HOUSE SPECIAL COMMITTEE ON OIL & GAS February 7, 1995 10:04 a.m. MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative Scott Ogan, Vice Chair Representative Gary Davis Representative Bill Williams Representative Tom Brice Representative Bettye Davis Representative David Finkelstein MEMBERS ABSENT None COMMITTEE CALENDAR Overview by Department of Revenue, Dr. Charles Logsdon, Chief Petroleum Economist WITNESS REGISTER DR. CHARLES LOGSDON Chief Petroleum Economist Oil and Gas Audit Division Department of Revenue 550 W 7th Ave., Suite 570 Anchorage, AK 99501 Telephone: (907) 277-5627 ACTION NARRATIVE TAPE 95-3, SIDE A Number 000 CHAIRMAN ROKEBERG called the committee to order at 10:04 a.m. Committee members present at the call to order were Representatives Rokeberg, G. Davis, B. Williams, T. Brice and B. Davis. Chairman Rokeberg declared there was a quorum present and the committee would hear an overview from Dr. Charles Logsdon, Petroleum Economist for the Department of Revenue. Number 039 DR. CHARLES LOGSDON, Chief Petroleum Economist, Oil & Gas Audit Division, Department of Revenue, stated today he planned to give the committee a brief overview of the Alaska oil and gas taxation system. Dr. Logsdon referred the committee members to a handout that he had provided. He stated his plan for the day was to go through the procedure the state uses to collect our share of the petroleum production revenue. He referred to other materials that would be given to the members that would help in their understanding of the subject at hand, and stated the information would help keep the members up to date on the issues discussed today. Number 075 CHAIRMAN ROKEBERG asked Dr. Logsdon when the information would be published. Number 077 DR. LOGSDON stated the publication is sent out on a monthly basis. Number 090 DR. LOGSDON started with an overview of the current system. He stated the first item that he would discuss was property tax. Currently, all oil and gas production, transportation and hardware is subject to a 20 mill property tax based on the appraised value of that equipment. Dr. Logsdon stated that for all practical purposes, what this means is that all of the equipment, pipelines, wells, spare parts, etc., is subject to a property tax which is assessed by the Oil and Gas Audit Division, of which he is a member. Dr. Logsdon then mentioned Clyde Benson who is the state's chief assessor, and stated that Mr. Benson is responsible for assessing all of the property in Cook Inlet, the Trans Alaska Pipeline and the North Slope. Number 120 DR. LOGSDON began to explain the mill rate by stating that 20 mills is approximately 2 percent of the appraised value of the property. He then stated the total value of all the oil producing property around the state is around $15 billion. DR. LOGSDON stated that much of this property is located within the boundaries of organized boroughs and therefore is subject to paying borough property taxes. Dr. Logsdon then explained the way in which this situation works is the state establishes the assessed value, and then becomes the value base the boroughs use to determine their local property taxes on the same property. He said the state's 2 percent of the appraised value sets a cap, and there is a formula approach which is used to determine how much of that will be returned to the borough in the form of a credit. This would enable the companies to pay the boroughs the assessment, which would be a credit against the 20 mills going to the state. Dr. Logsdon further stated the state would split part of the money between the local municipalities and themselves. DR. LOGSDON then informed the committee members of the amounts of money that this program is bringing into the state treasury. In 1994 the state received $61.5 million. The total amount of tax assessed value in FY 94 was $315 million, indicating that the state received $61.5 million and the numerous municipalities received the rest of the monies. This trend shows that over time the local municipalities have begun taking a bigger share of the property tax money, but the state still receives $61.5 million. Dr. Logsdon then asked if there were any questions from the committee members. Number 180 CHAIRMAN ROKEBERG asked Dr. Logsdon if his office would provide the information that was just reviewed. He agreed, and spoke briefly of the Revenue Sources Book which outlines the department's income, and the tax revenues. Dr. Logsdon stated that the book is very detailed, but if you are interested in where the money comes from, it is a valuable resource. Number 200 REPRESENTATIVE G. DAVIS asked Dr. Logsdon about his knowledge as far as the history of the tax, and any fluctuations in the 20 mills. Number 210 DR. LOGSDON stated the value has been relatively stable. In other words, over the life of the tax there are two things going on; there are some very large expenditures upfront (obviously those began to depreciate) and as an asset begins to depreciate away, the taxable base becomes lower. However, the investment in the North Slope has become greater. There are additional investments being made, and to a certain extent they intended to offset each