Legislature(2019 - 2020)SENATE FINANCE 532
03/02/2020 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Analysis of Ballot Initiative 190gtx | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
March 2, 2020
9:05 a.m.
9:05:43 AM
CALL TO ORDER
Senator Click Bishop called the Senate Finance Committee
meeting to order at 9:05 a.m.
MEMBERS PRESENT
Senator Natasha von Imhof, Co-Chair
Senator Lyman Hoffman
Senator Donny Olson
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
Senator Bert Stedman, Co-Chair
ALSO PRESENT
Rich Ruggiero, IN3NERGY, Juneau; Christina Ruggiero,
IN3NERGY, Juneau; Senator Cathy Giessel; Senator Gary
Stevens.
SUMMARY
^ANALYSIS OF BALLOT INITIATIVE 190GTX
9:06:27 AM
Senator Bishop remarked that the meeting may be required to
return in the afternoon to complete the presentation.
9:07:30 AM
RICH RUGGIERO, IN3NERGY, JUNEAU, introduced himself.
CHRISTINA RUGGIERO, IN3NERGY, JUNEAU, introduced herself.
9:07:47 AM
Mr. Ruggiero discussed the presentation "19OGTX Review,
Alaska Legislature, February 2020" (copy on file). He spoke
to Slide 3, Ballot Initiative:
The presiding officers formally
requested a review of the ballot
initiative 19OGTX related to oil and gas
production tax, tax payments and tax
credits.
The following is an independent review
of what is being proposed highlighting
clarity and ambiguity. Where there is
ambiguity, we highlight ways in which
the language of the initiative might be
interpreted.
Mr. Ruggiero shared that the review was intended to
determine whether there was a clear route and a clear
understanding on how the initiative would be implemented it
passed or could there be areas that might be disputed. He
said that some assets existed on the North Slope that would
provide a new set of taxation, a set of ring fencing, and
different tax returns that would need to be done. He shared
that in reading the initiative, each section provided
leeway for multiple interpretations of the language. He
noted that after the initiative had been reviewed by
Legislative Council, legislative lawyers had determined
that some form of litigation would occur upon
implementation because of the various interpretations of
the language.
Mr. Ruggiero looked at Slide 4, "Glossary, 19OGTX and AS
43.55 Terminology":
Initiative: 19OGTX
GVPP: Gross Value at the Point of Production
PTV: Production Tax Value
ANSWC: Alaska North Slope crude sales price on the
West Coast of the United States
bopd: barrels of oil per day
NOLs: net operating losses
Middle Earth: region south of 68 degrees north
latitude and not Cook Inlet
AOGCC: Alaska Oil and Gas Conservation Commission
Taxable Barrel: Total barrels of oil sold less royalty
barrels
40/400 Asset: oil producing asset that meets the
qualification criteria in Section 2 of the Initiative
Mr. Ruggiero said that anything that qualified under the
initiative was called a 40/400 Asset using this term
allowed for a general interpretation of an asset for
purposes of the presentation.
9:10:36 AM
Mr. Ruggiero looked at Slide 6, "Summary":
? 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
9:12:24 AM
Senator Wielechowski asked whether either presenter was an
attorney.
9:12:28 AM
Mr. Ruggiero replied in the negative.
9:12:34 AM
Senator Wielechowski asked what the Supreme Court had said
was the most important thing to look at when interpreting
an initiative.
9:12:44 AM
Mr. Ruggiero responded that he had not looked outside of
anything other than the initiative itself.
9:12:53 AM
Senator Wielechowski understood that the presenters had not
communicated with anyone at all, or read any other
documents, when preparing the report and making their
conclusions.
9:13:08 AM
Mr. Ruggiero responded that they had followed the
instructions of the legislature. They had looked only at
the two pages of the initiative and had based their
conclusions on their experience of having written
legislation and regulation and having advised governments
in the past.
9:13:30 AM
Senator Olson wondered whether IN3NERGY had advised other
states or sovereign nations on ballot initiatives.
9:13:40 AM
Mr. Ruggiero replied no.
9:13:46 AM
Senator Wielechowski restated his question concerning what
the courts had ruled should be looked at when interpreting
a ballot initiative.
