Legislature(2011 - 2012)BUTROVICH 205
02/25/2011 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB91 | |
| SB85 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 85 | TELECONFERENCED | |
| *+ | SB 91 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 25, 2011
3:34 p.m.
MEMBERS PRESENT
Senator Joe Paskvan, Co-Chair
Senator Thomas Wagoner, Co-Chair
Senator Bill Wielechowski, Vice Chair
Senator Bert Stedman
Senator Hollis French
MEMBERS ABSENT
Senator Lesil McGuire
Senator Gary Stevens
COMMITTEE CALENDAR
SENATE BILL NO. 91
"An Act amending the termination date of the licensing of sport
fishing operators and sport fishing guides; and providing for an
effective date."
- HEARD AND HELD
SENATE BILL NO. 85
"An Act providing for a tax credit applicable to the oil and gas
production tax based on the cost of developing new oil and gas
production; and providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 91
SHORT TITLE: SPORT FISHING GUIDING SERVICES
SPONSOR(s): SENATOR(s) MCGUIRE
02/16/11 (S) READ THE FIRST TIME - REFERRALS
02/16/11 (S) RES, FIN
02/25/11 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SB 85
SHORT TITLE: TAX CREDIT FOR NEW OIL & GAS DEVELOPMENT
SPONSOR(s): SENATOR(s) WAGONER
02/07/11 (S) READ THE FIRST TIME - REFERRALS
02/07/11 (S) RES, FIN
02/25/11 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
MIKE PAWLOWSKI
Staff to Senator McGuire
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Presented SB 91 for the sponsor.
MARY JACKSON
Staff to Senator Wagoner
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Presented SB 85 for the sponsor.
DON BULLOCK, Attorney
Legislative Legal Services
Legislative Affairs Agency
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Commented on SB 85 as the drafting attorney.
ACTION NARRATIVE
3:34:49 PM
CO-CHAIR TOM WAGONER called the Senate Resources Standing
Committee meeting to order at 3:34 p.m. Present at the call to
order Senators Stedman, Wielechowski, French, Wagoner, and
Paskvan.
3:35:44 PM
SB 91-SPORT FISHING GUIDING SERVICES
CO-CHAIR WAGONER announced SB 91 to be up for consideration.
MIKE PAWLOWSKI, staff to Senator McGuire, sponsor of SB 91,
explained that SB 91 extends the existing program for the
licensing of sportfish guides in the state of Alaska for another
year. On page 1, line 8, of [SB 91] 27-LS0550\A the only change
is made from the year 2012 to 2013. This extends the program for
the current year to give the committee time to do work on the
overall systems for fish licensing and most importantly the log
book program, which allows Alaska Department of Fish and Game
(ADF&G) to collect data from the sport guide industry on catch
that goes on in different areas of the state.
SENATOR WIELECHOWSKI asked if this is similar to the bill the
legislature has had before it for the last couple of years.
MR. PAWLOWSKI answered yes.
CO-CHAIR WAGONER said they would have a public hearing on Monday
and held action on SB 91 until that time.
3:37:11 PM
SB 85-TAX CREDIT FOR NEW OIL & GAS DEVELOPMENT
CO-CHAIR WAGONER announced SB 85 to be up for consideration. He
asked for a motion to bring the bill before the committee.
SENATOR PASKVAN moved to bring SB 85, labeled 27-LS0484\M,
before the committee. There were no objections.
3:37:41 PM
MARY JACKSON, staff to Senator Wagoner, sponsor of SB 85,
explained that the genesis for this bill came from an Alberta
royalty tax holiday provision. She said Senator Wagoner intends
to use it here as a production tax holiday and is intended to
encourage new conventional and unconventional oil and gas
development. The Department of Revenue fiscal note is
indeterminate. She said the target is to simply increase the
throughput in the Trans Alaska Pipeline System (TAPS) because of
the reported decline. The result of increased throughput is
economic activity, jobs and after five years, assuming this bill
passes, continued production taxes.
