiative intended for fields, units, and non-unitized
reservoirs to be considered "three different types of assets."
2:34:47 PM
MR. RUGGIERO shared the bullet points on slide 13, which read as
follows [original punctuation provided]:
? While the term 'field' is very common in the oil and
gas industry, we looked in statute and regulations for
a more precise Alaska definition
? Various Alaska agencies describe operations and
publish data for wells, pads, leases, pools,
participating areas, fields, units and general areas
such as North Slope, Middle Earth and Cook Inlet
? AS 31.05.170 defines, for that particular chapter,
"field" as a general area which is underlain or
appears to be underlain by at least one pool, and
includes the underground reservoir containing oil or
gas. More than one pool can be part of a defined field
MR. RUGGIERO explained that although "field" is a common term
used in the industry, it is important to consider how terms are
used by the State of Alaska in order to consider the Initiative.
He indicated that IN3NERGY's research through Alaska regulations
showed the term "field" defined loosely depending on which
source was used.
MR. RUGGIERO directed attention to the bullet points on slide
14, which read as follows [original punctuation provided]:
? Neither AS 43.55 nor the Initiative provide any
guidance on what grouping of wells constitute a
'field'
? Under AS 43.55.900 "unit" is defined and means a
group of tracts of land that is subject to a
cooperative or a unit plan of development or operation
that has been certified by the commissioner of natural
resources under AS 38.05.180(p)
? The North Slope contains a number of "units". Each
unit contains a number of pools and fields
MR. RUGGIERO named Prudhoe Bay Unit, Kuparuk River Unit, and
Pikka Unit as units with which the committee would be well
aware. He noted that AS 43.55 addresses taxation.
2:37:18 PM
MR. RUGGIERO paraphrased the bullet points on slide 15, which
read as follows [original punctuation provided]:
? It appears there are two ways to qualify as a 40/400
Asset: (1) the combined daily production and the
combined cumulative production of all the pools and
fields in a unit meet the two threshold levels, or (2)
a single 'field' within a unit meets the two threshold
levels which by definition then the field and entire
'unit' of which it is part of would both qualify as a
40/400 Asset
? The 'fields' qualifying as 40/400 Assets are Alpine,
Kuparuk and Prudhoe Bay. Because those fields qualify
then the Colville River Unit, Kuparuk River Unit and
Prudhoe Bay Unit are 40/400 Assets as well
MR. RUGGIERO said he thinks that primarily, either a field -
when its definition is determined - or a unit qualifies, but the
interesting question is, "What if a field is also part of the
unit?" He explained that upcoming was language that would
require a tax return for each field and each unit; therefore,
there is a question of whether there may be double taxation or
"all sorts of very interesting regulations on how to sort that
out," because the Initiative appears to require separate tax
returns.
2:38:59 PM
CO-CHAIR TARR summarized that under the Initiative, it is
possible, for example, that the Prudhoe Bay field could qualify
other fields within the unit to also be taxed.
MR. RUGGIERO directed attention to the map on slide 16, with red
circles around the areas that would likely qualify as 40/400
assets: Colville River Unit, Kuparuk River Unit, and Prudhoe
Bay Unit. He drew attention to slide 17, which shows that the
Colville River Unit consists of the following six pools: Alpine
Oil, Fiord Oil, GMT1 Undef Oil, Nan-K Oil Term, Nanuq Oil, and
Qannik Oil. He continued:
So, I don't know whether Alpine field is just Alpine
Oil or whether it's Alpine plus the other five that
are there. If it's just the Alpine Oil pool, then
also the Colville River Unit will qualify as a 40/400
asset .... We've got both the field, and then the
unit that it's a part of, and then that pulls in all
the smaller pools, as well, to be qualified in there.
MR. RUGGIERO showed slides 18 and 19, which list the oil pools
in the Kuparuk River Unit and Prudhoe Bay Unit, respectively.
