2:32:05 PM CS FOR SENATE BILL NO. 305(RES) "An Act providing for a production tax on oil and gas; repealing the oil and gas production (severance) tax; relating to the calculation of the gross value at the point of production of oil or gas and to the determination of the value of oil and gas for purposes of the production tax on oil and gas; providing for tax credits against the tax for certain expenditures and losses; relating to the relationship of the production tax on oil and gas to other taxes, to the dates those tax payments and surcharges are due, to interest on overpayments of the tax, and to the treatment of the tax in a producer's settlement with the royalty owners; relating to flared gas, and to oil and gas used in the operation of a lease or property under the production tax; relating to the prevailing value of oil or gas under the production tax; relating to surcharges on oil; relating to statements or other information required to be filed with or furnished to the Department of Revenue, to the penalty for failure to file certain reports for the tax, to the powers of the Department of Revenue, and to the disclosure of certain information required to be furnished to the Department of Revenue as applicable to the administration of the tax; relating to criminal penalties for violating conditions governing access to and use of confidential information relating to the tax, and to the deposit of tax money collected by the Department of Revenue; amending the definitions of 'gas,' 'oil,' and certain other terms for purposes of the production tax, and as the definition of the term 'gas' applies in the Alaska Stranded Gas Development Act, and adding further definitions; making conforming amendments; and providing for an effective date." This was the 13th hearing for this bill in the Senate Finance Committee. 2:32:13 PM DAN DICKINSON, CPA, Consultant to the Department of Revenue, introduced Mr. Mintz. 2:33:10 PM ROB MINTZ, Assistant Attorney General, Oil, Gas and Mining Section, Civil Division, Department of Law, testified via teleconference from an offnet location and gave a presentation titled "Comparing CSSB 305(RES) to CSSB 305(FIN) (version P)" [copy on file]. He explained the color coding system utilized in the presentation with red text indicating key words and phrases that are unchanged from the original version of the bill; Yellow text indicating changes included in the Senate Resources Committee substitute, and Pink text indicating changes included in the Senate Finance Committee substitute, Version P. [NOTE: In the text of these minutes, the color coded language is contained in quotation marks proceeded by the version of the bill in which that language was amended, (RES) or (FIN). Language color coded as red to indicate it is unchanged from the original version of the bill introduced at the request of Governor Murkowski is shown in quotation marks also and is preceded by (GOV). Brackets shown in the presentation have been inserted by the authors of the presentation. Quotations not proceeded by a bill version reference were inserted by the authors of the presentation.] 2:34:20 PM Page 2 RES, Section 32 FIN, Section 37 New production tax provisions apply to oil and gas produced on or after: April 1, 2006 (RES) July 1, 2006 (FIN) Mr. Mintz noted the difference effective dates of the proposed Petroleum Production Tax (PPT). 2:34:53 PM Page 3 RES, Section 5 AS 43.55.011(e) There is levied upon the producer … a tax for all "oil and gas" (GOV) produced "each month" (GOV) … "[except for] a lessor's royalty interest" (RES) … The tax is equal to "25" (RES) "percent" (GOV) of the "production tax" (RES) "value" (GOV) … under AS 43.55.160. Mr. Mintz outlined the changes made in the Senate Resources Committee substitute to the original bill. 2:35:30 PM Page 4 FIN, Section 5 AS 43.55.011(e) There is levied upon the producer … a tax for all "oil and gas" (GOV) produced "each month" (GOV) … "[except for] a lessor's royalty interest" (RES) … The tax is equal to "25" (FIN) "percent" (GOV) of the "production tax" (RES) "value" (GOV) … under AS 43.55.160. Mr. Mintz pointed out that the language of the Senate Finance Committee substitute is identical to the Senate Resources Committee substitute with the exception of the percentage rate. 2:35:50 PM Page 5 RES, Section 5 (cont.) AS 43.55.011(f) There is levied upon to producer … a tax for all oil and gas produced each month … the ownership or right to which constitutes a "lessor's royalty interest" (RES) … The tax is equal to "five percent of the gross value at the point of production" (RES) … ["for existing leases" (RES)] - BUT… Mr. Mintz explained this language pertains to tax on private royalty share. Private royalty shares comprise a small amount of production; however, the issue must be resolved. 2:36:38 PM Page 6 RES, Section 5 (cont.) AS 43.55.011(f) (cont.) The tax is equal to "1.5 percent of the gross value at the point of production" (RES) … ["for existing COOK INLET BASIN leases" (RES)] - AND… Mr. Mintz noted the exception provided in the Senate Resources Committee substitute for operations located in Cook Inlet. 2:36:48 PM Page 7 RES, Section 6 (cont.) AS 43.55.011(f) (cont.) The commissioner shall "recommend to the legislature" (RES) the rate of tax ["for FUTURE leases" (RES)] Mr. Mintz qualified this language would only apply to leases already in effect. 2:37:08 PM Page 8 FIN, Section 5 (cont.) AS 43.55.011(f) There is levied upon to producer … a tax for all oil and gas produced each month … the ownership or right to which constitutes a "lessor's royalty interest" (RES) … "five percent of the gross value at the point of production" (RES) "of the oil … 1.667 percent of the gross value at the point of production of the gas [PERIOD]" (FIN) Mr. Mintz stated this represents significant changes made in the Senate Finance Committee substitute. 2:37:56 PM Page 9 FIN, Section 36 The Department of Revenue is directed to study and report to the legislature by 2013 on the private royalty tax rates and whether they should be changed in the future. Mr. Mintz read this language inserted in the Senate Finance Committee substitute. 2:38:32 PM Page 10 RES, Section 5 (cont.) AS 43.55.011(g)-(h) [When West Coast ANS is "above $40/Bbl" (RES)] there is levied upon the producer "of oil" (RES) a tax … equal to "(West Coast ANS - 40) * .2% * (ANS Prevailing Value) * 75% * (amount of oil production)" (RES) Mr. Mintz noted this language pertains to the progressivity tax that would be levied when oil prices were high. 2:39:10 PM Page 11 FIN, Section 5 (cont.) AS 43.55.011(g)-(h) When "price index is above 45" (FIN) there is levied upon the producer of oil "or gas" (FIN) a tax equal to ".1%" (FIN) of "production tax value" (FIN) times price index "price index = production tax value per barrel - 45" (FIN) Mr. Mintz stated that the language of the Senate Finance Committee substitute is similar to that of the Senate Resources Committee substitute. He explained the price index calculation. 2:40:59 PM Page 12 So… The Resources CS has three production tax components: (1) 25% of net value (now called "production tax value") except for lessor royalty share (2) 5% or 1.5% of gross value for lessor royalty share (3) A progressive-rate tax on prevailing value of oil only, including lessor royalty share Mr. Mintz overviewed this information. 2:41:32 PM Page 13 And… The Finance CS also has three production tax components: (1) 22.5% of net value (now called "production tax value") except for lessor royalty share (2) 5% of oil gross value and 1.667% of gas gross value for lessor royalty share (3) a progressive-rate tax on net value of oil gas (excluding 2.3 of gas gross value), no including lessor royalty share Mr. Mintz gave a comparison of the variations of the three components between the Senate Resources Committee Substitute and the Senate Finance Committee substitute. 