ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 7, 2010
1:05 p.m.
MEMBERS PRESENT
Representative Craig Johnson, Co-Chair
Representative Mark Neuman, Co-Chair
Representative Bryce Edgmon
Representative Kurt Olson
Representative Paul Seaton
Representative Peggy Wilson
Representative David Guttenberg
Representative Scott Kawasaki
Representative Chris Tuck
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Nancy Dahlstrom
COMMITTEE CALENDAR
COMMITTEE SUBSTITUTE FOR SENATE BILL NO. 305(FIN)(TITLE AM)
"An Act providing that the tax rate applicable to the production
of oil as the average on oil and gas production for
appropriation to the community revenue sharing fund; production
tax value of oil, gas produced in the Cook Inlet sedimentary
basin, and gas relating to the allocation of lease expenditures
and adjustments to lease expenditures; produced outside of the
Cook Inlet sedimentary basin and used in the state increases and
providing for an effective date."
- HEARD & HELD
HOUSE BILL NO. 337
"An Act relating to interest on certain underpayments or
overpayments for the oil and gas production tax, to certificates
for certain oil and gas production tax credits for qualified
capital expenditures, and to alternative tax credits for
expenditures for certain oil and gas development and exploration
activities for the oil and gas production tax; relating to the
use of the oil and gas tax credit fund to purchase certain tax
credit certificates; and providing for an effective date."
- MOVED CSHB 337(RES) OUT OF COMMITTEE
HOUSE BILL NO. 332
"An Act providing income tax credits for geothermal resource
exploration and development."
- BILL HEARING CANCELED
HOUSE BILL NO. 411
"An Act providing income tax credits for geothermal resource
exploration and development."
- SCHEDULED BUT NOT HEARD
HOUSE BILL NO. 320
"An Act removing the royalty obligation for geothermal
resources."
- WAIVED HB 320 OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: SB 305
SHORT TITLE: SEPARATE OIL & GAS PROD. TAX/ DEDUCTIONS
SPONSOR(s): FINANCE
03/08/10 (S) READ THE FIRST TIME - REFERRALS
03/08/10 (S) FIN
03/09/10 (S) FIN AT 9:00 AM SENATE FINANCE 532
03/09/10 (S) Heard & Held
03/09/10 (S) MINUTE(FIN)
03/10/10 (S) FIN AT 9:00 AM SENATE FINANCE 532
03/10/10 (S) <Bill Hearing Canceled>
03/11/10 (S) FIN AT 9:00 AM SENATE FINANCE 532
03/11/10 (S) -- MEETING CANCELED --
03/12/10 (S) FIN AT 9:00 AM SENATE FINANCE 532
03/12/10 (S) Heard & Held
03/12/10 (S) MINUTE(FIN)
03/18/10 (S) FIN AT 3:00 PM SENATE FINANCE 532
03/29/10 (S) FIN AT 9:00 AM SENATE FINANCE 532
03/29/10 (S) <Bill Hearing Postponed>
03/31/10 (S) FIN RPT CS 6DP 1AM NEW TITLE
03/31/10 (S) DP: HOFFMAN, STEDMAN, THOMAS, EGAN,
OLSON, ELLIS
03/31/10 (S) AM: HUGGINS
03/31/10 (S) FIN AT 9:00 AM SENATE FINANCE 532
03/31/10 (S) Moved CSSB 305(FIN) Out of Committee
03/31/10 (S) MINUTE(FIN)
04/01/10 (S) TRANSMITTED TO (H)
04/01/10 (S) VERSION: CSSB 305(FIN)(TITLE AM)
04/05/10 (H) READ THE FIRST TIME - REFERRALS
04/05/10 (H) RES, FIN
04/07/10 (H) RES AT 1:00 PM BARNES 124
BILL: HB 337
SHORT TITLE: OIL AND GAS PROD. TAX: CREDITS/INTEREST
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
02/10/10 (H) READ THE FIRST TIME - REFERRALS
02/10/10 (H) RES, FIN
03/10/10 (H) RES AT 1:00 PM BARNES 124
03/10/10 (H) Heard & Held
03/10/10 (H) MINUTE(RES)
03/27/10 (H) RES AT 10:00 AM BARNES 124
03/27/10 (H) Heard & Held
03/27/10 (H) MINUTE(RES)
03/29/10 (H) RES AT 1:00 PM BARNES 124
03/29/10 (H) Heard & Held
03/29/10 (H) MINUTE(RES)
03/31/10 (H) RES AT 1:00 PM BARNES 124
03/31/10 (H) <Bill Hearing Canceled>
04/07/10 (H) RES AT 1:00 PM BARNES 124
BILL: HB 320
SHORT TITLE: NO ROYALTY ON GEOTHERMAL RESOURCE
SPONSOR(s): REPRESENTATIVE(s) MILLETT
01/29/10 (H) READ THE FIRST TIME - REFERRALS
01/29/10 (H) RES, FIN
04/07/10 (H) RES REFERRAL WAIVED
04/07/10 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
MILES BAKER, Staff
Senator Bert Stedman
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Introduced SB 305 on behalf of the Senate
Finance Committee, sponsor.
PATRICK GALVIN, Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Testified during the hearings on SB 305 and
HB 337.
SENATOR BERT STEDMAN
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Provided background on the history of SB
305 on behalf of the Senate Finance Committee, sponsor.
SENATOR JOE PASKVAN
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Discussed SB 305.
ACTION NARRATIVE
1:11:32 PM
CO-CHAIR MARK NEUMAN called the House Resources Standing
Committee meeting to order at 1:05 p.m. Representatives Neuman,
Guttenberg, Olson, Johnson, Tuck, Seaton, Kawasaki, and Peggy
Wilson were present at the call to order. Representative Edgmon
arrived as the meeting was in progress.
SB 305-SEPARATE OIL & GAS PROD. TAX/ DEDUCTIONS
1:12:06 PM
CO-CHAIR NEUMAN announced that the first order of business would
be SENATE BILL NO. 305, "An Act relating to the tax on oil and
gas production; and providing for an effective date." [Before
the committee was CSSB 305(FIN).]
1:12:55 PM
CO-CHAIR JOHNSON announced that amendments on the bill must be
submitted by 4/8/10 in order to be introduced on 4/9/10. He
said the schedule for the meeting would be to recess at 3:00
p.m. and return to a call of the chair to hear HB 337.
1:14:27 PM
MILES BAKER, Staff to Senator Bert Stedman, Alaska State
Legislature, introduced SB 305 on behalf of the Senate Finance
Committee, sponsor. He stated that the current tax rate of oil
and gas activities is based on the combined British thermal unit
(Btu) value of oil and gas. However, oil and gas can have
vastly different values on a Btu basis. The current structure,
in conjunction with the uncertainty of future prices, exposes
the state to significant financial risk under a major gas sale.
In addition, this structure creates economic instability for any
entity that chooses to participate in the development or
financing of a natural gas pipeline in Alaska. Senate Bill 305
separates oil and natural gas for the purpose of calculating the
progressivity portion of the production tax under AS 43.55. The
intent of the bill is for progressivity surcharges for oil and
Cook Inlet and in-state gas to be calculated together - but
distinctly separate from export gas - instead of the current
practice where oil and gas are combined. However, the
progressivity mechanism is unchanged, and remains based on 0.4
percent of the production value that exceeds $30 per barrel of
oil, and $30 per Btu barrel equivalent for gas. Furthermore,
the base tax rate is unchanged at 25 percent of production tax
value. Mr. Baker gave a description of the effect of the bill
by saying it is "kind of creating two separate 'buckets' that we
use to do our progressivity calculation. Instead of having one
state-wide progressivity calculation, we would have two ... the
first would be based on oil, Cook Inlet gas, and other in-state
gas with the progressivity calculated together, and the non-Cook
Inlet gas used in state would be treated as it is now."
1:16:43 PM
MR. BAKER continued to explain that the reason for this change
is because there is some gas being produced in the state and the
lower value of that gas is combined with the higher valued oil,
and that brings down the value of the revenue to the state. The
bill, by splitting out oil and gas, would preclude producers of
gas to use that "dilution" against their oil tax liability. Mr.
Baker clarified that the intent of the bill is not to create an
additional tax liability, but the estimated cost of the dilution
effect ranges from $40 million to $170 million per year. Thus,
the state is currently giving up anywhere from $50 million to
$200 million a year. Again, splitting oil and gas directly
represents a tax increase, but this mechanism will separate the
two for the purpose of a future major gas sale, and not have the
impact affect the current minimal in-state gas use. Therefore,
the two buckets allow for the dilution effect for current in-
state gas, and for a separate calculation in the event of a
major gas sale, or for export gas.
1:19:41 PM
CO-CHAIR NEUMAN asked whether the effect on state general fund
revenue is about $2 billion.
