HOUSE SPECIAL COMMITTEE ON OIL AND GAS April 23, 1998 10:04 a.m. MEMBERS PRESENT Representative Mark Hodgins, Chairman Representative Scott Ogan Representative Norman Rokeberg Representative Joe Ryan Representative Con Bunde Representative Tom Brice MEMBERS ABSENT Representative J. Allen Kemplen COMMITTEE CALENDAR HOUSE BILL NO. 440 "An Act relating to certain audits regarding oil and gas royalty and net profits and to audits regarding costs relating to exploration incentive credits and oil and gas exploration licenses; and providing for an effective date." - MOVED HB 440 OUT OF COMMITTEE CONFIRMATION HEARING OIL AND GAS CONSERVATION COMMISSION Camille Oechsli - Anchorage -CONFIRMATION ADVANCED (* First public hearing) PREVIOUS ACTION BILL: HB 440 SHORT TITLE: OIL & GAS AUDITS/INCENTIVE CREDITS SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR Jrn-Date Jrn-Page Action 2/18/98 2357 (H) READ THE FIRST TIME - REFERRAL(S) 2/18/98 2358 (H) O&G, RESOURCES 2/18/98 2358 (H) 3 FISCAL NOTES (2-DNR, REV) 2/18/98 2358 (H) GOVERNOR'S TRANSMITTAL LETTER 4/02/98 (H) O&G AT 10:00 AM CAPITOL 124 4/02/98 (H) MINUTE(O&G) 4/21/98 (H) O&G AT 10:00 AM CAPITOL 124 4/21/98 (H) MINUTE(O&G) 4/23/98 (H) O&G AT 10:00 AM CAPITOL 124 WITNESS REGISTER WILSON CONDON, Commissioner Department of Revenue P.O. Box 110400 Juneau, Alaska 998811 Telephone: (907) 465-2300 POSITION STATEMENT: Testified on HB 440. KEVIN BANKS, Petroleum Market Analyst Department of Natural Resources 3601 C Street, Suite 1380 Anchorage, Alaska 99503 Telephone: (907) 269-8800 POSITION STATEMENT: Testified on HB 440. CAMILLE OECHSLI, Appointee Oil and Gas Conservation Committee 1333 West 11th Avenue Anchorage, Alaska 99501 Telephone: (907) 277-4242 POSITION STATEMENT: Testified as an appointee to the Oil and Gas Conservation Commission. ACTION NARRATIVE TAPE 98-31, SIDE A Number 0001 CHAIRMAN MARK HODGINS called the House Special Committee on Oil and Gas meeting to order at 10:04 a.m. Members present at the call to order were Representatives Hodgins, Ogan, Rokeberg, Ryan, Bunde, Brice and Kemplen. HB 440 - OIL & GAS AUDITS/INCENTIVE CREDITS CHAIRMAN HODGINS stated that the committee would hear HB 440, "An Act relating to certain audits regarding oil and gas royalty and net profits and to audits regarding costs relating to exploration incentive credits and oil and gas exploration licenses; and providing for an effective date." Number 0046 WILSON CONDON, Commissioner, Department of Revenue, stated that HB 440 would move the royalty audit function from Department of Revenue back to the Department of Natural Resources. He stated that it was there until 1980 when it was moved to the Department of Revenue. He stated that the rationale for putting the audit responsibility in the Department of Revenue was because they were also auditing the production tax and both the royalty and production tax are calculated on the basis of a net back calculation. It was recommended by the legislative auditor that those functions be combined. Since that time, the royalty obligation and the production tax have headed in somewhat different directions. He stated that the royalty obligation is a product of a contract and it requires contract administration and enforcement to deal with the royalty obligation. He stated that on the other hand, taxation is the exercise by the state through the legislature of the sovereign power of taxation and it goes about enforcing a tax obligation in a somewhat different way then dealing with a partner in a contract. The long litigation with respect to the royalty obligation, led to a set of settlement agreements which use a different approach then what is used in the tax arena for determining the value of oil for royalty purposes as opposed to tax purposes. The royalty obligation is one of the important elements of contract administration from the Department of Natural Resources and they believe it is important for the responsibility of all the elements of contract enforcement to be put under the umbrella of the contract administrator or the Commissioner of Natural Resources. Number 0423 CHAIRMAN HODGINS stated that it shows there would be a negative fiscal note. Number 0488 COMMISSIONER CONDON stated that is a matter that he just learned about and he is sure that between the Department of Revenue and the Department of Natural Resources, a set of arrangements can be made to make it a zero fiscal note. He stated that he cannot do that today but pledges that is what they will do. They will find a way to take care of the $31,000. Number 0506 REPRESENTATIVE SCOTT OGAN stated that the bill is more than a transfer. It is a change of policy from "the Department of Revenue shall order reports" to