2:42:44 PM Senator Stedman understood the intent of the discussion is to address the issue of progressivity at a later time. 2:42:55 PM Mr. Mintz affirmed. 2:43:31 PM Mr. Dickinson stated that additional information would be overviewed later in the presentation. 2:43:56 PM Page 14 RES, Section 22 AS 43.55.160(a) "production tax" (RES) "value" (GOV) … is the total of the "gross value at the point of production" (GOV) of … oil and gas … from "all leases or properties" (GOV) in the state, Less "lease expenditures" (GOV) … as "adjusted" (GOV) Mr. Mintz read this language. 2:44:41 PM Page 15 AS 43.55.160(a) "production tax" (RES) "value" (GOV) … is the total of the "gross value at the point of production" (GOV) of … oil and "one-third of the gross value at the point of production of the gas" (FIN) … from "all leases or properties" (GOV) in the state, Less "lease expenditures" (GOV) … as "adjusted" (GOV) Mr. Mintz noted the Senate Finance Committee substitute follows the basic concept of the Senate Resources Committee substitute, with one significant change pertaining to gas. 2:45:24 PM Page 16 RES, Section 28 FIN, Section 32 AS 43.55.900(7) "gross value at the point of production" means For "oil" (GOV), the value … at the … meter … in … "pipeline quality" (GOV) For "gas" (GOV) … the value … where … metered ["after any separation or gas processing" (GOV)] And Page 17 RES, Section 20 FIN, Section 24 AS 43.55.150(a) … gross value at the point of production is calculated using the reasonable "costs of transportation" (GOV) … Mr. Mintz noted neither committee substitute changes the original language. 2:46:23 PM Page 18 RES, Section 21 AS 43.55.150(d) "if the commissioner completes a detailed fiscal analysis and determines … the long-term fiscal interests of the state [would be served]" (RES) …the department "may allow" (GOV) … gross value [to be calculated based upon "DNR or U.S. Dep't of Interior" (GOV)] royalty … valuation [or] another "formula … that reasonable estimates" (GOV) a value … Mr. Mintz explained this language of subsection (d) of the Senate Resources Committee substitute. 2:47:02 PM Page 19 FIN, Section 25 AS 43.55.150(d) "if the department determines [it would improve efficiency & economy of tax administration and be reasonably accurate and not biased toward understating tax]" (FIN) … the department "may allow" (GOV) … gross value [to be calculated based upon "DNR or U.S. Dep't of Interior" (GOV)] royalty … valuation [or] another "formula … that reasonable estimates" (GOV) a value… Mr. Mintz accepted the concept expressed in the language of the Senate Finance Committee substitute, but cautioned that it would change the "details of the determination" in ways "more specifically relevant to the reasons why" it would or would not be "desirable" to allow "use of a simplified formula". A simplified formula would not produce the same result for each month as would application of a standard calculation. However, over time, the simplified formula should never understate the tax liability. 2:48:21 PM Page 20 RES, Section 22 FIN, Section 26 AS 43.55.160(c) … lease expenditures … are the "total" (GOV) costs "upstream" (GOV) of the point of production … on or after "April 1" (RES) "July 1" (FIN), 2006 … that are the "direct, ordinary, and necessary" (GOV) costs of "exploring for, developing, or producing" (GOV) oil or gas … in the state. Mr. Mintz remarked this page demonstrates that the basic definition of lease expenditures has not changed; only the effective date. 2:48:57 PM Page 21 RES Section 22 AS 43.55.160(c) (continued) In determining … ["direct, ordinary, and necessary" (GOV)] costs … the department shall give substantial weight … to typical "industry practices and standards" (GOV) … as to [billable] costs … under "unit operating agreements" (GOV) … and ["DNR net profits share lease regulations" (GOV)]. Mr. Mintz explained this language, which has not been changed in either committee substitute. The Department of Natural Resources would be directed to follow industry practices and standards utilized in joint operating agreements between partners. 2:49:54 PM Page 22 FIN Section 26 AS 43.55.160(c) (continued) This CS gives priority to industry practices and standards. DNR's net profit share lease regulations are looked to only if industry practices and standards do not address a subject or are not clear or not uniform. Mr. Mintz characterized this as an "important refinement". 2:50:48 PM Page 23 Section 22/26 AS 43.55.160(d) provides specific examples of, and exclusions from, "direct costs" · FIN CS adds "depletion" to exclusion of depreciation/amortization · FIN CS clarifies language of several exclusions · FIN CS deletes RES CS exclusion for "disuse", dismantlement, restoration, etc. Mr. Mintz stated this page provides additional detail of deductible lease expenditures provisions. 2:52:32 PM Page 24 Section 22/26 (cont.) · FIN CS retains RES CS fair market rule for non-arm's length transactions but deletes RES language referring to IRS provisions. · Note: fair market rule for adjustments to lease expenditures is moved from subsec. (l) to sub-subpar. (e)(3)(A)(ii) · FIN CS deletes RES CS treatment of "relinquished assets" Mr. Mintz supported the concept contained in the Senate Resources Committee substitute. The Department of Revenue could review and make adjustments if a transaction did not reflect fair market value. 2:54:35 PM Mr. Dickinson elaborated on the concept to adjust for assets that were "turned", defining this as equipment purchased and disposed in one year, and new equipment that would perform the same function purchased the following year. This issue could be significant in rural areas such as the North Slope. 2:55:20 PM Page 25 RES, Section 22 AS 43.55.160(g) … a producer that is "qualified" (GOV) … and "produces under 55,000 BOE/day" (RES) may reduce the net value by "deducting an allowance" (GOV) … "equal to the following fraction of the production tax value: (5,000 - 0.2* [average daily production - 5,000]) ÷ average daily production" (RES) Mr. Mintz noted the Senate Resources Committee substitute replaced the language providing a $73 million allowance contained in the original version of the bill with language providing for 5,000 BOE average daily production. This change would eliminate one tax and institute a different tax at higher oil prices. 2:56:18 PM Page 26 RES, Section 22 AS 43.55.160(h) - producer's "qualification" (RES) for an allowance. "Expires 12/31/2013)." (RES) This is an anti-splitting provision to prevent abuse of the per producer allowance under AS 43.55.160(g). It is essentially the same anti-splitting provision that is in sec. 21 of the original bill, for the $73 million per producer allowance. Mr. Mintz told how this language stipulates that the producer must demonstrate to qualification to the Department of Revenue. 2:56:41 PM Page 27 FIN, Sec. 26 (cont.) "Allowance" (RES) provision in RES CS version (AS 43.55.160(g) & (h)) is replaced with a new "credit" (FIN) provision in FIN CS (AS 43.55.170) Credit = "22.5% of production tax value" (FIN) of up to "5,000 barrels per day" (FIN) of production Up to $14 million/yr, non-transferable, not carried forward, expires 2016 Mr. Mintz stated that because the tax rate is 22.5 percent the credit rate is also 22.5 percent, and would offset the tax "exactly" if an operator produced no more than 5,000 barrels per day. Mr. Mintz qualified this provision "has some limitations" in that as production increased, operators would still receive credit for 5,000 barrels per day. 2:58:09 PM Page 28 FIN, Sec. 26 (cont.) Credit provisions of AS 43.55.170 has essentially the same anti-splitting provision as the Governor's bill and the RES CS AS 43.55.170(c) Mr. Mintz read this information into the record. 2:58:30 PM Page 29 FIN, Section 36 Department of Revenue is directed to study the effects of the AS 43.55.170 credit on exploration, encouraging new entrants, etc., and report to the legislature by 2015, including recommending whether to extend credit provision. Mr. Mintz pointed out the lapse date of the credit provision. 