01/18/2006 09:10 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HB223 | |
| Pers/trs Funding Shortfall Issues | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
January 18, 2006
9:10 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Norman Rokeberg
Representative Paul Seaton
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
Representative Ralph Samuels
Representative Peggy Wilson
OTHER LEGISLATORS PRESENT
Representative Harry Crawford
Representative Kurt Olson
COMMITTEE CALENDAR
HOUSE BILL NO. 223
"An Act levying a tax on certain known resources of natural gas,
conditionally repealing the levy of that tax, and authorizing a
credit for payments of that tax against amounts due under the
oil and gas properties production (severance) tax if
requirements relating to the sale and delivery of the natural
gas are met; and providing for an effective date."
- HEARD AND HELD
PERS/TRS Funding Shortfall Issues
- HEARD
PREVIOUS COMMITTEE ACTION
BILL: HB 223
SHORT TITLE: NATURAL GAS PIPELINE INCENTIVE/ GAS TAX
SPONSOR(S): REPRESENTATIVE(S) CROFT
03/17/05 (H) READ THE FIRST TIME - REFERRALS
03/17/05 (H) W&M, O&G, RES
04/25/05 (H) W&M AT 8:30 AM CAPITOL 106
04/25/05 (H) Heard & Held
04/25/05 (H) MINUTE(W&M)
01/11/06 (H) W&M AT 9:00 AM CAPITOL 106
01/11/06 (H) Heard & Held
01/11/06 (H) MINUTE(W&M)
01/18/06 (H) W&M AT 9:00 AM CAPITOL 106
WITNESS REGISTER
MARK MYERS
Anchorage, Alaska
POSITION STATEMENT: On behalf of Representative Croft, provided
information on the economic issues pertaining to HB 223.
REPRESENTATIVE ERIC CROFT
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as the sponsor of HB 223.
ACTION NARRATIVE
CHAIR BRUCE WEYHRAUCH called the House Special Committee on Ways
and Means meeting to order at 9:10:55 AM. Representatives
Weyhrauch, Seaton, and Gruenberg were present at the call to
order. Representatives Rokeberg and Moses arrived as the
meeting was in progress. Representatives Crawford and Olson
were also in attendance.
HB 223-NATURAL GAS PIPELINE INCENTIVE/ GAS TAX
9:11:05 AM
CHAIR WEYHRAUCH announced that the first order of business would
be continuing testimony on HOUSE BILL NO. 223, "An Act levying a
tax on certain known resources of natural gas, conditionally
repealing the levy of that tax, and authorizing a credit for
payments of that tax against amounts due under the oil and gas
properties production (severance) tax if requirements relating
to the sale and delivery of the natural gas are met; and
providing for an effective date."
9:11:46 AM
MARK MYERS, former Director of the Division of Oil and Gas,
Department of Natural Resources (DNR), summarized his
presentation given at the previous meeting during which he
addressed the economics of the gas pipeline project as analyzed
in a report by Econ One Research, Inc. He noted that prices
north of $3.00/million British thermal units (mmbtu) are "very
robust" and the [gas pipeline] project is actually net-positive
at prices below $3.00/mmbtu.
MR. MYERS explained that today's prices, around $9.00/mmbtu, and
future prices, which are expected to be greater than
$5.00/mmbtu, show the project as being very economic.
Furthermore, he noted that the Econ One findings showing a
$4.00, $5.00, and $6.00 price-deck with varying returns, all
indicate the project as very robust. Even with high-cost
overruns on the project, Mr. Myers concluded that it's still
lucrative with investment returns very typical of those expected
for a petroleum company investment.
9:14:40 AM
REPRESENTATIVE SEATON remarked that [the committee] is looking
at HB 223 as an incentive tax and wonders why it doesn't make
any reference to interest being accumulated and paid back.
Furthermore, he noted, the bill doesn't address any loss after
commitment and prior to shipment of gas. He questioned whether
more language is needed to address an incentive. However, he
indicated that he does not believe the intent is to have people
"using this as just a bank" where money is deposited, earns
interest and no loss is incurred if done within a required
timeframe.
