Legislature(2009 - 2010)BARNES 124

03/26/2010 01:00 PM House RESOURCES

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               HB 308-OIL AND GAS PRODUCTION TAX                                                                            
                [Contains discussion of HB 337]                                                                                 
1:23:16 PM                                                                                                                    
CO-CHAIR JOHNSON  announced that  the next  order of  business is                                                               
HOUSE BILL NO.  308, "An Act relating to the  tax rate applicable                                                               
to the  production of  oil and gas;  relating to  credits against                                                               
the oil  and gas production  tax; and  relating to the  period in                                                               
which oil  and gas  production taxes may  be assessed."   [Before                                                               
the committee was HB 308,  Version 26-LS1328\P, Bullock, 3/17/10,                                                               
adopted as a work draft on 3/17/10.]                                                                                            
REPRESENTATIVE SEATON withdrew Conceptual Amendment 1.                                                                          
CO-CHAIR  JOHNSON  explained  that  Conceptual  Amendment  1  was                                                               
adopted on 3/17/10 and Representative  Seaton will be bringing up                                                               
another amendment later.                                                                                                        
CO-CHAIR  JOHNSON  moved  to  adopt   Amendment  2,  labeled  26-                                                               
LS1328\P.2,  Bullock,  3/24/10,   written  as  follows  [original                                                               
punctuation provided]:                                                                                                          
     Page 9, line 8, following "expenditure":                                                                                   
          Insert "incurred after June 30, 2010"                                                                                 
REPRESENTATIVE KAWASAKI objected.                                                                                               
CO-CHAIR JOHNSON stated that Amendment 2 adds an effective date.                                                                
1:25:28 PM                                                                                                                    
CO-CHAIR JOHNSON,  in response to Representative  Tuck, confirmed                                                               
that  Conceptual Amendment  1  was  withdrawn and  Representative                                                               
Seaton  will  be  introducing  another   amendment  that  is  not                                                               
conceptual.   He  reiterated that  Amendment 2  would provide  an                                                               
effective date.                                                                                                                 
REPRESENTATIVE KAWASAKI  maintained his  objection.   He inquired                                                               
about  the implication  of adding  this effective  date over  the                                                               
total bill's effective dates.                                                                                                   
CO-CHAIR JOHNSON responded the purpose  of this effective date is                                                               
to end in the  fiscal year so July 1 can be  started with a clean                                                               
set of taxes and not have overlapping taxation policies.                                                                        
1:26:46 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI observed  that  the  effective dates  in                                                               
Sections  18-22  regarding the  applicability  of  these laws  is                                                               
confusing.  He  asked whether the regulation  propagated by these                                                               
would be done by  that time and what the impact  would be for the                                                               
Department of Revenue (DOR) in analyzing how much the tax is.                                                                   
MARCIA DAVIS,  Deputy Commissioner,  Office of  the Commissioner,                                                               
Department of Revenue, replied Amendment  2 would ensure that the                                                               
tax credit for well-related  expenditures applies to expenditures                                                               
that are incurred  after June 2010.  In order  for the Department                                                               
of  Revenue to  identify what  will  and will  not be  considered                                                               
well-related   expenditures,   the   department  will   have   to                                                               
promulgate  regulations  if nothing  else  changes  in the  bill.                                                               
However,  she  said she  believes  Co-Chair  Johnson has  another                                                               
amendment pending which may clarify  the type of costs that would                                                               
fall within  this credit, so  the answer to the  question depends                                                               
upon what happens with the other amendment.                                                                                     
1:28:23 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI  inquired   whether  the  Department  of                                                               
Revenue would be  able to come up with those  definitions and the                                                               
regulations before that date.                                                                                                   
MS. DAVIS  answered that the  70-80 days is the  absolute minimum                                                               
time  necessary   for  moving   out  a  regulation   because  the                                                               
regulation must  first be drafted,  then 30 days must  be allowed                                                               
for  public  comment,  followed  by   another  30  days  for  the                                                               
regulation  to  become effective.    She  presumed that  if  this                                                               
passes the department might be able to do it.                                                                                   
1:29:27 PM                                                                                                                    
REPRESENTATIVE SEATON  asked whether  the taxpayer's tax  year is                                                               
July 1 or the calendar year.                                                                                                    
MS. DAVIS  responded it is  the calendar year for  the production                                                               
REPRESENTATIVE SEATON speculated this  may be problematic because                                                               
the state has a profits-based  tax and the profits are calculated                                                               
on a  yearly basis and estimated  payments are made on  a monthly                                                               
basis.  He inquired whether this will create a problem for DOR.                                                                 
MS. DAVIS replied that  any time a tax law has  two phases in the                                                               
midst of  a single tax year  it is more complicated  for both the                                                               
department and  the taxpayer.   While  that does  not mean  it is                                                               
insurmountable, it is a challenge to do.                                                                                        
1:31:11 PM                                                                                                                    
CO-CHAIR NEUMAN asked whether a  profits-based tax is the same as                                                               
a production tax given that both terms are being used.                                                                          
MS. DAVIS answered  the tax rate is applied to  the dollar amount                                                               
that  is   left  over   after  the  product   is  sold   and  the                                                               
transportation  and lease  expenditure costs,  which are  all the                                                               
costs to  produce the  oil or  gas, are  deducted from  the price                                                               
received.   This  dollar amount  represents what  is held  by the                                                               
company after it  has recovered its costs, so  by definition that                                                               
is the  net profit remaining and  the tax rate goes  against that                                                               
net  profit.   However, the  bill uses  the term  "production tax                                                               
value at the point of production" rather than the term "profit".                                                                
1:32:51 PM                                                                                                                    
CO-CHAIR NEUMAN  understood Ms.  Davis to be  saying that  in the                                                               
bill, expenditures for development  are considered to be upstream                                                               
development  cost.   He inquired  whether it  would also  include                                                               
midstream or delivery costs.                                                                                                    
MS. DAVIS responded both are  being talked about.  The production                                                               
tax  liability is  determined by  applying  the tax  rate to  the                                                               
dollar amount  that is  left over after  taking into  account the                                                               
downstream costs,  which are the  tanker and pipeline  costs, and                                                               
the upstream  costs, which  are all  the lease  expenditure costs                                                               
from out of the  ground to the pipeline.  A  tax credit, which is                                                               
a  certain percentage  of  those costs,  is  applied against  the                                                               
taxpayer's tax  bill.   Thus, a  certain cost  may be  counted to                                                               
both arrive at the net taxable amount and to create a credit.                                                                   
1:34:36 PM                                                                                                                    
CO-CHAIR  NEUMAN  noted  that HB  308  would  expand  exploration                                                               
credits.  He  asked whether this is a tax  against the profits or                                                               
a credit that can be used against additional taxes owed.                                                                        
MS.  DAVIS replied  this particular  provision is  a credit  that                                                               
would  be applied  against  the tax  that is  owed.   In  further                                                               
response, she  said it is a  credit against the taxes  that would                                                               
otherwise be owed.                                                                                                              
1:36:16 PM                                                                                                                    
REPRESENTATIVE KAWASAKI maintained his  objection to Amendment 2,                                                               
saying that  the proposed effective  date is much  different than                                                               
the calendar  year dates of  taxation, the retroactivity  date of                                                               
February 28,  2007, and the effective  date of 90 days  after the                                                               
bill goes into  law.  This creates a confusing  situation for the                                                               
Department of Revenue, he surmised,  especially when there are so                                                               
many things  at stake.   He  further commented  that if  the bill                                                               