He reiterated that in terms of qualification, the reach could be
broad or narrow depending on the definition of terminology.
2:40:57 PM
MR. RUGGIERO, paraphrased the bullet points on slide 20, which
read as follows [original punctuation provided]:
? We were unable to find any definition for
nonunitized reservoir" in Alaska statute or
regulation.
In industry a "unitized" reservoir is a reservoir
that crosses ownership boundaries. That agreement
decides on how much of the reserves are owned by each
party, what the optimum development plan and the
naming of the operator. A unitization agreement is for
the operation of a single reservoir.
? Units in Alaska do not represent the unitization of
a reservoir.
? One alternative interpretation is that all wells
that produce from the same reservoir could be deemed a
"nonunitized reservoir"
MR. RUGGIERO said in Alaska there are formations that run across
the North Slope; therefore, it could be said that every well
that is in the same formation and the same reservoir would, if
they all met the requirements, become a 40/400 asset. For
example, if everything in West Sak, which "goes across the
[North] Slope," becomes part of a nonunitized reservoir, then
"collectively all that could work towards qualifying for being
covered under Section 2."
2:42:58 PM
MR. RUGGIERO paraphrased confusing aspects of the Initiative
regarding production, shown in the bullet points on slide 21, as
follows [original punctuation provided] :
? It is unclear whether production has to average over
40,000 bopd for an entire year or only exceed 40,000
bopd on a single day in the previous year
? Use of a couple extra words, such as "averaged" or
"produced on any day" would have easily provided
clarity
? For 40/400 Assets, do the new taxes apply beginning
January in the following year? Do they apply for an
entire calendar year if during a year the production
falls below 40,000 bopd? The Initiative provides no
direction or clarity
MR. RUGGIERO discussed further points of confusion, shown in the
bullet points on slide 22, as follows [original punctuation
provided]:
? In the future, some new units may have production
above 40,000 bopd but have not yet reached the
cumulative criteria of 400,000,000 barrels
? Once the cumulative production exceeds 400,000,000
barrels do the new taxes apply immediately or do they
apply at the start of the next calendar year? There is
no language to guide this decision
? Where is production to be measured? Barrels sold to
the market? Barrels into TAPS [Trans-Alaska Pipeline
System]? Or, wellhead barrels? How are barrels
consumed in field operations counted? Section 2 just
mentions barrels
? Does Section 2 refer to the production of total
barrels or taxable barrels? As much as a +/- 12%
difference
MR. RUGGIERO said there can be a 5-10 percent difference between
wellhead and market; a 10 percent difference on 400 million is a
lot of barrels and days of production where "you're either in or
you're not in, under Section 2, as a [40/400] asset." He said
theses are significant questions as to when this would actually
take effect.
MR. RUGGIERO gave a summary of Section 2 of the Initiative,
which is shown in the bullet points on slide 23, as follows
[original punctuation provided]:
? It appears the intent is to raise taxes only for the
large legacy fields of Alpine, Kuparuk and Prudhoe Bay
? Depending on how fields, units and nonunitized
reservoirs are defined, there are numerous possible
interpretations, some which could have much more of
the current North Slope production qualifying as
40/400 Assets
? Other than being immediately applicable to the three
large fields, it is unclear when the new taxes begin
to apply and when they stop applying
2:46:12 PM
MR. RUGGIERO responded to questions from the committee. In
response to Representative Rauscher, he explained that the
confusion he had expressed regarding a starting date had to do
with what day the taxes under the Initiative would "kick in."
He said, "This Initiative is silent on when that would occur."
In response to a question from Representative Rasmussen, as to
whether fiscal year versus calendar considerations would have
any impact on investment, he said the taxation is set by
calendar year, which is offset from Alaska's fiscal year. In
response to a follow-up question, he emphasized that any
confusion created under the Initiative would lead to "a high
degree of uncertainty from the producers as to what game they're
playing in," which would result in producers holding back until
they understand the rules of the game.
