Legislature(2009 - 2010)SENATE FINANCE 532
02/17/2010 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Production Tax Lease Expenditure Regulation | |
| Operating and Capital Expenditures |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
February 17, 2010
9:00 a.m.
9:00:28 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:00 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
None
ALSO PRESENT
Marcia Davis, Deputy Commissioner, Office of the
Commissioner, Department of Revenue; John Larson, Master
Auditor, Department of Revenue.
PRESENT VIA TELECONFERENCE
None
SUMMARY
Oil and Gas Overviews:
PRODUCTION TAX LEASE EXPENDITURE REGULATIONS
OPERATING and CAPITAL EXPENDITURES
Oil Industry Employment and Resident Hire
Scheduled but not Heard
9:00:53 AM
^PRODUCTION TAX LEASE EXPENDITURE REGULATION
9:01:53 AM AT EASE
9:07:04 AM RECONVENED
MARCIA DAVIS, DEPUTY COMMISSIONER, OFFICE OF THE
COMMISSIONER, DEPARTMENT OF REVENUE, explained the
production tax lease expenditure regulations and the
process whereby the department arrived at them. She
reviewed the PowerPoint presentation "Production Tax Lease
Expenditure Regulations" (Copy on File).
Ms. Davis began with Slide 2: "Overview"
12/20/2007
Department of Law (DOL) in order to ensure the
legality, constitutionality, and consistency with
other regulations
(AS 44.62.060)
9:12:01 AM
Ms. Davis discussed Slide 3: "Public Workshops"
workshops" to gain public input at early regulation
design stage.
received during workshops. If big changes on important
issues, then additional workshops held.
Ms. Davis detailed Slide 4: "APA- 30-Day Formal Notice"
After Workshops, proposed regulation is put out for a
minimum 30 day public comment under AS 44.62.190.
1. Published in a newspaper
2. Furnished to every person who has filed for a request
of proposed action ("Interested Parties")
3. Furnished to Department of Law
4. Provided to all incumbent State of Alaska legislators,
committee chairs, and to the Legislative Affairs
Agency.
Ms. Davis explained Slide 5: "APA-Notice of Proposed
Action"
opportunity to present statements, arguments, or
contention in writing, with or without opportunity to
present them orally (AS 44.62.210(a))
other relevant matter presented to it before adopting,
amending, or repealing a regulation. (AS 44.62.210(b))
Ms. Davis detailed Slide 6: "APA-Final Step"
After considering public comment, regulation is either
adopted, or put out for another public notice. Once
regulation has been adopted:
Governor
9:13:44 AM
Ms. Davis reviewed the Alaska's Clear and Equitable Share
(ACES) regulations as listed on Slides 7-18. She noted that
the regulations were listed on the Department of Revenue
(DOR) website. The department first provided a format for
the taxpayer to report taxes under the new law. Each
taxpayer must file a monthly estimate of their taxes
necessitating a monthly form. She informed of the advisory
bulletin, which helped interpret particular tax laws.
Regulations also addressed facility sharing arrangements
and the interpretation of the issues.
9:16:41 AM
Ms. Davis continued with Slide 19: "What Remains?"
Forty six of the approximately seventy production tax
regulations have been adopted and signed into law by
the Lt. Governor. Of those remaining, seventeen relate
to transportation and AGIA issues, four relate to
facility sharing and the British Thermal Unit (BTU)
heating value.
Public Hearing for facility sharing and BTU heating
value has been held and the written comment period has
also been closed. The department is currently
evaluating comments received.
Transportation and AGIA related Regulations
distributed for public comment February 9, 2010.
Unplanned Production Interruption Regulations--Second
workshop to be scheduled this spring.
Co-Chair Stedman asked about the last sentence of the first
paragraph.
Ms. Davis responded that "seventeen relates to
transportation" refers to sections of the regulations that
require revision. Approximately 17 provisions govern the
way transportation costs are deducted from the gross
revenue to arrive at the production tax value. With respect
to "facility sharing and BTU heating value," those
provisions that relate to AS 43 55 170 created a barrier to
facility sharing on the North Slope. Because the producers
read the statute in a defensive manner, there was a
significant tax impact. Therefore, to protect themselves in
a facility sharing arrangement, the producers took all of
the payments received from a new entrant requesting a share
of the facility. The cost to share facilities was therefore
unnecessarily high because of the uncertainty around the
interpretation of the statute. She spoke of great learning
about the industry's challenges and ensuring that the tax
law is not a barrier.