other. Dr. Logsdon then stated, one thing we will find with regard to the property taxes, is that it is a much more stable revenue source since the property tax is not directly sensitive to oil prices. DR. LOGSDON went on to say there were indirect effects on the tax base. Obviously the lower the price, the fewer drilling rigs will be active. This may cause the company to take the drilling rig out of the state, or there would be a certain factor that would apply to a piece of equipment like a drilling rig. In other words, having the drill active or inactive would have an effect on the amount that is assessed for taxation. Basically, this has been a pretty stable source of revenue for the whole pot. Dr. Logsdon said, as mentioned before, the amount that has been going into the state coffers shows a trend that has been going down. He stated the state reached its peak in the early 80s at about $150 million and in 1993 it was down to 66 million and that is about what the level was in 1994. DR. LOGSDON then explained that much of what occurs is driven by the value of the pipeline. He further explained, when they started out, the cost base was about $9.6 billion; at this time the value of the pipeline for our present purposes was down in the 4 billions, so the pipeline is worth about half of what it was when it was carrying a full load of oil back in the early 80s, and this has probably been the biggest factor on the overall size of the pie. DR. LOGSDON went on to say the other thing that is shrinking the state's share is, of course, the municipalities. He stated that they relied very heavily on the revenues obtained from the property taxes as a constant source of their annual income, and they have started to take an ever increasing portion of that revenue. Number 250 CHAIRMAN ROKEBERG asked about the appreciation scales and how they are established under state law. Number 252 DR. LOGSDON said he did not have a great deal of expertise on this issue, but he was willing to give the Chairman a brief summary of what he did know. He stated that the pipeline is assessed using a net income type of approach rather than a depreciated original cost. He continued that the equipment will be assessed on a straight line with an economic life that would be appropriate to the type of facilities that are being discussed. One other feature of economic life that is becoming an issue is, how much longer is oil going to be flowing off of the Slope? This becomes a key parameter in the discussion with the taxing entities and the property owners. Number 280 CHAIRMAN ROKEBERG asked about the statutes written for the tax, and asked if they targeted just the petroleum industry. Number 290 DR. LOGSDON replied that this is a very specific oil & gas production, transportation, and hardware tax. Number 295 CHAIRMAN ROKEBERG then asked if it was true that for a number of years the state provided all of the auditors for the appraisal, and that just a few years ago the North Slope Borough took over that responsibility. DR. LOGSDON replied the North Slope had taken over much of that responsibility. Number 310 CHAIRMAN ROKEBERG followed up his previous question by asking if the function that was previously carried out by the state was shifted over to the North Slope. Number 312 DR. LOGSDON responded that the state had always used contractors. He said the department uses the firm "PRITCHARD & ABBOTT" out of Austin, Texas. He stated this firm does much of the appraisal work, and explained his answer by stating the localities in Texas have a long tradition of property and reserves taxes. He agreed that much of the auditing however, is being completed by the North Slope Borough. Number 337 CHAIRMAN ROKEBERG asked if the outside appraisers or the in-house staff make the ultimate evaluation decisions on the hardware. Number 346 DR. LOGSDON responded that the state retains the responsibility for assessing the property. Number 350 CHAIRMAN ROKEBERG then asked if there were limitations on the ability of the municipal governments to increase or decrease their share of the revenues. Number 353 DR. LOGSDON stated he was not an expert in that particular field, and added that he assumed the amount that the municipalities received was due to their populations. Number 368 DR. LOGSDON stated he could now move to a subject in which he had more expertise. He began to brief the members of the committee about the severance tax. He said the severance tax is the state's biggest money maker and it is levied on all production of oil and gas in the state of Alaska with the exception of public or government royalty production. He stated there was a small amount of this on the Kenai, but was very minor. Dr. Logsdon then stated the rates would vary depending on how old the field was, and was going to be subject to the Economic Limit Factor (ELF). DR. LOGSDON explained that the ELF is a very complicated formula that was to try to make the severance tax progressive. It is a factor between 0 and 1 which is intended to reduce the rate of taxation based on how productive the oil field is. Dr. Logsdon stated there were two main factors in determining this: The size of the oil