2:48:53 PM
MR. RUGGIERO, in response to Co-Chair Tarr, suggested that
clearer articulation might be: "all units on the North Slope
that exceed 40/400." He explained that the units are a known
factor.
2:50:08 PM
MS. RUGGIERO proffered that Mr. Ruggiero was referring to an
option in which a term is used that is already defined or a
definition is created where there is none. She added, "But
using the field, units, and nonunitized reservoirs -- there's a
possibility of interpretation that sets a very wide net and in
which case the state would be taxing more areas than is likely
intended."
MR. RUGGIERO, in response to Representative Rasmussen, said
IN3NERGY did not look for any prior court cases, and he said he
is not "aware of anything like that."
MS. RUGGIERO added that even if there was a case somewhere else,
she would seek for clarity in Alaska's terminology.
2:52:00 PM
MR. RUGGIERO, in response to Representative Hannan, confirmed
that Alpine, Kuparuk River, and Prudhoe Bay Units have all met
the 40/400 measure. In response to a follow-up comment, he
noted that in the past, smaller units have been consumed into
larger units for purposes optimization. Some newer players
could be concerned that if consumed into a larger unit, they
would be considered from day one to be 40/400 assets, even
though they had not yet produced, because the larger unit into
which they were captured was already qualified.
2:54:17 PM
MR. RUGGIERO, in response to Representative Hopkins, clarified
that sometimes an independent unit goes through its initial
"exploration, appraisal, and development plan," and there is
nothing to prevent Alaska Oil and Gas Conservation Commission
(AOGC) or others to decide it is better if that independent unit
is consumed into another existing unit. He said it does not
have anything to do with "whether or not they know what's under
the ground." He explained, "How units here are created are at
the convenience of operations and optimization, whereas
elsewhere units are created because it's a common reservoir."
In response to a follow-up question, he confirmed that the
common reservoir is where the lease applications would impact
taxation.
2:56:12 PM
MR. RUGGIERO, in response to a question from Representative
Talerico, confirmed that one issue is that there are operators
in Alaska that are operating more than one unit. In response to
a follow-up comment, he said he would be addressing the creation
of multiple tax returns when addressing Sections 5 and 6.
MR. RUGGIERO, in response to Representative Hannan, said AS
43.55.160 creates a series of six or seven ringfences in Alaska
for tax purposes. An operator with operations in each of those
ringfences would have to do six or seven tax returns; however,
an operator operating only on the North Slope, for example,
would submit only one tax return. In response to Co-Chair Tarr,
he said it's just one tax return on the North Slope, "unless gas
is used in state," which he indicated was addressed under AS
43.55.160(b).
2:58:16 PM
MR. RUGGIERO, in response to a question from Representative
Hopkins as to whether producers have the ability to designate
the field units in their reservoirs or whether that is done by
AOGCC or some other entity, said he does not know the process.
MR. RUGGIERO, in response to a comment from Representative Tuck
that the presentation was not intended for guessing at the
intent of the Initiative but to look at the language as written,
said he agrees; however, some ambiguities could result in the
difference of millions of dollars. For example, he said while
there may not be much pushback regarding the average for the
year or a single day, in terms of whether the language is
"barrels" or "taxable barrels" there is a difference of 50
million barrels to get to the cumulative, and that is a lot of
oil that either does or does not get taxed under the Initiative.
He said there could be "a good fight over that," especially
since everything in AS 43.55 addresses taxable barrels - not
total barrels.