Co-Chair Stedman asked about the fundamental issue of
opening the basin and accessing the facilities. Ms. Davis
explained that policy is at stake when a tax law requires a
facility owner to provide any payment received. The
department was able to break through the elements of
facility sharing, which included a facility owner requiring
a sharing party to pay its proportionate share of operating
expense associated with the other party's production.
Generally, in a facility sharing arrangement, the operator
of the facility should strive for optimum efficiency.
9:24:07 AM
Co-Chair Stedman noted that the cost of the facilities
create difficulty for a firm like Pioneer to come in and
build their own facility. He mentioned the third paragraph
and the Alaska Gasline Inducement Act (AGIA) regulations.
He asked if the
"in kind" and "in value" regulations would be in place by
May 1st. He requested definitions for "in kind" and "in
value" regulations.
Ms. Davis explained that there were two pieces of AGIA and
the related inducements in terms of the open season. Under
AS 43.90.300 there is opportunity to come forward and make
a commitment to ship during the initial open season. If
they do so in a manner that satisfies both the commissioner
of natural resources and the commissioner of revenue, then
Department of Natural Resources (DNR) will issue
regulations to govern the royalty inducement.
9:28:45 AM
Co-Chair Stedman asked if the exemption applies to oil. Ms.
Davis replied that the exemption only applies to gas.
Co-Chair Stedman asked for a definition of "get worse." Ms.
Davis answered that from an industry perspective, the tax
will not be greater on May 1st for the volume of gas that
is committed to the pipeline.
Senator Thomas clarified that the tax would prove worse for
the new shipper versus one with the tax already in effect.
Co-Chair Stedman requested definitions for open season. Ms.
Davis responded that the initial open season begins on the
firm date of May 1st, 2010 and is held open for 90 days.
During the three month time period, a substantial amount of
communication between pipeline companies and potential
shippers occurs and a negotiation for shipping is arrived
at. Because the regulations have been released for public
comment, too much description is prohibited. Each company
strikes its own deal during the time period.
Co-Chair Stedman asked if the second open season was not
applicable. Ms. Davis concurred and explained that a second
open season is necessary when commitments about the
previous open season are no longer applicable and the party
does not qualify under the existing AGIA law for the
inducements.
9:32:13 AM
Co-Chair Stedman asked about the firm's certificate
transfer ability. Ms. Davis explained the important AGIA
provision stating that every shipper does not own gas on
the North Slope. Large cooperatives of utilities are
willing to make the commitment to acquire gas on the North
Slope, but they would not pay taxes because they are not
producing oil and gas. There is provision in AGIA that
enables the transfer of the benefit of that tax or royalty
inducement to the producer from whom they buy the gas in an
effort to broaden the potential shippers and create a
successful open season.
Co-Chair Stedman queried the potential subscription to the
entire volume of the pipe by one entity followed by a
division among members. Would the certificate be
transferable? Ms. Davis assumed that the certificate would
be transferable.
Co-Chair Hoffman referred to a newspaper article stating
that the administration is open for business and China is
invited. He asked about provisions included in the
regulations that allow the arrangement. Ms. Davies
responded that the situation would be similar to a large
utility group in the lower 48. She provided an example
where the arrangement proved appropriate.
Co-Chair Stedman pointed out that the value exists only if
the tax is lower. Ms. Davis clarified that the value exists
when the tax is subsequently increased.
Co-Chair Hoffman asked about the federal level's effect on
the above mentioned scenario with China. Ms. Davis
explained that the federal constraints required an American
partner.
9:37:42 AM
Senator Huggins asked about similarities between in-state
gas and AGIA regarding tax provisions and the demand for a
large volume of gas. Ms. Davis answered that an instate gas
line would be similar to an industrial anchor user. She
added that the AGIA inducements would not be available. The
current law stated that the gas used to fuel the plant
would have the lower tax rate of 17 cents. The ethane would
be taxed at the normal tax rate. She pointed out that HB
217 purports to give ethane gas the favored tax rate.