becomes law, some producers may  wait to explore until after June                                                               
30, 2010.                                                                                                                       
CO-CHAIR  JOHNSON, in  response, inquired  whether Representative                                                               
Kawasaki thinks the date should be amended to May 30, 2010.                                                                     
REPRESENTATIVE KAWASAKI answered his  other objection is that the                                                               
department  would  be  unable  to  comply  with  this  provision;                                                               
additionally, he said he has a general objection to the bill.                                                                   
1:38:25 PM                                                                                                                    
DAN E. DICKINSON,  CPA, Consultant to the  Legislative Budget and                                                               
Audit Committee,  in response to  Co-Chair Johnson, said  he does                                                               
not have  anything to  add to  the effective  date argument.   It                                                               
would be  preferable to have  this become effective on  the first                                                               
of  the month  rather than  the date  the bill  becomes effective                                                               
because  that could  be  the  middle of  the  month, which  would                                                               
create argument over  when something was actually paid  for.  The                                                               
rules are  clearest when they  are over  the division of  a year.                                                               
The Department  of Revenue  already has rules  to deal  with what                                                               
happens when it  occurs on the first  of the month.   He said the                                                               
reason  for the  bill's wide  range of  other effective  dates is                                                               
that  interest  is  calculated  on   a  quarterly  basis  so  the                                                               
provisions  would  affect  interest  on  the  first  day  of  the                                                               
quarter, and  progressivity is calculated  on a monthly  basis so                                                               
the provisions  would affect  progressivity on  the first  day of                                                               
the month.                                                                                                                      
1:39:32 PM                                                                                                                    
REPRESENTATIVE  SEATON   stated  he  has  no   problem  with  the                                                               
effective  date  provided  that Amendment  2  will  not  prohibit                                                               
discussion of how  the bill would have affected  state revenue in                                                               
the years  since Alaska's Clear  and Equitable Share  (ACES) went                                                               
into effect.                                                                                                                    
CO-CHAIR JOHNSON responded he does  not intend to limit debate on                                                               
HB 308 in any way.                                                                                                              
REPRESENTATIVE KAWASAKI maintained his objection.                                                                               
CO-CHAIR  JOHNSON,  in  response  to  Representative  Guttenberg,                                                               
confirmed that without Amendment 2  the bill would go into effect                                                               
90 days after being signed by the governor.                                                                                     
A  roll call  vote was  taken.   Representatives Seaton,  Edgmon,                                                               
Guttenberg, Tuck, P. Wilson, Olson,  Neuman, and Johnson voted in                                                               
favor of Amendment 2.   Representative Kawasaki voted against it.                                                               
Therefore, Amendment 2 was adopted by a vote of 8-1.                                                                            
1:41:57 PM                                                                                                                    
CO-CHAIR  JOHNSON  moved  to  adopt   Amendment  3,  labeled  26-                                                               
LS1328\P.3,  Bullock,  3/25/10,   written  as  follows  [original                                                               
punctuation provided]:                                                                                                          
     Page 9, lines 24 - 31:                                                                                                     
          Delete all material and insert:                                                                                       
               "(3)  In this subsection, "well-related                                                                          
     expenditure" means a lease expenditure that is                                                                             
               (A)  directly related to a well; a lease                                                                         
     expenditure is directly related to a well if,                                                                              
               (i)  during exploration and development, the                                                                     
     lease  expenditure is  a qualified  capital expenditure                                                                    
     and  an   intangible  drilling  and   development  cost                                                                    
     authorized under 26 U.S.C.  (Internal Revenue Code), as                                                                    
     amended,  and  26  C.F.R. 1.612-4,  regardless  of  the                                                                    
     elections  made under  26 U.S.C.  263(c); in  this sub-                                                                    
     subparagraph  "exploration  and  development"  includes                                                                    
     well sidetracking,  well deepening, well  completion or                                                                    
     recompletion,  well workover  regardless as  to whether                                                                    
     the   well   is  or   has   been   a  producing   well,                                                                    
     stratigraphic test  wells, and injection  wells, except                                                                    
     that  "exploration and  development"  does not  include                                                                    
     disposal wells;                                                                                                            
               (ii)      during    production,   the   lease                                                                    
     expenditure  is  an  expenditure that  is  intended  to                                                                    
     increase,  maintain, enhance,  or mitigate  the decline                                                                    
     of  well  production and  is  directly  related to  the                                                                    
     processes of operating a well  and moving fluids to the                                                                    
     assembly  of  valves,  pipes,   and  fittings  used  to                                                                    
     control the  flow of oil  and gas from  the casinghead,                                                                    
     but  does  not  include  the  processes  of  gathering,                                                                    
     separating, and processing  well fluids downstream from                                                                    
     that assembly;                                                                                                             
               (B)  for seismic work conducted within the                                                                       
     boundaries of a production or exploration unit; or                                                                         
               (C)  an overhead expenditure authorized                                                                          
     under  AS 43.55.165(a)(2)   and  calculated   on  well-                                                                    
     related lease  expenditures allowed  under (A)  and (B)                                                                    
     of this paragraph."                                                                                                        
REPRESENTATIVE KAWASAKI objected.                                                                                               
1:42:14 PM                                                                                                                    
CO-CHAIR JOHNSON explained that  Amendment 3 defines well-related                                                               
expenditures and,  for clarification  and consistency,  it adopts                                                               
the same language that was  included in a previous bill regarding                                                               
gas storage.  He invited Ms. Davis to speak to the amendment.                                                                   
MS. DAVIS deferred to Mr. Dickinson.                                                                                            
MR. DICKINSON  said Amendment 3  is based on the  definition that                                                               
was in HB 280, although there  are some changes between that bill                                                               
and  HB 308.   The  idea is  to draw  a bright  line rather  than                                                               
having   a   general   definition   that   states   "well-related                                                               
expenditures",  for which  the Department  of Revenue  would then                                                               
have   to  take   public  testimony   and  craft   a  definition.                                                               
[Subparagraph (A)(i)]  would use the  bright line in  federal tax                                                               
law  called intangible  drilling and  development costs.   During                                                               
exploration and  during development, something that  qualifies as                                                               
an intangible  drilling and development cost  would be considered                                                               
a  well-related expense  and would  include:   well sidetracking,                                                               
well  deepening,  well  completion   or  recompletion,  and  well                                                               
workover.   When something is  going to  be part of  a taxpayer's                                                               
federal  tax return,  the taxpayer  can take  it as  part of  the                                                               
credit and the state would be able to go back and check on this.                                                                
1:44:35 PM                                                                                                                    
MR.  DICKINSON  said  subparagraph  (A)(ii)  would  provide  that                                                               
during production a lease expenditure  would be those things that                                                               
are designed  to enhance  productivity.  It  draws the  line that                                                               
the credit would  not apply once the well fluids  hit the surface                                                               
and move  into processing  facilities.   While the  Department of                                                               
Revenue would  write regulations,  he said  he thinks  in general                                                               
this  credit could  be  effective  immediately because  producers                                                               
would have a very  good sense of what would be  in and what would                                                               
be out since they know what the federal tax rule is.                                                                            
MR.  DICKINSON stated  subparagraph  (B)  clarifies that  seismic                                                               
work  undertaken within  a unit  is included  because, generally,                                                               
seismic  work within  a  unit is  well-related.   This  provision                                                               