the "Department may conduct audits". He stated that he sees this as a major policy shift and not just to simple transfer functions. He asked if that is a good policy call. Number 0705 COMMISSIONER CONDON replied that they believe they have interpreted the statute correctly. The Department of Revenue conducts audits when Department of Natural Resources asks them to do so. He stated that they have interpreted the "shall" to mean that they will do it if asked to do so. He stated that in terms of the way the department has applied this statute is that they have conducted the audits when the Department of Natural Resources believed they wanted to have one. Currently, the way audits work, is the Department of Natural Resources asks the Department of Revenue to do an audit and there are three different areas that they do audits in; regular production tax obligation, exploration and incentive credits and profit share leases. In the determination of regular royalty obligation it is just an audit of the net back from the disposition point to the point of production and the application of the terms in the lease. He stated that in respect to the exploration incentive credit he is not fully familiar with those audits. He stated that with the profit share lease not only do they do net back audit but also the upstream expenses to determine the profit. Once an audit is completed, it is sent to the royalty accounting and auditing group in the Department of Natural Resources which has its own audit staff. He stated that the audit staff looks at the audit and they make a judgement on whether they have correctly applied the interpretive policies that they have made with respect to terms of the lease. The Department of Natural Resources in turn deals with the lessee. Number 1041 COMMISSIONER CONDON stated that this bill would change all of that as it would put the responsibility solely on the auditors in the Department of Natural Resources instead of two groups of auditors passing audits back and forth. Number 1106 REPRESENTATIVE OGAN asked if this bill reflects the settlement agreement. Number 1136 COMMISSIONER CONDON stated that there are three settlement agreements that govern North Slope oil production. They are ARCO, B.P. and Exxon and each of them uses a slightly different approach to calculate a definition value for North Slope oil and each of them uses a slightly different approach for the marine transportation element. He stated that the other North Slope producers have either picked one of those settlement agreements to calculate their royalty obligation. He stated that each of the settlement agreements are different and are public records. Number 1322 REPRESENTATIVE OGAN stated that the settlement agreements are probably laborious to read and he asked if there was a way that he could provide an executive summary of them. He asked if this legislation reflects part of what is in that settlement agreement. Number 1343 COMMISSIONER CONDON stated that this legislation does not reflect what is in the settlement agreement. The settlement agreement and the approach they represent, makes this legislation a good idea because what is done to come up with a value under the royalty settlement agreement "is not -- it is certainly figuring out a destination value and a set of transportation charges but the elements that go in the calculation are different and so you do not get a material benefit of having the same auditors dealing with the royalty settlements and the tax, as was once believed would be the case." He stated that there is the inefficiency of having the Department of Revenue doing these audits and the law is such that a certain amount of information is not disclosed to the Department of Natural Resources who has the obligation to deal with the lessee and enforcing the obligation. He stated that it makes sense to put it all under the Department of Natural Resources to give them the authority to get whatever information they need to do their job. Number 1545 REPRESENTATIVE CON BUNDE stated it sounds like there are two competing ideas. One can be described as checks and balances with the two departments and the other is stream lining and efficiency. He asked why in 1980 was there a legislative audit that got "us" to the checks and balances position. He said, "Maybe you can help me understand why we should come back." Number 1568 COMMISSIONER CONDON replied that there are many historical reasons why this happened. He stated that he started working in this area in 1972 and had the responsibility of dealing with the litigation that dealt with both taxes and royalties in one lawsuit in respect to the Cook Inlet production that began in the end of 1965. He stated