Legislature(1999 - 2000)
09/25/1999 03:30 PM Senate MER
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
JOINT SPECIAL COMMITTEE ON MERGERS
September 25, 1999
3:30 p.m.
MEMBERS PRESENT
Senator Rick Halford, Chair
Senator Drue Pearce
Senator Johnny Ellis
Representative Joe Green, Vice-Chair
Representative Brian Porter
Representative Beth Kerttula
MEMBERS ABSENT
Representative Jim Whitaker
OTHER LEGISLATORS PRESENT
Senator Mike Miller
Senator Loren Leman
Senator Kim Elton
Senator Lyda Green
Senator Robin Taylor
Senator John Torgerson
Senator Lyman Hoffman
Senator David Donley
Senator Jerry Ward
Senator Gary Wilken
Representative Allen Kemplen
Representative John Coghill
Representative Sharon Cissna
Representative Tom Brice
Representative Hal Smalley
Representative John Davies
COMMITTEE CALENDAR
British Petroleum-ARCO Merger
Executive Session: Legislative Briefing
PREVIOUS ACTION
See the Joint Special Committee on Mergers minutes dated 6/11/99,
7/28/99, and 9/24/99.
WITNESS REGISTER
BRUCE BOTELHO, Attorney General
Department of Law
PO Box 110300
Juneau, Alaska 99811-0300
Telephone: (907) 465-2133
POSITION STATEMENT: Offered to answer any questions.
JOHN SHIVELY, Commissioner
Department of Natural Resources
400 Willoughby Avenue
Juneau, Alaska 99801-1724
Telephone: (907) 465-3886
POSITION STATEMENT: Spoke to the Administration's view on the
issues brought forth by BACKBONE. Answered questions.
FRED BONESS, Attorney
Preston, Gates & Ellis
420 L Street, Suite 400
Anchorage, Alaska
Telephone: (907) 276-1969
POSITION STATEMENT: As outside counsel for the committee, he
provided the committee with information and answered questions.
JOHN MESSENGER, Attorney
Preston, Gates & Ellis
420 L Street, Suite 400
Anchorage, Alaska
Telephone: (907) 276-1969
POSITION STATEMENT: Discussed the tax structure.
ACTION NARRATIVE
TAPE 99-6, SIDE A
Number 001
[NOTE: This meeting is technically a continuation of the
September 24, 1999, meeting which was recessed to the call of the
chair.]
CHAIRMAN HALFORD called the Joint Special Committee on Mergers
meeting to order at 3:30 p.m. Committee members present were
Senators Halford, Ellis and Representatives Green, Porter, and
Kerttula. Other Senators present were Senators Miller, Leman,
Elton, Green, Taylor, Torgerson, Hoffman, Donley, Ward, and Wilken.
Other Representatives present were Representatives Kemplen,
Coghill, Cissna, Brice, Smalley, and Davies.
BRUCE BOTELHO, Attorney General, Department of Law, expressed his
apologies that he has been summoned to another meeting. Therefore,
Commissioner Shively is prepared to speak to the BACKBONE issues on
behalf of the Administration. Attorney General Botelho also
expressed his desire to continue to work closely with the committee
and the legislature with regard to the state's best interests in
the merger. He offered to answer any questions.
Number 032
JOHN SHIVELY, Commissioner, Department of Natural Resources,
expressed the need to recognize that the state could have chosen a
variety of venues in order to review this merger. The state could
have worked under the assumption that the merger would have been
approved, leaving BP as the single largest player. The state
instead took the route to obtain divestiture in order to maintain
a competitive force on the North Slope as well as other parts of
the state. Commissioner Shively pointed out that with that
approach one must recognize that one can't fix every problem in the
oil industry. He said, "The key becomes divestiture, the key
becomes having another strong operator on the Slope against which
we contest things like pricing, like how they do business with
Alaska, like how they treat the environment, like what they're
doing with technology."
COMMISSIONER SHIVELY acknowledged that some, such as BACKBONE,
suggest that the state should bring a suit in court. Although
there are issues beyond divestiture which are important issues, he
believed, personally, that in court the state would face only the
anti-trust issue. Such a situation would probably result in only
one solution which he identified as divestiture. He mentioned that
in such a situation a number of the other issues would
automatically be taken off the table. Commissioner Shively turned
to the issues attached to the letter from BACKBONE. The first
issue listed is the wellhead value. He stated that the settlement
agreements provide some ability to revisit the wellhead value on a
regular basis. Therefore, there is some protection. He wasn't
sure it is appropriate to establish a particular approach for BP
since there will be another operator. Internally, there is regular
discussion with regard to whether the reopeners should be
activated. He believed that even with divestiture there is some
danger that values would change. He didn't believe that every
valuation problem would be fixable as part of the negotiations.
Commissioner Shively turned to the issue of competition. The
state, the Governor, and BACKBONE all seem to be in agreement that
there needs to be a strong operator. With regard to access to TAPS
and TAPS tariffs, the Governor has realized that high tariffs are
potentially a barrier to competition. However, he acknowledged
that the state negotiated an agreement in good faith. He commented
that TAPS and TAPS tariffs continue to be an issue of discussion
with BP.
COMMISSIONER SHIVELY turned to the issue of access to facilities
and infrastructure on the North Slope which is important even with
divestiture. He stressed that virtually no one is a single owner
of infrastructure. All fields built involve a number of oil
companies. For example, the Alpine field is owned by ARCO and
Anadarko. If someone wants access to the fields both companies
would have to agree on the fees. In a location such as Prudhoe,
where there are multiple owners, the situation becomes more
complicated. Therefore, no single company can set those fees.
However, internally there has been the view that the state has some
authority over these issues if companies can't resolve such issues.
Although there have been a number of disagreements on the Slope, to
his knowledge there hasn't been a situation in which oil wasn't
developed due to disagreements over fees. As part of the state's
ability to manage units, he believed the state could say that oil
has to be developed. Commissioner Shively recognized that this is
a complex issue because it isn't just access or money, the issue
also involves capacity. However, this issue is on the task force's
list.
COMMISSIONER SHIVELY said that natural gas is also on the task
force's list. The Governor has been clear that if there is a
viable project, the gas should be made available. He pointed out
that BACKBONE had expressed concern that if there was a gas to
liquids project, the state would receive no value for its gas. He,
as commissioner, said that he had never been under that impression.
If people use Alaska's gas, there will be a value to it. To his
knowledge, no one has ever suggested that there would be a zero
royalty. This Administration has always made it clear that they
believe there is a value which they intend to obtain. Certainly,
tax policy on natural gas can be utilized to promote various
things. Commissioner Shively offered to answer any questions.
Number 153
SENATOR TAYLOR understood Commissioner Shively to say that access
to processing facilities would be dependent upon consent from the
owner or owners. He also understood Commissioner Shively to say
that if the owners of such facilities were unable to achieve an
agreement with the new entrant, that Commissioner Shively had the
authority to step in. In those negotiations, who would protect the
State of Alaska?
COMMISSIONER SHIVELY replied no one. He explained that he didn't
believe those costs are deductible. The facility costs are between
the industry. For instance, if Company A tries to enter and
Companies B, C, and D charge too much, Company A would pay, not the
state.
SENATOR TAYLOR asked if that would impact the production, should
the company fail to produce based on too high of a rate.
COMMISSIONER SHIVELY said that is the issue. He reiterated that,
to his knowledge, no oil has failed to be developed because of
owners not coming to an agreement on the use of facilities. If the
owners did end up in disagreement, then the state should come in
and state that the oil should be developed.
SENATOR TAYLOR posed the assumption that the state receives back
some oil leases which are made available. In such a case, what
could the potential purchaser of a lease rely upon with regard to
access to facilities?
COMMISSIONER SHIVELY didn't view that situation as any different
than the current situation. He wasn't sure that if there is
competition, that it would change. Furthermore, not all fields
need access to other facilities. He believed that there needs to
be comfort for those who need facilities, in that the state would
have the ability to review that. With divestiture, Commissioner
Shively didn't really see a change from the current situation.