9:13:54 AM
Mr. Ruggiero reiterated that he had not looked at anything
outside of the initiative.
9:14:02 AM
Senator Bishop summarized that the presenters had followed
the instructions of the presiding offices in each body. He
believed that the initial letter to IN3NERGY could be made
found in members packets.
9:14:22 AM
AT EASE
9:14:33 AM
RECONVENED
Senator Bishop said that the letter would be made available
to members.
9:14:38 AM
Senator Wielechowski cited the letter and said that the
presiding officers had expected the presenters to consider
the initiative itself and not legislation that was based
off any individuals interpretation of the initiative. He
did not believe that the instructions warned against
contacting initiative sponsors or reviewing any public
documents regarding the initiative.
9:15:20 AM
Mr. Ruggiero rebutted that he did not have a copy of the
letter in from of him, therefore, he could not speak to the
letter. He repeated his previous statement that the
analysis had been conducted using the two pages of the
ballot initiative, using no other outside influence.
9:15:39 AM
Senator Bishop hoped to move on from Senator Wielechowskis
line of questioning.
9:15:53 AM
Co-Chair von Imhof asked how long IN3NERGY had been
involved in Alaska oil and gas policy and oil and gas
policy in general.
9:16:06 AM
Mr. Ruggiero shared that they had been working in Alaska
since 2006. He relayed that they had advised over 2 dozen
governments on their petroleum fiscal policy since the late
1990s.
9:16:32 AM
Co-Chair von Imhof noted their experience and relayed her
confidence in their ability to analyze the initiative.
9:17:00 AM
Senator Wielechowski argued that to analyze the initiative
properly, IN3NERY should look at the published arguments on
the initiative and should have spoken to the initiative
sponsor. He argued that without taking those steps to
develop their analysis, the 53-page presentation before the
committee was a waste of time.
9:18:34 AM
Senator Bishop felt that the presentation should speak for
itself.
9:18:45 AM
Mr. Ruggiero highlighted Slide 7, "Summary":
? 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
9:19:48 AM
Co-Chair von Imhof stated that the presentation was crafted
by qualified analysts. She stressed that it would be
difficult for Alaskans to research outside the two-page
ballot initiative. She thought that if the bill sponsor
wanted to be clearer, they would have provided clarity
within the two pages of the initiative.
9:21:34 AM
Senator Olson wondered whether there would be a
presentation from the initiative sponsor.
9:21:49 AM
Senator Bishop did not know.
9:21:58 AM
Senator Olson restated his question. He thought that the
initiative was important and wondered whether the
initiative sponsor would be presenting to the committee.
9:22:24 AM
Co-Chair von Imhof replied that it was possible to hear
from the sponsor.
9:22:47 AM
Senator Bishop asked for further clarity on the 40/400
Asset descriptor.
9:23:00 AM
Mr. Ruggiero replied that it was clear that the sponsor had
intended to capture 3 large fields under the initiative.
Unfortunately, the sponsor used the terms fields, units,
and nonunitized reservoirs thereby clouding the
definition of that was being discussed. He explained that
only one of the terms, unit, was currently defined in tax
regulation, the other two were not. He shared that the term
40/400 asset had been coined because Section 2 had a
requirement of 40,000 barrels per day and 400 million
cumulative barrels produced.
9:24:12 AM
Senator Wielechowski stressed that the current conversation
was a futile and confusing exercise, and he thought that
the Supreme Court would focus on the intent. He felt that
it would create more confusion to discuss ambiguities and
continue with the 53-page presentation.
9:24:53 AM
Mr. Ruggiero discussed Slide 9, "Section 1; Amending the
Uncodified Law of Alaska":
*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 known 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:
? 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
9:26:33 AM
Senator Wielechowski queried the legal significance of the
short title.
9:26:43 AM
Mr. Ruggiero did not believe that the short title had any
legal standing. He pointed out that as the public looked at
the title and tried to determine what the fair share was,
they could conclude that what was in the bill was the fair
share.
9:27:02 AM
Senator Wielechowski cited the second bullet on the slide.
He stressed that the purpose of the initiative was to amend
AS 43.55.