MS. JACKSON said the bill sets a very high bar by being for new
developments only. It applies to all areas and the credit must
be taken within five years. The credit is not transferable and
it may not be used to reduce the tax liability to below zero. In
other words, the new development gets a five-year holiday from
production taxes or 100 percent of the development costs,
whichever is first.
She explained when a producer explores currently they get
exploration credits. In SB 85, when they hit a field, they find
a play that is developable and then the Alaska Oil and Gas
Conservation Commission (AOGCC) certifies that it is
developable. From then on all development costs associated with
it up to the point of production are counted as part of this 100
percent. The bill then says that the Department of Natural
Resources (DNR) certifies that production is done and the
company is producing. All the costs between the AOGCC
certification and DNR certification are attributable to the
costs for this credit.
MS. JACKSON said the best way to explain the five-year holiday
is with an example. So, she described a $25 million development
that had $5 million worth of production, so their tax liability
would be a wash. Conversely, a $50 million project with a $5
million production tax liability would only be eligible for $25
million - because of the cap. She explained this feature was to
deal with the "gold plating" risk. The policy question is if the
production tax value that the state gives away is worth adding
throughput to the TAPS.
MS. JACKSON next invited Don Bullock, Attorney, Legislative
Legal Services, to help her go over the sectional analysis.
3:42:00 PM
DON BULLOCK, Attorney, Legislative Legal Services, Legislative
Affairs Agency, joined Ms. Jackson.
MS. JACKSON said sections 1, 2 and 3 are new and are added to AS
43.55.026. Section 3 actually sets out the new credits;
subsection (a) directs that the new credit applies to qualified
expenditures that were incurred prior to the production of oil
and gas in paying quantities for a lease or a property that is
not and has not been within any unit or produced oil and gas.
She explained that this language targets the new development.
SENATOR FRENCH asked what "within a unit" means.
MR. BULLOCK answered that unitization is authorized through the
oil and gas leasing statute, AS 38.05.180 (b). Generally it will
occur whether a common pool may actually be under several
leases. It protects one person's milkshake straw from sucking
all the oil out from underneath somebody else's property. The
production and costs of producing it are allocated among the
operators, "So, once the unit is formed, it's a group of leases
to develop a particular area."
SENATOR FRENCH said one widely covered new development is
ConocoPhillips' efforts to get across the Colville River into an
area known as CD5. If oil starts to flow out of CD5, as he hoped
it would, he asked if their expenditures would qualify for
credit under this bill or not.
MR. BULLOCK replied that he wasn't familiar with the facts
relating to that field, but the key date in SB 85 is December
31, 2010 and whether or not the project had previously not been
within a unit or produced oil and gas.
SENATOR FRENCH remarked that they had not produced oil and gas
yet in paying quantities, but they had probably found some.
MR. BULLOCK said the Alaska Oil and Gas Conservation Commission
(AOGCC) could probably answer that.
CO-CHAIR WAGONER added that AOGCC people will be here next week.
3:45:52 PM
SENATOR WIELECHOWSKI asked if this credit would apply to
activities on federal lands - NPRA and ANWR - and OCS. He
guessed it doesn't apply past the 6-mile limit, but within the
3-6 mile limit.
MR. BULLOCK answered the production tax is a tax on the activity
of producing oil and gas; it's not on the oil and gas itself.
So, if there is activity on federal land that produces oil and
gas, that activity would be taxable. The oil that is produced
that is not taxable (for example, the federal royalty share)
would not be subject to tax because of the exclusion in AS
43.55.011 that limits the tax to taxable production - and
defines it.
SENATOR WIELECHOWSKI said then that it would apply in NPRA, ANWR
and within 3 miles off the coast, but how about within 3-6
miles?
MR. BULLOCK answered that it applies in any area that is subject
to the state's tax jurisdiction.
CO-CHAIR WAGONER added, "But only to that share of the oil that
belongs to the State of Alaska."
MR. BULLOCK stated that both state and federal royalty oil are
not taxed.