Number 207
CHAIRMAN HALFORD said that he understood the law and regulations to
clearly provide that one can eliminate a fractional interest in
300,000 or 400,000 acres while maintaining absolute majority
control of 800,000. He understood that would comply with the law's
500,000 acre requirement. What will be done and how will it be
done?
COMMISSIONER SHIVELY commented that there are discussions with BP
regarding how the divestiture in acreage would take place.
Currently, BP and ARCO have bid with other partners who generally
have preference right if BP or ARCO wants to sell their portion to
buy in at whatever someone else offers. That is an issue that must
be dealt with. They may not have total control as to who they sell
to. There have been discussions, which he wasn't prepared to
discuss in public at this point, regarding how to assure one could
obtain control of definite prospects. Commissioner Shively
commented that BP wouldn't be able to have a controlling interest
if there are other operators. Ultimately, if BP doesn't meet the
requirement, they can be given a 90 day notice which must be
completed in 90 days or the lease reverts back to the state.
SENATOR PEARCE recalled that at yesterday's meeting, Attorney
General Botelho said that the Governor wants to ensure there is a
second operator on the North Slope. Does that mean a new entrant
coming in to operate new fields that aren't presently produced?
Or, is the desire to merely have a second operator on the North
Slope?
COMMISSIONER SHIVELY said that he believed the Governor has made it
clear that there has to be actual transfer of production.
Therefore, the new company or companies would have some production
from what is ongoing. Equally as important, would be decent
exploration acreage. He explained that no one would come to merely
operate for awhile, there have to be opportunities for the future.
The two must go together.
SENATOR PEARCE surmised then that a transfer of ownership would be
production.
COMMISSIONER SHIVELY agreed.
CHAIRMAN HALFORD interjected that it would include both ownership
and operation.
COMMISSIONER SHIVELY agreed and noted that there are a variety of
ways to achieve such. According to how it has been done on the
Slope, there would have to be someone with controlling interest in
production and production facilities in order to be an operator.
CHAIRMAN HALFORD pointed out that the conditions and 500,000 acre
limit that are in statute are part of the ownership and lease side
of the negotiations. He assumed that those are part of the
contractual obligations which are protected by the constitution
against unilateral amendment.
COMMISSIONER SHIVELY agreed.
CHAIRMAN HALFORD surmised then that real changes in those areas
would have to be done in the negotiating process versus something
in the legislature's power to change by law.
COMMISSIONER SHIVELY said that he believed that to be true.
CHAIRMAN HALFORD expressed the importance of understanding that is
an area that can't be fixed by statute.
SENATOR TAYLOR noted that it can be fixed with regard to future
uses.
CHAIRMAN HALFORD agreed, but believed the notion that we have
absolute control over the 500,000 acre limit is a misnomer.
SENATOR TAYLOR recalled that Commissioner Shively indicated that
the return of those properties in excess of the 500,000 acre limit
is a complex issue. Are there issues within that limit for which
the legislature could provide some guidance to the Administration
with regard to which property should be returned? Are there some
vague areas within that law which are problematic?
Number 275
COMMISSIONER SHIVELY replied no. He believed it clear that the
companies have been given a property right. Those leases contain
certain conditions, including the amount of acreage a company can
own in non-unitized areas. As a result of the property right, the
company has the ability to take actions with the lease themselves
in order to come down to the 500,000 acre limit. If the company
takes no action, the state has the right to make the company return
the acreage to the state. Commissioner Shively didn't believe
there to be much confusion on that point.
CHAIRMAN HALFORD posed an example of a company which owns 51
percent of 100 acres. Although that company would have absolute
control, it would count as 51 acres.
REPRESENTATIVE KEMPLEN asked if the state would accept Exxon as a
second operator.
COMMISSIONER SHIVELY commented that there are an endless number of
operators. Exxon Mobil will be the world's largest oil company
and he believed having it as an operator on the Slope would be
advantageous to the state.
SENATOR ELTON recalled that Commissioner Shively had mentioned that
some of the issues are complex and complicated. He expressed
concern with the Governor's aggressive schedule to reach an
agreement with BP. He wondered if the suggestion to file the anti-
trust legislation would afford more time for negotiations with BP
through the settlement process.
COMMISSIONER SHIVELY pointed out that the schedule is somewhat
driven by the schedule of the FTC. As previous testimony
indicates, we must work in conjunction with the FTC because it has
more clout than the state. At this point, he guessed the FTC could
deal with this in November. As the attorney general and the
Governor have said, if an agreement can't be reached, a suit will
be filed. Commissioner Shively stressed his belief that filing
suit is the last approach, not the first because once in court the
number of issues becomes confined. The litigation would be
confined to anti-trust issues. Therefore, in order to maximize
what is on the table, there should be negotiations.
SENATOR TAYLOR inquired as to the fate of the proposed $40 million
gift to the university as a condition of the merger.
COMMISSIONER SHIVELY wasn't sure. However, he reiterated that such
an issue, BP's commitment to the community, would not be available
if the state moved to litigation.
SENATOR TAYLOR reminded the commissioner that the legislature
appropriates money, not the Governor. If revenue is to be
generated, it comes into the general fund. He stressed that the
legislature should determine where such money is appropriated.
COMMISSIONER SHIVELY said that he would relay that to the Governor.
He commented that there is no question that if the money comes
directly to the state, the legislature has the ability to
appropriate it. If BP chooses to give money to the Boy Scouts or
the university, that is BP's business and the legislature isn't
generally involved.
SENATOR TAYLOR stated:
If, in fact, the negotiations on behalf of the people of
the State of Alaska for a state-owned resource and
revenue is generated from that or side deals made on
where revenues are going to go should come through this
legislature. (Indisc.) place an appropriation on
whatever the needs are, I think the legislature deems to
be most appropriate.
CHAIRMAN HALFORD commented that he didn't disagree with Senator
Taylor's premise, however he wouldn't pre-judge how the
Administration would handle it.
SENATOR TAYLOR said he wouldn't either. He clarified that he was
suggesting there is an appropriate way to deal with such a
condition which must be kept in mind.
Number 351
SENATOR PEARCE asked if Commissioner Shively could inform the
committee at what level the negotiations are occurring within the
BP ARCO corporation. Does any negotiated agreement have to be
placed before the company's board or can Mr. Browne merely make the
decision? Is there any knowledge as to how long the process will
take?
COMMISSIONER SHIVELY stated, to his knowledge, the Chief Executive
Officer has the ability to negotiate these issues. He believed
that the shareholders of both companies have voted on the merger
itself. Commissioner Shively believed, to his knowledge, that it
wouldn't have to go before the board. However, that question
hasn't been specifically answered. In terms of timing, BP isn't
interested in prolonging the process.
SENATOR PEARCE pointed out that the shareholders voted on a
specific merger which included some specific statements regarding
the financial gains. She expressed curiosity at what point the
Federal Communications Commission (FCC) will make the companies
take another vote of their shareholders, if the merger is different
than what was originally voted on.
COMMISSIONER SHIVELY said that he didn't have an opinion on that.
CHAIRMAN HALFORD commented that that information should provide the
state with some understanding of the state's relative benefits from
this process.
SENATOR TAYLOR asked if there is a price differential on a barrel
of oil, if that barrel's ownership transfers, based on wellhead
cost and field cost, from ARCO to BP.
COMMISSIONER SHIVELY replied yes.
SENATOR TAYLOR inquired as to the estimated loss or gain in state
revenue. How much would be gained or lost if an ARCO barrel, worth
X amount of dollars to the state, now becomes a BP barrel.
COMMISSIONER SHIVELY stated that he couldn't answer that
specifically. He noted that it wouldn't even be the same from
month to month due to a variety of factors which affect both
companies with regard to how their oil is priced. The price
changes can largely be attributed to the transportation deductions.
SENATOR TAYLOR said that he had heard that the mere transfer of
ownership of a barrel of oil between the two companies would result
in a significant loss of revenue to the state. He explained his
understanding that the loss would occur because BP has higher field
costs or associated production costs.
COMMISSIONER SHIVELY indicated that is basically the transportation
costs. Some of that does work itself out due to the efficiencies
that occur as BP is able to align its shipping interest with where
production comes from.