MR. MYERS recommended asking the sponsors for clarification on
the intent of HB 223 regarding incentives and the design of the
tax. He opined that the design is not to be punitive but rather
to provide a jumpstart to the project. According to his
interpretation of the bill, should the project move forward on a
timely basis, then the companies would recover all the tax lost.
9:16:49 AM
REPRESENTATIVE SEATON asked Mr. Myers if he believes a deposit
of money with the state, and then receiving that money back, is
enough of an incentive to help stimulate the development of a
gas pipeline.
MR. MYERS replied that this depends on how the legislature
perceives the project. He indicated his belief that HB 223
shows [the legislature's] intent to "cut a middle-ground" and
not be too punitive. Additionally, he said, that when looking
at a reserves tax, it's important not to discourage future
exploration. He relayed his belief that the bill is structured
in such a way as to not affect future exploration.
9:19:00 AM
REPRESENTATIVE SEATON referred to page 2, lines [10-16],
proposed AS 43.58.220(c)(1)-(2)(B):
(c) Gas is not taxable gas under this chapter if the
gas is
(1) not subject to a state-approved oil and gas
unit; or
(2) subject to a state oil and gas lease, but
that lease
(A) has not been in existence throughout
the 10 years immediately preceding the tax year;
(B) was not in a state-approved oil and gas
unit as of January 1, 2002, and January 1 of the tax
year; or
REPRESENTATIVE SEATON sought confirmation on his interpretation
of this section by asking whether those [gas reserves] which
haven't been unitized are then not taxable. He further asked
how common it is for [Alaska] to have large gas reserves that
are not unitized.
9:19:51 AM
MR. MYERS replied that generally unitization does not occur
until a lease is at the very end of its primary term, which
would typically be closer to 10 years from the initial issuance
of the lease. In those cases, he explained, unitization occurs
under one of two conditions: either "companies want to keep the
leases and they want to have a firm commitment for exploration,"
or, more typically, "they're ready to develop a field in order
to hold the leases, in order to produce the property in common."
Mr. Myers stated that according to his understanding of the
intent of HB 223, companies in the primary term of a lease and
still in an exploration stage would not be subject to a tax
unless they choose to unitize early in the primary term of the
lease. Mr. Myers concluded his testimony by expressing his
belief that HB 223 is designed to encourage exploration.
9:21:13 AM
CHAIR WEYHRAUCH, upon ascertaining there were no further
questions to ask of those present at the meeting - representing
ConocoPhillips Alaska, Inc., Department of Revenue or the Office
of Management & Budget - requested the sponsor of HB 223,
Representative Croft, come forward to testify.
9:21:47 AM
REPRESENTATIVE ERIC CROFT, Alaska State Legislature, first
pointed out that when working with Walter Hickel in drafting
HB 223, the former governor wanted Representative Croft to
increase the incentive [to develop the gas]. He then addressed
the questions posed earlier by Representative Seaton offering
his explanation of the language on page 2, lines [10-18] of HB
223, which lists the gas not taxable under this chapter.
Excluded from this [exemption], he explained, are units of
older, established fields, "particularly Prudhoe Bay and Point
Thompson," with leases over 10 years old. No future finds, he
said, are affected by this bill. "This is an incentive for
companies that have been sitting on gas for decades to develop
it, and we specifically crafted it so that it would not affect
any future exploration," he opined.
REPRESENTATIVE CROFT next addressed the structure of the credit
as written in HB 223 on page 6, lines 7-25, proposed AS
43.55.027(d)-(f), which addresses credits that may not be
allowed. He explained that only 50 percent of the [producer's]
severance tax owed each month can be written off at the end of
every year until December 31, 2030, when this credit can no
longer be applied.