9:40:09 AM
Co-Chair Stedman requested information about operating and
capital expenditures at corporate level.
Ms. Davis Slide 20: "Statutory Directions on Allowable
Costs"
AS 43.55.165(a)(1)(B) provides that, "[a] producer's
lease expenditures for a calendar year are costs that
meet the following three requirements:
(i)The costs must be incurred upstream of the point of
production of oil and gas
(ii)The costs must be ordinary and necessary costs of
exploring for, developing, or producing, as
applicable, oil or gas deposits; and
(iii)The costs must be direct costs of exploring for,
developing, or producing, as applicable, oil or gas
deposits"
9:43:40 AM
Co-Chair Stedman asked why some people were uncomfortable
with the statute. Ms. Davis answered that the concern was
that the standard could be manipulated by industry. She
highlighted the new recognition that the economy exists on
a global scale in the modern world, which eased some of the
discomfort with the statute.
Co-Chair Stedman asked about risk of an overzealous
department tightening the regulations and excluding some
expenditures better left included. Ms. Davis responded that
the admonition was protective of industry.
9:47:12 AM
Ms. Davies reviewed Slide 22: "Statutory Directions on
Allowable Costs"
AS 43.55.165(b) further delineates lease expenditures
as including:
(i)Direct cost of an asset even if it is capitalized
for accounting or IRS purposes
(ii)Payments of property, sales, use, motor fuel, and
excise taxes
(iii)Activity where the costs incurred do not are not
on or near the oil and gas lease
Ms. Davis discussed Slide 23: "How Clear Are the Lease
Expenditure Regulations"
15 AAC 55.250 -provides standards for the types of
activities and purposes for which costs will be
allowed, other than overhead.
15 AAC 55.260 -defines the direct charges that will be
allowed as lease expenditures for the activities and
purposes described in 15 AAC 55.250.
JOHN LARSON, MASTER AUDITOR, DEPARTMENT OF REVENUE,
addressed the question about off-lease charges. He
explained that historically, charges must be incurred on-
sight to be considered "direct." With the development of
electronic communications, the boundaries of the lease were
expanded efficiently. He believed that industry's concern
was valid. He claimed that the department sought a fair and
balanced approach to the exploration, development, and
production of oil and gas. The department agreed that those
costs were reasonable.
Mr. Larson addressed the transportation workshops. He
stated that regulations were released on February 9, 2010
with the aid of 12 workshops addressing the various types
of proposed regulations. He noted four separate workshops
addressing transportation issues.
Mr. Larson addressed Slide 23: "How Clear Are the Lease
expenditure Regulations?"
AAC 55.250:
drilling rig, crew costs, drilling, processing &
interpreting data, and completion, abandonment, or
suspension costs
constructing, operating, or maintaining an oil or gas
production facility or equipment
and similar transportation, communications systems,
medical, security, and emergency facilities.
9:53:59 AM
Mr. Larson moved on to Slide 24: "How Clear Are the Lease
Expenditure Regulations?"
described in 15 AAC 55.250:
maintenance and recovery.
9:55:59 AM
Co-Chair Hoffman sought the location of property tax and
payment in lieu of property tax information in the
presented handout. Mr. Larson answered Pages 10 and 11,
Paragraphs 15 and 16.
Mr. Larson described Slide 25: "State Regulations vs. IRS
Rules"
We align with the Internal Revenue Service (IRS) Code
in several instances:
•The Department uses IRS Code 263(c) to determine
whether a cost is a qualified capital expenditure
under AS 43.55.023(l).
•"Ordinary and necessary" costs defined by IRS code
162
•Incorporation of concepts, regulations and guidance
issued under IRS Code 482 for income and deduction
allocation among taxpayers. We are directed to
disregard the IRS code rules in some instances:
•We allow the deduction of a direct cost of an asset
even if it is capitalized for IRS purposes.
9:58:37 AM
Co-Chair Stedman asked why the committee should be
interested in the topic. Mr. Larson explained that ACES
allowed deduction of the cost of the facility. Co-Chair
Stedman asked if he referred to the production tax. Mr.
Larson replied yes. Co-Chair Stedman asked about
depreciation of corporate income tax. Mr. Larson replied
that deduction of costs or amortization is required for IRS
purposes.