1:20:07 PM
MR. BAKER, in response, called attention to the document
provided in the committee packet titled, "SB 305: The
Separation of Oil from Gas for the Oil & Gas Production Tax,"
from Logsdon & Associates, and dated 4/7/10. He said the chart
on page 13 shows oil and gas price parity relationships, and
that the $2 billion figure shown in scenario 3 is based on a
$120 oil price and an $8 gas price, which is a parity that is
equivalent to current prices, and what the U.S. Department of
Energy (DOE) projects for the time period at the beginning of
production from a gas pipeline. Therefore, with a $120 price of
oil and an $8 price of gas parity, under the current tax
structure and without the separation of how progressivity is
calculated, the annual tax reduction from combining oil and gas
is estimated to be $2 billion.
1:22:01 PM
REPRESENTATIVE SEATON observed the estimate on page 13 assumes
that gas is taxed separately at 25 percent plus progressivity to
generate $1.1 billion in tax revenue. He asked whether the
sponsor has confidence that this tax rate would produce a gas
pipeline.
1:22:45 PM
MR. BAKER asked for the question to be restated.
1:23:29 PM
REPRESENTATIVE SEATON restated his question, and added, "Did the
sponsor ... the Senate Finance Committee, believe that it was in
the realm of possibility that we would get a gas line at 25
percent profits tax plus progressivity?" He agreed that there
is a discrepancy in numbers; however, most of the testimony
heard by the committee asserts that those numbers are based on a
tax rate that would never produce a gas pipeline.
1:24:43 PM
MR. BAKER recognized that with the price parity projections,
there is concern that by going into an open season negotiation
with the current tax structure, there would be a negative tax
rate on Alaska's gas. He opined the sponsor feels that, at the
minimum, the tax should be zero, and that the state should not
go into negotiations "starting that far behind the power curve."
Furthermore, it was also recognized that the gas progressivity
structure, if left the same and affected by rates, slopes, and
triggers, was all "set up on oil, those were never conceived to
be the potentially proper progressivity mechanism that you would
want if you were going to tax your gas separately." Thus the
sponsor realized that all of those factors have to be on the
table for negotiation under the terms of a conditional open
season. In fact, royalty rates, progressivity, and all of
Alaska's tax structure would be part of what would be
negotiated. He concluded that splitting oil and gas results in
a tax structure that does not work well for gas, however, this
action acknowledges the state's intent to treat oil and gas
separately for the first time.
1:27:23 PM
CO-CHAIR NEUMAN, noting the approaching open season, recalled
that one of the inducements of the Alaska Gasline Inducement Act
(AGIA) was to lock in the tax rate for up to 10 years. He
questioned the wisdom of locking in the present tax rate when it
would have a negative impact on general fund revenues. In
addition, he opined the bill does not change tax structure, but
looks at oil taxes and gas taxes differently as they are both
energy producing components that are treated differently on the
world market, and have different values.
1:28:57 PM
CO-CHAIR JOHNSON referred to the previous presentation of these
estimates and pointed out that the $2 billion estimate was not a
prediction, but a number "carried out to a worst case scenario,
and somewhere in between zero, and this number, is what we're
basically gambling." He stressed that testimony by consultants
on the related House bill was identical and the estimates were
used illustratively.
1:29:57 PM
REPRESENTATIVE GUTTENBERG asked whether the Senate Finance
Committee explored any scenarios or alternatives that create a
floor, "so that it would never go below that rate, on either
side, or both, or a combination [there]of."
1:31:13 PM
MR. BAKER related that the Joint Committee on Legislative Budget
and Audit (JBUD) hired Dr. David Wood, David Wood & Associates,
United Kingdom, to create a robust model of Alaska's tax
structure, taking into consideration all of the variables and
unknowns. This model has been presented to other legislative
committees; and in fact, the first point of his analysis was
that Alaska's coupled tax structure is fundamentally flawed.
Furthermore, the analysis indicated that there are many
incentives used to encourage production, and Alaska must address
the decoupling issue and regressive taxes, such as property
taxes and royalty taxes, that are "built-in at the base level of
their business." Although Dr. Wood could address the mechanics
of the tax structure at the legislature's request, Mr. Baker
opined that the sponsor of the bill decided "to tackle the
decoupling."
1:35:24 PM
PATRICK GALVIN, Commissioner, Department of Revenue (DOR),
informed the committee the decoupling issue is complex with many
aspects to explore. He advised that his presentation is from "a
very high level [and I] tried to boil down what I see as the
issues, the policy issues, that are presented by this bill." In
addition, significant analysis has been done this session, and
the presentation attempts to cover the key points relative to
the legislature's decision-making process.
1:36:44 PM
CO-CHAIR NEUMAN asked whether this is an issue of which the
department is aware.
1:37:00 PM
COMMISSIONER GALVIN said yes. The "dilution effect" was built
into the system as an intended result of the "net base tax
system with the progressivity element." In fact, the department
testified in 2007 as to its impact on incentives for heavy oil
development and the gas project. Furthermore, in January 2008,
the department cautioned that revenue from a gas line, based on
prices then, would result in a reduction of oil taxes of about
$1 billion per year; in other words, that was presented as an
incentive for gas line development. Since then, oil and gas
prices have caused the projection of the dilution effect to be
much greater than anticipated, and the department now recognizes
that there are significant advantages, in terms of the state's
fiscal policy, of having the combination of oil and gas working
together. Commissioner Galvin acknowledged, however, that there
are extreme situations concerning the price differential between
oil and gas that need to be addressed, hence the decoupling
solution. Although there are less extreme ways to address the
situation, such as a minimum tax mechanism, the Senate Finance
Committee pursued decoupling, thus DOR has completed additional
analysis of SB 305.
1:40:10 PM
COMMISSIONER GALVIN continued to explain that his testimony
today will provide a context in which to look at the decoupling
issue, clarify where the state currently is in the gas line
development process, and examine expectations for the next few
years. Open season for the Alaska Pipeline Project (APP) begins
April 30, and Denali - The Alaska Gas Pipeline (Denali)
submitted its plan to the Federal Energy Regulatory Commission
(FEC) today. The open seasons will go through the summer, and
negotiations on agreements will continue through this year.
1:41:10 PM
REPRESENTATIVE GUTTENBERG surmised the only decoupling issue
facing the state now is with AGIA and not the Denali project.
1:41:42 PM
COMMISSIONER GALVIN clarified that the decoupling bill will
affect the economics of either project because it will become
the law of the land. He agreed, however, that the tax
inducement in AGIA is not available for the Denali project.
REPRESENTATIVE GUTTENBERG confirmed that decoupling changes the
state's tax law for all projects.
1:42:45 PM
CO-CHAIR NEUMAN asked how decoupling changes the tax structure.
1:43:21 PM
COMMISSIONER GALVIN explained that the current system combines
oil and gas and taxes them as a whole because oil and gas are
produced together. In contrast, wood and coal have energy
value, but they are not produced with oil. However, oil and gas
come out together, and if the state is going to have separate
systems to tax them, then the state's current tax system must be
changed, and SB 305 takes half of the calculation - revenue,
less cost, equal profit - and splits those costs in a way yet to
be determined. The result will be different economics for oil,
for gas, and for the taxes on the underlying profits.
Commissioner Galvin observed, "Regardless of whether the rate,
the progressivity rate, the kick-off rate for progressivity, are
changed, the fact of the matter is, we're going to end up with a
different tax system for oil then we have now, [and a] different
tax system for gas then we have now."
1:44:52 PM
CO-CHAIR NEUMAN opined that is the intent of the bill.
COMMISSIONER GALVIN agreed.
CO-CHAIR NEUMAN pointed out other gas and gas line developments
that are underway.
1:45:44 PM
COMMISSIONER GALVIN returned to upcoming events related to the
gas line projects and advised that the department is looking at
precedent agreements, full commitments from shippers,
sanctioning the project, and entering into transportation
services agreements, all effective around 2014. Between now and
then there will be ongoing discussions about project economics,
the cash flow needed by producers, and the relative risks the
state is willing to bear. At the conclusion of these
discussions will be agreement on the amount of fiscal
predictability that the producers are going to need to make
commitments. He disagreed with the initial premise that the
state's "take," including property taxes and royalty rates, is
up for negotiation. Conversely, Commissioner Galvin expressed
his belief that "fiscal certainty, fiscal predictability is
something that the producers have clearly stated they require."
However, the department looked at the economics of the project,
in terms of cash flow, and believes that under the state's
current system, as of now, there is adequate cash flow to the
producers. He stressed that the state's position should be one
of not conceding the question of whether a change in the state's
cash flow is required.
1:48:34 PM
CO-CHAIR NEUMAN recalled that one of the inducements under AGIA
is that a participant in the first open season gets a "lock-in
on your tax rate."
COMMISSIONER GALVIN clarified that the applicable rate is on the
gas production tax.
CO-CHAIR NEUMAN said his point is that the state may make full
commitments for shipping gas until 2014 at a locked-in rate, but
continue to change rates for the fiscal predictability that the
producers need.