2:59:07 PM Page 30 RES, Section 13 AS 43.55.024(a) … a producer … that incurs a "qualified capital expenditure" (GOV) … may … elect … to take a "tax credit" (GOV) in the amount of "20 percent" (GOV) of that expenditure. Mr. Mintz noted this is another credit provision that is identical in the original version of the bill and the Senate Resources Committee substitute. 2:59:29 PM Page 31 FIN, Section 12 AS 43.55.024(a) … a producer … that incurs a "qualified capital expenditure" (GOV) … may … elect … to take a "tax credit" (GOV) in the amount of "25 percent" (FIN) of that expenditure. ["But only if the producer agrees to share exploration data with DNR - as in SB 185" (FIN)] Mr. Mintz outlined the changes contained in the Senate Finance Committee substitute. This provision qualifying the tax credit on providing the Department of Natural Resources with exploration data is intended to make the new tax structure consistent with statutes enacted a previous legislative session as SB 185. 3:00:24 PM Page 32 Section 12/13 (cont.) AS 43.55.024(h)(2) "qualified capital expenditure" does "not" (RES) include an expenditure incurred … "for … an extended period of disuse, dismantlement, removal … or abandonment … or for the restoration of a lease, field, [etc.]" (RES) FIN CS deletes that exclusion. Mr. Mintz explained this pertains to the definition of "qualified capital expenditure". The Senate Resources Committee substitute added an exclusion, which was deleted in the Senate Finance Committee substitute. The difference would likely be negligible as these types of expenditures would generally not be capital expenditures. 3:01:19 PM Page 33 Section 12/13 (cont.) AS 43.55.024(b) A producer … may elect to take a "tax credit" (GOV) … of "25" (RES) "22.5" (FIN) percent of a carried-forward "annual loss" (GOV) [which is the amount of a previous year's "lease expenditures" (GOV) that were "not deductible" (GOV) because they would have reduced the "production tax value" (RES) of the oil and gas below zero]. Mr. Mintz stated that the reduction of the tax credit in the Senate Finance Committee substitute is necessary to offset the change of the production tax to 22.5 percent made in the same committee substitute. 3:02:13 PM Page 34 Section 12/13 (cont.) AS 43.55.024(d)-(f) A producer entitled to a tax credit may apply to the Dep't of Revenue for a "transferable tax credit certificate" (GOV). Once issued, a certificate may be used for its face value, but a transferee may not apply a certificate to reduce its tax liability by more than "20 percent" (GOV) during a calendar year. Mr. Mintz pointed out this provision is unchanged from the original version of the bill. 3:03:01 PM Page 35 Section 12/13 (cont.) AS 43.55.024(i) - "nontransferable credit for transitional investment expenditures" (RES) … transitional investment expenditures [TIE] are … "capital expenditures" (GOV) [incurred "4" (RES) "/2001 through" (GOV) "4" (RES) "/2006" (GOV)] ["7" (FIN)/2001 through "7" (FIN) /2006] … less … [proceeds from] the "sale … of assets" (GOV) … acquired … as a result of [those] capital expenditures. Mr. Mintz stated the dates are changed to conform. 3:03:13 PM Page 36 Section 12/13 (cont.) AS 43.55.024(i) (cont.) · A producer may … take a "tax credit" (RES) … of "20 percent" (RES) of the producer's ["TIE" (RES)] but only [up to] "one-half of the producer's qualified capital expenditures" (RES) … during the month · Credits are "non-transferable" (RES) · Credit provision "expires April 1" (RES) ["July 1" (FIN)] ", 2003" (RES) Mr. Mintz noted this pertains to the same subsection (i) as the previous page. 3:03:29 PM Page 37 FIN, Sections 13-17 AS 43.55.025 (from SB 185) The FIN CS · Extends the sunset for these exploration credits to 2016 statewide · Fixes an ambiguity re: $20 million cap for Cook Inlet · Makes conforming amendments Mr. Mintz overviewed these changes contained in the Senate Finance Committee substitute. 3:04:32 PM Page 38 RES, Sections 7, 12 AS 43.55.020(a) and (g) · 95 percent of principal production tax (AS 43.55.011(e)), net of credits, due each month. Remaining portion due at end of next calendar quarter. · 100 percent of tax on lessor royalty interest (AS 43.55.011(f)) due each month. · Bill does not specify payment of progressive-rate oil tax (AS 43.55.011(G)). Mr. Mintz remarked this relates to payment of the tax. Discrepancies in payments of less than 95 percent of the actual tax would be subject to interest. No interest would be assessed on discrepancies of up to five percent of the actual tax because that amount would not be due until the following quarter of the calendar year. 3:06:06 PM Page 39 FIN, Section 7 AS 43.55.020(a) "95 percent" (RES) of "total" (FIN) production tax (AS 43.55.011(e)-(g)), net of credits, due "each month" (RES). Remaining portion due "March 31 of following year" (FIN). Mr. Mintz contended this provision would be "much simpler" for both the tax payer and the Department of Revenue. The "true-up" was changed from quarterly to annual because financial information is not available by the end of the next calendar year quarter. 3:07:03 PM Page 40 FIN, Section 11 AS 43.55.020(f) - "Prevailing value" The Governor's bill clarified that prevailing value applies where there is "no actual sale" (GOV) of oil or gas. The FIN CS also clarifies that where there is a sale, prevailing value may be calculated for the "month during which the sale occurred" (FIN) when that makes more sense than the month during which the oil or gas was produced. Mr. Mintz commented that this language does not pertain to the PPT system, but is nonetheless important. 3:08:59 PM Page 41 And finally … RES Section 25, FIN Section 29 The RES CS increased the oil conservation surcharge under AS 43.55.300 from 3 cents per barrel to 5 cents. The FIN CS increases it from 3 cents per barrel to 4 cents. Mr. Mintz overviewed this information. 3:09:44 PM Senator Hoffman, referencing Page 24, asked the justification of deleting the language in the Senate Resources Committee substitute relating to "relinquished assets". Mr. Mintz deferred to Mr. Dickinson. Mr. Mintz surmised the issue to be more theoretical than problematic. 3:10:39 PM Mr. Dickinson defined "relinquished asset" as provided for in the Senate Resources Committee substitute as "an asset that is first acquired by the producer before the effective date of this section and has been replaced by the producer's later purchase of an asset that serves substantially similar function as an asset that was relinquished." This language should be included as "a test" in determining eligibility of capital investments made by producers on the North Slope. Producers would be unlikely to import assets to the North Slope for only the purpose of receiving a tax credit. 3:11:44 PM Senator Hoffman asked if this would apply even for high value purchases. 3:11:52 PM Mr. Dickinson could not guarantee this would not occur. However, the process required proof that the asset was new. 3:13:07 PM Co-Chair Wilken spoke to private royalty interest. He recalled debating the issue and subsequently directing the commissioner to provide the legislature with recommendations on future private royalty exploration and development and production. However, the language of the Senate Finance Committee substitute stipulates five percent of oil gross value and 1.667 percent of gas gross value for lessor royalty share up to the year 2013. He asked the reasoning for this change. 