9:27:36 AM
Mr. Ruggiero replied that there was inconsistency with the
interpretation of how notwithstanding was used in
Sections 3 and 4.
9:28:00 AM
Mr. Ruggiero highlighted Slide 11, "Section 2;
Applicability":
*Section 2, Applicability. The provisions I Section 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 this Act.
? 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
9:29:20 AM
Senator Bishop asked about prospective nonunitized
reservoirs.
9:29:35 AM
Mr. Ruggiero replied that nonunitized reservoirs would be
discussed in a future slide.
9:29:56 AM
Ms. Ruggiero interjected that when discussing ambiguities
and the wide latitude of interpretation of the initiative,
IN3NERGY was working to help the legislature to determine
whether the bill should pass and how widely the language
could be interpreted. She said that Section 2 was an area
where there could be a wide range of interpretation.
9:31:15 AM
Senator Wielechowski wondered whether the sponsors of the
initiative could have time between now and the election to
clean up any ambiguities in the language.
9:31:30 AM
Mr. Ruggiero replied that the signatures had been collected
and the initiative would go on the ballot as is he
wondered whether any actions taken by the sponsor between
now and the election would have any legal basis.
9:31:58 AM
Senator Wielechowski understood that the sponsor could
write an opinion editorial or make a public statement to
clear up ambiguities in the initiative language; he
believed that this would appease the Supreme Court.
9:32:23 AM
Mr. Ruggiero responded that he could not speak to any
Supreme Court case. He felt that Senator Wielechowskis
continued reference to the Supreme Court indicated that he
believed that the initiative would go to litigation with
the Supreme Court as the arbiter.
9:32:40 AM
Senator Wielechowski disagreed. He reiterated his argument
of the various ways the sponsor could clarify any ambiguity
in the language.
9:33:07 AM
Senator Bishop requested that the presenter continue with
the presentation.
9:33:29 AM
Mr. Ruggiero discussed Slide 12, "Section 2; Fields, Units,
and Nonunitized Reservoirs":
? 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
9:34:35 AM
Mr. Ruggiero looked at Slide 13, "Section 2; Fields, Units,
and Nonunitized Reservoirs":
? 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
9:35:59 AM
Mr. Ruggiero highlighted Slide 14, "Section 2; Fields,
Units, and Nonunitized Reservoirs":
? 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
9:37:02 AM
Mr. Ruggiero addressed Slide 15, "Section 2; Fields, Units,
and Nonunitized Reservoirs":
? 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
9:38:28 AM
Mr. Ruggiero discussed Slide 16 "Section 2; Fields, Units,
and Nonunitized Reservoirs." He stated that the map showed
the various units on the North Slope. The three circles
showed the discussed areas.
9:38:49 AM
Mr. Ruggiero looked at Slide 17, "Section 2; Fields, Units,
and Nonunitized Reservoirs":
? The Colville River Unit consists of the following
pools:
? ALPINE OIL
? FIORD OIL
? GMT1 UNDEF OIL
? NAN-K OIL TERM
? NANUQ OIL
? QANNIK OIL
Mr. Ruggiero stated that the next three slides showed the
numbers of pools of oil included in each of the units. He
said, for example; if the definition of the Alpine Field
was the Alpine Oil pool; by fact that those other oil
fields were in the Colville River Unit, they would be
collected and determined as 40/400 assets under Section 2.
Mr. Ruggiero addressed Slide 18, "Section 2; Fields, Units,
and Nonunitized Reservoirs":
? The Kuparuk River Unit consists of the following
pools:
? KUPARUK RIV OIL
? MELTWATER OIL
? PALEOZ UND OIL
? TABASCO OIL
? TARN OIL
? TOROK OIL
? UGNU UNDEF OIL
? UNDEFINED OIL
WEST SAK OIL
Mr. Ruggiero looked at Slide 19, "Section 2; Fields, Units,
and Nonunitized Reservoirs":
? The Prudhoe Bay Unit consists of the following
pools:
? AURORA OIL
? BOREALIS OIL
? KUPARUK RIVER OIL
? LISBURNE OIL
? MIDNIGHT SUN OIL
? N PRUDHOE BAY OIL
? NIAKUK OIL
? POLARIS OIL
? PRUDHOE OIL
? PT M PA UNDEF OIL
? PT M STUMP IS OIL
? PT M UNDEFINE OIL
? PT MCINTYRE OIL
? PUT RIVER OIL
? RAVEN OIL
? SAG RIV UNDEF OIL
? SCHRADER BLUF OIL
? W BEACH OIL
9:39:51 AM
Senator Wielechowski revealed that he had spoken with the
sponsor, and an attorney, and was told that the intent was
that every pool, within each of the three units, was
intended to be ringfenced together. He believed that this
fact cleared up any ambiguity in the last 10 slides of the
presentation.