SENATOR TAYLOR commented that although some of it may work out
because of efficiencies, overall there would be a loss in that
volume of production.
COMMISSIONER SHIVELY responded that there may or may not be a loss.
He said that he couldn't answer that question now. He reiterated
that the settlement agreements all provide for reopeners on a
regular basis. Therefore, there are ways outside of the merger to
deal with such an issue.
CHAIRMAN HALFORD stated:
We, ..., picked the month with the highest differential
and tried to run it through and there were explanations
back from the Administration when we did that. But if we
ran through the month that we picked and the explanations
didn't come through, the ... range of that difference of
converting all ARCO barrels to all BP barrels - in that
worst month scenario were then annualized - was in the
range of $80 million a year. It was significant, but the
answers back pointed out that some of that wouldn't
happen and some, on the other side, might come up. It's
at least a question that is very worthwhile to ask and to
try and figure out.
COMMISSIONER SHIVELY agreed that it is also worth keeping track of,
but he reiterated that he wasn't sure that everything can be fixed
within this merger.
CHAIRMAN HALFORD interjected that it seems that part of that is
bound by settlements which go with the oil, not with the owner.
SENATOR PEARCE asked if the knowledge of whether there is a
reopener on those is confidential information.
COMMISSIONER SHIVELY answered that he didn't know the answer to
that, but offered to find that answer.
REPRESENTATIVE KEMPLEN asked if Commissioner Shively makes a
distinction between an owner and an operator. If so, please
clarify the two.
Number 425
COMMISSIONER SHIVELY said that he does make a distinction between
an owner and an operator. He pointed out that lots of people own
leases and the oil under them in Prudhoe Bay. However, two or
three actually manage a field or fields. He explained that an
operator is one who performs the management, hiring personnel and
contractors who work in the field. The operators produce the cost
estimates for capital constructions. The operator receives a fee
for managing. Therefore, there are a number of owners with,
traditionally, only two operators in terms of production.
Commissioner Shively noted that Exxon is designated the operator of
Point Thompson, but since Exxon hasn't really produced anything he
didn't consider them an operator.
CHAIRMAN HALFORD pointed out that the series of maps, the pre-
merger and post merger map, illustrate the operators for given
fields. He clarified that the leases indicate owners.
REPRESENTATIVE KEMPLEN asked if there could be a situation in which
BP could be a part owner, although a very influential owner, with
two operators.
COMMISSIONER SHIVELY agreed that could be correct theoretically.
However, he didn't believe that any oil company would want to
operate in a field in which it didn't have controlling interest.
Such has not been the case in the past.
REPRESENTATIVE KEMPLEN surmised then that a second operator would
really mean another owner.
COMMISSIONER SHIVELY clarified that it may not be another owner.
Perhaps, someone who already owns a piece of the field takes a
bigger piece by purchasing it from BP. It would be a different
company that would be the operator and they would have a different
percentage ownership than currently.
REPRESENTATIVE KEMPLEN understood then that the predominant color,
green, on the map would change after the settlement.
COMMISSIONER SHIVELY agreed and noted that to be the point of the
divestiture.
SENATOR ELTON asked if Commissioner Shively envisioned the pipeline
tariff as one of the fixes that would occur outside the merger
context.
COMMISSIONER SHIVELY answered that the issue of pipeline tariffs is
on the table. He reiterated that the issue of pipeline tariffs is
a complex issue due to an agreement which the state was involved
in. The current tariff situation is clearly anti-competitive.
There are a variety of solutions. Therefore, in terms of a new
operator that is an issue that must be addressed.
SENATOR TAYLOR inquired as to whether there has been contemplation
of any changes in existing legislation or a new package of
legislation in order to encourage independent operators to enter
Alaska. If so, what has been contemplated?
COMMISSIONER SHIVELY replied no. If there is a competitive system
combined with the area wide leasing program, that would allow
entrants. He believed that without reviewing divestiture there
wouldn't have been much interest from others on the North Slope.
Once the divestiture situation unfolds, he believed it will add to
the interest of other independent oil companies to come to Alaska.
At this point, there is no anticipation of any legislation which
would change the current bidding system. He commented that the
bidding system had worked well until ARCO decided it didn't want to
be there any longer.
CHAIRMAN HALFORD predicted then that the state would be able to
measure its success in the number of bidders in the next major
North Slope lease sale.
COMMISSIONER SHIVELY affirmed that could be the case. He pointed
out that the Beaufort sale had just been postponed because he felt
the current instability didn't maximize the state's opportunity for
others to enter.
CHAIRMAN HALFORD commented that he believed that to be a good
decision.
SENATOR TAYLOR said that he didn't believe there was a choice with
regard to divestiture, that law had to be enforced. He
acknowledged that divestiture may be a negotiating point. Senator
Taylor asked if the assumption would be that upon resolution of the
divestiture, there would be additional and more attractive
properties to offer.
COMMISSIONER SHIVELY responded that is unclear because there is no
knowledge as to whether properties will be returned to the state or
whether BP will make changes. He referred to maps present at the
hearing. He noted that one of the challenges the state faces is
that the state owns from [Mount] Canning to [Mount] Colville and
most of the good acreage is currently leased. There have been some
interest in various geological formations to the south. Anadarko
has made a commitment to review Arctic Slope lands well south of
the state's lands.
COMMISSIONER SHIVELY turned to the North Slope and the potential
for new fields. He indicated that one would look at what would
occur in the National Petroleum Reserve-Alaska (NPR-A) which is
mentioned with regard to divestiture. Regardless of changing or
keeping the current law, he didn't believe many would be excited by
the acreage. He pointed out that currently some relatively small
companies are bidding large amounts for strategic leases which they
believe will connect with existing fields. However, there is not
much great acreage at this point.
SENATOR TAYLOR surmised then that divestiture would be left up to
the companies to decide what negotiations they may have with their
partial owners. After they make the decision with regard to what
they return to the state, the state will...
COMMISSIONER SHIVELY interjected that would not be the exact
scenario. He said that he wouldn't discuss the total negotiating
strategy. However, he believed that the state has a role in how
the divestiture will end up. The divestiture is not being totally
left in BP's hands.
CHAIRMAN HALFORD reiterated that the law is clear and not in the
state's favor. This is an issue that must be won in negotiations.
COMMISSIONER SHIVELY agreed. However, the divestiture model for
the FTC and the state will have to meet certain criteria,
regardless, which will be BP's problem. He specified that was his
personal thought.
Number 536
REPRESENTATIVE CISSNA recalled that there was a question regarding
the DR&R (Dismantling, Removal and Restoration) funds in escrow and
the state demanding discontinuation of that collection.
COMMISSIONER SHIVELY informed everyone that Mr. Fineberg has
requested that he have nothing further to do with that issue. Mr.
Fineberg believes Commissioner Shively has a conflict of interest
because how the state deals with DR&R was part of the tariff
settlement developed when Commissioner Shively was Chief of Staff.
At this point, Commissioner Shively said that he hasn't made a
decision on that point yet. Commissioner Shively stressed that
DR&R has never been made an issue and has never been handled that
way in any location. He assumed that when it comes time to
cleanup, a big company would do so. He turned to the Cook Inlet
when Shell decided to sell to Cross Timbers. When Shell wanted to
transfer the leases, the state informed Shell it could transfer the
leases, but it couldn't transfer its responsibility if Cross
Timbers can't clean it up. Therefore, a different scenario was
utilized for DR&R for Cross Timbers because Cross Timbers is
smaller. At this point, the state doesn't require large companies
to escrow DR&R.
CHAIRMAN HALFORD commented that he too was around when the tariff
settlement was developed. Bob Maynard did much of that
negotiation. Both Mr. Maynard and the Administration at that time
did the best that they could. If they made mistakes, those are
mistakes that can be identified in hindsight with much new
information. Chairman Halford explained that most of the money
returns to them because it was their oil. It was a portion of the
tariff on all the oil that went through. Therefore, the numbers
look bigger than he thought they would come out. Chairman Halford
indicated that it is an exercise that may not arrive where he had
initially hoped.