MS. JACKSON pointed out that some people are interested who are
in that range Senator French just spoke to; so there may be some
public comment about expanding it beyond "new." But that is
obviously a policy call.
SENATOR WIELECHOWSKI asked if this credit applies only north of
the 68th parallel. Would it apply to Cook Inlet?
CO-CHAIR WAGONER responded that discussion had happened in his
office, but it was decided to leave it out for the time being.
He didn't think it would apply to many areas in Cook Inlet.
MS. JACKSON added that most of Cook Inlet is already unitized
and therefore wouldn't be eligible for this credit. She said
that Senator Wagoner want a high bar - like new development - to
have discussions on and then go from there.
3:48:48 PM
SENATOR STEDMAN said that's a point they could work on as they
work with the bill, because the tax structure in Cook Inlet is
quite a bit different than the rest of the state.
MS. JACKSON said that subsection (b) defines the amount of the
credit, which is 100 percent of the qualified costs - subject to
the AOGCC and DNR certifications of starting and stopping
production. She said that AOGCC prefers to certify both start
and stop since the production is under their purview.
SENATOR PASKVAN asked if the "Department of Natural Resources"
in (b)(2) on page 2, line 30, would be changed to "AOGCC".
MS. JACKSON answered yes, and that was DNR's suggestion. She
didn't have a chance to talk it over with Mr. Bullock. She said
the credit is for 100 percent of the costs or a five-year tax
holiday, whichever comes first.
SENATOR WIELECHOWSKI asked if this credit would cover dry holes.
MS. JACKSON answered no; AOGCC has to certify that the pool is
developable.
SENATOR WIELECHOWSKI asked what the standard is for that.
MR. BULLOCK answered that language in subsection (h) on page 3,
line 31, says "meets an expenditure other than an expenditure
for exploring for new oil or gas reserves." This would all be
subject to how AOGCC categorizes the wells.
CO-CHAIR WAGONER remarked that other credits would apply to it,
but not under this bill.
SENATOR WIELECHOWSKI said a well in a new unit would get a 40
percent tax credit right now, plus other net operating cost
deductions and asked how this credit interplays with those.
3:52:44 PM
MR. BULLOCK replied subsection (d) on page 3 explains the fact
that 100 percent credit can be taken and that's a lot. They may
not double dip and take a credit for the same expenditure under
another credit provision.
SENATOR WIELECHOWSKI asked if a company drills in a new area and
is eligible for the 40 percent tax credit, the net operating
loss deduction and maybe some other things, do they get it
immediately.
MR. BULLOCK answered they would continue to get their
exploration credits for those costs. Whether they have net
operating losses that are carried forward depends on what the
value of their production is and whether their lease
expenditures exceed that value.
SENATOR WIELECHOWSKI asked if a company found oil and started
producing it in recoverable amounts, say if they got a tax
credit of 60 percent of their exploration costs, are they
proposing giving them an additional 40 percent?
MR. BULLOCK nodded no. He said the first thing this bill does is
set up the period in which the credit may be earned and that
period starts on a lease or property in which they discovered a
pool that is capable of production. From that point until they
produce oil in sufficient quantities to go into the pipeline,
all those costs to get that field in operation - additional
drilling for wells and the equipment needed for that - to
produce the oil in a pipeline quality, then those costs are
development costs. And they get 100 percent credit for those
costs during that time period.
CO-CHAIR WAGONER said maybe a different way to say it is,
generally speaking, an exploratory well does not become the
producing well. So, existing credits go towards an exploratory
well and then once they know they have a pool and it is
producible, that's when these credits kick in.
3:55:07 PM
MS. JACKSON said the drafter was charged with saying "only costs
that lead to production" excluding any exploration from the day
AOGCC says this well is developable.
MS. JACKSON said the credit is not transferable and can't reduce
a tax liability to "under zero." She said subsection (f)
authorizes the department to promulgate regulations.