1:49:40 PM
COMMISSIONER GALVIN explained that AGIA legislation assures a
10-year fiscal certainty aspect to gas production taxes;
however, producers have consistently said 10 years is not long
enough, and there is still uncertainty. Regardless of whether
producers qualify for the AGIA inducement, he said he expects
producers will ask for more durability and predictability after
the open season. The question remains about how flexible the
state will be in terms of its negotiation position.
1:50:40 PM
CO-CHAIR NEUMAN noted the Commissioner's reference to
assumptions and stated his concern is with the law as it stands
today.
1:50:51 PM
COMMISSIONER GALVIN said he was not contradicting current law at
all.
1:51:01 PM
REPRESENTATIVE SEATON expressed his belief that Alaska's Clear
and Equitable Share (ACES) inducement for gas was the difference
between the tax rate during the first open season and what was
subsequently negotiated.
1:51:34 PM
COMMISSIONER GALVIN advised that the inducement is the gas
production tax obligation not the tax rate, but the obligation
under the current system that sets the ceiling. He said,
"Whatever the obligation, the gas production tax obligation
that's under the current system in place, is what sets the
ceiling."
1:52:37 PM
COMMISSIONER GALVIN, in response to Representative Guttenberg,
said he would explain the difference between the rate and the
obligation later in his testimony. He then turned to the
subject of the primary considerations of today, and said that
there will be a period of uncertainty during open season when
there will be ongoing discussions in regard to the state's
fiscal system, and what needs to be in place for the long-term.
For example, if the state's interest can be protected during
this period by achieving a gas pipeline, and by securing an
appropriate share of revenue from oil and gas production once a
gas pipeline is in place. On this issue there are two
considerations: 1. whether our fiscal system is attractive
enough to get a gas pipeline project; 2. whether the potentially
locked-in portion of the fiscal system is set at an acceptable
level for the state. To address these considerations,
Commissioner Galvin said the department modeled the provisions
of SB 305, in comparison to the status quo, using broad and
varied comparisons from an oil price range of $40 to $200 per
barrel and a gas price parity range of $6 to $26. The model
also assumed oil production of 500 thousand barrels of oil per
day (500 MMbl/d); a 4.5 billion cubic feet per day (Bcf/d) gas
pipeline; operating expenses (OPEX) of $2.2 billion; capital
expenses (CAPEX) of $2.2 billion.
1:56:05 PM
COMMISSIONER GALVIN displayed a PowerPoint presentation by the
Alaska Department of Revenue titled, "Comments on CSSB
305(FIN)," and dated 4/7/10. Slide 5 titled, "In all of the
Cases Run: CSSB305(FIN) Results in a Lower "Locked-in" Gas Tax
Obligation," illustrated two buckets, one of taxes defined by
the bill and one of the status quo. Because the bill does not
set a cost allocation, there are a variety of cost allocation
methods that can be used by the model, such as an individual
basis, or formulas using a Btu barrel equivalent (BOE) basis or
a point of production (PoP) basis. He described some of these
methods and cautioned that "you get two different numbers,
wildly different numbers, and we'll show you that."
1:58:49 PM
CO-CHAIR NEUMAN asked the commissioner to identify the colored
areas on the slide. He then observed that the problem with Btu
equivalents is that not all oil and gas are the same; in fact,
there is a tremendous variation depending on the presence of
natural gas liquids. To try to base the model on a Btu
equivalent simply using "60 percent of your costs for gas, 40
percent for oil, well that gas could be so much different ...
that's the issue I've always had with Btu equivalent.... I
don't think it's an appropriate way to do it."
1:59:46 PM
COMMISSIONER GALVIN explained that if the gas stream is broken
down into its Btu equivalents, more value is given to gas that
has liquids in it, when compared to other gas, and it will take
less of it to equate to one barrel of oil. This is a method
that allows one to recognize that there is a difference in value
and quality that can be set on a volume basis. On the other
hand, the PoP value method can be used, which is based on the
dollar value of the commodity itself. He advised that different
cost allocation methods are used for analysis and because the
bill does not specify which cost allocation method is to be
used, the department has "no magic that I'm going to come up
with, through a [regulatory] process that's going to somehow,
empirically come up with one. But if you don't like Btu basis
... then it would be best to have that in the statute."
2:02:18 PM
CO-CHAIR NEUMAN restated his point that the department is using
Btu equivalencies that are based on a percentage of gas and oil
out of a well, in volume, yet the Btu values are different
across just about every oil and gas field.
2:02:48 PM
COMMISSIONER GALVIN assured the committee that the Btu value is
established based upon the quality of the product; however, he
acknowledged that at this time, there is a cause for confusion
during his presentation when he gives examples and assumptions.
He returned to slide 5 and noted that the assumption, for the
purpose of the model, is that the cost allocation would either
be on a BOE or a PoP basis, simply to make the presentation of
the results of the model easier.
2:04:17 PM
REPRESENTATIVE P. WILSON observed that the PoP is the net after
the tariff and asked, "Is that counting upstream or ... upstream
and downstream, or just downstream?"
2:04:53 PM
COMMISSIONER GALVIN said for a gas pipeline, it includes the gas
treatment plant, the main pipeline, and smaller pipelines to the
market. Those are the only costs being deducted from the sales
price to establish the PoP value. Gathering lines, processing
plants, and wells are the costs that must be allocated; thus it
needs to be determined which of the upstream costs are being
incurred to produce both oil and gas, and how much will be
deducted from oil revenue and how much will be deducted from gas
revenue. Therefore, for a point of production basis, the
percentages of the value of the gas and the value of the oil
determine the way the costs are split. He stressed that this is
not what the tax is based on, but these are the two methods
being used in the model.
COMMISSIONER GALVIN, in response to Co-Chair Neuman's earlier
question, said that on slide 5 the bar identified as
CSSB305(FIN) is the separate gas tax and the separate oil tax,
using the same tax rates that are in current law. The taxes are
illustrated as separate because the bill calculates the taxes
separately. To do that, the costs must also be separated, and
the cost allocation will make the adjustment. Slides 5, 6, and
7 do not use numbers, but merely compare the relative size of
the bars.
2:07:46 PM
COMMISSIONER GALVIN stated the right hand bar represents the
status quo under the current combined tax system, and there is
no separate gas portion or oil portion. However, because of the
AGIA tax inducement, the department had to come up with a way to
derive the gas production tax obligation so it could be compared
to some future law that may be in place. In fact, in the
present regulations, there is a method to attribute current
production tax obligations between oil and gas, so the gas
production tax can be established for AGIA tax inducement
purposes. Therefore, slide 5 shows that for all of the
different price relationships, the gas tax being locked-in
without changes is always higher than the tax set by the passage
of the proposed decoupling statute.
2:09:44 PM
COMMISSIONER GALVIN, in response to Co-Chair Neuman, said the
current system, under ACES, is the combined production tax that
results in a single number for oil and gas together, that the
producer owes to the state. For example, an oil and gas
producer has a gas line, prepares its taxes, and determines its
tax obligation to the state is $5 billion. The department,
under current regulation, uses the relative PoP value, and
determines how much is the oil portion and how much is the gas
portion. Thus the $5 billion may be divided into $2 billion for
gas and $3 billion for oil. In the same example, if oil and gas
are separated and calculated differently, the gas tax portion
will be less than $2 billion in every price comparison.
2:11:57 PM
COMMISSIONER GALVIN continued to slide 6 titled, "In All of the
Cases Run: CSSB305(FIN) Raises Oil Taxes," and pointed out that
in all of the models that were run, the separate oil tax under
the proposed decoupled law is larger than the attributed oil tax
under the status quo. Furthermore, in 90 percent of the cases
the combined tax obligation of separate oil and separate gas is
larger than when the two are combined under the status quo. It
is important to understand that while the overall state revenue
is increased by separation, the portion that is "fixed" by the
AGIA open season is always lower under SB 305 than under the
status quo.
2:13:39 PM
CO-CHAIR NEUMAN asked whether the regulations are written yet.
COMMISSIONER GALVIN said the regulations are final.
2:13:50 PM
CO-CHAIR NEUMAN surmised that the regulations are final on
evaluating PoP, yet Btu values are different. He asked whether
the regulations tell industry and the department how to tax
those different rates and volumes, based upon Btu equivalents at
the PoP.
COMMISSIONER GALVIN said yes.
2:15:03 PM
CO-CHAIR NEUMAN asked for examples from different fields for
comparison. In response to Commissioner Galvin's request for
clarification, he remarked:
You have your point of production ... at the meter ...
the point of production, and then your value of that
is based on market values, so you've got that point of
production value. Then, because the Btu equivalents
are different between different oil and gas fields ...
that produce both oil and gas, and because those Btu
values are so much different between each one of those
wells, what I'd like to see is a chart that talks
about ... the Btu value...
COMMISSIONER GALVIN agreed to provide information on potential
oil and gas mixes, the potential heat value of the gasses, and
the calculation method for establishing that value.