REPRESENTATIVE KERTTULA spoke to the comments regarding the loss of
some conditions if the state were to go to court. However, if the
state filed an anti-trust lawsuit and the merger stopped, then a
different scenario would exist.
COMMISSIONER SHIVELY acknowledged that BP may find that there are
requirements that make the deal unattractive. Whether BP would
return to its shareholders or make a decision to oppose the deal,
that would be BP's decision. Commissioner Shively believed that
ARCO has made a decision. If BP changes its mind, he didn't expect
ARCO to remain in the long-run.
CHAIRMAN HALFORD asked if it was possible that ARCO's situation
changed between the time of $13 and $24 oil.
COMMISSIONER SHIVELY believed, personally, that the decision was
broader than the price of oil at the time. Although ARCO is in
better shape today, he believed review of ARCO's Alaska operations
reveal that it was a viable company and could continue as such.
However, ARCO had other operations.
TAPE 99-6, SIDE B
SENATOR PEARCE asked if Usibelli, for example, has to escrow money
as they cleanup or do they also have to escrow money for final
remediation.
COMMISSIONER SHIVELY answered that, to his knowledge, Usibelli
wouldn't escrow any money. However, there are some things which
require bonds and there is also a state bonding pool to which
mining companies contribute.
Number 578
FRED BONESS, Attorney, Preston, Gates & Ellis, testified as outside
counsel for the committee. He informed the committee that a number
of the topics he had intended to address had been addressed by
Commissioner Shively. Mr. Boness turned to the issue of the
divestiture or interests and leases on the North Slope. Previous
discussions have used the word divestiture in various different
contexts. He noted that he would first discuss divestiture in
terms of the state statute, which requires divestiture of state
leases. He highlighted the limited nature of the divestiture
statute. He referred to the map as well. The state statute
requires when there is over 500,000 acres divestiture must occur,
in non-unitized areas. He explained non-unitized as being
essentially not developed. Therefore, the discussion is not about
Prudhoe Bay, Kuparuk, Badami, or Duck Island all of which are
unitized. He commented that BP would probably attempt to get below
the 500,000 acre maximum in order to bid in the future. Mr. Boness
explained, "When they do that, if they own 100 acres -- 100 percent
of the lease, for simplicity, 100 acres. If they divest 49 percent
of that, then under the statute they own 51 percent of the lease
and it's credited as 51 acres." Therefore, in many of the areas
where BP owns a lease now or after the merger, that could remain
green [controlled by BP] simply by reducing the percentage of
ownership in those leases.
CHAIRMAN HALFORD asked if the change, between the maps, could occur
under the 500,000 acre limit.
MR. BONESS replied yes, but noted that he hasn't worked out the
math. He mentioned that it may be easier to achieve the same
objective by eliminating a lease here and there. He pointed out
another important aspect. For instance, if BP recognizes that
there is a logical unit in the future, then BP could choose to
divest, in total, the leases outside of that unit in order to
continue to own some percentage within the unit expected in the
future. If BP determines that it has some leases that aren't
particularly valuable or unlikely to be in the overall plan, BP
could choose to divest those leases. That would still accomplish
the objectives, and therefore it wouldn't matter that some of the
lease tracks weren't green [controlled by BP]. Perhaps, it will be
far more important which areas remain green [controlled by BP] and
the percentage at which they remain so.
MR. BONESS clarified that the divestiture to which Commissioner
Shively referred is a negotiated divestiture, which is probably
premised on the anti-trust notion of divestiture. For example, in
the CARRS Safeway merger there was a divestiture of certain CARRS
stores. That divestiture was an anti-trust type of divestiture,
not a concept which specifies the amount of grocery stores that one
owner can own. Therefore, the notion of going beyond the lease is
important. Mr. Boness pointed out that the only divestiture
required by the state statute is that which is not in units.
However, Commissioner Shively indicated that there is the desire
for divestiture of production as well, which would have to be
premised on an anti-trust concept.
MR. BONESS mentioned that he had intended to address the
distinction between an owner and an operator, but Commissioner
Shively has already covered that issue. However, he said:
I think some of the questions and Commissioner Shively's
answers were in the context of what if BP continues to
have a controlling interest. And I suppose for most
purposes, people would think that that means 51 percent
or more. You can go again to the concept of maybe
there's a block out there where BP is going to divest 49
percent. And I think it's important to keep in mind that
it may not be a controlling interest in the sense of 51
percent that is important to focus on in the negotiations
with divestiture. Because, typically, when you get into,
for example, negotiations by owners with respect to
sharing of facilities, the requirement is going to be
more than, in many of the agreements amongst the parties,
... 50 percent approval. In other words, ..., in the
agreements that exist up there if I come to the various
owners of a unit up there and say I would like to gain
access to your facilities, it may not be that I have to
have 100 percent approval of all the owners, although it
is possible I would have to have 100 percent. But I,
almost certainly, am going to have to have something like
66 percent of 75 percent or 90 percent. Therefore, if BP
divests in such a way that they own a percentage which
gives them veto power, as opposed to controlling power,
that is something that has to be considered and kept in
mind in analyzing the divestiture. I think where that
leads one is simply underscores the notion that the
negotiation and the ability to implement a program which
will encourage competition is, as Commissioner Shively
said, complicated because it does involve these kinds of
considerations of control via the veto power as well as
control by a more traditional way of having majority
ownership in the matter.
Number 496
MR. BONESS turned to the subject of net-back in revenues. He
clarified that field costs don't really enter in to the state's
revenue considerations of the merger. He acknowledged that there
are various ways that the state receives revenue from the industry
in the area of taxes. He explained that the production tax,
commonly referred to as the severance tax, taxes a percentage of
the value at the point of production. In the case of Prudhoe Bay,
the point of production is pump station one. Therefore, the
severance tax values the oil from pump station. He pointed out
that the cost of getting the oil from the wellhead to pump station
one is irrelevant for purposes of the state's valuation because
that valuation is done on a net-back. He explained that the net-
back starts with a price in California or Asia and the cost of the
transportation and the pipeline tariff are subtracted out. For
severance tax purposes, no field costs are subtracted out.
MR. BONESS turned to royalties. Field costs do enter into
royalties. He explained that royalties are what landowners
typically reserve for themselves when entering into an oil and gas
lease. This is a common practice, which Alaska followed when it
leased lands on the North Slope. The original leases specified
that royalty is valued at the wellhead. He informed the committee
that the wellhead was part of litigation filed in the 1970s. He
believed that the wellhead portion of the litigation was settled in
1980. The settlement provided that the field cost deduction be a
fixed amount with some adjustment provisions. Therefore, the
deduction for field costs with respect to royalties is a fixed
number which isn't really tied to costs.
CHAIRMAN HALFORD understood then that the effect would be as
follows. If there is a $1 billion savings which is in the field
before the oil gets to pump station one, the state shares nothing
in the benefit of that savings.
MR. BONESS responded, that is correct. He emphasized the
importance of that realization. BP has advanced the justification
that there will be a substantial savings in lifting costs. Such a
rationalization is good, from a purely economic standpoint.
However, BP may not have to acquire ARCO for such to occur. He
stressed that those savings will not be reflected in the current
royalty structure. Furthermore, the legislature doesn't really
have any access to do anything about those savings. He pointed out
that those savings wouldn't be reflected in production taxes either
because the legislature made the valuation at pump station one.
The legislature is limited with regard to capturing a share of
those benefits. Mr. Boness stated that the state can capture
benefits in reductions of the tariff or tanker charges which are a
function of the net-back. He believed the estimate to be if the
tariff decreases by one cent, the net benefit to the state is
approximately $910,000. Therefore, there is a substantial benefit
to the state in having reductions in the tariff. Mr. Boness agreed
with Commissioner Shively in regards to a strictly anti-trust
forum, such a lawsuit would not allow a great ability for
adjustments in the tariff. He informed the committee that BP has
always filed at the maximum tariff. That tariff is governed by
settlement agreements entered into in 1985 with some adjustments.
He explained that those adjustments were the result of litigation
with regard to the complexities of the federal regulatory system in
place at that time. Mr. Boness believed that dealing with the
tariff can only be achieved through the negotiation process.