REPRESENTATIVE CROFT said that since HB 223 does not include
provisions for giving credit for interest, it is to the oil
company's advantage to have the gas pipeline project completed
as promptly as possible in order to have more years of applying
the 50 percent credit to taxes before the credit option expires.
He gave an example of how a company, in completing the gas
pipeline project in the next 6 to 7 years, would be able to get
all the money back on taxes paid by having 17 years to apply the
50 percent credit until the December 31, 2030 deadline. "That
is about the breakeven point," he explained, as every year [the
companies] delay the project, the less time they have to apply
the credit.
REPRESENTATIVE CROFT related that Mr. Hickel was adamant that
the amount of the tax be raised from $.02/1,000 cubic feet (mcf)
to $.03/mcf as the original tax Representative Croft introduced
raised approximately $650 million a year.
9:26:59 AM
REPRESENTATIVE SEATON asked where it's specifically stated that
interest will not accrue on the money that's deposited.
9:27:24 AM
REPRESENTATIVE CROFT explained that during early drafting of HB
223, the matter of interest was included in the credit section
but then removed. He stated that by not including language for
earning credit for interest means [oil companies] can expect a
dollar-for-dollar credit with no interest. Representative Croft
mentioned the possibility of the [committee] changing the bill
to include language on interest credit.
9:28:12 AM
REPRESENTATIVE GRUENBERG opined that it would be "much safer" to
specifically state "no interest" in the bill. He then asked if
there was any value to a petroleum company having a non-
producing lease with the possible exception of it being able to
deny that lease to a competitor or perhaps to increase the
credit-worthiness of the company.
REPRESENTATIVE CROFT presented three reasons to explain why
companies might want to reserve the gas even though "it's
perfectly economic to produce": companies' stock prices are
based on their reserve and Wall Street wants to see adequate
reserves to ensure those higher stock prices; companies having
more reserves in other countries might be getting tremendous
pressure to develop there versus very little pressure from
[Alaska]; and larger companies may see delaying development of a
project as a competitive ploy to "hurt certain smaller players."
REPRESENTATIVE GRUENBERG asked if there was any way to quantify
the value of interest [in the project] for the purpose of
establishing the rate of the tax.
9:32:53 AM
REPRESENTATIVE CROFT said the tax could be based on what it
would take to change the minds of "Exxon or British Petroleum"
in building a gas pipeline, or by reviewing the revenues the
State of Alaska may lose by delaying the project. He opined
that it's harder to quantify the advantages for companies in
having [gas] reserves than it is to quantify the actual value of
what [Alaska] would lose, which might be in the $4 to $5 billion
range.
9:34:19 AM
REPRESENTATIVE GRUENBERG asked if Representative Croft was
"aware of any economists or any economic model that has been
developed to actually, directly quantify those kinds of things."
REPRESENTATIVE CROFT said there is good, economic modeling that
shows how much the state would make from this project; however,
he said he has not seen modeling that shows benefits for [Exxon]
to delay in building a gas pipeline. He indicated his belief
that the revenues, however, would be substantial.
9:35:39 AM
REPRESENTATIVE CROFT, in answering questions put forth by Chair
Weyhrauch, confirmed that the tax only applies to the resource,
ends when the resource starts flowing through the pipeline, and
essentially only applies to the Prudhoe Bay and Point Thompson
fields.
CHAIR WEYHRAUCH asked why a company willing to build a gas
pipeline when others are not, would be subjected to a tax.
9:36:23 AM
REPRESENTATIVE CROFT replied that this differential impact on
the major leaseholders is addressed when the credit starts. He
explained that after much discussion with those more
knowledgeable on oil and gas leasing, it was determined that the
[gas reserve] tax would end "only on something that was
irrefutable" to avoid possible litigation. He listed some of
the specific requirements addressed in the bill such as delivery
by a [pipeline or combination of pipelines] having a [minimum
delivery capacity] of 2 billion cubic feet (bcf) of gas per day,
and one that is route-neutral, whether "Canadian or All-Alaska,"
and ownership neutral, whether independent, producer-owned, or
Alaska-owned.