complements the  exploration credits  for seismic  work conducted                                                               
outside the boundaries  of a production or  exploration unit that                                                               
are provided under AS 43.55.025.                                                                                                
1:46:53 PM                                                                                                                    
MR. DICKINSON  said subparagraph  (C) simply  fits this  into the                                                               
same category as the way other  things are handled.  For example,                                                               
indirect costs  are not  allowed, but once  the direct  costs are                                                               
known there  is a  markup on that.   The size  of that  markup is                                                               
determined   by    the   Department    of   Revenue    under   AS                                                               
43.55.165(a)(2), which  he said he  believes is currently  at 4.5                                                               
percent.   Thus, instead of  fighting about whether  a particular                                                               
support  cost is  part of  this, a  company would  just take  its                                                               
direct  costs  and  multiply  them  by  4.5  percent.    Although                                                               
Amendment 3  is longer than  the existing language in  Version P,                                                               
it  will give  direction  and  make it  clearer  as  to what  the                                                               
legislature had in mind.                                                                                                        
CO-CHAIR  JOHNSON  clarified  that  this  is  the  well  workover                                                               
section that  Governor Parnell has  in his legislation  [HB 337],                                                               
and he  wants to  ensure that  the administration  is comfortable                                                               
with this definition.                                                                                                           
1:48:10 PM                                                                                                                    
MS.  DAVIS, in  response  to  Representative Kawasaki,  confirmed                                                               
this provision  for well-related  expenditure would apply  to new                                                               
wells, existing wells,  and well workovers because  the intent is                                                               
to  capture the  phases of  the life  of a  well.   [Subparagraph                                                               
(A)(i)] would focus  on the exploration and  development phase of                                                               
locating and drilling  a well.  Subparagraph  (A)(ii) would focus                                                               
on production  of the well, but  what would be covered  under the                                                               
various categories is  different.  The governor's  bill would add                                                               
a category for  infill drilling because the  current drill credit                                                               
in the exploration section requires  that the drilling be so many                                                               
miles outside existing units,  although infill drilling qualifies                                                               
for 20  percent capital credit under  AS 43.55.023.  In  terms of                                                               
creating an  enhanced credit for  that type of infill  work, this                                                               
is similar to the governor's bill but a little broader.                                                                         
1:49:41 PM                                                                                                                    
REPRESENTATIVE KAWASAKI  asked what the  reason would be  for not                                                               
wanting to give infill credits  and having credits apply only for                                                               
outside of the field.                                                                                                           
MS. DAVIS responded that when  ACES was considered and passed, it                                                               
was  thought  that  the  20 percent  [capital]  credit  would  be                                                               
adequate for  work within the  unit and that the  enhanced credit                                                               
for exploration was  necessary because of the risk.   Kuparuk and                                                               
Prudhoe Bay produce  the lion's share of  Alaska's production and                                                               
revenue  stream  and  those declining  fields  may  require  more                                                               
extraordinary costs  and efforts to continue  their productivity.                                                               
Since the passage of ACES, the  question has become why the state                                                               
would  not  want  to  also incentivize  some  of  those  in-field                                                               
activities  because that  would  have  the same,  if  not a  more                                                               
immediate, effect on production.                                                                                                
1:51:19 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI understood  that subparagraph  (B) would                                                               
provide for  seismic work  conducted within  the boundaries  of a                                                               
unit, not outside.                                                                                                              
CO-CHAIR JOHNSON  said he believes  Mr. Dickinson  was explaining                                                               
that seismic work outside the  field is different than inside the                                                               
field  because  seismic  work  inside   a  field  is  to  enhance                                                               
production and seismic work outside is to find.                                                                                 
MR. DICKINSON stated correct.                                                                                                   
1:52:33 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG inquired  whether the enhancement under                                                               
subparagraph (B)  would be for  a specific well,  specific groups                                                               
of wells, wells  not drilled yet, or wells that  might be drilled                                                               
on other pads because of a redefined field.                                                                                     
MS.  DAVIS  understood  that  seismic   work  is  often  used  in                                                               
recompletions of an existing well  bore to help redirect where to                                                               
make  another lateral  completion  from the  bottom  of the  well                                                               
bore.    She  further  explained that  there  are  fields  within                                                               
already-producing  units  where  the resource  is  fractured  and                                                               
contained within  lenses.  She  said she believes  the Department                                                               
of Natural Resources (DNR) often  considers such production to be                                                               
contiguous and part of the same  unit and the seismic can be used                                                               
to target these smaller pockets.                                                                                                
1:53:55 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG asked whether  there is a definition of                                                               
seismic given that it can  be two dimensional, three dimensional,                                                               
or by explosives or vibrator.                                                                                                   
MS. DAVIS replied  she does not believe there is  a definition in                                                               
the state's tax  code and she thinks that  during the exploration                                                               
phase the  only type  of costs  that would  be eligible  for this                                                               
credit are those that qualify  under the Internal Revenue Service                                                               
definition of  intangible drilling cost.   She said she  does not                                                               
think production is  really going to apply in  this piece because                                                               
it  is  talking about  existing  production.    The way  this  is                                                               
written, development would more  likely involve an existing field                                                               
and  continued  development  and  access  to  new  parts  of  the                                                               
existing reservoir  or new  reservoirs.   She said  she therefore                                                               
thinks the  seismic is going  to be  tied to the  exploration and                                                               
development phase.                                                                                                              
1:55:16 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG inquired  whether current state statute                                                               
deals with well-related expenditures in any way.                                                                                
MS. DAVIS answered this is a new  term of art.  For credits under                                                               
AS 43.55.023,  the term of  art is qualified  capital expenditure                                                               
and  both  the  statute  and the  department's  regulations  have                                                               
defined that.   For credit under AS 43.55.025,  which is existing                                                               
exploration,  the statute  defines categories  of costs  that are                                                               
allowed to receive that credit  and these categories include both                                                               
some  capital and  some operating  types of  expenses.   However,                                                               
this proposed credit would create a new category of expenses.                                                                   
1:56:07 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG,  regarding subparagraph  (A)(i), asked                                                               
whether  the   intangible  drilling   cost  under  IRS   code  is                                                               
specifically for  exploration and  development costs,  or whether                                                               
there  are  other  definitions  under   the  IRS  code  or  other                                                               
definitions  outside of  the IRS  code that  the committee  might                                                               
want to consider.                                                                                                               
MS.  DAVIS responded  that  Amendment 3  first  starts with  what                                                               
would  be allowed  as  a lease  expenditure; it  then  goes to  a                                                               
subset  of  allowed  lease  expenditures  that  must  qualify  as                                                               
intangible  drilling  and  development   costs.    She  said  her                                                               
understanding is  that intangible drilling and  development costs                                                               
are a  circumscribed set of cost  items and that a  large body of                                                               
law has been worked up that makes it clear what those costs are.                                                                
MR.  DICKINSON added  he  is unaware  of  any other  definitions,                                                               
although he  is sure  there are other  definitions of  what well-                                                               
related costs are.  Because this  is a tax definition there are a                                                               