3:00:45 PM
MS. RUGGIERO brought the committee's attention back to the
PowerPoint and began discussion of Section 3(a), the language of
which was shown on slide 25, as follows:
*Section 3, Alternative Gross Minimum Tax For oil
production from fields, units, and nonunitized
reservoirs that meet the conditions in Sec. 2, the
amount of tax due for each calendar month shall be no
less than:
(a) 10 percent of the gross value at the point of
production when the average per-barrel price for
Alaska North Slope crude oil for sale on the United
States West Coast (La. Basin) during the calendar
month for which the tax is due is less than $50;
MS. RUGGIERO paraphrased the bullet points on slide 25, which
read as follows [original punctuation provided]:
? This is a monthly gross tax that appears to replace
the current gross minimum tax that ranges from 0% to
4% of the GVPP with a new gross tax ranging from 10%
to 15% of the GVPP
? The Initiative does not contain any language
specifically altering the definition of GVPP from how
it is defined in current statute
? It is unclear why the parenthetical (La. Basin) has
been added to the definition of the ANS WC trigger
price and what change that would cause from current
statute
MS. RUGGIERO explained that since the definition of gross value
at the point of production (GVPP) is not altered in the
Initiative, IN3NERGY assumes it remains the same as it is in AS
43.55. She moved on to slide 26, which showed Section 3(b), as
follows [original punctuation provided]:
(b) an additional 1 percent of the gross value at
the point of production for each $5 increment by which
the average per-barrel price for Alaska North Slope
crude oil for sale on the United States West Coast
(La. Basin) during the calendar month for which the
tax is due is equal to or exceeds $50. The maximum
tax rate calculated in this section shall not exceed
15 percent, which is reached when the price per barrel
is equal to or exceeds $70; and
MS. RUGGIERO directed attention to the bullet points on slide
26, which read as follows [original punctuation provided]:
? The language is not clear if the 1% gross minimum
tax increase at prices above $50 per barrel is in step
increments of $5 or if the increase is continuous
(like progressivity) at the rate of 1% per $5 increase
? e.g. at $53 ANS WC is the applicable tax rate
11% [10%+1% >$50 but<$55] or 10.6%
[10%+1%*($3/$5)]
? A step function would be consistent with current
gross minimum tax language. This could have been made
clear and unambiguous
? For some reason the last sentence does not define
where the price per barrel is to be taken from
MS. RUGGIERO turned to slide 27, which illustrated the gross tax
changes between current statute and initiative when a step
function and $70 Alaska North Slope crude sales price on the
West Coast of the United States (ANSWC) are assumed. She
explained that under the current system, "you top out at the 4
percent at $25 per barrel and above," and under the Initiative
there would be a 10 percent tax on amounts up to $50 and
"anything above $70 would be taxed at the 15 percent."
3:03:14 PM
MR. RUGGIERO drew attention to Section 3(c), on slide 28, which
read as follows [original punctuation provided]:
(c) No credits, carried-forward lease
expenditures, including operating losses, or other
offsets many reduce the amount of tax due below the
amounts calculated in this section.
MR. RUGGIERO discussed the bullet points on slide 28, which read
as follows [original punctuation provided]:
? Under AS 43.55, when calculating the applicable
gross tax there are no provisions for adjusting the
GVPP, through the use of credits, net operating losses
("NOLs") or similar
? Deductions from GVPP are allowed under AS 43.55 to
derive the PTV
? As such, we do not see why paragraph (c) is included
in this Section versus Section 4
? If the intent was to make the gross tax calculation
a hard floor, that could have been explicitly written
3:04:20 PM
MR. RUGGIERO, in response to Co-Chair Tarr, clarified what he
meant by "pierce the floor." He said under AS 43.55, a gross
minimum tax is calculated, and then the net tax is calculated,
and then "you take the greater of the gross or the net." He
offered an example to show that "there are things that ...
pierce that minimum floor, and there are other things that
cannot." He said IN3NERGY thinks the intent of the Initiative
is that no other deductions or credits would be allowed to
pierce the floor.
MR. RUGGIERO indicated that IN3NERGY was asked what an offset
was. He noted that AS 43.55 does not use the term "offsets."