REPRESENTATIVE CROFT then referred to the language on page 5,
Section 2 of the bill where it explains that the credit starts
when an [oil company] makes an irrevocable agreement to sell the
gas or agrees to ship it in an open season. The tax itself ends
when the pipeline is built," he noted. He said, "So, in that
situation, the leaseholder that has done what we'd like, starts
to receive the credit from that date and the other players do
not."
9:38:54 AM
REPRESENTATIVE SEATON posed a scenario in which only one owner
of a three-owner field was committed to shipping or selling the
gas. In that case, would the tax then accrue on all of the gas,
he said, "and is not part of the credit until they make this
binding agreement to either sell or ship, and therefore, if the
other two [owners] do not make that binding agreement, their tax
is there but no credit would be applied to that until such date
as they agree to sell or ship."
9:39:29 AM
REPRESENTATIVE CROFT said that was correct.
9:39:34 AM
REPRESENTATIVE ROKEBERG asked whether a company agreeing to ship
necessitates having a pipeline and wouldn't having an open
season mean having a project.
REPRESENTATIVE CROFT said it means a project proposal on an open
shipment or [oil companies] could agree to sell.
REPRESENTATIVE ROKEBERG posed a situation in which
ConocoPhillips Alaska, Inc. finalized the transaction of selling
the gas, and asked whether that would be an example of what
Representative Croft's "driving at here?"
REPRESENTATIVE CROFT replied that this addresses some of the
difficulties with the negotiation in which Governor Murkowski is
currently involved. He opined that if [Governor Murkowski]
concludes an option agreement wherein ConocoPhillips Alaska,
Inc. could take the fiscal terms whenever it wished, it would
not be a project; however, a specific agreement to ship under
these terms, would be. He said that this identifies one of the
great risks of the entire process, which is obtaining agreement
on fiscal terms and not on a project.
9:41:16 AM
REPRESENTATIVE ROKEBERG sought clarification on whether a
company, with the intent to ship gas, would not receive credit
and have to pay the tax if particular terms of an agreement are
not acceptable to it.
REPRESENTATIVE CROFT responded that it depends on the agreed
terms.
REPRESENTATIVE ROKEBERG then asked what if there's not a gas
pipeline, in spite of a company's willingness to have one,
because the company cannot afford to do it on its own.
REPRESENTATIVE CROFT maintained that the incentive remains until
the pipeline is built.
REPRESENTATIVE ROKEBERG requested clarification on whether
"paying the tax" is the "incentive" to which Representative
Croft refers.
REPRESENTATIVE CROFT reiterated that the intent of the bill is
"You don't let up pressure until the line is done." Any other
benchmark, he said, falls short of what is required.
REPRESENTATIVE ROKEBERG asked if a willing party entering into
an agreement would still have the incentive of paying a tax.
REPRESENTATIVE CROFT replied, "They're going to put that earnest
money down and get it back, and those that never did, aren't
going to get it back." He then agreed with the comment made by
Representative Rokeberg that interest would still be paid [while
completing the project].
9:43:34 AM
CHAIR WEYHRAUCH asked if this was related to a question posed
earlier by Representative Seaton regarding "whether they should
get that money back with some interest if they developed the
gas."
9:43:45 AM
REPRESENTATIVE SEATON expressed his belief that the current
structure of the bill does not lay out in firm enough detail the
sponsor's statement that it does not accrue interest. If
accruing interest is not the intent, he opined that this should
be stated in the bill to avoid being subject to litigation.
REPRESENTATIVE SEATON again sought confirmation from the sponsor
regarding his understanding that a company only has to agree to
sell [the gas] to start the credit and is not required to build
the pipeline.
9:45:09 AM
REPRESENTATIVE CROFT expressed his belief that once the first
agreement to sell is made, all the competitive pressures
Representative Gruenberg referred to earlier "come to bear the
other way." He explained that if ConocoPhillips Alaska, Inc.
can agree to sell, and a small yet viable project is started
without ExxonMobil Corporation's participation, then a whole new
competitive structure results. "I wanted to put as much
pressure as I could to get that first big agreement to sell," he
said.