SENATOR STEDMAN went back to the exclusion on AS 43.55.011(e)
[page 3, line 15] and asked if that referred to the 25 percent
base tax.
MS. JACKSON answered yes.
SENATOR STEDMAN asked if the progressivity part of the tax would
still trigger in.
MR. BULLOCK answered (e) says the tax is 25 percent plus the
amount determined under (g).
SENATOR STEDMAN said he was trying to fit these parts together.
He said AS 43.20.043 in (d) deals with gas, which some believe
is already a negative. He asked the impact of this credit on the
gas tax.
MR. BULLOCK answered this particular credit is not limited to
oil; AS 43.20.043(d) combines oil and gas.
SENATOR STEDMAN said he understands there is no gas market other
than the small one which costs the state treasury around $150
million a year, but he thought the gas issue should be explored
so people could be clear about how this credit stacks into what
some people think is already a negative impact.
MR. BULLOCK added that part of the issue is that reinjected gas
may not be considered produced and therefore is not taxable at
that time.
MS. JACKSON added that his question might be perhaps to just
separate oil and gas.
SENATOR STEDMAN said he would like to do that, but for the
discussion on this bill, he wanted to know how this credit flows
into what is already a negative impact on the treasury
concerning gas. If someone had several sources of gas to
reinject, would it be beneficial for them to use some of this
gas to go after the credit if they didn't hit oil and just hit
gas reserves. It might make it better to hit a dry hole than a
gas well.
4:00:46 PM
MR. BULLOCK said there may never be production for one reason or
another and the state won't get anything unless there is
production that is taxable.
SENATOR WIELECHOWSKI said he thought he had it figured out. So,
if he is an explorer and goes out and does seismic studies,
there is no tax credit under this bill. But the moment he
identifies a field he wants to explore, he puts his well in the
ground. Then AOGCC determines potential development, then the
credit would kick in at that point. Ms. Jackson indicated that
was correct. He went on and supposed he was a new entrant -
Great Bear for instance - then he is not eligible because he
can't transfer his tax credit because he doesn't have an income
stream now. He doesn't start getting the credits until he
actually produces.
MS. JACKSON said that is correct.
SENATOR WIELECHOWSKI said if he were BP or ConocoPhillips, then
the moment he starts drilling he can actually start taking that
credit off of his production taxes.
MS. JACKSON answered for that unit.
CO-CHAIR WAGONER added not until you are in production.
MS. JACKSON added it's per well and not transferable.
SENATOR WIELECHOWSKI asked what "quantities sufficient to
recover the cost of operating and marketing" means and why it
would cover marketing expenses.
MR. BULLOCK replied if a company is producing oil above the
breakeven point it must get sold and part of that is going to
involve a certain amount of developing the market and getting
the product there.
SENATOR WIELECHOWSKI queried that companies typically start
producing in very small quantities, maybe a few thousand barrels
a day and that is not the breaking point, right?
MR. BULLOCK replied that would be a question of fact, but at
some point they would produce enough oil to cover the cost of
production.
SENATOR WIELECHOWSKI said that is the point at which they would
start taking the tax credit, but lines 29 and 30 say "although
the quantity may be insufficient to recover the cost of
drilling."
MR. BULLOCK replied right, but drilling costs are not
recoverable; operating costs are. He said this is a standard
definition for production in paying quantities which he thought
came from "Williams and Myer."
MS. JACKSON said AOGCC also wants to know what that is,
particularly if they are the ones who are going to be certifying
that a well is producing. The sponsor's intent is to keep the
bar very high she repeated.
CO-CHAIR PASKVAN said subsection (d) says whatever is taken as a
credit may not be used as an expenditure and his assumption is
that means a company is not taking expenditures as deductions on
their taxes in that five-year period.
MR. BULLOCK replied right; the bill intends to
"compartmentalize" all the costs that are incurred during this
development period.
CO-CHAIR PASKVAN asked if operation expenses are currently
deducted at Prudhoe Bay.
MR. BULLOCK said he didn't know for sure, but the Department of
Revenue would know.