the litigation continued to the end of 1975 and then was settled. He stated that he was an early advocate as a consequence of his responsibility to the Department of Law at the time of combining royalty and production tax administration. He stated that before he came to work for the state in 1967, the state had attempted to combine the administration of royalty and production tax and actually place that responsibility in the Department of Natural Resources. He stated that it did not work, he advocated combining tax and royalty. He said "You can combine that with the fact that people in the Department of Revenue were as we all are from time to time, in bureaucracies imperialistic, though it would be a great thing to combine these. So you would have a combination of some eager lawyers who think they know the right answer together with some bureaucratic imperialists talking to a legislative auditor about what they think might work and low and behold they were able to convince the auditor that this is a great idea and the auditor put it in the audit report and the legislature generally believes what its auditor tells them and so that is how the responsibility got put in the Department of Revenue." He stated that he has learned what happens when there are two different organizations that have to pass things back and forth. He stated that he does not believe that there is that much to be gained in checks and balances rather an awful lot is lost in terms of accountability and efficiency. He stated that putting it under the responsibility of the Department of Natural Resources and eliminating the departments' ability to point fingers will bring about a better system. Number 2023 REPRESENTATIVE NORMAN ROKEBERG stated that the fiscal note from the Department of Revenue is very positive in the sense that it is lower then the Department of Natural Resources. He asked if anyone could talk to that. Number 2138 COMMISSIONER CONDON replied that Mr. Banks may be able to talk to that. He stated that the net of all the fiscal notes "is a minus two hundred and whatever from our department, the same amount going to DNR [Department of Natural Resources] and then another $31,000 that DNR has put as a net cost to this fiscal note." He stated that he was unaware that was the figure until last night and the two departments would figure out a way for this to be a net zero cost. Number 2203 REPRESENTATIVE ROKEBERG stated that it is clear that the bureaucratic imperialists have been at work here; something that is intended to remove duplicative services and be more efficient but is going to cost more money is very strange. Number 2219 COMMISSIONER CONDON replied, "I could not agree with you more and I pledge to fix that." Number 2246 KEVIN BANKS, Petroleum Market Analyst, Department of Natural Resources, stated that he can't say much except to say that he would like to see this happen and he would work with the Commissioner to make sure that the fiscal impact is what it should be. He stated that he would be happy to provide highlighted copies of the settlement agreement, especially the areas where they particularly affect the need for auditing. Number 2347 REPRESENTATIVE BUNDE made a motion to move HB 440, with the attached but soon to be revised fiscal note with individual recommendations. He stated that he would like to make the comment that if we seem suspicious it is because they are but they would appreciate the endeavor if it accomplishes what it says it will. Number 2443 CHAIRMAN HODGINS asked if there was an objection. Hearing none, HB 440 moved out of the House Oil and Gas Special Committee. CONFIRMATION HEARINGS - Oil and Gas Conservation Commission Number 2507 CHAIRMAN HODGINS stated that the committee would now consider Camille Oechsli for the Oil and Gas Conservation Committee. Number 2532 CAMILLE OECHSLI, Appointee, Oil and Gas Conservation Committee, stated that she has lived in Alaska for twenty years worked for the court system, left to go to law school and worked for both the public defender agency and the Department of Law. She stated that it was at the Department of Law were she began working at the Oil and Gas matters representing the state's interest with respect to taxes and oil and gas leasing. She stated that in 1975 she began representing the Oil and Gas Conservation Commission as a result of a lawsuit that was filed against them. She stated that as a result she had the fortune of working with the commission members as well as every commissioner back to the days of Chairman Chaterton [ph]. She stated that she had the unique opportunity of getting acquainted with the history of the commission, the processes by which they make decisions, looking