9:40:31 AM
Mr. Ruggiero looked at Slide 20, "Section 2; Fields, Units,
and Nonunitized Reservoirs":
? 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 related that the West Sak Reservoir exited
cross the North Slope and could be counted as a 40/400
asset under Section 2.
9:42:42 AM
Mr. Ruggiero discussed Slide 21, "Section 2; Qualifying
Production":
? 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
9:43:50 AM
Mr. Ruggiero highlighted Slide 22, "Section 2; Qualifying
Production":
? 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? 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
percent difference
9:46:05 AM
Mr. Ruggiero addressed Slide 23, "Section 2; Summary":
? 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
9:46:57 AM
Mr. Ruggiero discussed Slide 25, "Section 3; Alternative
Gross Minimum Tax":
*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;
? This is a monthly gross tax that appears to replace
the current gross minimum tax that ranges from 0
percent to 4 percent of the GVPP with a new gross tax
ranging from 10 percent to 15 percent 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
9:48:16 AM
Senator Bishop assumed the La. Basin was Los Angeles and
not Louisiana.
9:48:22 AM
Mr. Ruggiero replied in the affirmative.
9:48:44 AM
Co-Chair von Imhof asked whether there were different
prices for different regions in the West Coast.
9:48:47 AM
Mr. Ruggiero replied that the crude was sold in various
locations on the west coast and was not aware of the sales
arrangements.
9:49:18 AM
Co-Chair von Imhof wondered whether the prices were public.
9:49:27 AM
Mr. Ruggiero replied that there was one publication but was
not aware of the specific location on which the public
price was based.
9:49:48 AM
Mr. Ruggiero looked at Slide 26, "Section 3; Alternative
Gross Minimum Tax":
(b) an additional 1 percent of the gross vale 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
? The language is not clear if the 1 percent 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
percent per $5 increase
? e.g. at $53 ANS WC is the applicable tax rate 11
percent [10 percent+1 percent >$50 but<$55] or 10.6
percent [10 percent+1 percent*($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
9:51:07 AM
Mr. Ruggiero highlighted Slide 27, "Section 3; Alternative
Gross Minimum Tax.
Mr. Ruggiero discussed the gross tax changes using West
Coast prices to determine the gross tax amount, current vs.
Initiative, and assuming a step function.
9:51:40 AM
Senator Wielechowski noted that the chart created for the
initiative said that greater than zero or equal to 50 was a
10 percent gross tax. He noted that Section three said that
an additional 1 percent of the gross value would be added
when it was equal to or exceeding $50. He questioned the
numbers on the charts.
Mr. Ruggiero considered the comments in the affirmative.
9:52:28 AM
Mr. Ruggiero discussed Slide 28, ""Section 3; Alternative
Gross Minimum Tax":
(c) No credits, carried-forward for lease
expenditures, including operating leases, or other
offsets may reduce the amount of tax due below the
amounts calculated in this action.
? 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
("NOL) 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
Mr. Ruggiero discussed his discomfort with subsection (C).
He thought that if the intent had been to establish a hard
floor it could have been done with greater clarity.
9:54:07 AM
Mr. Ruggiero looked at Slide 30, "Section 4; Tax on
Production Tax Value":
*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 producers 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.