2:16:30 PM
CO-CHAIR NEUMAN observed that the Gubik field has a lot of
methane, and so has a very low Btu value, but possibly high
levels of gas. Therefore, the low Btu value would be a
disincentive to exploration. Co-Chair Neuman said this subject
would be discussed at another time.
2:17:46 PM
REPRESENTATIVE P. WILSON understood Commissioner Galvin to be
saying that if gas and oil taxes are separated, the state would
make more money because it would make more on oil.
COMMISSIONER GALVIN agreed. He referred back to page 13 of the
presentation by Logsdon & Associates, and pointed out that the
gas is not being taxed differently, but that the oil is getting
the full brunt of the tax against it. He said, "The oil is
paying full progressivity at that price and it's not getting the
benefit of the gas reducing the progressivity against the oil
tax." In fact, by decoupling, the state is increasing the oil
tax. He opined this change is not necessarily wrong, but that
is "the mechanics of it." In addition, he clarified that the
part being locked-in at open season is not the "so-called $2
billion loss", but is the gas production tax obligation.
CO-CHAIR NEUMAN observed that is the dispute with the numbers.
COMMISSIONER GALVIN stated the legislature's economists are not
disputing his statements - they have yet to testify on this.
2:21:09 PM
REPRESENTATIVE SEATON also referred to page 13 of the report by
Logsdon & Associates, and asked whether the amount attributed to
gas tax is higher because of the way the regulations read
regarding the PoP value. In all of the scenarios, the gas alone
tax is $1.1 billion.
2:22:09 PM
COMMISSIONER GALVIN said yes, and added that if the numbers from
page 13 are projected onto slide 5, at a $120 oil price and an
$8 gas price, the separate oil tax (green) section of the left
bar would be $6.4 billion and the separate gas tax (red) section
would be $1.1 billion. The red and green sections combined
would be $7.5 billion. The bar on the right would be $5.5
billion in total size, as the regulations take that $5.5 billion
and divide it between oil and gas; in fact, he estimated that
the red section would be $1.2 billion and the green section
would be $4.3 billion.
2:23:32 PM
CO-CHAIR NEUMAN noted some of these comparisons are shown on
subsequent slides.
2:23:50 PM
COMMISSIONER GALVIN directed attention to slide 8, titled
"Example Cases," and indicated that estimates on page 13 of the
Logsdon & Associates report are based on splitting costs by 90
percent to oil and 10 percent to gas (90:10). He stated that
this ratio represents "an extreme allocation that does not
reflect either point of production or a BOE equivalent basis."
He further explained that of the illustrated four graphs, the
first being a BOE cost allocation at $120 oil and $8 gas, which
is a 15:1 price relationship. The second was a PoP cost
allocation at 15:1. The third graph was a BOE cost allocation
at $120 oil and $15 gas, which is an 8:1 price relationship.
The fourth was a PoP cost allocation at 8:1. The first graph
also illustrates a total tax difference of about $3 billion to
the state, exclusively because the oil tax is almost double.
The attributed gas portion under the status quo is $1.2 billion,
but the separate gas tax is less, and that is the portion that
would be locked-in at open season.
2:26:54 PM
COMMISSIONER GALVIN pointed out the second graph that
illustrated the PoP method of cost allocation, and said that in
this case, $600 million in total state tax revenue is lost, oil
is reduced to $7 billion, and gas increases to $900 million.
Thus, the results of the proposed bill are dependent on the
regulations, but regardless of which, the gas tax generated is
less.
2:28:05 PM
CO-CHAIR NEUMAN said he thinks that is what the bill sponsor is
trying to show.
COMMISSIONER GALVIN agreed it is a significant tax increase.
CO-CHAIR NEUMAN recognized the different values of PoP and BOE.
2:28:39 PM
REPRESENTATIVE SEATON observed that regardless of the scenario,
if the tax is decoupled the amount of gas tax is going to be
less than the amount attributed to gas. Therefore, the state
would lock-in at open season a smaller amount of gas tax than
under either allocation scheme under AGIA.
COMMISSIONER GALVIN said yes.
2:29:57 PM
REPRESENTATIVE P. WILSON opined decoupling would raise the oil
tax.
COMMISSIONER GALVIN agreed.
2:30:22 PM
REPRESENTATIVE SEATON interjected that the significant action is
that the state would be raising the oil tax but lessening the
gas tax and, at open season, under AGIA, guaranteeing that the
companies will have the tax liability on gas as the law exists
at that time; thus the tax attributable to gas under the
combined status is higher, and if separated, there is a lower
tax liability.
COMMISSIONER GALVIN said yes.
2:31:14 PM
CO-CHAIR NEUMAN indicated that the regulations do not take into
account "higher oil tax productions."
2:31:49 PM
COMMISSIONER GALVIN clarified that the aforementioned
regulations deal with attributing the current tax obligation for
the purposes of the AGIA tax inducement. The department has
produced a book on how to value the gas and oil, and what the
tax value is; however, the department has not produced
regulations that put in place a cost allocation method for all
oil and gas, which the bill requires it to do.
2:33:08 PM
COMMISSIONER GALVIN directed attention to slide 9 titled,
"Observations," and stated that CSSB 305(FIN) increases oil
taxes, and in almost all cases increases total oil and gas
taxes. It provides a higher starting point for further
discussions with producers; however, it negatively affects
projected gas pipeline economics. In addition, it would lock in
a lower gas tax ceiling, which enhances the value of the AGIA
tax inducement, but reduces the state's flexibility after open
season. He then advised that the bill could be passed after
open season without conflicting with the AGIA tax inducement.
2:35:16 PM
The committee took an at-ease from 2:35 p.m. to 2:36 p.m.
2:36:23 PM
SENATOR BERT STEDMAN, Alaska State Legislature, said he has not
had an opportunity to review the presentation by the DOR. He
noted that over the last three months there has been concern
about the potential of a cross-subsidy at the time of the first
large gas flow from Alaska's oil and gas basin. About two years
ago, the Joint Committee on Legislative Budget and Audit hired
Dr. Wood to study the issue of the tax structure within the oil
basin, and to consult with the legislature. Senator Stedman
said the concern of some legislators was about the way the oil
tax is structured. In fact, during the discussion about the
Petroleum Production Tax (PPT), legislators took the discussion
of gas off of the table and concentrated on the oil tax,
eventually transitioning from the Economic Limit Factor (ELF) to
PPT, and then to ACES. At the time PPT was written, former
Governor Murkowski was adamant that progressivity was not to be
included in the tax. However, during the development of ACES,
the legislature included a component of PPT which was the
multiplier Btu equivalency that is part of the tax structure
today. As a matter of fact, the legislature has never taken a
policy position on the gas tax itself and as the state
approached open season, there was interest in discussing three
issues of a gas tax: the subject of HB 305, the gas tax level,
and progressivity on gas. The legislature, administration, and
the industry agreed that sufficient information was not
available at that time to develop legislation on the base gas
tax, or on progressivity. However, one component remains in the
current tax legislation.
2:40:54 PM
SENATOR STEDMAN further recalled that early in 2010, Mr. Tony
Palmer, vice-president for Alaska gas development, TransCanada,
Alberta, Canada, gave a presentation to the legislature
regarding open season and revealed a range of tariffs and
forward price expectations for oil and gas from the DOE for
2020-2030. The tariffs and price expectations were entered into
a model, and the offset to the state's gas revenue "actually
took out the royalties and then removed part of the revenue off
of oil." Senator Stedman then had Dr. Wood complete more
detailed analyses that showed the state would be facing a
significant revenue offset and basically giving away its gas
revenue, when the price ratio between gas and oil spreads.
Historically, the price ratio has been between 8:1-10:1, but the
state's tax structure is based on energy equivalency, about 6:1,
thus if the price of gas and oil is in the range of 8:1 with oil
being more valuable, the state is "relatively comfortable."
However, in the last three years the ratio has been 14:1-20:1,
and there are significant revenue offsets at 15:1. Today, DOE
expectations are 15:1-17:1, and Dr. Wood can provide projections
on how this would have affected the state's treasury.
2:43:51 PM
SENATOR STEDMAN expressed his belief that the ratio staying
around 15:1 versus around 8:1 is more probable. Clearly, DOE
forecasts and expectations are in the higher range; therefore,
the state's position is unknown. At the time of the "open
season lock-down day on May 1," the state will still have the
ability to decouple, but the impact or flexibility from that
action is substantially higher today because under AGIA, the
flexibility surrounding the gas tax is lost. He maintained this
is the cause for urgency and it is in the state's best interest
to negotiate with two separate revenue streams. In addition,
Dr. Wood has modeled the ability for the state to predict
outcomes, and illustrated that when the price multiple is moved
from 8:1-9:1 to 15:1-20:1, there are huge changes in cash flow
resulting in significant financial damage to the state; in fact,
when oil volumes are removed predictions become almost
impossible.