He surmised that the drafter of the Initiative was including "a
catchall" to "make it as big as they want" or "as narrow as they
want" by using an undefined term.
3:06:19 PM
MR. RUGGIERO, in response to Representative Hopkins, said AS
43.55 uses the term "ANS West Coast price" and, for some reason,
the drafter of the Initiative has added "(La. Basin)". He said
it was unclear whether the term was being added to imply a
difference. He said in this instance, "La." refers to Los
Angeles, and he interprets the Initiative to mean that for the
purpose of the gross tax, the price at the "La." Basin would be
used. In response to Representative Hopkins, he confirmed his
understanding that this was not just about Alaska oil but about
oil sold in the "La." Basin.
3:08:44 PM
MR. RUGGIERO continued the PowerPoint presentation and discussed
Section 4 of the Initiative, which is written on slide 30, as
follows [original punctuation provided]:
*Section 4, Tax on Production Tax Value. For
production from fields, units, and nonunitized
reservoirs that meet the conditions in Sec. 2:
(a) The per-taxable-barrel credit in AS
43.55.024(i) and (j) shall not be used; and
(b) An additional production tax shall be paid
for each month for which the producer's average
monthly Production Tax Value of taxable oil is equal
to or more than $50. The additional tax shall be the
difference between the average monthly Production Tax
Value of a barrel of oil and $50, multiplied by the
volume of taxable oil produced by the producer for the
month, multiplied by 15 percent.
MR. RUGGIERO highlighted the first bullet point on slide 30,
which read as follows [original punctuation provided, with a
technical change]:
[Subsection] (a) clearly and explicitly states that
the credits now allowed in AS 43.55.024 (i) and (j)
shall not be used for 40/400 Assets
MR. RUGGIERO then directed attention to slide 31, which focused
on [subsection](b) of Section 4. He paraphrased the bullet
points, which read as follows [original punctuation provided]:
? Under AS 43.55 both the gross tax on GVPP and the
net tax on PTV are referred to as a "production tax"
? Given the above, it is unclear whether "An
additional production tax" means (1) another
production tax in addition to the Section 3 production
tax; or (2) an additional tax on top of other
production taxes currently in AS 43.55
? Nowhere in the Initiative is there any direct or
implied reference to the current applicable net tax on
PTV in AS 43.55
MR. RUGGIERO directed attention to slide 32, where "of taxable
oil" and "of a barrel of oil" in [subsection] (b) of Section 4
are shown outlined in gold boxes. He paraphrased the
information in the bullet points, which read as follows
[original punctuation provided]:
? Two different definitions of PTV are used, PTV "of
taxable oil" and PTV "of a barrel of oil"
? PTV "of taxable oil" defines the gross income. It is
sales revenues minus transportation and lease costs.
It will always exceed $50
? PTV "of a barrel of oil" is the PTV divided by
applicable production to derive a per barrel unit
value
? As worded, the additional tax will apply every month
3:11:33 PM
MR. RUGGIERO said Section 4 applies when the value of taxable
oil is above $50. He said he would bet all his money that every
month, the PTV of a qualifying 40/400 asset would be above $50.
He said this means production of just two barrels. He stated,
"So, this is always going to be live and always going to be
applicable." He then used slide 33 to illustrate that "one is
per taxable oil, and the other one is just per barrel of oil."
He continued as follows:
So, to get unit value, I take the production tax
value, the PTV, and I divide by the quantity of oil.
If I'm dividing by total barrels, ... that's a larger
number, so the unit value's going to be smaller than
if I divide it by taxable barrels. So, again, when
we're talking about ambiguity, we mixed PTV "of
barrels" with PTV "per barrel," and we mixed taxable
barrels with total barrels. So, we've got kind of a
confusion. You could put a matrix here and have about
16 different alternative combinations of this, that,
and the other to go through there.
MR. RUGGIERO said AS 43.55 always refers to production tax value
per barrel of taxable oil. He added, "But that's not what's
chosen here."