Paragraph (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
? These credits are the fixed $5 per barrel credit for
GVR eligible fields and the sliding scale (from $0 to
$8) per barrel credit for all other fields
? Here, unlike elsewhere in the Initiative, specific
references in the current statutes were used to
unambiguously state which of the many credits allowed
under AS 43.55 would no longer apply
9:54:58 AM
Mr. Ruggiero discussed Slide 31, "Section 4; Tax on
Production Tax Value":
? 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
9:56:02 AM
Mr. Ruggiero looked at Slide 32, "Section 4; Tax on
Production Tax Value":
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
9:57:06 AM
Senator Wielechowski wondered what language would be used
to offer a reasonable interpretation of Section 4.
9:57:10 AM
Mr. Ruggiero asked for clarification of the question.
9:57:15 AM
Senator Wielechowski thought that $50 per barrel profit was
clear in the language.
9:57:25 AM
Mr. Ruggiero suggested it was not clear and that multiple
interpretations were available. He added that there was
confusing use of taxable and barrel, which had a 12
percent difference between the two.
9:58:05 AM
Senator Wielechowski asked Mr. Ruggiero for his
interpretation of the language.
9:58:15 AM
Mr. Ruggiero replied that he did not have a single
interpretation, rather he could highlight the alternative
ways in which the section could be interpreted. He stressed
that there were multiple interpretations that would need to
be addressed if the initiative were to become law.
9:58:48 AM
Mr. Ruggiero continued to discuss Slide 32:
? As worded, the additional tax will apply every month
9:59:06 AM
Mr. Ruggiero highlighted Slide 33, "Section 4; Tax on
Production Tax Value":
As highlighted above, paragraph (b) uses the terms
"taxable oiland "oil"
? "Taxable oil" is "oil" less royalty barrels
? Thus these two terms differ by roughly 12 percent
? All references in AS 43.55 today for similar
mechanisms make explicitly clear to use PTV of a
taxable barrel of oil. This ambiguity was easily
preventable
9:59:46 AM
Senator Olson requested a brief explanation of the 12
percent previously mentioned.
9:59:55 AM
Mr. Ruggiero replied that the 12 percent came from the
royalty. He explained that if one had 1000 barrels of oil,
and a one-eighth royalty, the one-eighth would be
subtracted (125 barrels) resulting in 875 barrels of
taxable oil. He said that one would have either 1000
barrels of total oil, or 875 barrels of taxable oil, and
determining the tax basis on which to pay on presented a
significant difference.
10:00:41 AM
Mr. Ruggiero discussed Slide 35, "Section 5; Separate
Treatment":
Section 5, Separate Treatment. For each producer, the
taxes set forth in Section 3 and 4 shall be calculated
separately for the following:
(a) For oil and for gas;
(b) For each calendar month (annual leave
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.
? Section 2 noted the taxes under Sections 3 and 4 can
only apply to oil. Section 5 now states the taxes in
Sections 3 and 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 ring fenced from other North
Slope gas and taxed via Sections 3 and 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
10:02:04 AM
Senator Wielechowski asked how much gas from the 40/400
assets was currently being produced and taxed.
10:02:13 AM
Mr. Ruggiero replied that he knew that gas was being used
for fuel purposes but could not say how much was sold to
other operators.
10:02:38 AM
Senator Wielechowski asked Mr. Ruggiero to research and
provide the information.
10:02:44 AM
Mr. Ruggiero responded that the Department of Revenue would
need to get back to the committee as he did not have access
to tax records.
10:03:10 AM
Senator Wielechowski knew that a huge amount of cycling
gas was not being taxed. He felt that any gas being sold
among producers was a small amount and not a significant
source of production tax.
10:03:36 AM
Mr. Ruggiero stressed that under the current legislation,
all the gas costs, including for recycling, were included
as oil lease expenses and deducted against the GVPP for
oil. He wondered whether the initiative intended to
separate oil and gas.
10:04:46 AM
Mr. Ruggiero looked at Slide 36, "Section 5; Is it Oil or
is it Oil and Gas?"
*Section 2, Applicability. The provisions in Section 3
and 4 only apply to oil
*Section 3, Alternative Gross Minimum Tax. For oil
production from fields, units,
*Section 4, Tax on Production Tax Value. For
production from fields, units, and
*Section 5, Separate Treatment. For each producer, the
taxes set forth in Section 3 and 4 shall be calculated
separately for the following:
(a) For oil and for gas
? 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 and 4
apply "for oiland "for gas
10:06:02 AM
Co-Chair von Imhof remarked that the issue was the
different language in the four sections.