2:46:38 PM
SENATOR STEDMAN opined members of the legislature did not
recognize the magnitude of the state's possible loss, of around
$2 billion, when the ratio is 15:1. He argued that the
probability of an outcome that is not in the state's interest is
substantially higher than the other way around. Furthermore,
the dynamics of a global market for shale gas and liquefied
natural gas (LNG) arise as Alaska is "locked-in a position,
under AGIA, where we can't, we don't have the flexibility."
Senator Paskvan, who did not experience the PPT, ACES, and AGIA
processes, was asked to help look at the legal aspects of this
matter because, as Senator Stedman said, "Frankly, I'm very
confident, that what's going on here is a world-class petro
dollar shell game being played on the State of Alaska, there's
actually no doubt in my mind." He cautioned that the
legislature will be provided with charts, formulas, and
regulations, but the fiscal regime of every hydrocarbon basin in
the world comes down to the amount of cash flow to the industry
and the sovereign - the state and federal government - and urged
the committee to watch the cash flow.
2:49:40 PM
SENATOR STEDMAN provided the example of today's multiple of
20:1, which are an $85 oil price and a $4 gas price. Thirty
days after the gas is turned on, he predicted DOR would report
no increase in revenue, that no revenue was made from the gas,
and that the oil revenue has declined. Nowhere else in the
world is hydrocarbon given away; in fact, troubled basins are
incentivized through tax relief, royalty relief, and perhaps
progressivity, but the hydrocarbon is not given away. Senator
Stedman concluded that after all of the analyses, the answer is
found in the cash. The bill is not an incentive for the
industry and will not affect open season, but it will affect the
state's ability to protect its revenue stream from the marketing
of its gas.
2:51:54 PM
CO-CHAIR NEUMAN referred to the variance in differentials over
time and pointed out that the ratio in 1982 was 20:1. He asked
for the effect of present-day competition, pointing out that was
not an issue for energy in the '80s. Today there is financial
support from the government for hydro, solar, and wind energy;
in fact, the world has changed, and the market in America has
changed.
2:53:45 PM
SENATOR JOE PASKVAN, Alaska State Legislature, addressing the
previous point regarding the difference between the price of the
commodity and the Btu equivalency, said historically there is
deviation from the 6:1 benchmark. He questioned what magnitude
of risk that would make to the state, considering that the DOE
forecasts a ratio of 14:1-18:1 for 100 percent of the time into
the future. He advised that at 12:1 the production tax is
eliminated, at 15:1 the royalty revenue is eliminated, and at
20:1 savings would be used to export the resource. Senator
Paskvan said he reviewed this situation, "looking at it through
the legal eyes," and his alert to the attorney general
instigated almost $1 million in research by the department of
law (DOL). This is important, not because of the cost to the
state, but because it is an indication that this is an extremely
complex legal issue of "first impression" to the state, and
holds significant legal risk. Therefore, the only answer would
come at a time in the future when Alaska is being sued, billions
of dollars are at risk, and the state is waiting for a decision
from the Alaska Supreme Court. Senator Paskvan opined action
can be taken before May 1 with zero legal risk, but after May 1,
the attorney general has advised any action is subject to legal
issues. He observed that Alaska has two world-class resources,
oil and natural gas, and each resource should be addressed on
its own merits; for example, the gas pipeline should stand
alone, and decoupling now allows that to occur without the
effect of dilution on the state's treasury. Senator Paskvan
concluded that this is not a Republican or Democratic issue, but
an action to protect the state's treasury and cash flow.
2:58:24 PM
CO-CHAIR NEUMAN asked for Senator Stedman's opinion on taxing
for value based on Btu equivalent.
2:58:51 PM
SENATOR STEDMAN responded that cost allocation is a difficult
section of the bill due to its importance to cash flow between
the state, the industry, and the federal government. There were
two constraints when dealing with the issue of cost allocation:
the administration was encouraged to use a barrel of oil
equivalency through regulation, and there was an urgency to put
the bill on the House calendar. He opined there is insufficient
information to answer the cost allocation question; however, the
departments have access to confidential information and are in a
better position to find the correct answer, along with the
legislature's expert consultants. Moreover, between now and
sanctioning, that subject will come to conclusion during
negotiations between the state and producers. Senator Stedman
urged the committee to study Dr. David Wood's calculations on
the revenue impact. Even today without gas running, for Cook
Inlet and on the North Slope, the cross-subsidy impact over the
last three years is about $250 million to the treasury.
3:01:35 PM
REPRESENTATIVE P. WILSON observed that DOR scenarios indicated
that decoupling dropped the gas revenue, but increased the oil
tax. She asked whether Dr. Wood reported on this effect.
3:02:34 PM
SENATOR STEDMAN has heard a similar debate in the media and
agreed, "You could look at it that way." However, the gas
revenue is the state's revenue, not the industry's revenue.
This is not a tax increase and that argument is a bizarre twist
of the mathematics of what is going on. He remarked:
Have the gas tax calculation run and put a stack of
cash on the table, have the oil tax run and put a
stack on the table, and then start playing this shell
game, and watch the state's pile go down, and the
industry's pile go up. And everything else stays the
same. ... But to what references exactly that the
commissioner made, I wasn't in the room, I haven't
seen his presentation, so I can't really comment on
that.
3:04:05 PM
[SB 305 was held over.]
3:04:14 PM
The House Resources Standing Committee meeting was recessed at
3:04 p.m. to a call of the chair.
[Transcription of the Gavel to Gavel audio recording from
6:38:09 p.m. to 6:42:55 p.m. follows:]
CO-CHAIR CRAIG JOHNSON called the House Resources Standing
Committee meeting back to order at 6:38 p.m. Representatives
Johnson, Neuman, P. Wilson, Guttenberg, Seaton, and Olson were
present at the call back to order. Representatives Edgmon,
Kawasaki, and Tuck arrived as the meeting was in progress.
Representative Dahlstrom was also in attendance.
HB 337-OIL AND GAS PROD. TAX: CREDITS/INTEREST
CO-CHAIR JOHNSON announced that the next order of business would
be HOUSE BILL NO. 337, "An Act relating to interest on certain
underpayments or overpayments for the oil and gas production
tax, to certificates for certain oil and gas production tax
credits for qualified capital expenditures, and to alternative
tax credits for expenditures for certain oil and gas development
and exploration activities for the oil and gas production tax;
relating to the use of the oil and gas tax credit fund to
purchase certain tax credit certificates; and providing for an
effective date."
CO-CHAIR JOHNSON stated the document before the committee is
Version R. He recalled that Representative Guttenberg had moved
Conceptual Amendment 3, labeled 26-GH2057\A.l, Bullock, 8/24/10,
at the 3/29/10 meeting; however, the amendment was withdrawn so
the meeting could adjourn without any business before it.
REPRESENTATIVE GUTTENBERG moved Conceptual Amendment 3, labeled
26-GH2057\A.1, Bullock, 8/24/10, which read:
Page 1, line 2:
Delete ","
Insert "and"
Page 1, lines 3 - 4:
Delete ", and to alternative tax credits for
expenditures for certain oil and gas development and
exploration activities for the oil and gas production
tax"
Page 3, line 7:
Delete "AS 43.55.025(f) [AS 43.55.025(f)(2)]"
Insert "AS 43.55.025(f)(2)"
Page 3, line 9:
Delete "AS 43.55.025(f) [AS 43.55.025(f)(2)]"
Insert "AS 43.55.025(f)(2)"
Page 4, line 5, through page 9, line 5:
Delete all material.
Renumber the following bill sections accordingly.
Page 9, lines 11 - 25:
Delete all material.
Renumber the following bill sections accordingly.
Page 10, lines 2 - 6:
Delete all material.
Renumber the following bill sections accordingly.
Page 10, line 19:
Delete "Sections 4 - 12 of this Act take"
Insert "Section 5 of this Act takes"
Page 10, line 20:
Delete "sec. 17"
Insert "sec. 9"
CO-CHAIR JOHNSON objected for the purpose of discussion.
REPRESENTATIVE GUTTENBERG explained that the amendment is
conceptual because it was written for a different version of HB
337.
The committee took a brief at-ease.
[FTR audio recording restored.]
6:42:55 PM
REPRESENTATIVE GUTTENBERG, for "practical purposes at this time"
withdrew Conceptual Amendment 3.
6:43:10 PM
CO-CHAIR NEUMAN informed the committee Version E "does not have
the [Alaska Retirement Management (ARM)] Board amendment in
there." He then moved to adopt Version E.
6:43:47 PM
CO-CHAIR JOHNSON announced the motion to bring back before the
committee Version E, the effect of which allows the ARM Board to
purchase the credits.
REPRESENTATIVE P. WILSON objected for the purpose of discussion.
CO-CHAIR NEUMAN pointed out that Version E "does not include the
ARM Board version."
CO-CHAIR JOHNSON corrected his previous statement. He said,
"That's the effect of what [Version E] does, it takes away the
ARM Board version."