lot of court cases that have  clearly set the boundaries in a tax                                                               
context.   It therefore  makes sense  to go to  this set  of pre-                                                               
existing definitions.                                                                                                           
1:57:53 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG  inquired  whether anything  has  been                                                               
left out of Amendment 3 for which a deduction could be given.                                                                   
MS.  DAVIS   replied  that  this   particular  subset   of  lease                                                               
expenditures allowed during  production is narrowly circumscribed                                                               
in  the amendment  by  virtue  of having  to  be  related to  the                                                               
processes of operating a well  and moving fluids to the wellhead.                                                               
By excluding the processes listed on  page 1, lines 22-23, a line                                                               
has  been drawn  at the  wellhead assembly  which says  the costs                                                               
incurred upstream  of that  will not be  taken into  account, but                                                               
the costs downstream of that  are included.  So, yes, absolutely,                                                               
there are things upstream that  the committee could consider, but                                                               
this is a fairly clear line in the sand.                                                                                        
1:59:19 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG, given  that a  wellhead or  Christmas                                                               
tree might  have a  well house  on top,  asked how  downstream is                                                               
MS.  DAVIS answered  the  language talks  about  the assembly  of                                                               
valves, pipes, and  fittings used to control the flow  of oil and                                                               
gas from the  casinghead, so it defines what is  being called the                                                               
assembly.   She thus assumed that  "that assembly" on line  23 of                                                               
the  amendment refers  to  the assembly  described  in the  lines                                                               
above  it.   She  said  she thinks  it  would  be interpreted  by                                                               
Department  of Revenue  tax specialists  as stopping  at wherever                                                               
the valves, pipes, and fittings that control the flow stop.                                                                     
CO-CHAIR  JOHNSON added  that the  intention is  to stop  once it                                                               
gets above  ground, so this is  trying to define that  as tightly                                                               
and narrowly as possible.                                                                                                       
2:00:44 PM                                                                                                                    
REPRESENTATIVE  P. WILSON  inquired  whether every  type of  well                                                               
there is has been named in subparagraph (A)(i).                                                                                 
MS. DAVIS responded there could  conceivably be an injector well,                                                               
which  is not  literally listed,  but it  should fit  within this                                                               
MR. DICKINSON corrected Ms. Davis's  statement by clarifying that                                                               
injection well is included in  subparagraph (A)(i).  A difference                                                               
between the governor's bill and  this is that the governor's bill                                                               
would exclude service wells, and  service wells include injectors                                                               
under  Alaska   Oil  and  Gas  Conservation   Commission  (AOGCC)                                                               
regulations.  Amendment 3 is  therefore a little broader than the                                                               
governor's bill because  it includes injection wells.   One issue                                                               
is  how to  minimize conflicts  when  drawing clean  lines.   For                                                               
example, some wells are specifically  drilled as injection wells,                                                               
but a production  well may be turned into an  injection well when                                                               
that area  is no  longer producing.   This subparagraph  makes it                                                               
clear that injection wells would be allowed.                                                                                    
2:02:35 PM                                                                                                                    
REPRESENTATIVE SEATON  asked what  the distinction is  between an                                                               
injection well and a disposal well.                                                                                             
MS.  DAVIS replied  that water  or a  miscible fluid  is injected                                                               
into injector wells  to enhance or drive production.   A disposal                                                               
well is  a type of injection  well used to get  rid of something,                                                               
such  as drill  cuttings, mud,  or water  for which  there is  no                                                               
useful purpose, and a disposal well does not enhance production.                                                                
REPRESENTATIVE  SEATON  surmised  that  the  disposal  of  carbon                                                               
dioxide, water, or  natural gas would be  considered an injection                                                               
well under the  terminology of Amendment 3, and  not an injection                                                               
well for mud,  chips, or something else that  does not pressurize                                                               
the field in some way.                                                                                                          
MS. DAVIS answered as long  as there is some production enhancing                                                               
aspect to the  injection, the department would consider  it to be                                                               
an injector well  that is allowed.  The purpose  of the injection                                                               
would define whether the material is being disposed.                                                                            
2:04:45 PM                                                                                                                    
REPRESENTATIVE SEATON  presumed there  is no  way for  either the                                                               
Department of Revenue  or the Department of  Natural Resources to                                                               
determine  whether   the  disposal   of  carbon  dioxide   is  to                                                               
pressurize the field or to get rid of it.                                                                                       
MS.  DAVIS  responded  that  the  location  of  the  bottom  hole                                                               
relative  to  the  reservoir  makes  it  very  clear  whether  an                                                               
injector well is being used for pressurizing or disposal.                                                                       
2:05:28 PM                                                                                                                    
REPRESENTATIVE  SEATON   understood  that   subparagraph  (A)(ii)                                                               
relates to  the normal operation  of the  field and giving  a tax                                                               
credit for anything below the surface.                                                                                          
MS. DAVIS replied  that there is a more nuanced  approach to this                                                               
because this  is a part  of the  definition that was  included in                                                               
HB 280 in a nod to the  governor's concern that a credit be given                                                               
to get  something.  The  design here is not  to give a  credit to                                                               
someone who  tinkers with the  wellhead but does nothing  to stem                                                               
the  normal decline  of that  well production.   Rather,  this is                                                               
designed  to target  those  activities that  try  to improve  the                                                               
production rate above what it would be if nothing was done.                                                                     
MR. DICKINSON added  that when he gives a  presentation he always                                                               
displays  a graph  depicting the  amount of  decline in  Alaska's                                                               
production.    He  said  Ms.   Davis's  point  is  that  if  well                                                               
production is  maintained, the  line in the  graph would  be flat                                                               
rather than  declining by 6-7  percent every  year.  So,  that is                                                               
the why the term "maintain" is used in Amendment 3.                                                                             
2:08:18 PM                                                                                                                    
REPRESENTATIVE SEATON noted  that every field on  the North Slope                                                               
is in decline, and asked whether  there is any time that it could                                                               
be  said a  producer  is not  attempting  to maintain  production                                                               
above what it would otherwise be if nothing is done.                                                                            
MR. DICKINSON answered  the intent is to avoid just  that kind of                                                               
dispute by creating a rule that  says any time new money is spent                                                               
or  invested to  get  oil  out of  the  ground, the  below-ground                                                               
portion of  that will  be included.   The  costs for  central gas                                                               
facilities, gas compression plants,  flow stations, and gathering                                                               
centers  are excluded  from this.   The  line has  been drawn  to                                                               
specifically aim for the well costs.                                                                                            
2:10:19 PM                                                                                                                    
CO-CHAIR  JOHNSON inquired  whether  Mr. Dickinson  or Ms.  Davis                                                               
knows of an  oil company that has spent money  to keep production                                                               
at the same decline level.                                                                                                      
MR. DICKINSON  pointed out that  there was no decline  after 1999                                                               
because a lot  of money was spent to simply  not decline further.                                                               
Generally, the  reason a producer invests  is to get oil  out and                                                               
if  that  investment  does  not get  more  production  then  that                                                               
investment will not be made.                                                                                                    
CO-CHAIR JOHNSON said his hope is to get more production.                                                                       
2:11:05 PM                                                                                                                    
REPRESENTATIVE  TUCK   asked  whether  a  well   recompletion  is                                                               
different from a well workover.                                                                                                 
MS. DAVIS  understood that  a recompletion is  when the  well has                                                               