field, and how productive the wells are. He stated the larger the field is and the more productive the wells are, the higher the tax will be. This means that it will be closer to the factor 1 on the scale. Dr. Logsdon then asked the members to consider the age of the field as another factor in this equation. He commented that one of the main incentives is that we tend to give a reduction in the tax rate for the first five years of production. The cut in the tax rate leaves the rate at 12.25 percent for the first five years. We do this to sweeten the deal to allow a more rapid recovery of costs because the tax rate is lower early on. DR. LOGSDON said this came into effect in June 1981, so any field that was producing prior to 1981 is going to pay a 15 percent tax rate. Fields like Kuparuk, Endicott, and all of the other fields that came into production after 1981 received five years of production at the 12.25 percent nominal rate. DR. LOGSDON continued, they have an 80 cents per barrel floor on the oil side. This 80 cents, at the 15 percent rate totals $5.33 per barrel. So, if the value of the oil at the wellhead is less than $5.33 per barrel, the cents per barrel floor kicks in and the state gets 80 cents per barrel instead of the rate times the value. Dr. Logsdon observed that this situation has actually occurred a couple of times in 1986 when the price of oil was at $10 per barrel. He reminded the members that the nominal rate was subject to the ELF, and there were not many fields that actually paid the full rate, and in fact, Prudhoe Bay produced a little bit more than 310 million barrels of oil in the 1994 calendar year. With the nominal tax rate at 15 percent, multiplied by the ELF, you come up with 14.79 percent. He then observed that a big field with relatively productive wells like Prudhoe Bay will have an ELF that is very close to 1. Contrast that with a very small field like Lisburne: Lisburne produced six million barrels of oil, and it was all produced tax free in the 1994 calendar year. The other big tax fields like Kuparuk produced 97 million barrels of taxable oil, and the state took just about 13 percent. Dr. Logsdon mentioned several other oil fields that produced oil at high levels. Number 460 DR. LOGSDON continued by stating the key factor of the ELF is production at the economic limit. We currently allow a 300 barrel of oil per well, per day that is tax free. However, once you get above 300 barrels per day the tax rate begins to go up. In 1989, the field size factor was introduced and it accelerated the way in which the tax goes up as the field size gets bigger, with other things being equal. Therefore, if you had an oil field with wells that was producing 1,000 barrels per day, and your total production was 100,000 barrels per day, your tax rate would be higher than if the well productivity was the same, but the field was twice as big. This law, when it was passed in 1989, raised the taxes on fields that produced about 115,000 barrels per day. If you produced at a rate less than 115,000 barrels a day, you got a tax break. What that meant in terms of the ELF was the tax rate on Prudhoe Bay stayed at about 15 percent. Most other fields saw their tax rates go down. Number 490 DR. LOGSDON explained the ELF in greater detail by mentioning that it has been around for a while in one form or the other and there have been many papers done on it. He then wanted to give the committee a history of the severance tax rate schedule. Whereas property tax in America is traditionally a tax type reserve for the localities used to fund schools, a severance tax or a production tax, is traditionally developed in America as a statewide tax. Almost every state in the union has an oil and gas production tax, he believes that as many as 35 states have an oil and gas severance tax. Alaska became a state in 1959, and we had a severance tax that started as a very simple 1 percent levy on gross value. Number 520 DR. LOGSDON said, as we became a state and began to take responsibility for the provision of the number of things that we relied on the federal government for in the territorial days, it was clear that the state needed additional revenue. At that time we had development on Cook Inlet, a growing oil industry, and those were the places we looked to for revenue. Dr. Logsdon then made reference to the flood in Fairbanks in 1967. He recalled that the state needed emergency money and it was decided that this was an emergency that was worthy of an additional percentage point in the tax. Number 530 DR. LOGSDON stated that it became clear in the early 1970s that a flat tax of this kind could act as a disincentive to developing petroleum properties, it did not recognize the fact that not all oil fields are created equal. Some oil fields have a greater ability to pay the tax. Because severance taxes are basically assessed on a cents per barrel basis or levied on the gross, there is no recognition of profitability as such, it is the entry fee to develop oil within the boundaries of the state. So what you ended up with is a stepwise tax. In other words, you'd pay so many percent on the first couple hundred barrels per day, and