6:43:55 PM
REPRESENTATIVE P. WILSON spoke to her objection and asked why
the ARM Board amendment should be removed from the bill.
6:44:30 PM
CO-CHAIR NEUMAN explained that his request to remove the ARM
Board is not for the purpose of disallowing the board to
purchase credits, in fact, he expressed his belief that these
opportunities should be expanded; however, the committee
received a legal opinion from Don Bullock, Attorney, Legislative
Legal Counsel, Legislative Legal and Research Services, advising
that the provision may violate the single-subject clause.
Because of this advice, he stated that his intent is to provide
other opportunities to use for purchases of the credits. In
addition, Co-Chair Neuman expressed his understanding that the
commissioner of the Department of Revenue said the ARM Board
would not purchase the tax credits.
6:46:21 PM
PATRICK GALVIN, Commissioner, Department of Revenue (DOR),
advised that the inclusion of the ARM Board as a potential
market for the credits is no longer necessary as other
provisions of the bill remove any barriers to a credit-
certificate holder getting 100 percent of his/her cash back from
the state, whereas the ARM Board would offer 92 cents on the
dollar. Furthermore, given the advice from Legislative Legal
and Research that the provision raises the possibility of a
single-subject violation, he said the department decided not to
put something unnecessary in the bill and risk creating a legal
issue.
6:47:21 PM
CO-CHAIR JOHNSON expressed his understanding that the bill now
allows the state to purchase, "100 cents on the dollar," and
there is no need for other options.
COMMISSIONER GALVIN said correct.
6:47:34 PM
REPRESENTATIVE KAWASAKI recalled previous debate on this version
of the bill. He said,
Version R is the version that I've marked up, we've
passed two amendments, at least discussed two
amendments to this version, R. I think that the idea
would be that if you don't want the ARM Board in
there, that we could later amend it out. ... To switch
from version to version I think is confusing, I'd
prefer to stick with this version for now....
6:48:20 PM
CO-CHAIR JOHNSON observed that the committee could vote on that,
as any member can make a motion.
6:48:28 PM
REPRESENTATIVE SEATON observed, "This is actually rescinding an
action we took, without rescinding the action." He recalled
that the committee had a choice and discussed Version E, but
Version R was adopted. He then reminded the committee he had
provided a legal memo from 2008 quoting the supreme court, which
held that in matters with such themes such as taxation, a "broad
breadth" of interpretation is acceptable. Further, testimony by
the commissioner pointed out that the bill deals with tax
credits and with the ARM Board's ability to buy those specific
tax credits in the bill, thus "this is probably the closest call
you would ever had." Representative Seaton opined that a
precedent has been set on the floor of the House that subjects
as varied as scallops, hair crab, and fishing licenses have
economic impact, as do Alaska Regional Development Organization
(ARDOR) boards; yet these do not violate the single-subject
rule. He disagreed with legislative counsel in this regard and
objected to the adoption of Version E instead of Version R.
6:50:50 PM
CO-CHAIR JOHNSON noted there are two ways to handle this
situation, one way is to rescind the committee's action, and
both means are technically appropriate.
6:51:12 PM
REPRESENTATIVE OLSON asked the commissioner if he was speaking
from experience and as a member of the ARM Board.
COMMISSIONER GALVIN said he was a member of the ARM Board. In
further response, he advised that this has not been an issue for
the ARM Board, thus has no previous experience; however, he said
the advantages to the ARM Board that were previously identified
are being eliminated by the bill. Therefore, he said he did not
see the value of having the ARM Board alternative in the bill
from the perspective of the credit-certificate holders. From
the perspective of the ARM Board, it may have the opportunity to
buy the certificates, but there will be no sellers.
6:52:31 PM
CO-CHAIR NEUMAN observed that the commissioner finds this
provision unnecessary, and expressed his belief that the
committee did not discuss Version E. Although there may have
been other pieces of legislation that have not been challenged
by the single-subject rule, if there is a challenge, it will
cost the state money for a defense, which would affect
legislation "which is desperately needed." He pointed out the
current legal opinion from Mr. Bullock that there is the
possibility of a violation, and stated, "Then let's just not
even go there."
6:53:52 PM
CO-CHAIR JOHNSON agreed that the provision is not needed, and
opined the single-subject clause is of less concern than
allowing 100 percent on the dollar from the state.
6:54:09 PM
REPRESENTATIVE P. WILSON asked whether that is the only
difference in the two bills.
CO-CHAIR JOHNSON said yes.
6:54:22 PM
REPRESENTATIVE KAWASAKI advised it is easier and cleaner working
on Version R and "amending out the portions of ARM Board for the
folks that object to the ARM Board addition," rather than trying
to add amendments into Version E.
6:54:48 PM
CO-CHAIR JOHNSON stated his intention "to vote to have Version
R, and offer that amendment later."
6:55:17 PM
A roll call vote was taken. Representatives Edgmon, P. Wilson,
Olson, and Neuman voted in favor of adopting Version E.
Representatives Guttenberg, Kawasaki, Tuck, Seaton, and Johnson
voted against it. Therefore, Version E failed by a vote of 4-5.
6:56:37 PM
CO-CHAIR JOHNSON said, "I'm going to vote no, but I want to
qualify that with the amendments coming. And only because we've
got amendments made to this, I would hope that everyone would
remember this vote."
6:56:39 PM
CO-CHAIR NEUMAN moved Conceptual Amendment 4 which read:
Page 7
Delete lines 24-31
Page 8
Delete lines 1-2
Title change
Delete reference to ARM Board
CO-CHAIR JOHNSON restated the conceptual amendment and added
that conforming language would also be appropriate.
6:57:29 PM
REPRESENTATIVE KAWASAKI objected for purpose of discussion.
6:58:08 PM
COMMISSIONER GALVIN pointed out a reference to the ARM Board in
Sec. 3 on page 2.
6:58:32 PM
CO-CHAIR JOHNSON clarified the conceptual amendment is to remove
the ARM Board from the title, and the bill, and for conforming
language where appropriate.
6:58:38 PM
A roll call vote was taken. Representatives Tuck, P. Wilson,
Olson, Edgmon, Neuman, and Johnson voted in favor of Conceptual
Amendment 4. Representatives Guttenberg, Kawasaki, and Seaton
voted against it. Therefore, Conceptual Amendment 4 was adopted
by a vote of 6-3.
6:59:33 PM
REPRESENTATIVE SEATON offered Amendment 5 to rescind the
committee's action on 3/29/10, in failing to adopt Amendment 2,
labeled R.1, Bullock, 2/29/10, which was drafted to Version R,
and which read:
Page 7, line 2:
Delete "that expenditure"
Insert "the expenditures during a calendar year
that exceed the average annual well-related
expenditures for the calendar years 2008, 2009, and
2010; the producer or explorer shall submit the amount
of well-related expenditures for each of the years
2008, 2009, and 2010 at the time an election is made
to apply the credit authorized by this subsection"
[Amendment 2 was amended on 3/29/10 to delete all references to
"2010."
REPRESENTATIVE SEATON reminded the committee that Amendment 2
relates expenditures to the average expenditures during 2008 and
2009, thus the credits are extended to expenditures that exceed
that average amount. The purpose of the amendment is to
accomplish the goal of the bill which is to stimulate additional
investment and production. In fact, the amendment would
encourage companies to increase their investment and in-field
exploration because they would get a higher credit if they
exceeded the amount of their current annual expenditures.
7:02:00 PM
CO-CHAIR NEUMAN objected for the purpose of discussion. He
asked the commissioner how much work it would be for the
department to average all well-related expenditures for 2008 and
2009.
7:03:21 PM
COMMISSIONER GALVIN explained that it would not be possible for
the department to determine this average based on the
information received thus far from taxpayers regarding 2008 and
2009. The department would have to request that taxpayers
provide supplemental tax returns, including documentation of
their well-related expenditures. Currently, the tax reporting
system does not break out expenditures in that way.
7:04:12 PM
CO-CHAIR NEUMAN asked whether the amendment would set a
precedent for the DOR to average well-related expenditures for
prior years; and if so, would this affect any changes in the tax
code.
7:04:57 PM
COMMISSIONER GALVIN explained that it would establish for each
taxpayer a fixed number for their 2008-2009 expenditures, and
that number would determine whether the 30 percent credit
created by the bill is available, or not.
7:05:33 PM
CO-CHAIR NEUMAN restated his question about whether there were
any changes in the tax code, regulations, or statute since 2008
that affect well-related expenditures.
7:05:53 PM
COMMISSIONER GALVIN related that the regulations that define
lease expenditures, as well as those that define qualified
capital expenditures, have been put in place recently and are
retroactive.
7:06:32 PM
CO-CHAIR NEUMAN assumed that if there have been changes dealing
with well-related expenditures since 2008, additional changes
may have negative impacts on companies that have made financial
decisions.