3:14:00 PM
MR. RUGGIERO brought attention to Section 5 of the Initiative,
shown on slide 35, as follows [original punctuation provided]:
*Section 5, Separate Treatment. For each producer,
the taxes set forth in Sections 3 and 4 shall be
calculated separately for the following:
(a) For oil and for gas;
(b) For each calendar month (annual lease
expenditures shall be divided equally among the 12
months of the tax year); and
(c) For each of the fields, units, and
nonunitized reservoirs, the lease expenditures shall
be calculated, deducted, and carried forward
separately.
MR. RUGGIERO addressed the bullets points on slide 35, which
read as follows [original punctuation provided]:
? Section 2 noted the taxes under Sections 3 & 4 can
only apply to oil. Section 5 now states the taxes in
Sections 3 & 4 apply to gas as well. Both can not be
true
? The inclusion of gas here opens the door to any
number of interpretations including that gas from
40/400 Assets would be ringfenced from other North
Slope gas and taxed via Sections 3 & 4 and not current
AS 43.55
? Another possible interpretation is that all costs
related to gas are to be separate from oil, not
combined as they are now under AS 43.55 and subtracted
from oil revenue to determine oil taxes
MR. RUGGIERO directed attention to slide 36. He stated that the
slide shows comparisons of disparate language from Sections 2,
3, 4, and 5, explained in the bullet points, which read as
follows [original punctuation provided]:
? Note the changing terminology.
? Section 2 "only apply to oil"; then ? Section 3 "for
oil production"; but
? in Section 4 it only addresses "production" which
generically means oil and gas, and then
? Section 5 states the taxes in Section 3 & 4 apply
"for oil" and "for gas
MR. RUGGIERO said, "This is going to be really hard for someone
to sort out." He said he would not want to be the person who
would have to write out the regulations.
3:16:38 PM
MR. RUGGIERO turned to slide 37. He said currently, under AS
43.55, there are monthly installments, with an annual "true up"
on each producer's taxes on the North Slope. He shared the
information on slide 37, which read as follows [original
punctuation provided, with a technical change]:
[Subsection] (b) changes the current monthly
installment payments as part of an annual tax return
to require a tax return be filed for each month for
each 40/400 Asset
? Because the accurate value for 1/12th of the annual
lease expenditures is not known until several weeks
after the end of the year, an amended return will need
to be filed for each month of the prior year for each
and every 40/400 Asset
? The Initiative provides no guidance on how to apply
tax credits, other carried forward credits or net
operating losses to the monthly tax returns. Lacking
guidance producers would appear to be free to use
these items at their discretion to minimize tax
payments
MR. RUGGIERO predicted that because producers cannot know what
one-twelfth of an annual lease expenditure will be until the end
of the year, each producer, for each asset, would have filed
roughly 24 returns - [the 12 monthly ones and 12 corrected
ones]. He emphasized that there is nothing in the Initiative
that calls for an annual true-up return; it calls only for
monthly tax returns.
MR. RUGGIERO, referring back to the terms field, unit, and
nonunitized reservoir, said, "We may capture operations that
actually have existing - or have generated some - losses or have
some credits, et cetera." He said the Initiative does not
address how those losses or deductions should be handled, "all
of which are applicable against PTV when calculating your net
tax." He said someone is going to have to write the rules for
addressing this issue.