3:13:52 PM Mr. Dickinson replied that the Senate Resources Committee substitute provided that the commissioner would set the future tax rate. The Murkowski Administration determined this would be inappropriate and that the legislature should instead establish the rate in statute. It would be appropriate for the commissioner to make a recommendation of the tax rate and to implement the rate established by the legislature. The two branches of government should remain separate. Mr. Dickinson also pointed out that the Senate Resources Committee substitute provided a specific tax on private royalties for existing leases. However, producers considering new leases would not know the future rates. Although the legislature could always implement changes to existing rates, the proposed system would provide no rates whatsoever. Therefore a rate for all private royalties should always be in place. The commissioner could recommend the rate be changed or remain unchanged. Mr. Dickinson addressed the establishment in the Senate Resources Committee substitute of a rate of five percent for oil and 1.667 percent for gas. The Administration did not support the geographic differentials, although a separate rate for some gas projects could be appropriate. Administratively, "there is no confusion over what's gas and what's oil;" however "net value" is unclear. "A reduction at the gross value level" would instead be appropriate and would "have the additional virtue of keeping the twenty percent applied to everything." A two-step process would be applied for gas resulting in a "lower effective rate". Because the gross value is utilized, the two "implicit" rates are stated in the presentation. Co-Chair Wilken indicated he would return to this issue at a later time. 3:17:15 PM Senator Hoffman asked the effect on the State of the removal and abandonment costs as provided for in the Senate Finance Committee substitute and overviewed on Page 23 of the presentation. 3:18:12 PM Mr. Dickinson replied, "I don't believe the dollars at stake are [a] huge issue." He continued, "I believe that the costs of abandonment: abandoning something, dismantling it, restoring what was there back to the State required by the lease is an important part of the business cycle. It's a duty. It falls on the person who's done the leasing." Although perceived as "a company leaving the state," as the fields "mature" some would be shut down yet the producers would still operate elsewhere in Alaska. Two small fields in Prudhoe Bay are no longer operable and the holders of those leases continue to operate other fields. Mr. Dickinson noted this matter was not addressed in the original version of the bill or in the Senate Finance Committee substitute. As a result, these costs would be treated the same as any other "ordinary, necessary business expense." 3:19:22 PM Senator Hoffman asked if the original Trans Alaska Pipeline System (TAPS) was not intended to be "covered" under this provision, as it was anticipated to extend to the year 2050. 3:19:43 PM Mr. Dickinson explained that a "fraction of the penny" or "over a penny now" is paid for every barrel transported through TAPS and held specifically for future abandonment costs. This legislation would not change the existing system. 3:20:42 PM Co-Chair Wilken, referencing the same presentation page, asked if the exclusions from direct costs would allow for "double counting", as normal accounting practices require holding funds aside in anticipation that a site would be abandoned. These would be considered annual operating expenditures at this point. At the time of actual abandonment, the costs could be deducted again if the specific exclusion were not included in this legislation. 3:21:21 PM Mr. Dickinson answered this is not the intent. Before an expense could be accounted for as a future liability it must be "identifiable with a sufficient amount of certainty." A reserve account could be established, but funds deposited into it could not be deducted from income at the time of deposit. He gave the value of pension funds as an example of this situation. Mr. Dickinson emphasized the "focus" is on actual costs or cash flows. For example, amortization, depletion or depreciation is not allowed. Only a "cash outlay" would be considered a direct cost. The only exception would be payment of a tariff for a downstream asset. 3:23:06 PM Co-Chair Wilken clarified that funds deposited into a producer established "sinking fund" would be an expense to the producer, but not considered an expense for tax purposes. 3:23:35 PM Senator Stedman reposed the question noting, "When there is abandonment and there's a PPT tax calculated, there is no credit taken against the PPT tax for abandonment." He asked if "any other charges taken against it from the abandonment the PPT tax." 3:23:58 PM Mr. Dickinson affirmed that capital is an investment for future benefit; abandonment would not generally be considered as such. Abandonment costs would be considered an ordinary and necessary expense. Each dollar spent on abandonment would reduce the PPT tax by 22.5 percent under the provision of the Senate Finance Committee Substitute. 3:24:59 PM Senator Bunde understood that abandonment costs, when expended would be considered ordinary business deductions that could be taken against corporate income tax. Mr. Dickinson affirmed. Senator Bunde asked if these expenses could also be deducted from the PPT tax liability. Mr. Dickinson again affirmed. Senator Bunde characterized this as "double dipping". Mr. Dickinson explained that this would involve two different taxes. Costs of operation on the North Slope would be considered a deduction from both PPT and corporate income tax. 3:26:59 PM Senator Olson questioned the absence of a geographical differential on investments related to natural gas development because operations in Cook Inlet are mostly developed but not developed on the North Slope. 3:27:43 PM Mr. Dickinson agreed that Cook Inlet contains "very mature wells"; however, new development is still occurring in that region. 3:29:10 PM Senator Hoffman noted the deletion of additional audit of lease expenditures requirements in Section 26(c) of the Senate Finance Committee substitute. He asked the reason for this. 3:29:44 PM Senator Stedman furthered that changes to this subsection would also reduce a penalty from 20 percent to 5 percent. 3:30:08 PM Mr. Dickinson read the language of the committee substitute as: "the Department of Revenue may authorize a producer, including a producer that is an operator, to treat as it's lease expenditures under this section, the costs paid by the producer that are billed to the producer by an operation in accordance with the terms of a unit operating agreement or similar operating agreement if the Department of Revenue finds that (1) the terms and conditions of the operating agreement are substantially similar with the Department of Revenue's determinations, and (2) at least one working interest owner party to the agreement, other than the operator, has a substantial incentive and ability to effectively audit billings under the agreement." Mr. Dickinson understood this provision has remained unchanged from the original bill and the Senate Resources Committee substitute. 3:31:22 PM Mr. Mintz affirmed. An "immaterial change" was made to clarify the inclusion of a producer that is also an operator. 3:31:40 PM Mr. Dickinson informed that most operations occurring on the North Slope are through joint ventures involving one operator performing the functions and other working interest owners. He exampled activities at Prudhoe Bay in which BP Exploration is the operator. BP Exploration expends the funds necessary to operate the field and each month, Conoco Phillips reimburses 36 cents on the dollar and ExxonMobil reimburses an additional 36 percent. Mr. Dickinson stressed that multiple experts employed by the working interest owners continually review and audit the billings submitted by the operator. The working interest owners have a substantial interest in ensuring that the expenses are valid and accurate. The intent of the provision of Section 26(c) is to allow the State to benefit from these efforts. The State's right to audit would not be forfeited. 