7:07:18 PM
COMMISSIONER GALVIN clarified that the information submitted to
the department for 2008-2009 would not have specified
expenditures that were, or were not, well-related. Thus, new
information from 2008-2009 would have to be provided so that
taxpayers could seek a credit from 2010 forward. He recalled
his previous testimony on this amendment, pointing out that
taxpayers would be motivated to minimize their well-related
expenditures for 2008-2009, perhaps with controversy. He
concluded, "It's doable, as long as you take what they say for
face value."
7:09:35 PM
CO-CHAIR NEUMAN observed that for the governor's bill a
determination was made about penalties for taxes that were
underpaid. If the state changes the rules, it may create an
"inverse" situation that taxpayers would not be able to take
advantage of. He also cautioned about the amount of work
changes would require of the department and the producers.
7:11:14 PM
COMMISSIONER GALVIN advised that this amendment and the in-field
drilling credit in the bill would not affect a tax liability
from 2008-2009; however, when taxpayers submit a request for an
in-field drilling credit, they must show that their well-related
expenditures are consistent. The amendment will create some
additional accounting issues, but it will not impact the past
tax liability.
7:12:41 PM
CO-CHAIR NEUMAN noted that it would impact the value of a
taxpayer's money.
7:13:19 PM
REPRESENTATIVE GUTTENBERG clarified that new information will be
needed whether the amendment is adopted or not; in fact, the
department will be looking at new reporting forms for well
credits because well credits for capital and operating are all
"new ground." He surmised that if the bill passes, auditors
will be evaluating numbers from one year to the next to deal
with well rework.
7:14:50 PM
COMMISSIONER GALVIN agreed that the nature of the credit itself
requires a different accounting methodology than what is
currently required for a taxpayer, but noted that the amendment
does create a requirement for the taxpayer to retroactively
resubmit information for 2008-2009.
7:15:20 PM
REPRESENTATIVE GUTTENBERG confirmed it does not change the past
tax liability in any way.
7:15:34 PM
REPRESENTATIVE KAWASAKI asked how a company would view this
aspect of the bill. For example, a company may decline the
credit to avoid submitting additional information.
7:16:01 PM
CO-CHAIR JOHNSON reminded the commissioner that he is not
required to answer for oil companies.
7:16:06 PM
COMMISSIONER GALVIN opined that if taxpayers are offered an
opportunity to save money, they will.
7:16:26 PM
REPRESENTATIVE KAWASAKI further asked whether there is reason to
believe that the companies may not disclose accurate
information.
7:17:06 PM
COMMISSIONER GALVIN related that the amendment is something that
the department could implement, but it will create complexities
for DOR and for the taxpayer. He acknowledged that taxpayers
may "low ball" their expenditures and added that, from a tax
administration standpoint, the amendment imposes a burden.
7:18:20 PM
REPRESENTATIVE KAWASAKI guessed that the companies "are pretty
honest when they do their taxes, right?"
7:19:01 PM
COMMISSIONER GALVIN advised that taxpayers will interpret the
tax code to their maximum advantage, not to violate the statute,
but to take advantage of accounting principles. This amendment
will motivate taxpayers to lower their 2008-2009 expenditures in
order to maximize their ability to obtain credits.
7:20:24 PM
REPRESENTATIVE KAWASAKI suggested the assessment of penalties
for false claims of tax liability.
COMMISSIONER GALVIN assumed the normal tax penalties for
misreporting tax return data would apply.
7:21:28 PM
CO-CHAIR JOHNSON opined that the amendment sets a policy for a
number that only above which an oil company can take a tax
credit. This will create a disincentive and affect a decision
to complete rework or not. He questioned whether the state
wants to encourage in-field work, or create a barrier by setting
an arbitrary number. The policy call is to either "raise the
bar of disincentive," or to encourage companies to do all the
work they can. It is basically whether the state wants more
incentive or less incentive.
7:23:25 PM
REPRESENTATIVE KAWASAKI expressed his belief that the policy is
to try to create an incentive for more investment and more jobs.
The baseline set by the amendment identifies a company's present
investment, and shows that it can put in more money and apply
for a credit. He recalled testimony that companies might spend
more in Alaska, but decisions to invest are "made in boardrooms
in Houston and London, and they're not made here in the State of
Alaska." Thus the amendment goes to the heart of why we are
trying to push for credits for better investments and without
it, the money goes to other states or countries.
7:24:26 PM
CO-CHAIR JOHNSON disagreed.
7:24:35 PM
CO-CHAIR NEUMAN read from Amendment 2, 26-GH2057\R.1, Bullock,
8/26/10, [amended and not adopted on 3/29/10] paraphrasing as
follows:
Expenditures during a calendar year that exceed the
average wellhead-related expenditures for '08 and '09
... the producer or explorer shall submit the amount
of well-head, well-related expenditures for those
years at the time an election is made, applied, by the
credit authorized by this subsection.
REPRESENTATIVE NEUMAN pointed out that the aforementioned
subsection [found on page 6, line 25, of HB 337, Version R] in
the bill deals with credits taken after June 30, 2010, and
before July 1, 2016. He surmised the department would go back
and average 2008-2009 and apply that information to the credit
authorization in the subsection. Representative Neuman
questioned whether the time, issues, and dates "all falls in
line."
7:26:28 PM
COMMISSIONER GALVIN responded that the elimination of 2010 makes
it mathematically possible to arrive at an average for
comparison. However, the concern for the department is what
happens when an attempt is made to isolate individual taxpayers,
thus creating anomalies and unintended situations. For example,
a taxpayer may have well-related expenditures in 2008, but not
in 2009. The other issue of concern is that when taxpayers
apply for tax credits, they are also members of partnerships
with varied interests dependent upon lease relationships and
other considerations. This problem is exacerbated if the state
sets up a situation in which one partner is allowed to take a
disproportionate advantage of a tax credit, even though "the
concept is, you know, pure, the application ends up not being
so." He warned that the situation would lead to manipulation,
frustrating the underlying purpose.
7:30:14 PM
CO-CHAIR NEUMAN observed the problem would compound
exponentially when multiple companies are involved.
7:30:50 PM
REPRESENTATIVE SEATON reminded the committee that the present
structure allows for a 20 percent capital credit of 2008-2009
expenditures - expenditures and credits that were determined by
the companies to be adequate incentives for the amount of work
that they did. This bill not only allows 30 percent on capital
credits, but expands the credits into additional well-related
expenditures, which are of a greater proportion than the capital
credits. Therefore, the bill allows for a very large credit "on
a much broader sweep of expenditures, under this bill, than the
20 percent capital credit which was sufficient to get the amount
of work that was done in 2008 and 2009; it's obvious it was
enough incentive because they did the work with a 20 percent
capital credit." Addressing the complexity involved to
implement the amendment, he pointed out that the companies all
have joint operating agreements and are sophisticated partners
with clear financial arrangements. He acknowledged that since
this is a new category of well-related expenditures, the
companies will have to develop new computer models, but these
will be based on standard accounting principles; in fact, the
biggest question is the fiscal impact to the state.
Representative Seaton referred to the analysis contained in
Fiscal Note #3 **Corrected**, dated 2/08/10, from Tax Division,
DOR, and stated that revenues are estimated to be reduced by
$325 million in 2011 for doing the same work that is already
sanctioned, and that will garner a 20 percent capital credit.
The fiscal note further indicates that revenues are estimated to
be reduced by $350 million from 2013 to 2016. He concluded that
the amendment would likely reduce that loss by $200 million per
year.
7:34:33 PM
CO-CHAIR JOHNSON interjected that predicting a loss of revenue
to the state is speculation, and questioned whether
Representative Seaton could "extrapolate the numbers the way you
are doing it."
7:35:05 PM
REPRESENTATIVE SEATON called attention to the Alaska Department
of Revenue presentation dated 3/29/10, slide 2 titled,
"Production Tax Revenue with Additional Well-Related Credit
Under HB 337," found in the committee packet. The chart
illustrated projected FY 08 expenditures in the amount of $245
million, FY 09 expenditures in the amount of $255 million, and
FY 10 expenditures in the amount of $297 million. This program
will put all well-related expenses in these years in a new
category that enjoys a 30 percent tax credit - not only raising
the capital credit by 10 percent - but giving 30 percent on the
new category of "intangible drilling and development costs."
Although the numbers may be speculative, they have been provided
by the department and indicate the reduction of the revenue
stream, even though the companies are basically operating at
exactly the same level as they have operated in the last year.
7:36:36 PM
CO-CHAIR JOHNSON acknowledged Representative Seaton's point;
however, the facts are unknown and whether the bill spurs
development will be known very quickly.
7:36:47 PM
REPRESENTATIVE SEATON speculated that the amendment will save
the state about $200 million per year, and asked the department
whether the additional tax evaluations would be an unsustainable
burden.
