CS FOR SENATE BILL NO. 305(FIN)(title am) "An Act providing that the tax rate applicable to the production of oil as the average production tax value of oil, gas produced in the Cook Inlet sedimentary basin, and gas produced outside of the Cook Inlet sedimentary basin and used in the state increases above $30 shall be 0.4 percent multiplied by the number that represents the difference between that average monthly production tax value and $30, or the sum of 25 percent and the product of 0.1 percent multiplied by the number that represents the difference between that average monthly production tax value and $92.50, except that the total rate determined in the calculation may not exceed 50 percent; providing for an increase in the rate of tax on the production of gas as the average production tax value on a BTU equivalent barrel basis of gas produced outside of the Cook Inlet sedimentary basin and not used in the state increases above $30; relating to payments of the oil and gas production tax; relating to availability of a portion of the money received from the tax on oil and gas production for appropriation to the community revenue sharing fund; relating to the allocation of lease expenditures and adjustments to lease expenditures; and providing for an effective date." 9:02:15 AM Representative Fairclough MOVED CS CS SB 305(FIN) 26- LS1577\K, Bullock, 4/14/10 as a working document. Co-Chair Hawker OBJECTED for discussion. ROGER MARKS, PETROLEUM ECONOMIST, LEGISLATIVE BUDGET & AUDIT, detailed the "Summary of Changes Between House Resources CS and Finance Work Draft" (copy on file). He listed the reasons as described on the list. 1. Timing window of moving between the one "bucket" and two "bucket" regimes has been removed. 2. AS 43.55.011(g)(3): and (p)(3): This is a technical change that adds clarity. It depicts the detailed methodology for deriving the progressivity factor so that it is clear the word "average in the statute means weighted average. 3. AS 43.55.020(a): The section describing the calculation of the monthly installment payments has been repealed and reenacted. After all previous changes a more succinct drafting was crafted. 4. AS 55.161(a)(1) and (a)(2): This is an expansion on the current section describing the calculation of the annual and monthly production tax values. Lease expenditures include expenditures allocated under 160(f) (below) for the calendar year incurred to explore land not under lease, or explore or develop a lease before commencement of sustained production. 5. AS. 43.55.160(f): This is a new section. Expenditures to explore land not under lease, or to explore or develop a lease before commencement of production of oil or gas, are allocated between oil and gas in the year the expenditure is incurred. (Method of allocation is specified in AS 43.55.165(h)[an amendment out of House Resources] stating that for allocating costs between oil and gas gross value should be used to the maximum extent possible). 6. AS 43.55.(g): This is a new section that clarifies that lease expenditures include expenditures for producing or that are incurred for exploration or development after the commencement of sustained production, as well. Representative Gara found it difficult to follow the bill while using the "bucket explanation." He assumed that decoupling would not be necessary until the state began exporting gas. Mr. Marks clarified that if the bill passes then the decoupling is effective immediately. He offered another bucket analogy. 9:07:52 AM Mr. Marks explained that the progressivity for the current activity would be calculated together with Cook Inlet Gas, North Slope Oil, and all other instate gas. Representative Gara asked if the system would be similar to the current one. Mr. Marks responded yes. Mr. Marks continued to describe the technical changes. Representative Gara asked if a deduction from gas taxes would be appropriate when producing gas. Mr. Marks answered yes. Representative Gara asked if small field were found and dedicated to a certain demand, would decoupling allow deduction of gas costs from the gas tax. Mr. Marks discussed allocation. Costs are allocated between oil and gas pursuant to Section 165(h), as seen on page 15, Section 9. This amendment adopted by House Resources stated that costs are allocated between oil and gas based on gross value at the point of production. If the producer had gas income, the cost for developing the gas would be allocated between their gas and oil; expenditures could be offset against the gas income. Representative Gara commented that companies producing small amounts of gas are not required to decouple. Mr. Marks agreed that is correct. Representative Gara asked to know the trigger enforcing decoupling. Mr. Marks responded that a North Slope oil producer selling a small amount of taxable gas to Alyeska is considered an in-state gas sale. Those incomes and costs are allocated in proportion to gross value at the point of production. Co-Chair Hawker clarified that Representative Gara was seeking the trigger point export. Representative Gara understood that companies producing small amounts of gas would operate under current law. Mr. Marks commented that current law and activities are divided into segments. He listed the segments as North Slope oil and in-state gas. Representative Gara asked if in-state gas is taxed under Alaska's Clear and Equitable Share (ACES). Mr. Marks answered yes. Representative Gara asked if export gas triggers the decoupling rules. Mr. Marks responded correct. 9:17:00 AM Mr. Marks continued with the technical changes. Representative Kelly clarified that the mechanism does not change for in-state gas. Mr. Marks answered that is correct. Representative Austerman asked if the new subsection for Section 8 was discussed in both the Senate and Resource Committees as an option. Mr. Marks responded no. The subsection was an alternative way of addressing concern regarding the deduction of cost in the future. Co-Chair Hawker added that the three day window was a creation of legislative legal. The approach presented was a joint crafting by Department of Revenue (DOR) and the sponsor. Mr. Marks commented that the issue of cost recognition was in statute and regulation. As long as status quo was in place, the concern was alleviated. 9:20:06 AM Mr. Marks continued with Page 7, Section 7, which are in the current statue and describe how the production tax values are derived for the different segments. Lease expenditures should include those allocated by current production for the calendar year for expenses for exploration and development. Costs incurred can be deducted against current production. Representative Doogan asked if an oil and gas company looking for gas can deduct costs against oil taxes until gas development occurs. Mr. Marks explained that if a company were looking for gas but had only oil production, the gas seeking costs could be deducted against oil production. Once both oil and gas are produced, the costs are deducted against both in proportion to the gross value of the oil and the gas. Representative Doogan presented a scenario where a company is exploring just for gas without oil production. Mr. Marks explained that the company would take a credit of 25 percent of the expenditures. 9:23:13 AM Mr. Marks explained that lease expenditures include expenditures for producing and exploration before and after the commencement of production. Representative Austerman asked for identification of the section discussed. Mr. Marks clarified Section 8, Page 14, Section 43.55.160(g). Co-Chair Hawker commented that an update for the comprehensive sectional for the bill will be provided. Mr. Marks agreed to provide the comprehensive sectional. Representative Gara pointed out that the state will not require decoupling until Alaska exports gas. Companies that wish to produce gas for export understand the decoupling rule. Representative Gara asked where the decoupling trigger point was stated in the statute. Mr. Marks replied Section 4, AS 43.55.011(p). The current statute includes a base tax and progressivity for current activity in Section G. He noted that Section P sets up progressivity tax for gas. He mentioned Section 7, Page 9 which references gas produced during a calendar year. He noted that the key phrase was the bottom of Subsection f which explains that exported gas that is subject to a distinct progressivity calculation. Representative Gara highlighted that the section does not define that the trigger point is for exported gas. He understood the definition to read that in-state gas uses ACES and out of state gas employs the decoupling process. The issue of the commerce clause problem will be dealt with when the state begins exporting gas. Mr. Marks chose not to provide advice about constitutional issues. 9:29:00 AM Co-Chair Hawker removed his objection to adoption of the work draft. The work draft was adopted. Representative Fairclough communicated that her silence does not mean that that she agrees with the statements made about the inner-state commerce clause. Representative Gara clarified that he did not know that an inter-state commerce violation existed, but he realized that the question existed. SB 305 was HEARD and HELD in Committee for further consideration. 9:31:55 AM