then as production levels increased, the rate of taxation would go up again on the next couple of hundred barrels. So from very early on there was a graduated step-schedule of taxation based on well productivity. When Prudhoe Bay came on line this was a whole different level of oil production than the state had seen in prior times, and there was a great desire to make sure that the state benefitted from what was, even at the prices of that time (in the 3- 4- or 5-dollar per barrel range) likely to become a very valuable mineral development. DR. LOGSDON continued that we couldn't just move in and raise oil prices without looking at the oil fields under production in Cook Inlet. This was an entirely different situation than what was up on the North Slope which was the bonanza. As a result we got the ELF. Number 558 DR. LOGSDON commented, the ELF did not have any exponents on it at all. It was simply a fraction which scaled the tax rate based on how much above 300 barrels per day you produced from each well on the property. The first exponent which was 1.5333 simply took a curve which went up towards 1 fairly rapidly and leveled off at the higher rate of well productivity. The function of the final addition, put into place in 1989, was done to remedy what the people thought was the problem with the legislation that was passed in 1981 which put a 10-year stop-the-clock deal on a 15 percent at Prudhoe Bay, because after 10 years the tax rate was scheduled to drop. It turned out in that the 10-year provision resulted in a large drop in revenues. This was probably premature due to the fact Prudhoe Bay didn't start to decline until 1989. He stated he was sure all of the members of the committee were probably aware of the difficulties that occurred with the modifications made to the ELF. He stated they wanted to ensure the tax rate at Prudhoe Bay stayed close to the 15 percent level, while the rate on the marginal fields was dropped to encourage development of some of the marginal fields. That, he stated, is a brief overview of the severance tax, and said he would provide the members with information that was available through his office about some of the more technical aspects of the ELF. Number 595 CHAIRMAN ROKEBERG stated to the committee that it would be beneficial to pursue more information on this subject. He then asked Dr. Logsdon if he could comment on the size and number of wells, and how those factors relate to the ELF. Number 606 DR. LOGSDON responded that based on the typical geology of the North Slope, generally speaking if you have an oil field that produces 30,000 barrels per day or less, it has been their experience that the field is not going to pay much in the way of severance taxes. That is a function of both the fact that 30,000 barrels per day is going to decrease the sensitivity of the ELF, and secondly, fields of that size tend to have wells that are not very productive. There are some instances where there have been very productive pockets of oil where you would have up to 5 million barrels of oil that you could do with a step out and average up to 6000 barrels per day. However, these pools do not average that for very long, and that pool of oil is depleted very quickly. In that case, the field size factor is small enough so that even though they are very productive, they will not pay any taxes. However, once you get into the larger fields, for instance a field with 100 million barrels in it, you find a tax rate that is very dependent upon how productive the wells are. A field like Point McIntyre which produces about 130,000 barrels per day, has a very high ELF probably in the .8 to .9 range. They are very productive and have a high tax rate. Once you get a field that has above 1 billion barrels in the field, even with wells that are not very productive, the field size factor will overtake production and you will pay a very high tax rate. This is a rough gauge as to how sensitive the tax rate is. Number 655 CHAIRMAN ROKEBERG asked if the number of wells make a difference on the ELF. He also asked if a company can set up more wells to lower the ELF. Number 660 DR. LOGSDON responded that you must look at the cost of drilling extra wells, against the tax savings. He then stated this was an issue, but the answer is yes. There is an incentive, albeit a small one, to build more wells. Number 670 CHAIRMAN ROKEBERG then followed up by asking whether or not there is a disincentive in not drilling more wells for an existing field. Number 680 DR. LOGSDON stated that this was an interesting issue. With modern technology, the companies are capable of having multiple pumps from a single well bore. He stated this was a difficult issue due to the fact there is a debate as to what the definition of a well was. For example, you could have a single well, but if you ran five separate tubings through it, is there one well or five? Dr. Logsdon gave a preliminary answer to this question by stating it would depend on how those tubings were completed on those wells at the bottom to determine whether you could claim one or five wells. He then stated they have looked at the impact on incentive of basing the tax rate