MR. BONESS, per Representative Kerttula's request, addressed the
TAPS settlement methodology (TSM). The TSM agreement provides that
between 2006 and 2008, the parties will attempt to negotiate a new
agreement. If the parties haven't entered into a new agreement by
2008, the TSM terminates. Therefore, the state and the companies
would return to setting tariffs under the federal law which didn't
work very well and resulted in the TSM. This should be kept in
mind as it is very important to the state's overall financial
picture.
MR. BONESS pointed out that many are concerned with the technology
and innovation impacts that result from the elimination of any
entity such as ARCO. For example, advances in technology have
increased the projected 10 billion barrels of oil from Prudhoe Bay.
He believed that Prudhoe Bay has already produced 12 billion
barrels of oil and continues to produce substantial oil. That
increase in production can be substantially attributed to advances
in technology such as lateral drilling. He recognized the concern
that two thinkers/organizations with two sets of ideas is almost
always better than centralized control.
Number 383
REPRESENTATIVE DAVIES asked if the Administration could negotiate
a voluntary reduction in the tariff in order to reduce the tariff.
If so, how would that affect the other capacity (indisc.)?
MR. BONESS agreed that the Administration could try to negotiate a
voluntary reduction in the tariff. There are various options the
Administration could take in this area. He pointed out that, to
some extent, ARCO's tariff has always been lower than BP's tariff.
He noted that it is a function of tanker charges. Therefore, one
negotiating posture would be to simply ensure that formerly-owned
ARCO barrels are treated under the same tariff as if under ARCO.
Such a posture wouldn't necessarily require an amendment to the
TSM. Mr. Boness expressed concern that there are ways to negotiate
for competition, but what is being discussed is competition among
a small entity.
REPRESENTATIVE KERTTULA understood the question to have a mix with
regard to tariff reduction and increase in capacity. She didn't
believe that capacity would be increased.
MR. BONESS clarified that capacity and competition are intertwined
here. One group identifies capacity as whatever goes down the
pipeline. Another group identifies capacity as whatever could go
down the pipeline. Those two aren't necessarily the same.
Obviously, as pump stations are taken off line, capacity decreases.
However, if there is less oil put down the pipeline and the pump
station is not paid off, there could be additional capacity. Mr.
Boness informed the committee of the drag resistant agent (DRA).
He explained that by placing more or less of the DRA into the
pipeline, the capacity can be increased or decreased. Therefore,
there isn't a fixed number with regard to the amount of oil that
can travel down the pipeline. He believed that the state and other
parties negotiated a capacity settlement agreement in 1997. That
capacity settlement agreement defined a set of parameters such that
there will always be the assumption for tariff purposes that there
is a capacity of 105 percent. Consequently, there is more pipeline
capacity than there are barrels to go down the pipeline. That was
intended to create competition. He stated that the merger will not
better the situation.
MR. BONESS informed the committee that BP also claims there will be
a better alignment of ownership of oil and gas. He believed that
was fair to say, however there are trade offs. In Prudhoe Bay
there has been differences in ownership of gas and oil which have
often resulted in production compromises. He mentioned that BP
would refer to them as costs and inefficiencies. If BP acquires
ARCO, the better alignment would result in more effective and
efficient decision-making. He acknowledged that is probably true.
"The question to the extent that ... it results in cost savings,
... independent of royalty benefits, independent of severance tax
benefits and the state's benefit will be limited to that which may
result in additional production, if in fact some marginal barrels
of oil are produced sooner than they otherwise would have been."
He noted that assessing that is very difficult due to the interplay
between technological developments. Furthermore, the trade off
impacts the question of natural gas commercialization. He believed
there is a question with regard to how that could be factored in
the overall negotiations. Again, the matter won't be easily
addressed in a strictly anti-trust litigation. Therefore, he felt
it important to discuss the tax structure and how it relates to the
various benefits which Mr. Messenger will address.
SENATOR TAYLOR said that those people who own those interests
within those leases have done studies on their properties and know
what is present. Does the state have that information?
MR. BONESS answered that the state does have some of that
information. Furthermore, the leaseholders don't have the same
level of information amongst themselves.
SENATOR TAYLOR expressed concern with this situation because it
reminds him of the game Battleship in that the leaseholders have
information which the state doesn't. He indicated that the
negotiations occur without the same knowledge and thus could result
in one player having the choice properties. How does one avoid
such a situation?
Number 276
MR. BONESS said that he believed there is an element of correctness
to Senator Taylor's comments. However, any one negotiator has
his/her own level of information. The state has information from
other parties, which may not be available to BP. Mr. Boness
believed that the state has the following choices: if the state is
satisfied with the information, the state can make judgements based
on that information; the state could simply demand BP to provide
the state with the information it is utilizing to negotiate its
position. He believed that BP has said that it intends to make
seismic information available to the potential purchasers. Mr.
Boness agreed that there may be different levels of information,
but didn't believe it is at the same level as Battleship.
SENATOR TAYLOR disagreed with the comments, of both Mr. Boness and
Commissioner Shively, that merely filing an anti-trust action would
not allow the state to do these things. The resolution of an anti-
trust action could involve many other parameters.
MR. BONESS commented that anti-trust lawsuits are huge and
expensive endeavors. Once the lawsuit is filed, the dynamics of
negotiations are likely to change. That is a judgement call that
has to be made by those doing the negotiating. As an attorney, Mr.
Boness has experienced that things change, in comparison to the
time before the lawsuit was filed, for an extended period of time
once a lawsuit is filed. He didn't disagree with Senator Taylor's
comments with regard to what is on the table for settlement
purposes, once a lawsuit is filed. Mr. Boness stated that the
decision to accept a particular settlement without filing a lawsuit
or filing a lawsuit and negotiating back to what could've been
achieved before the lawsuit is a judgement call.
SENATOR TAYLOR understood there will be negotiations to reach a
settlement which will be presented to the people of Alaska. All of
this will occur prior to the final decision regarding whether a
suit will be filed. He wasn't sure what would occur at that point.
If the public is happy, is the process over. If the public is
unhappy, will the state return to the drawing board. That is of
concern.
CHAIRMAN HALFORD stated that he shared Senator Taylor's concern.
With regard to the access to seismic data, it has been a major
issue for many years.
REPRESENTATIVE KERTTULA pointed out that filing a lawsuit has its
own intrinsic value, in terms of pressure. She agreed that filing
a lawsuit wouldn't take issues off the table. However, she
believed that filing an anti-trust suit without a settlement would
limit some of the possible remedies in the long run. For instance,
she didn't believe that the issue of Alaska hire would be settled
in a court. She agreed that the settlement could address that
issue.
SENATOR TAYLOR agreed that the lawsuit may place some limitations
upon where negotiations go and the final options. However, he was
concerned with the speed with which this process is occurring, the
lack of public input, and the need to sign confidentiality
agreements for information. Senator Taylor emphasized that he
would like to be informed as to how much BP and ARCO owe in back
taxes. Should someone request those taxes be paid before the deal
is resolved? He noted that one can't obtain such information
without signing a confidentiality agreement. That should be public
information. Senator Taylor also expressed the need to resolve the
question of corporate taxation within the merger.
Number 162
REPRESENTATIVE KEMPLEN returned to the issue of tariffs. He
understood Mr. Boness to have said that for each dollar reduction
in tariffs, the state would see a $90 million increase in revenues.
Later, Representative Kemplen received the impression that the
state is locked into those tariffs because of the TSM. Therefore,
the question seemed to be whether the state would not lose any
revenues.
MR. BONESS explained that the state obtains more revenue by
reducing costs from either the tankers or the tariffs, et cetera.
The TSM establishes a maximum rate, and therefore the state can
increase its revenue by lowering the rate. He explained that a TSM
reduction would require a revision to the existing TSM or require
that barrels of oil currently under a tariff established by ARCO
will continue as such.
REPRESENTATIVE KEMPLEN understood then that it is possible to
negotiate that the state would want all the barrels of oil to be
treated as under the ARCO arrangement.
MR. BONESS replied that it would be possible, theoretically.
CHAIRMAN HALFORD interjected that the actual agreements go with the
barrels to the new purchaser.