10:06:20 AM
Mr. Ruggiero replied that writing a regulation using the
initiative would be a challenge because of the large number
of variations in the language. He stressed that ambiguity
in the language should be discussed before the passage of
the initiative.
10:07:25 AM
Senator Bishop interjected that the interpretation would
come from the revisor of statutes and from the affected
departments.
10:07:40 AM
Mr. Ruggiero looked at Slide 37, "Section 5, Separate
Treatment":
*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
? Paragraph (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
Mr. Ruggiero said that the section called for 200 tax
returns to be filed, every calendar year, for all the
40/400 assets.
10:09:44 AM
Senator Wielechowski offered that under Alaska's Clear and
Equitable Share (ACES), which Mr. Ruggiero had consulted
on, lease expenditures were counted for the monthy
progressivity calculation by dividing the annual numbers by
12.
10:10:01 AM
Mr. Ruggiero replied in the affirmative.
10:10:03 AM
Senator Wielechowski reiterated that was the calculation
under ACES.
10:10:06 AM
Mr. Ruggiero reminded Senator Wielechowski that the
initiative, and not ACES, was the current topic of
conversation.
10:10:15 AM
Senator Bishop commented that the filing could get labor
intensive for DOR at the end of the year.
10:10:33 AM
Mr. Ruggiero replied in the affirmative.
10:10:40 AM
Ms. Ruggiero addressed the complexity of tax return issue
under the initiative.
10:11:20 AM
Senator Wielechowski wondered how complex the tax structure
was under SB 21, in comparison to the rest of the world.
10:11:33 AM
Mr. Ruggiero responded that SB 21 had only changed certain
aspects of the taxation system. He said that SB 21 was the
only system he was aware of with negative progressivity. He
shared that looking at the totality of SB 21, with
additional statues, the system was quite complex.
10:12:08 AM
Mr. Ruggiero continued to discuss Slide 37:
? 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
10:14:00 AM
Mr. Ruggiero addressed Slide 38, "Section 5; Separate
Treatment - Expenses":
? Paragraph (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 losses 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
10:15:00 AM
Mr. Ruggiero addressed Slide 40, "Section 6; Greater Of":
*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 greater
of the tax under Section 3 or Section 4.
? 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 percent 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 ring
fenced separately for tax purposes.
If so, it raises the possibility of double taxation,
once as a field and again as a unit
10:17:45 AM
Mr. Ruggiero discussed Slide 42, "Section 7; Public
Records":
*Section 7, Public Records. All filings and supporting
information provided by each producer to the
Department relating to the calculation and payment of
the taxes set forth in Section 3 and 4 shall be a
matter of public record.
? Given that 'units' may contain more than one 'field'
or pool, this language would continue to treat tax
returns and supporting documentation as matters of
public record
? While our assumption is that the sponsors wanted to
make returns public, it is our understanding they did
not include the necessary language specifying the
returns need to be non-confidential
? "All filings and supporting information" could be
interpreted as not only supplying documents and data
for the initial filing of the monthly returns but also
all amended returns, all audits, and all settlement
negotiations
Mr. Ruggiero asserted that the section would take Alaska
beyond what any other regime in the world required of the
industry.
10:19:44 AM
Senator Wielechowski offered a quote from Mr. Ruggiero from
January 31, 2018:
What I can say is some of the most transparent
regimes that I am aware of, people dont lose
competition or competitiveness, and they dont lose
their edge, and they dont lose people coming in to
develop, in fact it is just the opposite; the more
transparent, usually the more activity they have and
the more investment they have.
10:20:15 AM
Mr. Ruggiero replied that he agreed and stated that his
reference was to Norway and the information provided to him
upon his request. He stressed that what he did not have in
Norway was access to invoice level paperwork. He said that
his previous comment had been based on what other regimes
made available to him and to the public.
10:21:11 AM
Co-Chair von Imhoff understood that most construction bids
for developments were closed.
10:21:32 AM
Mr. Ruggiero replied in the affirmative.
10:21:34 AM
Co-Chair von Imhof surmised that if those bids were
available to the public, out-of-state operations could
study them and undercut Alaskan contractors.