3:19:41 PM
MR. RUGGIERO directed attention to slide 38, and he covered the
information in the bullet points, which read as follows
[original punctuation provided, with a technical change]:
[Subsection] (c) requires that lease expenditures be
treated separately for each 40/400 Asset. Point
forward, systems can be put in place to disaggregate
future North Slope costs
? However, any existing carry-forward tax credits and
operating loses [sic] resulted collectively from all
operations a producer had on the North Slope
? The Initiative is silent on their use and likewise
silent on how these aggregated amounts are to be
separated for each 40/400 Asset. A mechanism will need
to be put in place as to how they are to be used for
40/400 Assets. The Initiative provides no direction in
this regard
? Costs for common facilities will also need to be
identified and allocated to all users
MR. RUGGIERO indicated that there are operations [on the North
Slope] that "do not qualify as a 40/400" that are "likely using
some of these facilities jointly with a 40/400 asset." Because
of the requirement to do separate accounting by each 40/400
qualifying entity, "you're going to have to break it up into all
expenses, whether a common use, into the individual entities
that use it." He added that he does not know whether that
already occurs.
3:20:46 PM
MR. RUGGIERO, in response to a question from Representative
Hannan regarding the gas issue posed on slide 35, proffered that
at one time Prudhoe Bay was producing over 300 billion cubic
feet per day, "using 400 or 500 for slope use and reinjecting
the remainder; so, there is ... gas usage, because they're
maintaining a gas cap for pressure. That helps push the oil
out." Mr. Ruggiero responded to follow-up questions from
Representative Hannan. As to whether any of that gas is
currently being taxed, he supposed that there are provisions
within AS 43.55 and the tax code wherein the revenue from
"entity A" selling gas to "entity B" would have to be "captured"
and reflected in a tax return. As to whether that would be
categorized under corporate taxes and expenses versus the
state's production structure, he offered his understanding that
as long as it is a reservoir captured under the production tax,
it would be part of the production tax calculation.
3:22:51 PM
MR. RUGGIERO, in response to Representative Tuck's reference to
the second bullet point on slide 37 and question as to whether
there had previously been a one-twelfth monthly progressivity
calculation under Alaska's Clear and Equitable Share (ACES) for
lease expenditures, recollected that had been the case, although
he said he had not reviewed ACES.
3:23:31 PM
MR. RUGGIERO confirmed Co-Chair Tarr's observation that the true
up would have to be done looking back at 12 months. He said one
interpretation is that it is a monthly tax return. He said
those who write the regulation could choose the current system
of a monthly return using an estimate of the one-twelfth, with a
true up at the end of the year; however, there is no language
within the Initiative that would "drive you to that conclusion."
3:27:38 PM
MR. RUGGIERO, in response to Representative Rasmussen, offered
his understanding that the state audit for oil taxes is
presently at 2014. In response to follow-up questions, he said
he knows there is a process in place; the Department of Revenue
(DOR) has communicated with the legislature, which has
determined that the current number of people working on [the
audits] is sufficient. He cautioned that if IN3NERGY's
interpretation is correct that there will be monthly returns
under the Initiative that will drive the number of returns up
exponentially, then that will be a challenge from the standpoint
of completing audits. He confirmed that this would increase
costs to both the state and the oil companies on the North
Slope.
3:29:07 PM
MR. RUGGIERO, in response to a remark made by Representative
Spohnholz, advanced to slide 40, which shows Section 6, as
follows [original punctuation provided]:
*Section 6, Greater-of. For each producer, for each
month, and for each of the fields, units, and
nonunitized reservoirs, the tax due shall be the
greater of the tax under Section 3 or Section 4.
MR. RUGGIERO said he does not know how a producer would come up
with the tax due figure without having done a tax return. He
said there is nothing in the Initiative to indicate the monthly
figure would be an estimate or installment, whereas currently
under AS 43.55, it is clear that an installment is being paid
monthly toward an annual tax return.