Senator Egan asked about the capitalized cost and the
difference between the IRS and the state. Mr. Larson
responded that deduction of costs for IRS require
capitalization of an asset and then depreciate the costs
over a period of time. The department then uses the IRS
rules to capitalize on an entity's books to base the
capital credits on the cost. In addition to gaining the
capital credits, the department allows the cost of the
asset to be deducted as the costs are incurred.
10:01:40 AM
Co-Chair Stedman asked about capital investment
depreciation. He inquired about the operating expense and
the treatment of the corporate income tax. He noted that
the deduction is accelerated and cash flow timing is
switched.
Ms. Davis commented that the provision is unusual in regard
to global practices in net tax calculation. Other countries
spread the deduction over two years. Alaska allows 100
percent of the deduction in the year incurred, which is an
element of ACES.
Co-Chair Stedman commented that the practice provides a big
stimulus.
Ms. Davis noted Slide 27: "Comments from Industry"
"Without clear regulatory guidance from the
Department, AS43.55.170 may be interpreted in a manner
which artificially inflates the costs associated with
facility sharing in the state; and acts as a
disincentive to future third-party facility access
agreements.
Thanks to this collaborative effort and the
Department's hard work, the proposed regulation
largely addresses the concerns Pioneer has expressed
over the past year, and in doing so, removes barriers
to future facility sharing opportunities in the
state."
Patrick Foley, Manager, Pioneer Natural Resources
Alaska November 19, 2009
10:05:39 AM
Ms. Davis finished with Slide 29: "Conclusion".
Tax Division's Regulations Process has ensured maximum
meaningful input from industry and public.
When final public comment period begins, involved
parties have had opportunity to critique proposed
regulations and Division has had opportunity to fully
understand how the regulations will impact industry
and been able to address ambiguity and problems.
Industry input and dialogue with the Department has
never been greater than in the implementation of the
AS 43.55 regulations.
10:07:44 AM
Co-Chair Stedman questioned the April 2010 date listed on
the presented regulations. Mr. Larson explained that the
date specified the register that the regulations will be
published. Ms. Davis added that the date was a publication
date, but the regulations were already signed and issued by
the lieutenant governor.
Co-Chair Stedman commented on the processing of disputes
with the industry where the settlement travels to the
Constitutional Budget Reserve (CBR) fund. He inquired about
an expectation of differing opinions with the industry
regarding regulations. Ms. Davis did not expect to see much
change in the returns filed, as the regulation aligns with
the different operating agreements. Co-Chair Stedman
questioned whether there would be litigation. Ms. Davis did
not think so.
10:10:02 AM AT-EASE
10:17:37 AM RECONVENED
^OPERATING and CAPITAL EXPENDITURES
10:18:46 AM
Ms. Davis stated that prior to ACES, the department
received an inquiry regarding the crude oil topping plant.
The North Slope producers require diesel fuel for
operations support. The diesel fuel is manufactured in a
plant in Kenai. A crude oil topping plant is a small scale
refinery where diverted oil is refined for the diesel
component. High sulfur diesel production has since been
outlawed. The department viewed the cost of the plant as a
"downstream cost" and therefore not deductable. She
referenced a handout titled "Oil Company Upstream Capital
Spending" by Gaffney, Cline and Associates Inc. (Copy on
file). The issue of cost deduction was put to the
legislature. Ultimately, the legislature included in the
exclusions from lease expenditures, costs associated with
the crude oil topping plant. The regulations reflect the
exclusion; the cost of acquiring diesel is legitimate lease
expenditure and may be deductable.
10:24:10 AM
Ms. Davis referred to Page 11, Item 20 of the legislation
describing the means of calculating the cost of the
product.
Co-Chair Stedman asked about the deduction. Ms. Davis
responded that industry is allowed to deduct the fair
market value of the acquired product. Certain provisions
address fair and appropriate charge when a producer owns a
facility and creates a product for other producers.
Co-Chair Stedman expressed concerns about fair market value
and diesel fuel. He asked how fair market value was derived
with only one topping plant. Ms. Davis referred to
Subsection 20 and explained that the department subtracted
the fair market value of the product from the prevailing
value.
10:28:26 AM
Senator Egan asked for a review of the fair market value.