3:34:40 PM Mr. Dickinson then began over-viewing a handout titled, "PPT Revenue Studies, Senate Finance Committee, April 20, 2006" [copy on file.] [Note: The pages in this document are not numbered and were not presented in the same order as contained in the packet. Several pages are untitled. For reference purposes, the Senate Finance Committee Secretary made a notation on each page of the corresponding timestamp in which that page was addressed in this hearing. General descriptive information of each page is provided in the body of these minutes when feasible. A copy of the handout can be obtained by contacting the Legislative Research Library at (907)465-3808.] Mr. Dickinson stated that this presentation pertains to several technical questions posed in the previous two hearings on this bill. 3:35:41 PM Cook Inlet [Bar graph showing Daily Production BOE (6000 mcf gas = 1Bbl oil) of amounts 5,000 through 35,000 in 5,000 increments for Taxpayer listed as A, B, C, D, E, F, and G and delineated by Oil [blue], Gas [white], and Taxable Gas (after exclusion) [green]. A red dotted line indicates 5,000 BOE equivalent credit. ] Mr. Dickinson corrected an error on the page, which incorrectly stated "Annual Production BOE…" He identified the Taxpayer lettering as "typical taxpayers in the last year." Mr. Dickinson noted that oil production has declined in this region, with two producers producing approximately 6,000 barrels per day and "four or five producers producing significantly less." Subsequently most oil produced in Cook Inlet would not be taxable under the provision of the "effective first credit". Most production in this region is of natural gas. Mr. Dickinson continued explaining the bar graph as follows. The combination of the white and green bars up there constitute the gas. What we've done here, is we've done a barrel of oil equivalent based on the BTU basis rule of thumb. It takes 6,000 cubic feet of gas makes one barrel of oil BTU equivalent. Clearly the values don't translate quite the same way, but for these purposes we're just going to use a six to one ratio of for a thousand cubic feet for a barrel of oil. On that basis there are three producers who have large quantities of gas, in fact, well, one of them also has oil, but two of them don't have very much gas. The rule that you will see there is of the gas that they have, when they go to calculate their base PPT two-thirds of that will not calculate in the tax. Two-thirds of the revenue from that gas will not calculate in. So what you will see here is, what is left after that exclusion is applied, is a very small about ten thousand cubic feet a day barrel of oil equivalent 60,000 cubic feet a day of taxable gas from those three tax payers. There will be the two places where the blue lines extend above the red dotted line. In other words where there is more than 5,000 barrels of oil being produced by a single producer. There will also be some tax on the oil. I hope what this slide illustrates is that through these two mechanisms, I think the taxpayers in Cook Inlet, both of these mechanisms, which are limits on size, effectively cover much of the production from the Cook Inlet. This is a simplified diagram of how Cook Inlet might look as these two, the 5,000 barrel a day equivalent credit and the reduction in gas, are applied. 3:39:20 PM Senator Stedman asked for clarification of the calculation of one-third of the gross revenue on gas and whether the calculation would be made before or after expenses were deducted. 3:39:54 PM Mr. Dickinson explained that one-third of gross revenues derived from natural gas operations would be added to all gross revenues from oil operations. All upstream costs would be deducted from that amount, and the total would be taxed 22.5 percent for PPT. 3:41:17 PM Senator Stedman predicted an adverse affect of this provision in situations involving an operator that only produces gas and has no revenues from oil production. Because all expenses would be deducted from one-third of the gross revenue, the tax due on the balance would be very low if any. 3:42:04 PM Mr. Dickinson responded, "You would adversely affect your tax base both ways. Doing it the way the bill lays out would affect it more." He began to reference another page of the presentation. 3:42:21 PM Senator Stedman interjected to request the presentation be made in an orderly manner, as his follow-up question was the affect of progressivity on natural gas development. 3:42:44 PM Mr. Dickinson reiterated that the "six to one is really a Btu [British thermal units] equivalent". The price of oil was currently $70 and a six-to-one equivalent would equal approximately $12 of thousand cubic feet (mcf) of gas. Most prices for Cook Inlet natural gas would be significantly lower at approximately $3 to $4. In utilizing actual proceeds in calculating progressivity, Cook Inlet gas would "not be driving much of the progressivity calculation". 3:43:53 PM Senator Stedman understood that progressivity would not be a significant factor in tax revenues collected on Cook Inlet natural gas productions. He deferred future discussion on this matter. 3:44:01 PM Senator Bunde asked if the same provision of basing the tax on one-third of gross revenues derived from natural gas production would apply statewide. Mr. Dickinson affirmed this provision would apply to all natural gas operations in the state. Currently gas is only produced from Cook Inlet with the exception of a small amount produced from the North Slope. Senator Bunde shared Senator Stedman's concern that this provision would be "very taxpayer friendly". He suggested deducting expenses from the gross revenues and taxing one third of the net amount would provide greater return to the State. He requested a comparison of the two methods. 3:44:55 PM Mr. Dickinson could create "a standard model or a standard deduction type arrangement". However, "As an average, it would be an average of a fairly broad range of costs associated with gas." Senator Bunde wanted a comparison of the two methods for the taxpayer represented on the bar graph as "B". 3:45:47 PM Co-Chair Green asked for clarification that "the one-third calculation [is] another way of saying that for the price on gas is $7.50 and the price on oil is $22.50 and we've just said it's one-third." 3:46:13 PM Mr. Dickinson replied that the reverse would be true only in the effect that "where there is only a gross value at point of production, in other words where the royalty value is based on gross value at point of production, which is how private royalty interests are taxed. I think that the numbers put into this bill were meant to reflect the gas revenue exclusion. They're meant to line up with each other. I'm not saying which one drove the other. Clearly in terms of volume there's a much larger volume in the non-royalty tax than there is on the royalty tax. But they are supposed to be exactly parallel." Co-Chair Green asked if "it would be easier to understand, if you took the gross value of the gas and the gross revenue and then just multiplied it by 7.5 rather than take your expenses away from the total but then just multiply by 7.5 and then it's more clearly set out that the gas is intended to be less a unit versus the price per unit of oil." 3:47:39 PM Mr. Dickinson agreed that such a calculation would essentially "have the same mathematical effect." 3:48:07 PM Senator Stedman requested an explanation of the methodology of using the "one-third, which is 7 and a half" and clarification of how expenses would be applied, whether to the gross or the "one-third side". He understood that this method, as opposed to a method in which portions of each facility were identified as either producing oil or gas, is proposed for a reason. Providing "one point of calculation" is part of the reasoning. Mr. Dickinson answered, "I think the Chair is absolutely correct. You could do it that way and I think what that emphasizes is that we are not reducing the incentives for production for gas. The credits are still available. The deduction at the higher rate is still available. And so, what's being created here is when those investments are being made. The PPT system is meant to support all those investments including explorations, which you can't differentiate. So the methodology, (a) it's difficult to do, and (b) it doesn't really line up with the vision of how this would work to [provide incentive for] investment. Certainly the step that the Chair has laid out is mechanically gets you to the same place." 