schedule on well productivity which is just really a function of how much oil there is, and how many wells. The formula for that would be total production divided by the number of wells equals production per well. DR. LOGSDON said there was one other minor issue that came up after the ELF debate. The question was, "What happens if the companies pump something into the wells to help in the retrieval of the remaining oil?" He stated the ELF would automatically go up due to the fact there would be an increase in production. So far they have not been able to demonstrate this has a tremendous effect, mostly because of the fact it is the price of the oil that makes the most difference on the revenue side than these minor changes on the cost side. This never is clear cut, and is always disputable. REPRESENTATIVE G. DAVIS asked Dr. Logsdon if there has ever been any dispute concerning overlapping fields. Number 719 DR. LOGSDON responded that the Department of Revenue has tried to provide the correct tax and to ensure the taxpayer contributes the proper amount. If the oil company can provide a reasonable way of ensuring an accurate accounting for all of the oil and the department could allocate it, there should not be a problem. Generally speaking, it hasn't been a real problem because there are numerous private interests in each of those fields. So, to a certain extent, we could rely on the owners themselves, but it is easier to keep track of if the developments are separate. For example, if you have two fields, one right on top of the other, and there is one well that is drawing oil out of both wells, then it is difficult to determine which oil came from which field. He stated these are just hypothetical issues right now, but they are issues for the future. He then stressed the tax is based on production and not revenue. Number 783 REPRESENTATIVE OGAN asked for a brief discussion as to the source of the oil disputes. Number 800 DR. LOGSDON replied the disputes begin on the value side of this equation. The tax base is the value of the oil in the ground. The price side is disputable because they did not have a reliable on-sight measure of the value of the oil at the point where they tax it, which is the point where the oil is extracted. On the North Slope, the oil is transported through the pipeline, then it is loaded onto tanker vessels to be transported to the refinery. This all adds to the cost. This creates a problem in setting a value for tax purposes. The companies' main point of disagreement came from the process of determining the value of the oil. This is where the dispute started. On the royalty side there are many other issues in addition to what the value of the oil is, what the transportation costs are, and what the appropriate transportation costs are. On the royalty side there is also a dispute over the cost of the deduction for cleaning and dehydrating. This is a fairly typical deduction in a royalty situation. DR. LOGSDON said there is an issue affecting both the tax and the royalty. The first is, whether it is appropriate to use the netback method which is the one that the state opted to use. The real dispute occurred because funny things happened to the price of oil in the late 1970s when oil prices went way up, and there was no way to establish the true value of the oil. The problem occurred because they couldn't establish a price for the oil at the wellhead. DR. LOGSDON then explained what was meant by the netback approach. He stated that you take the price of oil on the market and subtract out the allowable transportation costs to back in to what the oil was worth when it came out of the ground. So we are back at the problem of determining what the appropriate deduction for transportation was; recognizing that the different companies had approached the decision in different ways. Also, at the time there was no agreed upon tariff for use of the pipeline. This was essentially a monopoly and subject to regulation by the FERC, and the state and companies went to court to argue for the appropriate methodology for establishing an appropriate tariff. What this boiled down to was, how rapidly should the investors be compensated for the capital that they had put at risk, and the rate of return that the investors should have. The state agreed to a front loaded capital recovery program. In other words, they gave the companies a higher rate of return in the first few years of production so they could recover their capital costs very quickly. As a result, with those costs regained upfront, there should be an incentive to reinvest that money and increase production. So, in a nutshell, the disputes lie in value or transportation. Number 960 REPRESENTATIVE OGAN asked if it was a fair assessment that everyone is now following the same procedure. Number 970 DR. LOGSDON answered that big chunks of the dispute have come off of the table. He followed up by stating this was a function of the fact that most of the biggest pieces of the dispute were not knowable back in the early 1980s when there was this price explosion. But fortunately, the "Market Paradigm" on the price side of the equation is in on the rise. There