3:32:06 PM
MR. RUGGIERO returned to the PowerPoint and referred again to
slide 40, on which the bullet points read as follows [original
punctuation provided]:
? The language above explicitly states that the tax
due from a producer for a 40/400 Asset shall be the
greater of the tax under Section 3 or Section 4
? There is no Initiative reference, direct or implied,
to the inclusion of any other taxes under AS 43.55
being applicable for a 40/400 Asset
? The language above only references the tax
calculated under Section 4 and not Section 4 in
addition to another tax such as AS 43.55.011(e)(2) the
35% tax on PTV
? Section 5 defined items that needed to be treated
separately, but never called for each field, unit and
nonunitized reservoir to have its own tax return. The
use of "each of" above seems to imply that each of the
fields, units and nonunitized reservoirs is ringfenced
separately for tax purposes. If so, it raises the
possibility of double taxation, once as a field and
again as a unit
MR. RUGGIERO, regarding the third bullet point, said, "We almost
get to the part where the gross tax will always be the
controlling, because it's 10 to 15 percent gross on the GVPP,
and Section 4 is a net tax only when the PTV's above $50 a
barrel." He said IN3NERGY thinks Section 4 is not necessary,
because Section 3 would be "controlling in all circumstances."
MR. RUGGIERO, in response to a previous comment from
Representative Tuck, pointed out that Section 5 did not call for
the monthly tax; that is found in Section 6. He explained that
Section 6 would require a separate calculation "down to the
smallest common denominator, based on whatever you finally agree
to be field units and nonunitized reservoirs."
3:35:33 PM
CO-CHAIR TARR offered the following:
When we talk about getting that PTV: We have the
wellhead price and subtract transportation costs,
which we estimate around $10 - that's our GVPP; minus
the capital, minus the operating - this is the PTV.
So, only after all of those expenses and circumstances
where that number is $50 or above is why you're saying
that ... Section 3 is really the most important
section relative to Section 4.
MR. RUGGIERO told Co-Chair Tarr that that was a good analysis.
3:36:16 PM
MR. RUGGIERO, in response to Representative Hannan, relayed that
there was discussion about this presentation being given to the
Senate, and he indicated that it would likely happen.
3:37:03 PM
MR. RUGGIERO, in response to Representative Tuck's reference to
slide 31 and question as to whether it was clear that the
additional tax should not be applied to the gross tax, said
there is nothing in the language of the Initiative that "pulls
in this bill the 35 percent base tax that currently resides in
[AS] 43.55." He said someone had told him that it was obvious
that since the Initiative does not overwrite the 35 percent, it
must be brought in," to which he had replied that the gross tax
in AS 43.55 was not specifically overwritten in the Initiative,
"so instead of going from 10 to 15, you're going to go from 14
to 19." He emphasized that the same logic should be applied
throughout.
MR. RUGGIERO, in response to Representative Tuck pointing to
slide 9 and expressing his confusion over "notwithstanding,"
stated:
The way I read it is: Notwithstanding that there's a
gross tax already there, here's the gross tax, Section
3; notwithstanding there's already a net tax in [AS]
43.55, here's a net tax in Section 4. That's how I
read it. Like I said, but if one wants to argue that
that's an incorrect interpretation and use of the term
"notwithstanding", then again, you have to pull ...
both the gross and the net tax that's currently in
[AS] 43.55 into this bill.
MR. RUGGIERO, in response to a remark by Representative Tuck
that "notwithstanding" could mean not conforming, said
Representative Tuck was raising IN3NERGY's "beginning, overall
100,000-foot view [that] this is technically challenged as a
bill." He said the Initiative is unclear, and he reiterated
that "it'll be real fun for whoever has to write the regulations
to make it work."
3:40:26 PM
CO-CHAIR TARR announced that the committee would return to the
presentation on Friday. She encouraged committee members to
follow-up with Legislative Legal Services about the
interpretation questions before the next meeting.
3:42:46 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:42 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| IN3NERGY Analysis of Ballot Initiative 190GTX 2.26.20.pdf |
HRES 2/26/2020 1:00:00 PM |
IN3NERGY Analysis of Oil Tax Initiative |
| IN3NERGY Presentation Ballot Initiative 19OGTX.pdf |
HRES 2/26/2020 1:00:00 PM |
IN3NERGY Presentation on Oil Tax Initiative 2.26.20 |