been drilled to  the targeted zone but the  producer believes the                                                               
well's  performance  is  suboptimal   and  therefore  chooses  to                                                               
recomplete the well  at a deeper or shallower depth.   In further                                                               
response, she said  she thinks a well workover  under Amendment 3                                                               
would include currently producing wells  and wells that have been                                                               
suspended.   The  presumption is  that the  well was  drilled and                                                               
producing  at one  time, and  whether production  has stopped  or                                                               
not, the provision is intended to  cover well workover costs.  In                                                               
response to another question, she  confirmed that tax credits for                                                               
a well  workover could  be for  re-opening a  well that  had been                                                               
shut down or a recompletion by drilling down further.                                                                           
[Co-Chair Johnson passed the gavel to Co-Chair Neuman.]                                                                         
2:13:11 PM                                                                                                                    
REPRESENTATIVE TUCK requested a  definition of stratigraphic test                                                               
MS. DAVIS described  a stratigraphic well as one  that is drilled                                                               
solely for  the purpose of ascertaining  data.  She said  this is                                                               
defined  in various  locations, one  of  which she  thinks is  AS                                                               
43.55.025.  The  challenge is that that kind of  well can qualify                                                               
as an intangible  drilling and development cost if  it is capable                                                               
of transporting  hydrocarbon fluids  should they  be encountered.                                                               
Thus, it  is possible  to have a  stratigraphic well  that yields                                                               
both data and production.                                                                                                       
[Co-Chair Neuman returned the gavel to Co-Chair Johnson.]                                                                       
2:14:42 PM                                                                                                                    
REPRESENTATIVE TUCK  inquired whether  a stratigraphic  test well                                                               
could end up becoming a disposal well.                                                                                          
MS.  DAVIS replied  it could,  but it  would be  unlikely because                                                               
most  disposal  wells are  designed  according  to what  will  be                                                               
disposed  as far  as the  casing size,  which usually  has to  be                                                               
large for disposal.  Also, the  location to which a disposal well                                                               
goes has to be carefully selected  because it must be approved by                                                               
various   environmental  agencies   and  demonstrated   that  the                                                               
drilling is  to a location  that cannot access drinking  water or                                                               
be susceptible to leaking.                                                                                                      
2:15:31 PM                                                                                                                    
REPRESENTATIVE TUCK  asked whether  a disposal  well is  the only                                                               
exception to any type of exploration and development.                                                                           
MS. DAVIS answered  she cannot think of anything  else that would                                                               
be  well  related.    As   long  as  something  fits  within  the                                                               
definition of  being a lease  expenditure and meets  the criteria                                                               
of  being  an  intangible  drilling and  development  cost,  that                                                               
should pretty much exclude just disposal wells.                                                                                 
MR. DICKINSON  agreed that  that summarizes  the kinds  of wells.                                                               
He added there are some wells  for which a different credit would                                                               
be used.   For example, there is a 40  percent exploration credit                                                               
for wildcat  wells more than  25 miles  from an existing  unit or                                                               
other drilling  location.  If  30 years  earlier a well  had been                                                               
drilled closer than that, then  this would be the pertinent place                                                               
where the credit would go.                                                                                                      
CO-CHAIR  JOHNSON stated  Amendment 3  is a  conforming amendment                                                               
and is  the same language for  defining wells that was  adopted a                                                               
week ago  [in HB 280].   He said he  would like the  committee to                                                               
decide whether it wants consistent language in the bill.                                                                        
2:17:39 PM                                                                                                                    
REPRESENTATIVE  SEATON inquired  whether the  state receives  the                                                               
data for credits given under AS 43.55.025 for the North Slope.                                                                  
MS. DAVIS responded yes.                                                                                                        
REPRESENTATIVE SEATON  asked whether  the data would  be received                                                               
under this provision.                                                                                                           
MR. DICKINSON  replied not in  this definition, but page  9 where                                                               
Amendment  3  would  go,  lines 19-23,  would  require  that  the                                                               
producer agree  in writing to  the terms  and submit the  data to                                                               
receive the  credit.  So,  yes, all the  terms that apply  to the                                                               
exploration data would apply to anything that is done here.                                                                     
REPRESENTATIVE SEATON noted that  the state allows deductions for                                                               
an amount  of overhead and  inquired whether there are  any other                                                               
places where credit is given for overhead.                                                                                      
MS.  DAVIS answered  no, this  would be  the only  credit she  is                                                               
aware of that would have an allowance for overhead.                                                                             
2:19:06 PM                                                                                                                    
REPRESENTATIVE KAWASAKI maintained his objection to Amendment 3.                                                                
REPRESENTATIVE P. WILSON  asked whether there is  a deduction for                                                               
overhead anywhere else.                                                                                                         
MS.  DAVIS responded  yes, and  recalled her  answer to  Co-Chair                                                               
Neuman about how transportation  costs and lease expenditures are                                                               
subtracted from  the selling price  of the product, and  that one                                                               
of the elements of lease  expenditures is overhead.  The taxpayer                                                               
recovers 4.5 percent  of all direct costs as  its overhead, which                                                               
is  deducted  before  the  department   comes  up  with  the  net                                                               
remaining amount, called the production  tax value, against which                                                               
the tax is applied.                                                                                                             
MR. DICKINSON added that if HB  280 becomes law, a deduction will                                                               
be there  as well; however, Ms.  Davis is correct that  right now                                                               
there is not.                                                                                                                   
REPRESENTATIVE P. WILSON surmised this  would allow a taxpayer to                                                               
deduct the overhead twice.                                                                                                      
MS. DAVIS  replied yes,  the overhead as  well as  the underlying                                                               
cost because all  of those get deducted as  lease expenditures to                                                               
arrive at  the net  amount.   The beauty of  credits is  that the                                                               
taxpayer receives a double bang for its buck.                                                                                   
2:20:59 PM                                                                                                                    
REPRESENTATIVE EDGMON inquired whether  the Department of Revenue                                                               
supports Amendment 3.                                                                                                           
MS. DAVIS answered the department  supports the concept of having                                                               
a  credit similar  to that  included in  the governor's  bill for                                                               
infill  drilling  expenditures.     While  HB  308   is  not  the                                                               
administration's bill, it has similar elements.                                                                                 
REPRESENTATIVE  EDGMON  asked  whether   this  language  is  more                                                               
aggressive than the Department of  Revenue and the governor would                                                               
MS. DAVIS responded there are a  few places where it goes further                                                               
than the  governor's bill.   As far as  having a credit  for that                                                               
type of activity,  the governor is supportive.   Speaking just to                                                               
Amendment 3,  she said  she thinks the  governor could  live with                                                               
this type of credit.                                                                                                            
2:22:26 PM                                                                                                                    
REPRESENTATIVE KAWASAKI maintained his objection.                                                                               
A roll call  vote was taken.  Representatives  Edgmon, P. Wilson,                                                               
Olson,  Neuman,  and  Johnson  voted in  favor  of  Amendment  3.                                                               
Representatives Guttenberg, Kawasaki, Tuck, and Seaton voted                                                                    
against it.  Amendment 3 was therefore adopted by a vote of 5-4.                                                                
2:23:20 PM                                                                                                                    
REPRESENTATIVE SEATON moved to adopt Amendment 4, labeled 26-                                                                   
LS1328\P.4, Bullock, 3/25/10, written as follows:                                                                               
     Page 2, following line 22:                                                                                                 