7:37:43 PM
COMMISSIONER GALVIN appreciated the committee's attempt to
simplify the issue before it; however, he described the
challenges faced by the department as it was trying to write a
bill for a credit that will spur the development of additional
wells. He cautioned against assuming that there will be the
same number of well-related expenditure opportunities from one
year to the next. As a matter of fact, companies operate on a
basis of opportunity, development, schedules for fields, and
sophisticated investment methods, including the economics of a
specific well. The state does not have a methodology to discern
whether certain costs are for work a company would be doing
anyway, and other if costs are "additional stuff." The
governor's bill attempts to give an across-the-board credit for
well-related work because drilling wells is good for the state.
7:40:25 PM
REPRESENTATIVE TUCK acknowledged that the purpose of the bill is
to change behavior, create jobs, and increase the flow of oil in
the Trans-Alaska Pipeline System (TAPS). He stressed that the
hope is to have production above and beyond what is already
taking place, but the bill gives tax credits for work that is
already being done. On the other hand, the amendment offers
credit to those companies that are going above and beyond,
thereby producing more jobs, more revenue for the state, and
more oil for TAPS. Representative Tuck acknowledged the
difficulties created by the amendment, and related that he
supported the new capital and exploration credits, but said he
had concerns about the operating portion. Spending more on its
operating budget to produce more oil is beneficial to a company
and to the state, but testimony before the committee has
indicated that doing that may be hindered because of the current
tax regime. Without the amendment, he said he was hesitant to
include operating expenses, although he supported the original
proposals that gave capital credits "where we know we're
successful, and give a little bit more for that."
7:42:53 PM
REPRESENTATIVE EDGMON said a clear picture is not evident; in
fact, there remains an element of false economy and speculation.
Hearing the debate leads him to support the amendment, and he
recalled that previous testimony on oil and gas topics failed to
reveal the financial aspects of the industry. He cautioned,
however, that the bill may not do what it intends to do, and it
could cost the state money in the process. Representative
Edgmon then called the question.
7:43:56 PM
REPRESENTATIVE GUTTENBERG restated the estimated production tax
revenue credits from aforementioned slide 2: $297 million in FY
10; $327 million in FY 11; $336 million in FY 12; $390 million
in FY 13. He suggested that the companies will be happy with
this bill in any form, even if they have to hire accountants,
because they will receive unexpected credits for work that they
were going to do anyway.
7:45:02 PM
CO-CHAIR JOHNSON observed that the bill may not work, and the
amount of money involved is unknown; however, what is known is
that employment on the slope continues to decline, and the state
is losing $100 million per year in revenue. The focus of the
committee is on the loss of revenue to the state, but the
committee did not even discuss the number of jobs that these
credits create.
7:45:50 PM
REPRESENTATIVE NEUMAN maintained his objection to the motion.
CO-CHAIR JOHNSON clarified that a yes vote [on Amendment 5]
would put Amendment 2 before the committee.
7:47:16 PM
A roll call vote was taken. Representatives Kawasaki, Tuck, P.
Wilson, Seaton, Edgmon, and Guttenberg, voted in favor of
[Amendment 5] rescinding the previous vote on Amendment 2.
Representatives Olson, Neuman, and Johnson voted against it.
Therefore, Amendment 5 was adopted by a vote of 6-3.
7:47:19 PM
CO-CHAIR JOHNSON announced that Amendment 2 was before the
committee.
7:47:26 PM
REPRESENTATIVE SEATON moved to adopt Amendment 2.
CO-CHAIR JOHNSON objected.
COMMISSIONER GALVIN pointed out that Amendment 2 originally
affected 2008, 2009, and 2010, but there was an amendment to the
amendment.
CO-CHAIR JOHNSON, in response to Commissioner Galvin, clarified
that Amendment 2, as amended, removes 2010 from the years that
are averaged.
7:48:39 PM
A roll call vote was taken. Representatives Kawasaki, Tuck,
Seaton, Edgmon, and Guttenberg voted in favor of Amendment 2, as
amended. Representatives P. Wilson, Olson, Neuman, and Johnson
voted against it. Therefore, Amendment 2, as amended, was
adopted by a vote of 5-4.
7:48:41 PM
CO-CHAIR JOHNSON announced that HB 337 was before the committee.
7:48:47 PM
CO-CHAIR NEUMAN moved to report CSHB 337, out of committee with
individual recommendations and the accompanying fiscal notes.
He then withdrew his motion.
7:49:24 PM
CO-CHAIR JOHNSON, hearing no objection to the withdrawal of the
motion, announced that the bill was before the committee.
7:49:35 PM
REPRESENTATIVE KAWASAKI offered Conceptual Amendment 6, which
read as follows:
On page 3, line 1
Delete the word "three"
Insert the word "five"
7:50:06 PM
REPRESENTATIVE TUCK said that was an error that was previously
noted.
7:50:24 PM
CO-CHAIR JOHNSON, hearing no objection, announced that
Conceptual Amendment 6 was adopted.
7:50:36 PM
REPRESENTATIVE KAWASAKI offered Conceptual Amendment 7, which
read as follows:
On page 6, line 26,
After the word "expenditure"
Insert "incurred"
7:51:00 PM
There being no objection, Conceptual Amendment 7 was adopted.
7:51:47 PM
REPRESENTATIVE NEUMAN moved to report CSHB 337, 26-GH2057\R, as
amended, out of committee with individual recommendations and
the accompanying fiscal notes.
REPRESENTATIVE GUTTENBERG objected for the purpose of
discussion. He spoke to his objection by first reminding the
committee the purpose of the bill is to encourage a heightened
level of jobs for Alaskans and an increased level of oil
production through TAPS; however, no analysis to support this
result has been offered. Although passage of the bill implies
that more jobs will be available after the industry is granted
these credits, there is no guarantee, but only speculation. He
read from written testimony given by an oil and gas attorney,
Spencer Hosie, Hosie McArthur, San Francisco, California, to the
Regulatory Commission of Alaska (RCA) [date and source not
provided]:
Under the duty to develop, a royalty owner's project
need not be the most economic development project on
the producers' platter. After the lease is signed,
the royalty owner is not in competition with other
potential projects in this country and abroad for the
producers' development dollars. Under the lease
agreements, the producers' obligation is to continue
to produce from and develop a field if reasonably
economic, despite individual preferences to defer
development or invest capital dollars elsewhere.
7:58:10 PM
REPRESENTATIVE GUTTENBERG explained that Mr. Hosie is saying
that a company that signs an oil and gas lease with the state is
obligated to put the state on equal footing; in fact, the duty
to develop the leases means they must. The only way the company
is not obligated to do all the things the state grants credits
for, is for the state to "let them off the hook." Furthermore,
there is a duty to develop in the development clause of the
resources section of the state constitution, thus when the state
signs a lease agreement it expects development for the good of
all Alaskans. Routinely, leaseholders ask for and receive
credits for development; however, Mr. Hosie advises that the
leaseholders alone have the duty to develop. Representative
Guttenberg gave the example of former Governor Murkowski's
statement that the leaseholders at Point Thomson have an
obligation to develop. He concluded that well drilling, in-
field drilling, and processes to enhance production are part of
the schedule that every oil field has and now, 20-30 years into
production, the obligation to enhance production remains with
the leaseholder. He restated his objection to giving credits
for actions that the leaseholders "knew that they were going to
do." On the other hand, the standing of the bill would be
improved if the sponsors provided definitive answers on jobs,
the flow of oil, and revenue for the state. Representative
Guttenberg said he could not support the bill.
7:58:26 PM
CO-CHAIR NEUMAN questioned the objectivity of the testimony
quoted by Representative Guttenberg because the testimony was
solicited by the state. He agreed that leases call for the due
regard for the interests of the landowner, which is the state,
and to that regard, he said the governor and the commissioner
recognized the recent large increases in oil production along
with a decrease in new investment. He said he disagreed with
some earlier testimony about, "how we're giving this money away,
well, it's just money that we're not taking." Representative
Neuman opined that the "trade-out" is the sweet spot of the
policy call that must be made by the legislature. He recalled
that at the introduction of the bill, he assumed the governor
and the commissioner believed the bill provides incentives for
further exploration. Although there is less money coming in as
revenue due to the credits, there is also less oil flowing
through TAPS, and the solution is more exploration, more oil
flowing through TAPS, more jobs, more economic diversification,
and more benefits to the state and the economy. He expressed
his support for the bill.
REPRESENTATIVE GUTTENBERG maintained his objection.
8:01:14 PM
A roll call vote was taken. Representatives Tuck, P. Wilson,
Olson, Seaton, Edgmon, Neuman, and Johnson voted in favor of HB
337, Version R, as amended. Representatives Guttenberg and
Kawasaki voted against it. Therefore, CSHB 337(RES) was
reported out of the House Resources Standing Committee by a vote
of 7-2.
8:02:26 PM
REPRESENTATIVE SEATON asked Co-Chair Johnson to ensure that the
committee receives copies of the revised fiscal note.
8:02:37 PM
CO-CHAIR JOHNSON agreed.
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 8:03 p.m.