3:49:47 PM Co-Chair Green remarked that the discussion was "going way too deep" on an issue "that in the whole scheme of things is fairly minor." 3:49:57 PM Senator Bunde understood the concept that gas is less valuable per unit and that a lower tax rate would be appropriate. However, he questioned the deduction of expenses from net revenue rather than gross revenue. He asked the monetary differences to "government take" or "industry loss". 3:50:29 PM Mr. Dickinson reposed the question to ask how costs would be allocated between oil and gas activities and whether it would be done on a value basis, specific engineering identification basis, or volumetric basis. Costs associated with a "hole in the ground" from which both oil and gas was produced would be difficult to separately account for as either oil or gas related expenses. Instead under the method proposed in this legislation, "you really wouldn't be identifying costs so much as setting up a rule to create two buckets of cost." 3:51:01 PM Senator Bunde clarified that under the provisions of the current committee substitute, expenses would be subtracted from the identified one-third of gross revenues from gas. He asked the difference of deducting expenses from the total gross revenue from gas before calculating one-third from which to base the tax. The expenses would be the same in either case. 3:51:33 PM Mr. Dickinson responded that to utilize the second method suggested by Senator Bunde, it would be necessary to multiply some expenses by one rate and other expenses by a different rate. He posed a scenario of a producer expending $7 million to operate a facility that receives well fluid and separates it into gas and oil. Senator Bunde's method would require a determination of which of those expenses are related to oil production and which to gas production." Senator Bunde surmised that under the provisions of the bill, one-third of gross revenues from gas production would be taxed after all expenses were deducted. He again wanted to know the difference, given that the expenses would be unchanged, of deducting these expenses from the total gross revenue from gas rather than one-third of the gross revenue from gas. Mr. Dickinson identified the problem as determining the amounts of the total expenses were related to gas activities versus oil activities. An arbitrary rule, such as that contained in the legislation could be established, or calculations of the expenses could be made. The costs for producing oil and gas are simple to calculate. Dividing those costs between oil and gas production is complicated. 3:53:04 PM Senator Bunde acquiesced due to time constraints, but contended that the costs could be deducted from either the full gross revenue from gas or one-third of the gross revenue from gas. Deducting costs from the one-third net would result in less tax paid to the State. 3:53:23 PM Co-Chair Wilken referenced a chart that was earlier projected by Mr. Dickinson but not identified. Co-Chair Wilken asked if the axis would reflect all of Alaska. Mr. Dickinson affirmed. 3:53:37 PM Senator Stedman emphasized the point that revenues from gas taxed at a rate of 22.5 percent would be too high. Either form of calculation of the tax of one-third of the revenues would produce similar results. 3:54:25 PM Per Barrel Progressivity Surcharge 2010 [Line graph depicting Per Barrel Progressivity in amounts of $0 to $50.00 shown in $5 increments and ANS Price of $40 through $120 shown in $10 increments of the House Resources Committee substitute, the Senate Resources Committee substitute, and the proposed Senate Finance Committee substitute.] Mr. Dickinson noted that this chart, included in the handout, had already been addressed. 3:54:44 PM Total Progressivity Surcharges 2006-2030 ($B) [Line graph depicting Progressivity Surcharge ($B) in increments of 50 between zero and 200 and ANS Price in $10 increments of $40 through $120 for the House Resources Committee substitute, the Senate Resources Committee substitute, and the Senate Finance Committee substitute.] Mr. Dickinson explained that a rate would be applied against the calculated tax base. This is the progressivity. He referenced a chart presented at the previous hearing on this bill that addressed the effect per each barrel. The slide currently before the Committee "translates" the data into cumulative terms over 25 years and "adds up the difference." At current prices, the progressivity surcharge would add $2 to $3 billion in additional revenue over the 25 year period. Under the provisions of the House Resources Committee substitute, the additional revenue generated during this time period from oil priced at $120 per barrel would be approximately $200 billion. 3:56:49 PM Distribution of Future Cash Flows Under SQ, Gov's Bill, Sen Res and Proposed Sen Fin CS* FY 2007-2016 [Spreadsheet and line graph listing Government Share of the current tax system and the various versions of SB 305 based on Alaska North Slope West Coast (ANS WC) price per barrel as follows: Status Quo: $30 ANS WC $/bbl 56.2% $40 53.7% $50 52.6% $60 51.9% $70 51.4% $80 51.1% Governor's Bill $30 ANS WC $/bbl 57.2% $40 57.1% $50 56.5% $60 56.5% $70 56.6% $80 56.6% Senate Finance $30 ANS WC $/bbl 58.1% $40 57.9% $50 57.7% $60 57.9% $70 58.5% $80 59.1% Senate Resources $30 ANS WC $/bbl 60.2% $40 59.9% $50 60.7% $60 61.5% $70 62.3% $80 63.2%] *Assumes the Progressive tax is deductible only once from the PPT calculation for Resources CS; it is not deductible for Finance CS. Mr. Dickinson explained this page relates only to progressivity and calculates the government share of the cash flow in "a year". This data demonstrates the effect of a change of one- tenths, two-tenths or three-tenths of a percent of the progressivity rate. 3:57:55 PM Senator Bunde noted that if the long-range forecasted price of $40 per barrel is realized, no progressivity tax would be collected. Mr. Dickinson affirmed. The Senate Resources Committee substitute would provide for the progressivity tax for prices of $41 per barrel and higher. Mr. Dickinson qualified that because this information is based on a 25 year model, the costs could vary. The Senate Finance Committee substitute progressivity provision is "cost sensitive"; therefore progressivity would not be levied at prices of $60 per barrel if costs were higher than $15 per barrel. 3:59:25 PM Senator Bunde asked why less tax would be collected on prices of $60 per barrel than $40 per barrel under the provision of the Senate Finance Committee substitute. Mr. Dickinson replied that the State has a regressive system. He continued, "PPT does much to correct that"; however the situation would remain due to "the nature of" royalty and property tax. He emphasized, "As the total dollars goes up, the percentage goes down." 4:00:24 PM Distribution of Future Cash Flows Under Sen Fin CS with .1%, .2% and .3% Progressivity FY 2007-2016 Spreadsheet and line graph listing Government Share at Alaska North Slope West Coast (ANS WC) price per barrel for three progressivity rates under the provisions of the Senate Finance Committee as follows: Senate Finance CS .1% Progressivity: $40 ANS WC $/bbl 57.9% $50 57.7% $60 57.9% $70 58.5% $80 59.1% $90 59.6% Senate Finance CS .2% Progressivity: $40 ANS WC $/bbl 57.9% $50 57.7% $60 58.0% $70 59.1% $80 60.2% $90 61.3% Senate Finance CS .3% Progressivity: $40 ANS WC $/bbl 57.9% $50 57.7% $60 58.1% $70 59.7% $80 61.3% $90 63.0%] Mr. Dickinson noted this demonstrates the trend depicted on the previous page over a longer time period. 