     Insert a new bill section to read:                                                                                         
        "*   Sec.  5.   AS 43.55.011(f)   is  repealed   and                                                                
     reenacted to read:                                                                                                         
          (f)  This subsection applies to a taxpayer that                                                                       
     produces more  than 100,000  BTU equivalent  barrels of                                                                    
     oil and gas  a day north of 68  degrees North latitude.                                                                    
     Notwithstanding  any  contrary   provision  of  law,  a                                                                    
     producer  may  not  apply tax  credits  to  reduce  the                                                                    
     producer's  total  tax  liability  under  (e)  of  this                                                                    
     section for  oil and  gas produced  from all  leases or                                                                    
     properties  within the  unit  or nonunitized  reservoir                                                                    
     below 10 percent of the  total gross value at the point                                                                    
     of  production  of that  oil  and  gas. If  the  amount                                                                    
     calculated   by   multiplying   the  total   tax   rate                                                                    
     determined under  (e)(1) and (g) of  this section times                                                                    
     the  total production  tax  value of  the  oil and  gas                                                                    
     taxable under (e) of this  section produced from all of                                                                    
     the  producer's leases  or properties  is less  than 10                                                                    
     percent  of  the total  gross  value  at the  point  of                                                                    
     production of that  oil and gas, the tax  levied by (e)                                                                    
     of this  section for that  oil and  gas is equal  to 10                                                                    
     percent  of  the total  gross  value  at the  point  of                                                                    
     production of that oil and gas."                                                                                           
     Renumber the following bill sections accordingly.                                                                          
     Page 4, lines 6 - 23:                                                                                                      
          Delete all material and insert:                                                                                       
               "(B)  for oil and gas produced from leases                                                                       
     or properties  subject to AS 43.55.011(f), 1/12  of the                                                                
     amount due for the calendar  year of the tax amount due                                                                
     under AS 43.55.011(f) [THE GREATEST OF                                                                                 
               (i)  ZERO;                                                                                                       
               (ii)  ZERO PERCENT, ONE PERCENT, TWO                                                                             
     PERCENT,   THREE   PERCENT,   OR   FOUR   PERCENT,   AS                                                                    
     APPLICABLE,  OF  THE  GROSS   VALUE  AT  THE  POINT  OF                                                                    
     PRODUCTION OF THE OIL AND  GAS PRODUCED FROM ALL LEASES                                                                    
     OR   PROPERTIES  DURING   THE  MONTH   FOR  WHICH   THE                                                                    
     INSTALLMENT PAYMENT IS CALCULATED; OR                                                                                      
               (iii)  THE SUM OF 25 PERCENT AND THE TAX                                                                         
     RATE  CALCULATED FOR  THE  MONTH UNDER  AS 43.55.011(g)                                                                    
     MULTIPLIED  BY THE  REMAINDER  OBTAINED BY  SUBTRACTING                                                                    
     1/12 OF THE PRODUCER'S  ADJUSTED LEASE EXPENDITURES FOR                                                                    
     THE CALENDAR YEAR OF  PRODUCTION UNDER AS 43.55.165 AND                                                                    
     43.55.170  THAT  ARE  DEDUCTIBLE FOR  THOSE  LEASES  OR                                                                    
     PROPERTIES UNDER  AS 43.55.160 FROM THE GROSS  VALUE AT                                                                    
     THE POINT  OF PRODUCTION  OF THE  OIL AND  GAS PRODUCED                                                                    
     FROM THOSE  LEASES OR PROPERTIES  DURING THE  MONTH FOR                                                                    
     WHICH THE INSTALLMENT PAYMENT IS CALCULATED];"                                                                             
     Page 10, line 23:                                                                                                          
          Delete "sec. 8"                                                                                                       
          Insert "sec. 9"                                                                                                       
     Page 10, line 31:                                                                                                          
          Delete "sec. 8"                                                                                                       
          Insert "sec. 9"                                                                                                       
          Delete "sec. 9"                                                                                                       
          Insert "sec. 10"                                                                                                      
     Page 11, line 1:                                                                                                           
          Delete "sec. 10"                                                                                                      
          Insert "sec. 11"                                                                                                      
     Page 11, line 5:                                                                                                           
          Delete "sec. 8"                                                                                                       
          Insert "sec. 9"                                                                                                       
     Page 11, line 7:                                                                                                           
          Delete "sec. 9"                                                                                                       
          Insert "sec. 10"                                                                                                      
     Page 11, line 8:                                                                                                           
          Delete "sec. 10"                                                                                                      
          Insert "sec. 11"                                                                                                      
          Delete "sec. 13"                                                                                                      
          Insert "sec. 14"                                                                                                      
     Page 11, line 11:                                                                                                          
          Delete "secs. 1, 2, 4, and 6 - 19"                                                                                    
          Insert "secs. 1, 2, 4, and 7 - 20"                                                                                    
     Page 11, line 13:                                                                                                          
          Delete "AS 43.55.011(g)"                                                                                              
          Insert    "AS 43.55.011(f),   as    repealed   and                                                                    
     reenacted by sec. 5 of this Act, and AS 43.55.011(g)"                                                                      
          Delete "sec. 5"                                                                                                       
          Insert "sec. 6"                                                                                                       
          Delete "takes"                                                                                                        
          Insert "take"                                                                                                         
     Page 11, line 14:                                                                                                          
          Delete "secs. 1, 2, 4, and 6 - 19"                                                                                    
          Insert "secs. 1, 2, 4, and 7 - 20"                                                                                    
     Page 11, line 15:                                                                                                          
          Delete "secs. 20 and 21"                                                                                              
          Insert "secs. 21 and 22"                                                                                              
CO-CHAIR JOHNSON objected.                                                                                                      
The committee took an at-ease from 2:23 p.m. to 2:27 p.m.                                                                       
2:27:09 PM                                                                                                                    
REPRESENTATIVE SEATON  moved to  adopt Conceptual Amendment  1 to                                                               
Amendment 4, written as follows:                                                                                                
     Page 1, line 8:                                                                                                            
       Delete "within the unit or nonunitized reservoir"                                                                        
     Page 1, lines 10 and 11:                                                                                                   
        Insert "producer's total tax liability under (e)                                                                        
     Page 1, line 12, [after] "section":                                                                                        
          Delete "produced from all of the producer's"                                                                          
          Insert "for oil and gas produced from"                                                                                
CO-CHAIR NEUMAN objected.                                                                                                       
CO-CHAIR JOHNSON objected.                                                                                                      
2:27:48 PM                                                                                                                    
REPRESENTATIVE  SEATON  explained  that  Conceptual  Amendment  1                                                               
[adopted at  the previous meeting  and withdrawn at the  start of                                                               
today's  meeting]  had  provisions   that  delineated  by  field.                                                               
Several sections  in that amendment were  by taxpayer's producing                                                               
over  100,000 British  Thermal Unit  (BTU) equivalent  barrels of                                                               
oil and  gas per day, and  in Amendment 4 these  sections did not                                                               
get changed  to the tax  liability.  On  page 1, line  8, "within                                                               
the  unit or  nonunitized  reservoir" should  be deleted  because                                                               
Amendment  4  is  now  talking  about a  taxpayer  instead  of  a                                                               
taxpayer's production  from a field  or unit.   This is  the same                                                               
throughout,  so  Conceptual  Amendment  1 to  Amendment  4  would                                                               
delete  the  references  to  a  field  or  unit  and  insert  the                                                               
producer's total tax liability.                                                                                                 