Ms. Davis responded that the diesel that is trucked and
sold to the North Slope encompasses benchmarks for products
delivered in the vicinity. Diesel fuel is then sold by the
crude oil topping plants to other owners and operators on
slope allowing the factoring in of Kenai prices.
Senator Egan asked if value is determined only from Alaska.
Ms. Davies responded yes unless a competitive market for
the product does not exist.
Co-Chair Stedman noted termination of the orders in
Seattle.
10:30:17 AM
Ms. Davis mentioned the department's presentation request
regarding Alaska's global investments relative to
investments by companies. What makes Alaska an attractive
place for investment? The legislative body wants to make
the state as attractive as possible. She referred to the
report generated by Gaffney, Cline, and Associates, Inc. in
2007, which was updated to comprise upstream capital
spending. The report viewed the largest investors in Alaska
to find out where they are investing their dollars. Oil
companies are for-profit companies and several factors
affect investment. If resource potential and other
variables are similar, government take can swing.
Investment tends to happen in places where government take
is the lowest. The likelihood and size of the discovery
also affect the decision about where to invest. She noted
that large oil companies are spending money in places where
approximately 70 percent of the capital spent is not in the
United States. Comparisons among United States provide a
small piece of the puzzle. Increased information can be
gathered by comparing Alaska to the international market.
10:33:54 AM
Ms. Davis informed about upcoming presentations involving
global regions. The Gulf region of the United States has
one of the lowest tax regimes in the world.
Co-Chair Stedman requested comment regarding the
differences and similarities between the Gulf region and
Alaska. Ms. Davis replied that business in the Gulf of
Mexico experienced a downturn due to a lack of deep water
development. The shallow water around the Gulf was
exhausted, but the offshore water is identified as federal
land, which is governed by the federal royalty rules.
Historically, the federal government has a low royalty
take, which is attractive to big oil industry. She noted
that the oil industry has shareholders and obligations as
reserves are used to replace them. The Gulf of Mexico is
not large enough to allow all of the big oil companies to
replace their reserves. For the reasons listed, a
diversified portfolio is necessary. The outer continental
shelf is an important piece of the puzzle, although small.
Alaska has a substantial resource offshore in the outer
continental shelf. She mentioned heavy oil and its appeal.
Offshore Alaska provides another large target. A tariff
charge is altered by lowering the cost and increasing the
throughput.
10:39:28 AM
Ms. Davis addressed the chart on Page 2 of the handout
titled "Oil Company Upstream Capital Spending," which
compares the capital spending of Exxon-Mobil, British
Petroleum (BP), Chevron and Conoco-Phillips. Only Conoco-
Phillips had a reported Alaska share. Exxon had the
smallest investment in the United States, while BP had the
highest percentage spent.
10:41:18 AM
Senator Olson asked about the demarcation point and the
United States/Canadian division. Ms. Davis did not know but
assumed that international treaties were very specific
about the use of country boundaries.
Ms. Davis concluded that the report gave information
regarding an analysis of ACES and what can or cannot be
done to improve Alaska as an investment location. The
advice from Gaffney, Cline & Associates was to accept that
a large share of the money is directed internationally.
Alaska must therefore position itself accordingly. Alaska
did not have the highest government take when compared to
the global market. The international monies were invested
in jurisdictions with high government takes, meaning that a
company's decision to invest is not driven by the
government take analysis. Factors might include potential
prizes that add large stakes to the reserve portfolios. She
recommended a thoughtful approach when attracting
investment.
Co-Chair Stedman commented on the historic presentations
that have occurred in committee in the past few years and
he offered to provide copies to members if necessary.
^Oil Industry Employment and Resident Hire
Scheduled but not Heard
ADJOURNMENT
The meeting was adjourned at 10:45 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 2010 02 16_Alaska-Investment Comparison Memo.pdf |
SFIN 2/17/2010 9:00:00 AM |
|
| 2010 02 17 DOR Production Tax Lease Expensiture Regulations SFC.pdf |
SFIN 2/17/2010 9:00:00 AM |
|
| 2010 02 17 DOR Lease Regulations.pdf |
SFIN 2/17/2010 9:00:00 AM |
Oil and Gas Production Tax Review |
| Agenda 021710 am.docx |
SFIN 2/17/2010 9:00:00 AM |