4:06:32 PM
MS. JACKSON went on to subsection (g) [on page 3] which has to
do with the credits being applied only toward leases and then on
to the definitions section, subsection (h). One company asked
what if they didn't want to take this credit but take the other
credit instead. But she hadn't had the opportunity to see
whether or not that choice was available to them.
SENATOR STEDMAN said that is a good question and maybe later on
they could have some calculations and comparisons back and forth
on it.
SENATOR WIELECHOWSKI asked how this credit would play out with
shale oil, because the oil is trapped in sands not in a pool.
CO-CHAIR WAGONER answered that wells wouldn't get drilled that
fast and this is meant to stimulate development in the area. It
wouldn't be in effect long enough to develop the total area. He
thought this committee should discuss a five or seven year
sunset date for that reason. He added that this credit also
allows companies that are looking to develop these new "non-
traditional plays" on the North Slope to have others become
involved with them and share the risk of the development phase.
4:09:42 PM
MS. JACKSON went to section 4 on page 4 that amends existing law
to include this new section of tax credits. Section 5 is the
effective date, which is immediate.
CO-CHAIR PASKVAN said the original thought pattern for this
credit came from tax changes done in Alberta and asked what was
included compared to what wasn't included from their tax
pattern, so they can determine which expenditures might be
working or not compared to Alberta.
CO-CHAIR WAGONER answered that Alberta reduced their royalty to
a 2 percent level and stays at the level until the company pays
itself back from coming into production. The credit in SB 85 was
designed to do that, but with a different design. This is done
using the reduction of the production tax. Alberta's royalty is
about 50 percent.
MS. JACKSON said it is interesting to see Alberta go through
what they are going through now.
SENATOR WIELECHOWSKI said they might want to consider a
provision about shortening the credit time period for a company
that finds a major well and asked if that was done in Alberta.
CO-CHAIR WAGONER answered Alberta didn't do that, but companies
did come back and asked for more royalty reductions. That's why
he wanted to look at a sunset date that is not too soon and not
too late.
SENATOR WIELECHOWSKI said if their goal is to incent oil fields,
hypothetically Congress could decide to open up ANWR and then
Alaska would be subsidizing its development. What about
excluding some production that doesn't need incentives?
CO-CHAIR WAGONER answered they could "ringfence this thing" and
put lines where they want them - north of the Brooks Range over
to but not to exceed the boundary of such and such.
MS. JACKSON said a lot of those questions would go away with
sunset language.
4:14:21 PM
SENATOR STEDMAN went back to Senator Wielechowski's point of a
big find in a big field - maybe they could have some
hypotheticals run under the current tax structure with different
dollar amounts and different size pools versus the scenario
under this bill. They might get a better feel for which type of
credit enhancement would be most desirable from the industry's
perspective.
MR. BULLOCK said there are two factors relating to the value of
the production: the quantity of the production and the costs
that are incurred to develop the field. So, if the field is very
rich, the credit would be used up quickly. On the other hand, if
the development costs are very high and the production is not of
sufficient value, the full amount of credit might never get used
because of the five-year limitation.
SENATOR WIELECHOWSKI asked if the credit applies only to the
production tax.
MR. BULLOCK answered yes, only to the production tax in AS
43.55.011.
SENATOR WIELECHOWSKI asked if a company paying its 12.5 percent
royalty can't lower its burden there at all.
MR. BULLOCK said the royalty continues, as well as the 1 and 4
cent surcharges and income tax.
SENATOR WIELECHOWSKI asked what percentage of a field is
typically developed in the first five years and whether or not
companies could extract enough in that time to damage the
fields.
MS. JACKSON replied that the AOGCC would have to allow them to
do that because of that very issue.
SENATOR STEDMAN went to a hypothetical larger find that is
actually profitable where the credit is used up in three years
and asked if they would then automatically trigger existing
credits for ongoing work and development.