10:22:00 AM
Mr. Ruggiero shared that allowing certain information to
become public could jeopardize companies, which could
prompt them to stop doing business in the state.
10:22:58 AM
Senator Wielechowski thought that the ambiguity in the
language could have been cleared up if they had directly
asked the bill sponsor their intent.
10:23:29 AM
Mr. Ruggiero rebutted that the language could have been
written more clearly from the onset.
10:23:47 AM
Mr. Ruggiero addressed Slide 43, "Section 7, Public
Records":
? If the suggested documents were to be made public,
since producers as part of their various tax return
submissions would be replying to inquiries or
statements by DOR staff, DOR documents could become
matters of public record
? Could this be interpreted to include settlement
negotiations? If so, further government drafted
documents could be captured and made public
? Throughout AS 43.55 the Department of Revenue is
referred to as the "department" (lower case). We are
not able to discern any reason why the Initiative
would choose to use the upper-case Department
10:24:58 AM
Mr. Ruggiero looked at Slide 45, "Section 8; Scope of
Initiative":
*Section 8, Scope of Initiative. Nothing in this Act
authorizes or requires the Legislature to dedicate
revenue, to make or repeal appropriation, to enact
local or special legislation, or to perform any
unconstitutional act. While not required by this Act,
the revenues from this Act could be used to fund
essential government services, capital projects, the
permanent fund, and permanent fund dividends.
? This section places no restriction on the
legislature for use of the funds raised by this
Initiative
? It explicitly allows for the revenues generated to
be used to pay permanent fund dividends
10:25:26 AM
Mr. Ruggiero addressed Slide 47, "Section 9; Severability":
*Section 9, Severability. The provisions of this Act
are independent and severable, and if any provision of
this Act or applicability of any provision to any
person or circumstance shall be found to be invalid,
the remainder of this Act shall not be affected and
shall be given effect to the fullest extent
practicable.
? This is a typical clause that states if any part of
the Act is found to be invalid all the other parts
remain unaffected
10:25:47 AM
Mr. Ruggiero looked at Slide 49, "Specific Questions;
Changes to Current Fiscal Regime":
Please review the initiative language from a holistic
perspective. Describe the initiative; how it would
change the current oil and gas fiscal regime;
questions raised by the initiative, the answers to
which would materially impact future analysis of the
initiative impacts; and provisions to which the
contractors, as they undertake modeling and analysis
of the impacts, may need to interpret or receive
direction on how to interpret.
? Creates a new tax ring fence for each producer for
each producing asset that meets the qualifications set
forth in Section 2, a 40/400 Asset
? Raises the gross minimum tax on GVPP
? Creates a new net tax on PTV when realized prices
exceed a threshold
? Details of the above are contained in the previous
sectional analysis of the Initiative
10:27:39 AM
Mr. Ruggiero highlighted Slide 50, "Specific Questions;
Investment Impacts":
Identify provisions which may affect generally
investment in the North Slope basin, such as the
disclosure of previously confidential taxpayer
information.
? There are no provisions of the Initiative that
encourage or incentivize more investment
? Ring fencing the revenues of the largest fields will
make investment on the North Slope much more expensive
which can only hurt investments
? The Initiative creates a high degree of economic
uncertainty and would be viewed as extremely risky
given the many possible interpretations
? The uncertainty will take a long time to sort out
likely resulting in a reluctance to commit funds until
statue and regulation are finalized
? The uncertainty will very likely slow capital
spending, which would then likely cause production
levels to decline faster than expected
10:29:17 AM
Senator Wielechowski wondered whether the legislature could
pass legislation to clear up the ambiguity in the language.
10:29:38 AM
Mr. Ruggiero replied that the legislature working to clear
up ambiguity in the language had been the basis of his and
Ms. Ruggieros work on the matter.
10:29:56 AM
Senator Wielechowski said that when ACES was passed the
bill had been effective January 1, 2008, and the day it was
passed an advisory bulletin had been issued on who to
interpret parts of it and draft regulations were issued
within a month.
10:30:20 AM
Mr. Ruggiero said he would take the statement subject to
check.