MR. BONESS clarified:
There is a provision in the agreements that, what lawyers
call covenants running with the land; but there is also
a provision in a different agreement or a different part
of the agreement that says ... when BP acquires ARCO, BP
has the right to elect to treat the ARCO barrels as if
they're BP barrels.
Mr. Boness said that the state could lose money that the state
could have received had the merger not occurred.
[Manual tape change, approximately 5 minutes of blank tape.]
TAPE 99-7, SIDE A
Number 026
JOHN MESSENGER, Attorney, Preston, Gates & Ellis, informed everyone
that he is a partner of Mr. Boness, counsel to the committee. He
announced that he would be discussing the tax structure. The tax
structure is important with regard to the impact the merger will
have on Alaska's tax revenues. He indicated that he would also
address whether the current tax structure is appropriate, given the
new environment after the merger. He noted that the committee had
been provided a series of charts, which illustrate some of the
points he will be making. Mr. Messenger referred to the charts
entitled, "Comparison of Actual Oil and Gas Corporate Income Tax
Collected with Estimated Revenues using a Separate Accounting
Income Tax Approach Assuming Existing AS 43.20 Rate" and "Net
Income From Prudhoe Bay and TAPS." These charts should help
address questions involving the corporate income tax as they
illustrate the difference in separate accounting and formula
apportionment. He explained that the tall bars on these two charts
represent the profits that would be earned by the industry in
Alaska directly, without reference to operations that occur
worldwide. The lower bars represent the tax base under formula
apportionment, which is another type of corporate income tax.
MR. MESSENGER addressed the situation that the state faced in 1978,
which relates to the tall blue bars on the "Net Income From Prudhoe
Bay and TAPS" chart. The blue bars refer to the net income or
profit from Prudhoe Bay and TAPS as estimated by various parties.
The short red bars on this graph illustrate the amount to be
measured under formula apportionment. At that time, the
legislature made the judgement that the industry wasn't paying an
effective tax rate similar to what a corporation would earn if it
was operating those same assets in the state. In other words, the
oil companies were paying a tax rate substantially below the 9.4
tax rate that other corporations were paying. The debate was
regarding how to change the corporate income tax such that the oil
companies would pay a fair portion of the corporate income tax as
being paid by other corporations. Ultimately, the legislature
adopted the separate accounting approach, which more accurately
measured that income earned directly in Alaska. Therefore, the
issue became whether the oil industry was willing to pay 9.4
percent of the income it was actually earning in Alaska. Mr.
Messenger read the following question, which illustrates the nub of
the dispute, posed by Senator Huber at a committee hearing.
Senator Huber asked Mr. Donaldson, an executive of SOHIO, the
following:
Does SOHIO object to paying 9.4 percent on its true net
income, the same as they would have to pay if they were
strictly an Alaskan corporation.
Mr. Messenger said that Mr. Donaldson replied, "Yes."
Number 160
MR. MESSENGER explained that separate accounting merely measures
the activities in the state and measures that directly which, in
the case of the oil companies, would be the production, pipeline
and transportation operations, et cetera. Formula apportionment,
on the other hand, would review the company's worldwide income and
then apply a formula. That formula, property, payroll, and sales,
would then be multiplied times that worldwide income in order to
estimate the amount of activity taking place in the state. He said
that the formula didn't correctly reflect the amount of activity in
the state because those factors didn't account for the sale of oil
that took place outside of the state or the value of the oil and
gas reserves as property. Therefore, the legislature passed the
separate accounting bill in order to focus Alaska's tax structure
on activities that were taking place in Alaska. The oil companies
challenged the separate accounting statute and ultimately, the
Alaska Supreme Court approved the constitutionality of the tax in
1985. Subsequently, in 1986 the oil companies took that to the
U.S. Supreme Court, who dismissed the appeal by the oil companies
for want of a substantial federal question. In 1981, the
uncertainty with regard to the lawsuit and the amount of liability,
led the legislature to repeal the separate accounting bill and
substitute another form of apportionment. Therefore, the repeal
wasn't based on a change in policy.
MR. MESSENGER turned to the chart entitled, "Comparison of Actual
Oil and Gas Corporate Income Tax Collected with Estimated Revenues
using a Separate Accounting Income Tax Approach Assuming Existing
AS 43.20 Rate." In this chart the tall red bars represent the
estimated separate accounting revenues, while the small blue bars
represent the actual O&G income tax collected. When the
legislature passed the new tax laws in 1981, the legislature
modified the apportionment formula so that it better reflected
activity in Alaska. The modified apportionment formula substituted
an extraction factor for the payroll factor, which took into
account actual production in Alaska versus production elsewhere.
Still, that formula didn't result in earnings parallel to earnings
measured more directly under the separate accounting approach.
CHAIRMAN HALFORD observed that the charts seem to reveal that the
higher the oil price, the higher and more significant the loss from
having apportionment versus separate accounting.
MR. MESSENGER agreed that Chairman Halford's observation is the
case. It is a trade off between profitability in Alaska versus
profitability elsewhere. He recognized that oil prices affect the
company worldwide. In terms of prices in Alaska, the higher bars
seem to occur during higher oil prices in Alaska. Mr. Messenger
clarified that this chart, "Comparison of Actual Oil and Gas
Corporate Income Tax Collected with Estimated Revenues using a
Separate Accounting Income Tax Approach Assuming Existing AS 43.20
Rate," represents information from 1982-1997. He recalled that a
letter from the Commissioner of Revenue indicated that, for the
next five years, formula apportionment would collect approximately
$150 million per year. If the separate accounting approach were in
effect, that collection would be 50 percent higher. That is,
another $75 million per year would be collected under a separate
accounting approach.
CHAIRMAN HALFORD pointed out that the Commissioner of Revenue's
statement was made when oil prices and projections were in the $13
range versus the $23 range.
MR. MESSENGER indicated that he wasn't sure of the date of the
Commissioner of Revenue's comments. If Chairman Halford is
correct, then higher prices would result in higher collections.
MR. MESSENGER returned to the chart entitled, "Comparison of Actual
Oil and Gas Corporate Income Tax Collected with Estimated Revenues
using a Separate Accounting Income Tax Approach Assuming Existing
AS 43.20 Rate." He explained that 1982 is a transition year, the
year when the separate accounting approach changed to the modified
apportionment. Therefore, 1982 includes some overlap in earnings
from both approaches. Mr. Messenger stated that this chart
reflects the difference between the two methodologies. However, he
clarified that the chart doesn't mean that the state lost this
entire amount when the law was changed in 1981. That would be a
separate calculation.
Number 281
REPRESENTATIVE GREEN asked if this chart follows, although not
dollar for dollar, crude prices. He asked:
If we're using a modified apportion on the worldwide
profits, - where you're dealing with vertically
integrated companies that actually make money on crude
purchase or sale and refining and marketing - wouldn't
that have much less of an exaggeration compared, and I
think that's what this shows, in the crude price since
essentially all we get from those is the crude price
(indisc.).
MR. MESSENGER clarified that it is not just the crude oil price, it
is activity in Alaska. The state's fortunes are being tied to the
company's profits and activities in Alaska which would include
their earnings on oil produced in Alaska as well as the company's
earnings from their pipeline assets in Alaska. Mr. Messenger
agreed with Representative Green, in that formula apportionment
will be affected by a variety of things which happen to the company
worldwide. On the other hand, separate accounting focuses on
activities in Alaska. Therefore, the question is what is better
for Alaska in the long-term.
CHAIRMAN HALFORD commented that previous discussions have included
comments regarding at what point, on the downside, does
apportionment reflect a better picture for the state. He recalled
that number to be considerably lower than the lowest number "we"
have seen. The danger sign would be if the pipeline was shut down
for a two month period, then there would be real problems.
However, he inquired as to whether the state wants to bet on its
own actions or some else's actions. He stated, "Of all the
exposures that were argued in the past, we've never gotten near a
price that wouldn't generate more under separate accounting than it
generates under apportionment."
SENATOR ELTON interpreted the discussion to say that before
separate accounting, oil companies were paying less at
approximately 3.5 percent in corporate taxes. He asked if under
separate accounting, the oil companies paid a corporate income tax
more or less equal to that paid by Alaskan corporations and now,
the oil companies have fallen below Alaskan corporations.