is now a proliferation on the value of oil due to factors around the world. We no longer need to try to back into values through complicated methods or overly simplified methods. Also, in the Department of Revenue we have made a major overhaul of our regulations that cover the severance tax. The previous regulations were in many cases 15 years old. A lot has changed in the industry since then. We have made a huge effort in making those regulations more current, and together with the rest of the industries. Now the disputes are much more manageable, and I don't see us getting to the point that neither party can act. TAPE 95-3, SIDE B Number 000 CHAIRMAN ROKEBERG asked if it was Dr. Logsdon's group that put out the new regulations. Number 012 DR. LOGSDON stated it was his office that put out the new regulations, and he was hopeful that they would help to reduce the massive amount of paperwork that moves through his office. He then estimated that it would take six months to accomplish this goal. Number 032 CHAIRMAN ROKEBERG then asked if there was a need for a statutory change by the legislature to help find a solution. Number 034 DR. LOGSDON responded that he was not prepared to discuss that issue. Number 036 REPRESENTATIVE G. DAVIS asked if the tax returns mentioned earlier were quarterly returns. Dr. Logsdon stated Representative G. Davis was correct. Number 045 REPRESENTATIVE GREEN asked Dr. Logsdon if there was a process by which some of the smaller problems that occur in this field could be resolved very quickly. DR. LOGSDON stated, there are provisions in place to ensure the department has the ability to talk to the taxpayer about certain developments, or any other changes in what they are doing which might have some tax consequences. Therefore, there is the opportunity for informal conferences, and ultimately you can ask for a formal hearing if there was some aspect of the regulation that you wanted to challenge in court. Number 094 CHAIRMAN ROKEBERG asked if there was a stipulation as to the valuation of the prices. Number 100 DR. LOGSDON answered they use the SPOT price method. If there is a West Coast delivery, then we will use a West Coast SPOT. The same is true for a Gulf Coast, or Midwest delivery. There are timing issues that have become a problem. Should the value of the oil be based on the time at which it was loaded for transport, or do you value it at the time at which it was delivered. These are very major theoretical problems. Dr. Logsdon stated my recommendation is that we do need the ability to ensure these SPOT prices are being carried out fairly. REPRESENTATIVE GREEN asked how the department would handle a situation where a company delivers oil to its own refinery. DR. LOGSDON stated they would assess that situation on a SPOT price in that market. There are regulations providing factor adjustments for other specific markets. There will be some questions raised about valuation of the oil if ANWR is opened. Hopefully, we would be able to find a publicly quoted SPOT price for a Pacific Rim delivery. Dr. Logsdon then responded to a comment by Chairman Rokeberg that these prices would most likely be found in Plats Oil Gram. He then went on by stating that, on the royalty side, they have a market basket which use the same source to develop the value for royalty purposes. Based on the way the contracts are written, they tend to look a lot like a standard lease; it is the state's ownership interest and not a tax. The state has a 12.5 percent cut off the top, the state can either take in barrels, or in value. Not all of the leases are 12.5 percent, some are as high as 20 percent. The rates on the North Slope for instance come close to that 20 percent level. There are also some profit share leases like those at Endicott in addition to the fixed royalty. These are calculated to recover all of the development costs and operating expenses with interest. He stated they are hopeful the development account at Endicott would be paid off soon. He then stated, if the members wanted to think of royalties as being at 12.5 percent, that is a fair estimate. However, with the new regulation, we are focusing on the monthly SPOT price. On the royalty side there are some different deals. The deal that we did with ARCO uses the market basket theory. For instance, on the West Coast there are six different kinds of crude oil, each with a different weight. You take the SPOT price average for each of those crude oils, average it and that becomes the value of the basket. Depending on the company, you may or may not make an additional factor adjustment to that value. On the ARCO side, there is no factor adjustment. However, ARCO does have a direct formula for the transportation cost allowance. When the formula is figured out it comes to about 3.5 percent of the market value, which is then subtracted from the basket value to get a price for Valdez. And then you subtract the pipeline to get a wellhead price. Number 258 CHAIRMAN ROKEBERG asked if there were negotiated formulas under the regulations. Number 274 DR. LOGSDON responded that they were negotiated as part of a settlement. They are used monthly to determine