2:28:59 PM                                                                                                                    
CO-CHAIR  NEUMAN  noted that  oil  is  currently selling  on  the                                                               
market for  about $80 [West  Coast price  per barrel] and  gas is                                                               
selling  at about  $4 [per  thousand  cubic feet].   He  inquired                                                               
whether  those prices  would be  considered the  gross values  of                                                               
that oil and gas.                                                                                                               
MS. DAVIS responded no, the gross value  is a term of art used at                                                               
the  point  of production,  which  on  the  North Slope  is  Pump                                                               
Station 1.   The gross value is determined by  taking the selling                                                               
price and deducting the marine  and pipeline transportation costs                                                               
that  are  incurred starting  at  Pump  Station  1.   In  further                                                               
response, she said  the Department of Revenue  uses roughly $6.50                                                               
to $7.00 for  the transportation cost, so the gross  value of the                                                               
oil in this example would be $73 [per barrel].                                                                                  
2:31:41 PM                                                                                                                    
REPRESENTATIVE SEATON,  in response to Representative  P. Wilson,                                                               
again explained  that Conceptual  Amendment 1  to Amendment  4 is                                                               
conforming  language to  ensure  it is  the taxpayer's  liability                                                               
that  is  talked about  and  not  oil  and  gas produced  from  a                                                               
specific unit or reservoir.                                                                                                     
CO-CHAIR JOHNSON withdrew his [objection  to the amendment to the                                                               
amendment],  but  said this  does  not  in  any way  indicate  he                                                               
supports the pending amendment.                                                                                                 
REPRESENTATIVE  TUCK  objected  to  ask if  the  reason  for  the                                                               
amendment to  the amendment is  because there could be  more than                                                               
one taxpayer on a particular reservoir.                                                                                         
REPRESENTATIVE SEATON responded that  rather than a specific unit                                                               
or field, what is being talked  about is a taxpayer that produces                                                               
over  100,000 [BTU  equivalent barrels]  in total  production and                                                               
this total production is the taxpayer's tax base.                                                                               
2:33:27 PM                                                                                                                    
CO-CHAIR NEUMAN withdrew  his objection.  There  being no further                                                               
objection, Conceptual Amendment 1 to Amendment 4 was adopted.                                                                   
CO-CHAIR JOHNSON maintained his objection to Amendment 4.                                                                       
REPRESENTATIVE SEATON  stated that industry has  asked to receive                                                               
more of the  upside through reduced progressivity  or other means                                                               
of taking  less tax  on the  upside.  Under  ACES, a  balance was                                                               
struck using  a floor mechanism  whereby the state took  the risk                                                               
through no  taxes on the downside  in return for taking  more tax                                                               
on the upside.   Now, the legislature is  recalculating the taxes                                                               
and credits  so that industry  receives more  of the upside.   To                                                               
restore the  balance, Amendment  4 would  provide that  the state                                                               
receive tax when prices are low.                                                                                                
2:35:55 PM                                                                                                                    
CO-CHAIR  NEUMAN  inquired  what  the BTU  equivalent  is  for  a                                                               
standard cubic foot of methane.                                                                                                 
MS. DAVIS  responded the amount of  gas it takes to  create 6,000                                                               
BTU's of  energy is  called one  barrel equivalent,  although the                                                               
conversion factor  is not exactly  1 because it depends  upon the                                                               
gas field.                                                                                                                      
2:37:03 PM                                                                                                                    
CO-CHAIR NEUMAN pointed out that in  the coming years as more and                                                               
more  miscible fluids  are injected  into  wells to  keep up  oil                                                               
production, the  oil will become  less and less  valuable because                                                               
of its decreased BTU value.   He further noted that propane has a                                                               
BTU value two and a half times  that of methane, so a 100,000 BTU                                                               
equivalent of gas could be as little as 10-14 cubic feet of gas.                                                                
MS.  DAVIS  replied she  thinks  that  as  used in  Amendment  4,                                                               
100,000  BTU equivalent  barrels of  oil  and gas  refers to  the                                                               
definitional  section and  is not  taking the  BTU in  isolation.                                                               
Rather, BTU equivalent barrel is a  term of art, and for gas that                                                               
will always be  the amount of gas  that has a heating  value of 6                                                               
million  BTUs.     A  BTU  equivalent   barrel  equilibrates  the                                                               
differences between  propane, natural gas liquids,  and liquefied                                                               
natural gas.                                                                                                                    
2:39:35 PM                                                                                                                    
CO-CHAIR  NEUMAN said  [Amendment 4]  is  about all  oil and  gas                                                               
produced north of 68 degrees."                                                                                                  
MS. DAVIS  answered it applies  only to  the North Slope,  as she                                                               
reads it, and  it only applies to a taxpayer  that on any average                                                               
day of a  year has at least 100,000 barrels  of oil equivalent in                                                               
production credited to its account.   This minimum tax would only                                                               
apply to  those specific  tax payers  regardless of  whether this                                                               
production is all oil, or a mixture of oil and gas, or all gas.                                                                 
2:40:22 PM                                                                                                                    
CO-CHAIR NEUMAN  stated that  would be  just about  all producers                                                               
north of 68 degrees.                                                                                                            
MS. DAVIS responded  that this minimum tax would apply  only to a                                                               
taxpayer  whose  various  interests  in  the  North  Slope  added                                                               
together average 100,000 barrels of  oil equivalent a day.  Under                                                               
AS 43.55.024,  a producer eligible  for the $6 million  credit is                                                               
defined as  one that does  not have  more than 50,000  barrels of                                                               
equivalent average per day.  This  statute also has a $12 million                                                               
credit  and to  qualify for  that credit  a producer  cannot have                                                               
more than 100,000 barrels of oil  equivalent a day.  She said she                                                               
therefore thinks the 100,000 was  intended to draw a line between                                                               
the last entity that could be a small producer and the others.                                                                  
MR. DICKINSON  interjected that  three producers  would currently                                                               
meet that  qualification - "ExxonMobil, BP,  and ConocoPhillips."                                                               
No other producer comes close.                                                                                                  
2:42:11 PM                                                                                                                    
CO-CHAIR  NEUMAN  offered  his   belief  that  the  language  [in                                                               
Amendment 4, page 1, lines  6-7] that states "Notwithstanding any                                                               
contrary provision of  law, a producer may not  apply tax credits                                                               
to reduce  the producer's total  tax liability under (e)  of this                                                               
section...." would basically kill HB 308.                                                                                       
MS. DAVIS explained (e) is a  reference to AS 43.55.011 and deals                                                               
with  the base  tax  and progressivity  tax, so  (e)  is the  tax                                                               
liability.  This  first part of Amendment 4 would  provide that a                                                               
large producer's tax  liability under the production  tax for its                                                               
North  Slope oil  cannot be  less than  10 percent  of the  gross                                                               
value  at the  point of  production, a  large producer  being one                                                               
with more  than 100,000 barrels [of  oil equivalent a day].   The                                                               
second part  of Amendment  4 is about  credits and  would provide                                                               
that credits  can draw down  a large producer's tax  liability no                                                               
further than 10 percent of the  gross value.  Thus, credits could                                                               
not be  used to bring  a large  producer's tax liability  down to                                                               
zero,  and any  credits  that could  not be  used  would then  be                                                               
carried forward.                                                                                                                
2:44:29 PM                                                                                                                    
CO-CHAIR  NEUMAN  noted  that  Amendment 4  would  insert  a  new                                                               
Section 5 that  would repeal AS 43.55.011(f) and  reenact it with                                                               
new language.  He read this new  Section 5 aloud as it would read                                                               