4:00:44 PM Cumulative Revenues Attributable to Progressivity Sen Fin CS and Sen Res CS, 2007-2030 Low Volume Scenario [Line graph depicting the Revenues at certain ANS West Coast Prices under the provisions of the two committee substitutes as follows: Senate Finance Committee Substitute: $50 ANS WC $0 $60 $0.2 billion $70 2.6 billion $80 6.0 billion $90 10.4 billion $100 15.7 billion Senate Resources Committee Substitute: $50 ANS WC $4 billion [approximately] $60 7.7 billion $70 13.7 billion $80 21.1 billion $90 29.9 billion $100 40.1 billion Mr. Dickinson explained this page presents the same information as provided in earlier presentations, although as cumulative revenues attributable to progressivity. 4:02:26 PM Senator Hoffman noted this page presented the low volume scenario and that a high volume scenario was not provided. He asked if, "the high volume scenario would be with the lower taxes, more to the Governor's version and the low volume scenario would be more toward the Senate Resources [committee substitute] because of exploration incentives." Mr. Dickinson responded, "Yes, we'd like to think that the high volume scenario lines up with what is happening with incentives and as a consequence there would be much more volume and much more revenue. The progressivity lines, I believe, would move exactly proportionately because the - it'd simply be more - the same thing happen in two more barrels." 4:04:18 PM Effect of Tax Rate: Annual Oil Severance Tax ($Millions) Senate Finance CS with 22.5% and 25% Tax Rate at $20, $40, and $60 per bbl, Low Volume Scenario [Line graph depicting the trend of Severance Tax ($Millions) of zero through 3,000 for the years 2005 through 2030 for tax rates of 22.5 percent and 25 percent.] Mr. Dickinson pointed out that the differences in the amount of revenue would remain fairly consistent. He qualified this chart does not calculate in other factors and assumes all other provisions are consistent. 4:06:16 PM Senator Dyson clarified this information represents a low volume scenario. Mr. Dickinson affirmed. 4:06:22 PM Cumulative Severance Tax Revenue, Senate Finance CS, with Tax Rates of 22.5% and 25%, 2007-2030 ($B), Low Volume [Line graph showing Cumulative Sev Tax Revenue ($B) at ANS Price for the two tax rates with certain amounts noted as follows: 22.5 percent tax rate: $40 ANS Price $18.9 billion $50 28.9 billion $60 39.6 billion $70 52.4 billion $80 66.2 billion 25 percent tax rate: $40 ANS Price $21.8 billion $50 33.0 billion $60 44.8 billion $70 58.8 billion $80 73.7 billion Mr. Dickinson pointed out the increased variances between the effects of the two tax rates as the price of oil increases. 4:07:04 PM Senator Hoffman requested a comparison of this information to the existing tax structure to demonstrate the increases that would occur under the proposed methods. Mr. Dickinson stated he would prepare such a comparison. 4:07:30 PM Senator Stedman asked if the amount of $70 "non-discounted" is held constant to the year 2030 in these charts. He surmised, "If we double that back in today's dollars that gap would severely implode in present value terms." Mr. Dickinson affirmed this would occur "in present value terms." The presentation utilizes "real dollars" but does not account for the "time value of those dollars." 4:08:54 PM Value of Credits against Capital Expenditures Under Senate Finance CS, at 20% and 25% Credit Rates, 2007-2030 Low Volume [Line graph showing Value of Credits ($mm) for Year at a 20% rate and a 25% rate with certain years and corresponding amounts noted as follows: 20% credit rate: Year 2007 $212 million 2011 210 million 2015 205 million 2019 197 million 2023 188 million 2027 180 million 2030 178 million 25% credit rate: Year 2007 $265 million 2011 263 million 2015 256 million 2019 246 million 2023 235 million 2027 226 million 2030 222 million] Average annual credit value is $50 million greater under 25% credit rate than under 20% credit rate. Mr. Dickinson continued his presentation, explaining that the credits would be calculated after the rate was calculated for both progressivity and the tax base. The figures represented on the graph are driven by the assumptions of the level of capital investment more so than by price. 4:09:24 PM Senator Stedman asked the dollar amount of capital expenditures utilized to generate these findings. Mr. Dickinson responded that a figure of approximately $1.1 billion was utilized for the year 2007. The amounts utilized decline over the next 20 years to approximately $600 million. 4:09:57 PM Senator Stedman asked the expectation of production in relation to capital expenditures. Mr. Dickinson relayed arguments made to the Committee by other presenters contend that at the current level of investment, the low volume forecast would not be achieved. The data used in compiling this graph considers the current levels of investment and attempts to "create distribution of those dollars that we think will create the barrels that we're modeling." However, Senator B. Stevens "correctly identified the issue" that if this legislation was "successful" investment would increase. The graphs presented are intended to demonstrate the difference that "such an investment" would cause under the rates of 20 and 25 percent. 4:11:10 PM Senator Hoffman requested clarification that "over 20 years, the total credit value would be $1 billion additional between 20 and 25 percent." Mr. Dickinson affirmed this is correct. 4:11:45 PM Cumulative Revenue Loss Attributable to 5000 Bbl Mechanism Sen Fin CS and Sen Res CS, 2007-2030 Low Volume Scenario [Line graph depicting the trend of Revenue Loss ($B) at ANS West Coast Price under the provisions of the committee substitutes with certain amounts noted as follows: Senate Finance CS $20 ANS WC Price $0.1 billion [approximately] $30 0.6 billion $40 0.8 billion $50 1.3 billion $60 1.3 billion $70 1.3 billion Senate Resources CS $20 ANS WC Price $0.2 billion $30 0.4 billion $40 0.5 billion $50 0.6 billion $60 0.8 billion $70 0.9 billion Mr. Dickinson reminded that, under the provisions of the Senate Resources Committee substitute, production of less than 5,000 barrels would not be taxed. At production of more than 5,000, the number of barrels exempt from tax would decline. No exemption would be granted on production of 30,000 or more. The five largest producers operating in Alaska would receive no tax benefit from this provision. Mr. Dickinson then reiterated that the provisions of the Senate Finance Committee substitute would exempt tax on at least 5,000 barrels for every producer. The effect of this would be minimal for large producers, although would still be granted. Mr. Dickinson pointed out that due to these provisions, the Senate Resources Committee substitute would "have less effect on revenue" than the Senate Finance Committee substitute. The Senate Finance Committee substitute would allow certain credits that the Senate Resources Committee substitute would not. 4:13:59 PM Co-Chair Wilken clarified that the difference of the impact of the two bill versions would be $300 million annually at an ANS price of $40. Mr. Dickinson corrected that the amount would be cumulative over the period of 2007 through 2030. The amount would be approximately $100 million at significantly higher prices. 4:14:57 PM CHERIE NIENHUIS, Petroleum Economist, Tax Division, Department of Revenue, testified that the 5,000 barrel credit provision of the Senate Finance Committee substitute would only be effective through the year 2016. The results are charted on this graph as cumulative through the year 2030. 