ARCO's royalty to the state. Number 293 DR. LOGSDON proceeded to move to the flip chart where he demonstrated the mathematical equations for the committee members. He worked through the market schematic, as well as the formula used for determining the tariff rate. TAPE 95-4, SIDE A Number 000 DR. LOGSDON continued his presentation on the flip charts. He displayed the formula for the ARCO value formula and the royalty severance tax. Number 150 DR. LOGSDON returned to his seat at the front of the committee to provide the committee members with some extra information on the tax system. First, he mentioned a conservation tax, which is assessed at the rate of 4 mills per barrel of oil, or 4 mills per 50,000 cubic feet of natural gas. This tax is not levied on the public royalty production. Much of this tax is used to fund the oil and gas conservation commission. This is a common occurrence, and it brings in about $2 million per year. The corporate income tax is also known as a worldwide apportionment. This tax is not directly sensitive to the price of oil, so in theory should be more stable than the other taxes. This is tailored to specifically address the petroleum producing companies by the way the three factor formula is derived. The oil and gas companies are subject to a three factor apportionment method that is different from a general corporation's. Dr. Logsdon said we have something called the percentage of corporate sales and tariffs from Alaskan operations. This is different than the factor approach used by the other corporations. The maximum marginal rate is 9.4 percent, the average rate they pay is closer to 1.5 percent. This is because Alaska represents a big chunk of the net income of our three biggest companies. Number 203 DR. LOGSDON continued his discussion of the tax structure by informing the members of a production tax surcharge. This tax is used to set up a fund to cover the cost of an emergency occurring in the oil industry. This tax was set up at 5-cents per barrel, for every taxable barrel after the Exxon Valdez disaster. DR. LOGSDON commented on how the state measured up to the rest of the United States. He said that Alaska is just like the rest of the United States, at the margin, as far as the oil companies are concerned. He then said that our system isn't that unfair. We have very large development costs, and to get to a point where there is some income is more difficult in Alaska. That is especially so when oil prices are lower. He then referred to some pie charts that he had brought with him to show the members of the committee. DR. LOGSDON commented that the most tax friendly area on the planet is the United Kingdom. Their rates are almost 15 percent better. Dr. Logsdon mentioned that for the first time royalties fell below $100 million in 1994, and he stressed the real factors which determine how much the state will get in royalties is how many barrels are produced each year, and how much they can be sold for. Number 300 REPRESENTATIVE OGAN asked if there was an investment credit on the corporate income tax. Number 307 DR. LOGSDON replied that the main credit is called the exploration incentive credit. This is given at the discretion of the Commissioner of the Department of Natural Resources. The state, on a qualified lease, (i.e., a lease that the commissioner wants to have granted and believes that there is a possibility for a good return of the investment) can grant up to 40 percent of the cost of drilling that exploration well. This can be credited against the company's royalty obligation or severance tax. Number 320 CHAIRMAN ROKEBERG asked if this was done only at the request of the commissioner. Number 328 DR. LOGSDON stated this was done at the request of the commissioner. He later commented that he didn't know if they were always granted, but it was his impression that most of the recommendations are granted, and told the Chairman that it was a discretionary issue. Dr. Logsdon also mentioned that he didn't know the total dollar amount that could be given as part of this credit. However, he did say that the state is not willing to dump $40 million into an exploratory well somewhere offshore. Number 352 CHAIRMAN ROKEBERG then asked about the idea of review of incentives and if Dr. Logsdon would comment on that issue. DR. LOGSDON replied there are a number of things that can be addressed in this issue. Our position is, we are going to protect the revenue stream. He then reported the decisions made in this field are relatively good decisions. He said you want to give incentives, but you don't want to give away the farm. He continued that he believes we are in a mode of declining production, and we must be concerned as to where the state's money will come from in the future. One recommendation that Dr. Logsdon made was that he believed it was necessary to insure the integrity of the pipeline. Number 427 CHAIRMAN ROKEBERG thanked Dr. Logsdon and stated for the record that Representative Ogan joined the committee at 10:10 a.m., and Representative Finkelstein joined the committee at 11:00 a.m. and left at 11:15 a.m. ADJOURNMENT Chairman Rokeberg adjourned the meeting at 12:00 p.m.