MR. BULLOCK replied that is his understanding. They are allowed
to take credits until the production tax is offset by those
credits; then this credit is not an issue any more. The credits
they earn for ongoing capital and lease expenditures will apply
from that point on.
SENATOR STEDMAN stated there is no look-back provision so they
would have to have a date certain where one stops and the other
one activates.
MR. BULLOCK said the department would have to consider when the
transition occurs when they adopt their regulations. He remarked
that payments are made on a monthly basis.
4:18:49 PM
CO-CHAIR PASKVAN asked since the bill indicates that the credit
doesn't apply to work that was done in an area that is currently
in a unit or had previously been in a unit, if it applies to
heavy oil in the known fields.
CO-CHAIR WAGONER remarked that heavy oil is already in unitized
areas but lying in a different level than what is being produced
right now.
SENATOR WIELECHOWSKI said he would be interested in finding out
what the typical costs of developing a field are, maybe various
sized fields. Then he said that the issue of gold plating is a
potential concern, particularly in a very profitable field.
MR. BULLOCK agreed with him and added also if someone is sharing
the risk with you, perhaps the standard for deciding whether to
make that investment may be different because you are
backstopped.
SENATOR STEDMAN asked, "How could we be gamed?"
MS. JACKSON said they were hoping during the discourse in the
next week someone would slip and tell them.
SENATOR STEDMAN said the concept of allowing immediate credits
is very common all over with little different twists.
4:22:33 PM
SENATOR WIELECHOWSKI agreed and said they hear all the time
about other countries that have much higher tax rates than
Alaska and maybe they are doing things like this where they keep
the high tax rate, but front load the payback. He said it would
be great if the administration could "chime in" on what other
countries do.
MS. JACKSON said she had talked briefly with the Department of
Revenue about modeling that very issue. Senator Wagoner's goal
was to stay removed from production taxes and see what they
could do in terms of credits.
4:23:53 PM
CO-CHAIR WAGONER stated his long term goal is "more oil in the
pipe." With that he thanked everyone for coming and adjourned
the meeting at 4:24 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 91_Hearing Request.pdf |
SRES 2/25/2011 3:30:00 PM |
SB 91 |
| SB 91_Sponsor Statement.pdf |
SRES 2/25/2011 3:30:00 PM |
SB 91 |
| SB 91_Bill Version A.pdf |
SRES 2/25/2011 3:30:00 PM |
SB 91 |
| SB91_Fiscal Note_DFG-SFD-02-18-11.pdf |
SRES 2/25/2011 3:30:00 PM |
SB 91 |
| SB 91_Letter of Support_UFA.pdf |
SRES 2/25/2011 3:30:00 PM |
SB 91 |
| SB0085A.PDF |
SRES 2/25/2011 3:30:00 PM |
SB 85 |
| SS SB 85 5 year tax holiday.pdf |
SRES 2/25/2011 3:30:00 PM |
SB 85 |
| SA SB 85 5 year tax holiday.pdf |
SRES 2/25/2011 3:30:00 PM |
SB 85 |
| SB 85 Pg 1 TAPS May 2010.pdf |
SRES 2/25/2011 3:30:00 PM |
SB 85 |
| SB 85 Pg 2 TAPS May 2010 info.pdf |
SRES 2/25/2011 3:30:00 PM |
SB 85 |
| SB 91 Packet - HB 452 Enrolled.pdf |
SRES 2/25/2011 3:30:00 PM |
HB 452 SB 91 |
| SB 91 Packet - 2007Summary.pdf |
SRES 2/25/2011 3:30:00 PM |
SB 91 |
| SB 91 Packet - LICENSING REAUTH BRIEF March102010final (2).doc |
SRES 2/25/2011 3:30:00 PM |
SB 91 |
| SB 91_Letter of Support_Southeast Alaska Fishermans Alliance.pdf |
SRES 2/25/2011 3:30:00 PM |
SB 91 |
| SB85_Fiscal Note_DOR-TAX-02-24-11.pdf |
SRES 2/25/2011 3:30:00 PM |
SB 85 |