10:30:32 AM
Senator Wielechowski noted that under previous legislation
SB 21, the bill was signed into law on June 24, 2013
after which roughly 46 pages of proposed regulation were
issued a month later.
10:30:57 AM
Mr. Ruggiero replied that he would fact check the
statement. He added that both ACES and SB 21 had been
multi-paged documents and had created a specific tax. He
said that the writing of regulation for something specific
was not difficult. He said that writing regulation for a
document full of ambiguities would be more challenging.
10:31:41 AM
Co-Chair von Imhof noted that there were laws that limited
legislative edits on initiatives. She remarked that the
first bullet point on Slide 50 was troubling. She lamented
that volume was waning in the state and it was becoming
more expensive and more difficult to produce in Alaska. She
believed that SB 21 was working. She asked whether passing
of the initiative would halt activity, investment, or
forward progress for the industry in the state.
10:33:22 AM
Mr. Ruggiero replied that he believed that capital spending
would slow. He noted Alaskas decline as a player in the
industry. He thought that ringfencing large fields would
cause a pause in productivity.
10:35:28 AM
Co-Chair von Imhof stressed that with a 300 percent tax
increase there would be a decline in production in less
than a decade.
10:36:28 AM
Senator Wielechowski pointed out that under SB 21
investment on the North Slope had declined. He said that
jobs had declined over 5,000 jobs. He said that in that
timeframe the number of out-of-state workers had actually
increased. He argued that every aspect of production was
down.
10:37:39 AM
Senator Bishop remarked that the price of oil had
contributed to the loss of jobs.
10:38:03 AM
Mr. Ruggiero addressed Slide 51, "Specific Questions;
Disclosure Impacts":
? Producers with ownership in the 40/400 Assets will
no longer be able to deduct expenses associated with
smaller fields or new developments against the
revenues of the 40/400 Assets
? This ring fencing will greatly increase the
perceived costs and negatively impact the economics
(longer time to recovering costs and being profitable)
of any satellite operations or possible new
developments
? The negative impact to economics could push the new
developments being actively pursued below the
corporate funding level for approval
? If documents were to become non-confidential, Alaska
would be the only regime to require public disclosure
of all documents associated with tax filings
10:39:44 AM
Mr. Ruggiero discussed Slide 52, "Specific Questions;
Middle Earth and Cook Inlet Impacts":
Articulate ant impacts of the Middle Earth and Cook
Inlet basins, including to investment behavior.
? The current wording of the Initiative makes no
changes to operations or tax returns for Middle Earth
or Cook Inlet
? The only impact we perceive to non-North Slope areas
is the uncertainty that is created and the ensuing
debates that will take place on how to interpret the
Initiative
? This risk will likely cause current and prospective
producers to take a pause in their investment
considerations while implementation details are sorted
10:40:42 AM
Senator Wielechowski wondered whether the legislature
should do everything it could to reduce uncertainty
associated with the Fair Shar Act and how it should be
applied.
10:40:56 AM
Mr. Ruggiero said that the legislature should decide what
action to take with the initiative.
10:41:04 AM
Senator Wielechowski asked whether the legislature should
be responsible to clear up ambiguity in the language.
10:41:17 AM
Mr. Ruggiero reiterated his previous answer.
10:41:23 AM
Senator Wielechowski asked whether, as an expert, Mr.
Ruggiero believed that it would be responsible for the
legislature to clear up ambiguity in the language if the
initiative should pass.
10:41:40 AM
Mr. Ruggiero rested that the decision was with the
legislature.
10:42:14 AM
Co-Chair von Imhof thought that if the sponsor of the
initiative wanted to be clear with their intent, they would
have written the language more clearly. She noted that in
the DOR Fall Revenue Source Book capital expenditures had
increased under SB 21. She noted several articles that
supported the idea that SB 21 was, in fact, working.
10:43:52 AM
Senator Bishop thanked the committee and presenters.
ADJOURNMENT
10:44:04 AM
The meeting was adjourned at 10:44 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 030220 IN3NERGY Ballot Initiative 19OGTX Presentation.pdf |
SFIN 3/2/2020 9:00:00 AM |
Ballot Initiative 190GTX |