4:15:44 PM Distribution of Future Cash Flows Under SQ, Gov's Bill, Sen Res and Proposed Sen Fin CS* FY 2007-2030 *Assumes the Progressive tax is deductible only once from the PPT calculation for Resources CS; it is not deductible for Finance CS. [Spreadsheet and line graph listing Government Share at ANS WC Price at follows: Status Quo: $30 ANS WC $/bbl 56.9% $40 54.1% $50 52.7% $60 52.0% $70 51.5% $80 51.2% Governor's Bill: $30 ANS WC $/bbl 57.4% $40 57.4% $50 57.1% $60 57.2% $70 57.3% $80 57.3% Senate Finance: $30 ANS WC $/bbl 59.2% $40 58.9% $50 58.8% $60 58.9% $70 59.4% $80 59.9% Senate Resources: $30 ANS WC $/bbl 61.4% $40 61.9% $50 61.7% $60 62.5% $70 63.3% $80 64.1] Mr. Dickinson explained this information is calculated after capital expenses are deducted. The percentages represent both State and federal taxes. Mr. Dickinson detailed the chart. 4:18:00 PM Senator Stedman surmised that the difference of the impact of a 22.5 percent tax rate should equally reflected between the 20 percent tax rate included in the original version of the bill and the 25 percent tax rate included in the Senate Resources Committee substitute. However, the Senate Finance Committee substitute figures are closer that those of the Governor's budget. He asked if this is due to the higher credit rate provided in the Senate Finance Committee substitute. Mr. Dickinson answered, "Let's look at $40. I believe that you've correctly identified that should form part of that shift. We can certainly go in and look at it more." He assured, "That certainly would have been my first reaction as well." 4:18:58 PM Senator Stedman asked for verification that the information presented for the Senate Finance Committee substitute accounts for a 25 percent credit, the Senate Resources Committee substitute and the original bill versions account for a 20 percent credit. 4:20:19 PM Effective Severance Tax Rate Sev Tax / Wellhead (less royalty) Low Volume Scenario [Line graph comparing Eff Sev Tax Rate of ANS West Coast Price of the bill versions with certain percentages noted as follows: Status Quo: $20 ANS WC Price 4.9% [approximately] $30 5.0% $40 4.9% $50 4.9% $60 4.9% $70 4.8% Governor's bill: $20 ANS WC Price >1.0% [approximately] $30 5.6% $40 9.5% $50 11.4% $60 12.9% $70 14.0% Senate Finance Committee Substitute: $20 ANS WC Price >2.0% [approximately] $30 7.6% $40 11.7% $50 13.9% $60 15.5% $70 17.3% Senate Resources Committee Substitute: $20 ANS WC Price >4.0% [approximately] $30 10.4% $40 14.5% $50 17.9% $60 20.5% $70 22.6%] Mr. Dickinson detailed this information, noting this represents effective tax rates on gross value at the point of production. 4:22:02 PM Senator Stedman asked if the targeted tax rates shown are calculated without the offset of the credits. The percentages would be lower with the inclusion of the credits. Mr. Dickinson responded that the credits are included in these calculations. The percentages represent the tax obligation as a ratio to the total wellhead value. Senator Stedman asked if the credit data reflects historical investment amounts or the amount of investment anticipated with the increased incentives provided in the change of the tax system. Mr. Dickinson answered that this graph utilizes historical spending. Increased investment would reduce the percentage of tax liability in the years those investments were expended. Additional production as a result of increased investment would increase the percentages. 4:23:40 PM Senate Finance CS Transition at 20% and 25%, Annual Revenue Loss, 2007-2003 [Line graph depicting a Net Value of Allowance ($mm) of 100 for the years 2007 through 2013 at a rate of 20 percent and approximately 125 at a rate of 25 percent for the same time period.] Mr. Dickinson explained this information as follows. If you look at the transition, transition investment expenditures they are - and this is not a difference between two bills. But the Senate Finance bill - the CS you have in front of you, generally has a 25 percent deduction for capital expenditures. However, the transitionals, the TIE, the transitional expenditures have a 20 percent. So this is simply indicating the effect every year that you would get. It's a difference between these two assuming they were utilized effectively at 70 percent. So I won't tell you, it's a sophisticated piece of analysis here. These are just two strait lines. But it just shows you the effect of roughly $12 million a year from the difference between the 20 and the 25 percent." Co-Chair Wilken requested clarification. Mr. Dickinson corrected his calculations and estimated the difference to be approximately $100. 4:25:45 PM Effective Date Change From 04/01/2006 to 07/01/2006 at $60 per Barrel Oil [Line graph showing a line labeled as $418 million] Mr. Dickinson indicated that Senator Olson had requested the effect of changing the effective date from April 1 to July 1. The difference would be $418 million calculated at oil prices of $60 per barrel. The actual amount would be higher, given that prices are currently $70 per barrel. 4:26:23 PM PPT and GRE Revenue in FY 2007 at $60 per Barrel Oil [Bar graph stating that Severance Tax Revenues of PPT Oil Revenue at a price of $60 per barrel is approximately $2.2 billion and Severance Tax Revenues of GRE is approximately $100 million.] Mr. Dickinson explained this demonstrates the effect of the "gas revenue stream". The total Severance Tax Revenues of PPT Oil Revenue at $60 per barrel and Gas Revenue Exclusion (GRE) for FY 07 would be $2.3 billion. The GRE represents approximately "five percent reduction in the total tax take, as a consequence." 4:26:59 PM Cumulative Severance Tax Revenue under Governor's Bill as Written, with 22.5/20, and with 25/20, Low Volume Scenario 2006-2030 [Bar graph listing Cumulative Revenues of the existing tax structure and of different tax rates of a PPT structure at certain prices as follows: Status Quo: $20 ANS WC Price $2,095 million $40 8,001 million $60 12,496 million Gov 20/20: $20 ANS WC Price $ 256 million $40 15,587 million $60 33,259 million Gov with 22.5/20: $20 ANS WC Price $ 455 million $40 18,120 million $60 37,989 million Gov with 25/20: $20 ANS WC Price $ 670 million $40 20,654 million $60 42,719 million] Mr. Dickinson qualified this information was requested, although it does not reflect the provisions of the Senate Finance Committee substitute. Instead, it demonstrates the effect of different PPT tax percentage rates under the provisions of the original version of the bill. While revenues generated from a PPT structure would be greater than revenues generated under the existing tax structure at higher oil prices, revenue would be less than the status quo at lower oil prices. 4:28:30 PM Cumulative Severance Tax Revenues under Governor's Bill as Written, with 22.5/20, and with 25/20, High Volume Scenario 2006/2050 [Bar graph listing Cumulative Revenues of the existing tax structure and of different tax rates of a PPT structure at certain prices as follows: Status Quo: $20 ANS WC Price $5,042 million $40 12,947 million $60 20,331 million Gov 20/20: $20 ANS WC Price $ 129 million $40 20,917 million $60 54,907 million Gov with 22.5/20: $20 ANS WC Price $ 207 million $40 24,982 million $60 63,208 million Gov with 25/20: $20 ANS WC Price $ 285 million $40 29,046 million $60 71,509 million] Mr. Dickinson noted this chart presents the data from the previous chart, although for a high volume scenario. 4:28:52 PM Co-Chair Wilken requested information regarding distribution of future cash flows under the provisions of this legislation utilizing a 25 percent tax rate and 25 percent credit rate. Senator Bunde added a request for this information utilizing a 22.5 tax rate and 25 percent credit rate. 4:29:53 PM Senator Stedman requested a comparison of the progressivity provision under consideration in the House of Representatives applied to the Senate Finance Committee substitute, similar to the comparison created by the consultant to the legislature, EconOne. He asked that this information be presented in one chart. 4:31:04 PM Senator Bunde and Co-Chair Green thanked Mr. Dickinson and Ms. Nienhuis for their efforts in preparing this presentation. Co-Chair Green announced that possible changes to the Senate Finance Committee substitute should be prepared for the following hearing on this bill. AT EASE 4:31:34 PM / 4:32:13 PM