at budget issues as well personnel issues. She stated that the Oil and Gas Conservation Commission is a regulatory commission and it represents the state's interest. It is a commission that is mandated by state statute and charged with the protection of the state's interest, protecting against waste, maximizing ultimate recovery and protecting the correlative rights of other owners of oil and gas. Number 2729 MS. OECHSLI stated that as a result of her work as a lawyer some of those skills translate into the adjudicatory arena with the two other commissioners to decide issues and request expectations that would otherwise be dictated by the regulations. She stated that it is a narrow focus, they do not deal with any issues related to whether or not leases get issued it is only with respect to the actual drilling and production of Oil and Gas. Number 2743 REPRESENTATIVE BUNDE stated that it is a large step from public defender to the Oil and Gas Commission. He asked what her motivation and previous skills are that would be most productive for Alaska. Number 2853 MS. OECHSLI replied that when she first arrived in Alaska she was an elementary teacher and then was encouraged to apply for the position of clerk of the District Court and was able to exercise independent judgement in an adjudicatory function as an acting magistrate. She stated that the her work with the public and the work in the general issues that came before the court, being in a small community, included everything from coroner duties and law recording to traditional criminal and civil calendars. She then went to law school and became interested in natural resources issues and became assistant public defender. She stated that in this position she had a lot of contact with people and court time. She stated that the system worked very successfully, she felt her skills as a negotiator where very effective in that she was working with people with different interests, trying to reach a consensus. She stated that when she went to work for the Department of Law, it was because of her court room experience that she was recruited to work with the oil and gas section since the state was facing litigation on a number of fronts. As a result, she has an exposure to a number of the oil and gas issues. She stated that the combination of that exposure and the skills that she has learned as a teacher to being a negotiator has come into play. REPRESENTATIVE JOE RYAN stated that if Senator Taylor was Ms. Oechsli mentor and Governor Knowles appointed her, obviously she must be qualified to do the job because there is no political influence involved. Number 3308 REPRESENTATIVE ROKEBERG asked if she could describe to the committee the scope of her activity when she was representing the Oil and Gas Conservation Commissioner. MS. OECHSLI replied that it was with respect to a large employment lawsuit the basis of which was an underlying whistle blower complaint against the commissioner. Number 3404 REPRESENTATIVE ROKEBERG asked how did she perceive her role and who is she representing as the commissioner on the board. Number 3421 MS. OECHSLI replied that with respect to her role as commissioner, all three commissioners have a statutory mandate to follow the obligations set out by the legislation created that enacted the Oil and Gas Conservation Act. She stated that the regulations that were promulgated in respect to that, deal precisely with issues like permitting disposal flaring enhanced recovery processes. She stated that in respect to the way that the system is set up, if that criteria is met there is no discretion on the commission's part to change it. If someone requested an exception then the commission would view that in an adjudicatory setting. She stated that information would be presented at a public hearing and the decision would be made with the input of all three commissioners. Number 3551 REPRESENTATIVE ROKEBERG asked what is her perception of who she is going to be representing on the commission. He stated that isn't the charge of the commission to conserve the natural resources and to produce them at a maximum benefit to the state. MS. OECHSLI replied yes that is correct. The state is the primary interest group that the commission represents. REPRESENTATIVE ROKEBERG asked "and who is the state?" Number 3631 MS. OECHSLI replied all of us. Number 3637 REPRESENTATIVE BUNDE made a motion to move Ms. Oechsli's name forward. Number 3653 CHAIRMAN HODGINS asked if there was an objection. Hearing none, Ms. Oechsli's name is forwarded out of the House Special Committee on Oil and Gas. ADJOURNMENT Number 3708 CHAIRMAN HODGINS adjourned the House Special Committee on Oil and Gas meeting at 10:35 a.m.