MR. MESSENGER, in a general sense, agreed with Senator Elton. He
reiterated that the separate accounting approach measures an amount
of income that would be commensurate with an Alaskan company as
opposed to an approach where the income is estimated by a formula
based upon occurrences elsewhere.
Number 337
REPRESENTATIVE GREEN posed a situation in which another operator
entered. If that operator was strictly an Alaskan company, would
this type of differential unfairly penalize such an operator.
MR. MESSENGER specified that it would depend upon the company.
Obviously, an apportionment formula would result in paying less
tax, which is advantageous to the company. However, this is an
income tax, which many believe to be the fairest type of tax. He
then turned to the barrel chart entitled, "Estimated Revenues and
Costs per Barrel of Alaskan Crude Oil." This chart illustrates how
the separate accounting approach taxes. He noted that one of the
arguments made by the oil companies in the lawsuit against Alaska
was that the separate accounting approach was unfair. The oil
companies believed it to be unfair because Alaska was taxing 100
percent of the barrel of oil, and therefore reached income/activity
outside of Alaska. He noted that this chart was actually included
in the Alaska Supreme Court opinion upholding the constitutionality
of Alaska's tax. The chart illustrates that the separate
accounting approach only taxes halfway down the equation, which is
the wellhead. He clarified that the gross income under a separate
accounting approach for production income is the value at the
wellhead. From that, the companies are allowed to deduct royalty,
production taxes, ad valorem taxes, direct operating costs,
acquisition and development costs, uncapitalized interest,
overhead, and exploration costs. Therefore, only the profit would
be subject to tax. Also the state wouldn't tax anything downstream
of that such as refining, marketing, et cetera. In terms of the
merger, the separate accounting approach would allow both BP and
the state to share in the savings. He explained that as a company
would become more efficient and reduce costs, that company's
reductions on their tax return would be reduced. However, it would
increase the company's profits and the net income subject to tax.
Under the worldwide apportionment approach, those cost reductions
become more diffused in the overall operation and the state would
receive a slice of that in the formula apportionment approach.
CHAIRMAN HALFORD related his, admittedly naive, assumption, "If
they saved a billion dollars and our structure gained a third of
that, somewhere along the way, without changing the laws ..., the
State of Alaska would receive $330 million." Now he has heard that
will not happen in both royalty and severance taxes. Furthermore,
he pointed out that apportionment occurs at a rate of about six
percent while the rate under separate accounting would be 9.4
percent. Therefore, the amount the state would receive from that
billion dollars would only be $60 million under apportionment and
$94 million under separate accounting.
MR. MESSENGER stated that it is really worse than Chairman
Halford's scenario because the state isn't receiving that six
percent of the cost savings. He explained that the companies
overall costs are included in its worldwide operation, and
therefore only a minuscule portion of the slice of that cost would
be received by the state.
REPRESENTATIVE GREEN referred to the chart entitled, "Net Income
from Prudhoe Bay and TAPS." He pointed out that the net income
from Prudhoe Bay and TAPS, the blue bars, are practically equal for
Exxon and ARCO. While the red bars, the UDITPA tax base,
illustrate a significant difference between Exxon and ARCO. He
indicated that difference would support the discussion that ARCO's
worldwide misfortunes drew ARCO down, not its operations in Alaska.
Therefore, Representative Green believed that to provide further
support for revisiting the separate accounting approach.
Representative Green, in response to Chairman Halford, said that he
realized that chart is from 1979.
Number 425
SENATOR ELTON referred to the "Estimated Revenues and Costs per
Barrel of Alaskan Crude Oil" chart and inquired as to why tanker
costs and profits are exempted.
MR. MESSENGER noted that there are some constitutional questions
which relate to how far the state can reach with its tax powers.
He reiterated that the state was only looking to activities taking
place inside of Alaska. Some tankers spend some time in Alaska,
but their major operations are outside of the state. Therefore,
the category of taxation referred to as other income was
established in order to accommodate situations in which there was
some activity in Alaska by the oil industry which didn't fall under
production or pipeline transportation. That other income was
multiplied times the formula while subtracting out pipeline income,
production income, and the activities in the formula related to
those. So, anything left would represent any other activity.
MR. MESSENGER turned to the severance tax and directed the
committee to the three charts entitled, "Economic Limit Factor."
He explained that the current ELF applies two nominal tax rates to
the value of the oil at the point of production. As Mr. Boness
mentioned, the value of the tax is determined at pump station one,
in the case of the North Slope. There is also a cents per barrel
tax rate, 80 cents per barrel, which the state would receive even
if the value of the oil fell below a certain level. He estimated
the threshold to be about $5.33. If the value of oil fell below
$5.33, the tax rate would be $.80 per barrel multiplied by the ELF
rather than a percentage of value. Any value above $5.33 and the
value rate applies.
CHAIRMAN HALFORD surmised then that $.80 per barrel multiplied by
.1 equals $.08 per barrel.
MR. MESSENGER continued by saying, "Nominally, under the statute,
it's 15 percent of value or in the case of new properties, it's
12.25 percent for five years and then it goes to 15. That then is
multiplied times the ... ELF which then gives you your ...
effective tax rate." He further explained that when the ELF is
close to one, that is tantamount to multiplying the tax rate by
one, which results in the same tax rate. If the ELF is below one,
then the nominal tax rate is reduced. For example, Prudhoe Bay oil
has a nominal tax rate of 15 percent and an ELF of 95 percent which
results in an effective tax rate of 12.47 percent. He referred to
the double-sided chart entitled, "Economic Limit Factor" which
illustrates that newer fields, those five years from commercial
production, have a nominal tax rate of 12.25 percent. Those have
a lower effective tax rate.
MR. MESSENGER commented that the ELF is a complicated figure that
is computed under the formula by factors of production, days, the
number of wells, and field size. Fields larger than 150 barrels
per day have a higher ELF than those smaller fields. Therefore,
there is an incentive to be a new small field because the effective
tax rate will be lower.
Number 501
REPRESENTATIVE GREEN inquired as to why the nominal tax rate
multiplied by the ELF does not equal the effective tax rate.
MR. MESSENGER said that this information was provided to him.
CHAIRMAN HALFORD pointed out that from 1999 to 2003, there is an
overall decrease from 11 to under nine which is a 20 percent
reduction in severance tax average for all Alaska production in the
next four years.
MR. MESSENGER replied that he didn't have an answer for this right
now. However, he mentioned that 1981 was the year the separate
accounting bill was repealed. To make up for that repeal the state
enacted the modified apportionment income tax. As illustrated the
modified apportionment income tax doesn't measure up to the
separate accounting approach. Therefore, the severance tax rate
was raised from 12.25 percent to 15 percent. The state also set
the ELF at one for Prudhoe Bay for a 10 year period beginning with
the commencement of production. He believed that the ELF of one
for Prudhoe Bay ended in 1987. Subsequent to that, the legislature
changed the ELF by introducing the field size component to the ELF.
Therefore, raising the ELF for larger fields and reducing the ELF
for smaller fields. This is the situation today.
CHAIRMAN HALFORD commented that, in that time frame, it was a net
benefit due to the size of Prudhoe Bay and Kuparuk. In this time
frame, the ELF was reduced for the smaller fields. He identified
the current difficulty as Prudhoe Bay production is being replaced
with small field production.
MR. MESSENGER noted, as the chart illustrates, that the ELF is
continuing to decrease which affects the severance tax revenues
over time.
REPRESENTATIVE DAVIES surmised:
If we were to have another owner/operator on the North
Slope and they were to want to have access to existing
facilities - which are at some limit right now - and you
substituted a new barrel with existing barrels from
Prudhoe Bay, we would lose because of the economic limit
factor.
CHAIRMAN HALFORD clarified that a one percent severance tax barrel
would be substituted for a 12 percent severance tax barrel.
MR. MESSENGER interjected that the incentive is to get production
under something classified as new and small.
SENATOR PEARCE asked if the state has ever challenged whether
production coming on-line be called a new field versus a satellite.