9:46:28 AM
REPRESENTATIVE SEATON asked if it is legally possible for only
some of the owners of a field to sell their gas without all of
the owners of that field agreeing to do so.
9:47:24 AM
REPRESENTATIVE CROFT related his understanding that it is
legally possible; however, "the relationships in the different
fields, the different agreements, as well as the other ways they
cooperate in this state on the Trans-Alaska Pipeline system and
others, make it practically difficult to separate themselves."
9:48:07 AM
REPRESENTATIVE ROKEBERG, referring to a question asked earlier
by Representative Seaton, said he didn't see how a bullet line
could satisfy the requirement of having a minimum delivery
capacity of 2 bcf of gas per day as most bullet lines only have
half the capacity or less. He asked then if it was correct to
say "a bullet line from the North Slope to Cook Inlet would not
qualify and that gas would still be subject to the penalty of
[the] tax."
9:48:56 AM
REPRESENTATIVE CROFT explained that the intent was to set to a
low, viable project level which would encompass the All-Alaska
route or the Canadian route and maintain enough gas sufficient
for [Alaska] needs as well as maintain the production level
currently in Kenai. He said Representative Rokeberg was correct
in saying [the project] would not do those very small bullet
lines of 300 or 400 mcf per day.
9:50:10 AM
REPRESENTATIVE ROKEBERG expressed concern that there may be
missed opportunities in the years ahead considering the demand
for fuel in the rest of the state, which might eventually entail
repealing [HB 223].
REPRESENTATIVE CROFT expressed his belief that if the gas
pipeline project is unsuccessful this time, HB 223 should be
kept in place.
9:51:24 AM
REPRESENTATIVE ROKEBERG posed a situation in which the gas
pipeline project is adopted by the legislature or by initiative,
and asked whether the tax would still go into effect by January
2007, in spite of any agreement or any movement forward on the
project.
REPRESENTATIVE CROFT expressed his hope that an agreement, with
a binding commitment to ship, is signed.
9:52:55 AM
REPRESENTATIVE GRUENBERG relayed that sometimes companies that
own pipelines and have the capacity to ship, will turn them off.
He asked if there is anything in [the bill] that reinstates the
tax should this occur. In hearing the sponsor's reply that
there is nothing in the bill addressing this, Representative
Gruenberg suggested it be seriously considered since
[Representative Croft] would be "up against the best minds in
the world who will do anything they can to get out of this tax."
9:54:04 AM
CHAIR WEYHRAUCH asked if paying a fee every day that the
pipeline is not developed is essentially a disincentive to
holding leases in gas. He questioned, "Why pay a tax on an
uncertain future?"
REPRESENTATIVE CROFT maintained that [the bill] is an incentive
to build the gas pipeline, has no effect on future exploration,
and if companies decide to turn over leases, there are hundreds
of companies that would take them. Referencing contracts which
were signed years ago and in which these companies agreed to
develop, he expressed his belief they have the contractual duty
to develop. He said that although the [government] can not
nationalize in the United States, it can insist on its
contractual rights and use taxing powers as constitutionally
allowed.
9:55:15 AM
CHAIR WEYHRAUCH, having ascertained there was no further
testimony on HB 223, closed public participation with the
exception of the sponsor, Representative Croft.
[HB 223 was held over.]
^PERS/TRS Funding Shortfall Issues
9:55:28 AM
CHAIR WEYHRAUCH announced that the final order of business would
be to address the funding shortfall issues of the Public
Employees' Retirement System/Teachers' Retirement System
(PERS/TRS). Having ascertained there was no one present who
wished to testify on the PERS/TRS issue, he announced the next
meeting would address the two new bills dealing with the
unfunded liability of the PERS/TRS.
9:56:26 AM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
9:56 a.m.
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