HB 89-OIL & GAS PRODUCTION TAX 4:19:15 PM CHAIR KOHRING announced that the next order of business would be HOUSE BILL NO. 89, "An Act providing for the use of petroleum production and other facilities by additional entities; amending the powers of the Alaska Oil and Gas Conservation Commission; relating to oil and gas properties production taxes and credits; providing for production tax adjustments to increase the amount of tax at high oil prices, reduce the amount of tax at low oil prices, and reduce the amount of tax on the production of heavy oil; relating to the determination of the gross value of oil and gas at the point of production; and providing for an effective date." REPRESENTATIVE LES GARA, Alaska State Legislature, sponsor of HB 89, informed the committee that there are two major ways to tax oil. The first is by taxing the taxpayers on the profit from production and the second is to tax on a percentage of the sales value of the oil. The latter system is known as "taxing on the gross." With budget deficits approaching, he explained, "taxing on the gross" is the best way to obtain the maximum possible benefit for Alaskans from resource development. He said he believes there are several reasons to support HB 89. First, when compared to the world average tax rate on oil, the PPT will result in tax revenue to the state of about $1 billion less per year. Secondly, Alaska's political stability is a benefit to the producers; there is no threat of a coup or nationalization of assets. Additionally, the PPT allows the North Slope producers to deduct the cost of developing gas production facilities before the production of gas begins. The estimated cost of the development of the gas field is $9 billion; therefore, a 40 percent gas line development deduction is estimated to equal between $200 million and $300 million per year. This amount will be subtracted from oil tax revenue during the development years. Representative Gara observed that once a gas pipeline is built there is no reason to give a company a subsidy for developing its gas field, as there will be no risk to do so. Finally, the development and exploration deductions allowed under the PPT are unknown, unpredictable, and will impact revenue income for the state. The PPT is a profit- based tax that allows the opportunity for companies to deduct costs, thereby reducing tax revenue due to the state. Representative Gara described HB 89 as a law designed to determine a tax rate closer to the world average, to provide fair incentives for new exploration, and to address the problem of facilities access. Regarding the problem of facilities access, he reported that initial data from DNR suggests that more oil can be developed on the North Slope if independent companies had access to the existing processing facilities. The North Slope processing facilities are filled to capacity with high water content oil from older fields. ConocoPhillips Alaska, Inc., ExxonMobil Corporation, and BP own most of the facilities and are unwilling to provide access to their competitors who are producing higher oil content oil from newer fields. This bill, Representative Gara acknowledged, may not be the best way to address the facilities access issue. However, HB 89 includes production incentives, one of which is a tax exemption of the first 7,500 barrels per day produced by smaller fields. Representative Gara said that the tax rate set by HB 89 is designed to raise tax revenue at higher oil prices. The tax rate begins at 15 percent gross tax when the price of oil is at $35 per barrel of oil. For every $1 increase in the price of oil per barrel there is an approximate increase of one-third in the tax rate percentage. If the price of oil falls to below $20 per barrel, the tax rate percentage will decrease proportionately. In conclusion, Representative Gara urged the committee to consider the following: HB 89 seeks to tax the oil producers at the world average in a verifiable way; it will not encourage surprise deductions for questionable expenditures; and it will not require hiring a team of accountants for implementation and enforcement. The PPT, Representative Gara emphasized, will increase tax revenue in the short term; however, it provides for a $4 million subsidy to build the gas pipeline. This subsidy, he cautioned, will come at a time of reduced state revenue; furthermore, it is only available to major North Slope lease owners. CHAIR KOHRING stated his support of the concept of HB 89; however, he said he is strongly opposed to greatly increasing taxes to the oil producing industry. He announced that HB 89 would be held over for public testimony.