MR. MESSENGER said that nothing comes to mind.
SENATOR PEARCE asked if advertising and public relations expenses
are deductible in the corporate income tax for the oil companies.
MR. MESSENGER answered that he didn't know the answer to that
question, although he assumed such expenses are deductible.
REPRESENTATIVE KERTTULA informed the committee that Charlie Cole,
the ex-attorney general, challenged putting the advertisement for
the Exxon Valdez into the tariff and the state settled.
SENATOR PEARCE commented that the state is paying for the
advertising.
SENATOR TAYLOR said that he believed the state was paying for all
of the institutional advertisements.
Number 560
MR. MESSENGER returned to the property tax which was enacted in the
Special Session of 1973 in order to tax equipment and facilities
related to exploration, production, and pipeline transportation.
The tax wasn't applied to the value of the oil and gas in the
ground, although other states do impose such a tax. He noted that
there was one exception when the state enacted a reserves tax for
a two year period in the years 1975 and 1976. That two year tax
was on the value of the oil and gas reserves in the ground. Mr.
Messenger pointed out that in 1975, the state's general fund was
dwindling considerably and the pipeline wasn't scheduled to start
production from the North Slope until 1977. In order to deal with
the crisis, the legislature adopted the aforementioned reserves tax
and allowed the companies to credit their current severance taxes
or those in the future against the reserves tax. That reserves tax
provided a bridge for the state during that difficult time. The
reserves tax was initially set at 20 mills for the first year. He
believed the legislation allowed the second year to establish a
millage rate similar to a municipal millage rate in order to cover
the budget for that year. Ultimately, the legislature provided
that the millage would be 20 mills unless action was taken. The
reserves tax was 20 mills in both 1975 and 1976.
CHAIRMAN HALFORD understood then that the tax was a credit against
the future severance tax on the resource. If the gas were
produced, then it would be a nontax.
MR. MESSENGER replied that Chairman Halford was correct.
TAPE 99-7, SIDE B
SENATOR TAYLOR commented that if a mill levy was assessed every
year against oil reserves or properties based on the current fiscal
gap in the general fund, the oil industry may be willing to cut the
budget.
SENATOR TAYLOR suggested that the committee eliminate the ELF and
institute the separate accounting approach.
CHAIRMAN HALFORD indicated the need for the leadership to request,
from the Governor, an expansion of the call if such action is
desired.
Number 561
REPRESENTATIVE THERRIAULT thanked the committee for the
information. He inquired as to the time line of this special
committee as it attempts to interject the legislature's desire to
protect Alaska and its citizens in this process. He noted that the
Administration will possibly be moving forward and producing a
package within the middle of October, when the legislature isn't in
session.
CHAIRMAN HALFORD stated that he believed the committee has arrived
at the table in a way that no legislative committee ever has. He
believed that the committee has good counsel and a good economist.
Furthermore, the FTC appears willing and interested in talking with
the committee. Chairman Halford noted that these meetings have
occurred in order to obtain a sense of what members want with
regard to the merger. This is the only option short of an
expansion of the call or a resolution.
SENATOR TAYLOR suggested the committee should take a poll and
determine if the legislature would call itself back into session to
take up this matter which is of such magnitude.
REPRESENTATIVE GREEN agreed and believed any criticism over another
special session would be worth it.
REPRESENTATIVE DAVIES asked if there is anything that prevents the
legislature from calling itself into another special session now.
CHAIRMAN HALFORD informed everyone that the committee has a legal
opinion that indicates that it would be difficult for the
legislature to call itself into session while in a special session.
Chairman Halford reiterated that the way to address the merger
would be for the two presiding officers to go before the Governor
and request the call be extended to the subject of the merger. If
such is the will of the majority of the membership of both houses,
then that request should be made. Short of that scenario, much can
be achieved by asking questions.
REPRESENTATIVE THERRIAULT pointed out that although the FTC doesn't
care about the timing, negotiations with the companies can occur
regarding reduced tariffs. However, that negotiating leverage will
likely be unavailable by the time the legislature returns.
CHAIRMAN HALFORD stressed that "this leverage" will be available.
He said that we should continue to want the state's fair share with
as much competition as possible. Without competition, there would
be a regulatory structure that would be beyond the legislature's
capacity to understand, manipulate, and control in order to protect
a small operator's ability to operate.
REPRESENTATIVE THERRIAULT stated:
If one of the goals is we do want to have a very
competitive environment, and all we do is rely on
taxation without using the opportunity to get (indisc.-
multiple speakers) we potentially lose the opportunity and lower
the tariffs which would increase competition. ... So that does not
help us.
CHAIRMAN HALFORD agreed. However, there are ways for the state to
obtain a benefit. Lowering the tariff helps the companies and the
state, although there are different things that hurt the companies
and the state.
SENATOR TAYLOR indicated that it would be premature to follow that,
but in the next few weeks there would have to be a decision.
CHAIRMAN HALFORD commented that the Governor may return with a
proposal for which the committee would want to request formal
action and take a formal position for the FTC.
Number 489
REPRESENTATIVE KERTTULA said that would be at a minimum. She noted
that it is difficult to negotiate after a deal is cut. The
committee has had some strong assurances with regard to bringing
anti-trust cases, if necessary. Although the FTC may hold out,
there is value for the committee to be personally involved while
there is interest. She also mentioned the involvement as helpful
in that it provides background information for the FTC.
Representative Kerttula agreed that the magnitude of the merger is
huge.
REPRESENTATIVE CISSNA inquired as to the options that would help
strengthen the committee's bargaining position. Can the committee
simply survey the legislature?
CHAIRMAN HALFORD noted that in his time with the legislature, he
has not seen a subpoena issued by a committee of the legislature.
This committee has issued a subpoena in order to obtain the
information. He also noted that the resolution creating the
committee said the committee should do whatever necessary.
However, once actions are taken the opponents of the actions would
counter by saying the committee is acting out of session with no
authority. The opponents would further counter that the committee
isn't expressing the legislature's position or the state's
position. Chairman Halford believed that the more authority and
the more formal the authority, the more strength a body has. The
question is how much is necessary. If the committee takes a tough
position and receives "heat" for it, then the entire legislature
would need to come together.
REPRESENTATIVE CISSNA inquired as to the specifics that would
strengthen the committee in the coming weeks.
CHAIRMAN HALFORD reiterated that the Governor could be approached
with regard to expanding the call, the legislature could send a
resolution or a letter requesting the Governor's proposal be
formally before the legislature for action. The legislature could
adopt a resolution which points out the significance of this merger
and speak to the procedures of the FTC. Chairman Halford believed
the entry level to be for the Governor to agree with a formal
ability to take up the issues which could actually enhance the
Governor's position. This is not a matter of the legislature
versus the Governor.
CHAIRMAN HALFORD, in response to Representative Kerttula,
reiterated that Senator Pearce had requested a legal opinion
regarding if the merger issue could be added to the call. The
opinion indicated that the simplest approach would be to adjourn
from this special session and then the legislature call itself back
for another special session. He noted that there is some need to
avoid criticism that the merger is a way to avoid subsistence. The
scheduling of this meeting has to stay behind the subject of this
special session.
SENATOR PEARCE informed everyone that the House set a precedent in
1994. Taking time to argue whether action was taken in the
appropriate place, takes away from the issue.
REPRESENTATIVE DAVIES commented that if the legislature unanimously
passed a resolution, then who would care.
CHAIRMAN HALFORD explained that the enforcement mechanism for the
call is to invalidate a law. A resolution doesn't have the power
of law. He indicated the need to do it right. He couldn't believe
that the Governor would refuse an expansion of the call, if both
presiding officers approached him on the matter. However, that
conclusion hasn't been reached yet.
REPRESENTATIVE CISSNA asked if the committee has any concept of the
timing on that readiness.
REPRESENTATIVE KERTTULA answered, perhaps a week. The review of
the documents and analysis has been proceeding quickly. The
committee is close to determining the appropriate path. She noted
that the Administration has cooperated as much as it legitimately
can. All of this is difficult, under these time constraints.
CHAIRMAN HALFORD adjourned the Joint Special Committee on Mergers
at 6:10 p.m.
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