amended by Conceptual Amendment 1.   He understood that if $80 is                                                               
the oil price  and the transportation cost is  deducted to arrive                                                               
at a gross value of $73 at  the point of production, then no more                                                               
than $7.30 could be  taken off of that for the  total tax on that                                                               
produced value.                                                                                                                 
MS. DAVIS replied  it is correct that $7.30 is  10 percent of the                                                               
gross value; however, that represents  the minimum tax that would                                                               
be paid by  one of these large producers for  its production.  If                                                               
ACES is  higher, this does not  get implicated; but, if  for some                                                               
reason  the tax  liability is  calculated using  ACES, it  cannot                                                               
fall below  the $7.30.   Likewise,  a producer  could not  have a                                                               
higher tax  liability under ACES  and then apply all  its credits                                                               
to draw  it down below  $7.30.  The $7.30  would be the  floor in                                                               
tax that would be paid on those barrels at $80 West Coast price.                                                                
2:48:36 PM                                                                                                                    
CO-CHAIR   NEUMAN   understood  "Notwithstanding   any   contrary                                                               
provision of law" to be royalties.                                                                                              
MS. DAVIS answered no, it would be the production tax section.                                                                  
CO-CHAIR NEUMAN  reiterated his belief  that being unable  to use                                                               
credits to reduce the tax liability would kill HB 308.                                                                          
MS.  DAVIS responded  the  provision does  not  say that  credits                                                               
cannot be used, it says the  credits cannot be used to drive down                                                               
the  tax  liability  to  less  than  $7.30  per  barrel  in  this                                                               
hypothetical example.                                                                                                           
MR.  DICKINSON agreed  with Ms.  Davis's characterization  of how                                                               
this  provision would  work.   He noted  a minor  correction that                                                               
could be  made to  the amendment, explaining  that the  law being                                                               
replaced talks about  tax subject to (i) and tax  subject to (o).                                                               
As currently  framed, Amendment 4 would  put a double tax  on gas                                                               
used in the state  because it is not exempted from  one.  That is                                                               
a technicality because  here the liability under  (e) is compared                                                               
against the  total gross value at  the point of production.   So,                                                               
gross value at the point  of production would include everything,                                                               
while the value  under (e) does not include a  tax on the royalty                                                               
portion of private royalties and gas  used in the state.  He said                                                               
it is  a very minor point  because very few dollars  are attached                                                               
to it, but it is one correction.                                                                                                
2:50:52 PM                                                                                                                    
CO-CHAIR JOHNSON  asked whether "few dollars"  means $100 million                                                               
or $10 million.                                                                                                                 
MR. DICKINSON replied  that at $73 the floor  typically would not                                                               
apply, but it would if oil prices  declined to the $10 range.  He                                                               
said he  believes this would only  occur when there are  very low                                                               
prices, like the low prices for  gas now, so what is being talked                                                               
about is hundreds of thousands  of dollars.  However, for several                                                               
small taxpayers  it would be  critical that they  understand what                                                               
their obligation was.                                                                                                           
CO-CHAIR JOHNSON clarified that Amendment  4 would take the floor                                                               
out and protect the state on  the down side while sharing more on                                                               
the upside.   He asked  whether it  is correct that  the downside                                                               
would be around $10.                                                                                                            
MR. DICKINSON  answered it  would occur when  the gross  value at                                                               
the point of production is about  1.6 times the lease costs.  For                                                               
example,  at  a  lease  cost  of  $20  this  provision  would  be                                                               
triggered  at   1.6  times  $20,   which  would  be   about  $32.                                                               
Therefore,  this would  not  be triggered  at  today's prices  of                                                               
nearly $80, but it would be triggered earlier than $10.                                                                         
2:52:46 PM                                                                                                                    
MR. DICKINSON,  in response  to Representative  Seaton, explained                                                               
that  for   the  $26  figure   used  in  Department   of  Revenue                                                               
publications,  $20 was  the upstream  cost  and $6  was from  the                                                               
destination  value in  the Lower  48 to  the gross  value at  the                                                               
point of production.                                                                                                            
REPRESENTATIVE   SEATON,  in   response   to  Co-Chair   Johnson,                                                               
confirmed that  the remaining  language in  Amendment 4,  page 2,                                                               
line [19] onward, is conforming amendments.                                                                                     
2:54:29 PM                                                                                                                    
CO-CHAIR JOHNSON withdrew his objection.                                                                                        
CO-CHAIR  NEUMAN maintained  his  objection, saying  he does  not                                                               
believe the changes made by Amendment 4 are appropriate.                                                                        
CO-CHAIR JOHNSON  said he will look  into this, but at  his point                                                               
he does not have a terrible objection to the amendment.                                                                         
A  roll  call  vote  was   taken.    Representatives  Guttenberg,                                                               
Kawasaki,  Tuck, P.  Wilson, Olson,  Seaton, Edgmon,  and Johnson                                                               
voted  in  favor of  Amendment  4,  as amended.    Representative                                                               
Neuman voted  against it.   Therefore,  Amendment 4,  as amended,                                                               
was adopted by a vote of 8-1.                                                                                                   
2:56:39 PM                                                                                                                    
CO-CHAIR JOHNSON opened public testimony on HB 308.                                                                             
MS.  DAVIS  offered testimony  on  behalf  of the  Department  of                                                               
Revenue.   She provided a 5-page  handout and said that  the last                                                               
page  entitled,  "Comparison  of  Progressivity  Impacts,"  dated                                                               
2/24/2010,  captures the  upside that  would be  shifted back  to                                                               
producers just by  the proposed progressivity change.   She noted                                                               
that the  calculations for fiscal  years 2008 and 2009  are based                                                               
on actual data and the  calculations for fiscal years 2010, 2011,                                                               
and  2012  are  based  on  the  department's  fall  2009  revenue                                                               
forecasts.    The  column  for  Version E  shows  the  impact  of                                                               
changing the progressivity  from 0.4 to 0.2 percent.   The column                                                               
for  Version P  shows  the impact  of  keeping the  progressivity                                                               
curve at  0.4 percent but  starting the progressivity  after $30.                                                               
The  numbers  in  these  columns are  the  reduction  in  current                                                               
production tax revenue that the  state would receive during those                                                               
fiscal years;  the figures are  expressed in millions  of dollars                                                               
as  well as  percentages.   She related  that the  administration                                                               
under the  governor is  keen to  give credits  if the  state will                                                               
receive value  in the form  of increased production  or increased                                                               
employment, but the  change in progressivity under HB  308 is not                                                               
necessarily tied to those elements.                                                                                             
2:59:35 PM                                                                                                                    
MS.  DAVIS said  another area  of concern  for the  Department of                                                               
Revenue  is the  interest  rate which  the bill  would  set at  3                                                               
percent  above  the  Federal  Reserve rate.    With  the  Federal                                                               
Reserve  rate currently  wavering between  0.5 and  0.75 percent,                                                               
DOR  is very  much  concerned that  the state  may  not get  paid                                                               
because most  companies could not  borrow money at  3.75 percent;                                                               
if there  are disputes or  issues the  companies will hang  on to                                                               
the money and  potentially make money on the difference.   If the                                                               
11  percent  rate  is  changed, she  said  the  department  would                                                               
suggest adjusting the rate to 5 percent.                                                                                        
MS. DAVIS, in  regard to the statute of  limitations, related she                                                               
has received  calls from a  company that  is very anxious  to get                                                               
its  credits processed  and cashed  out.   The company  is moving                                                               
from  the exploration  and development  phase to  production, but                                                               
needs the  cash flow to  do so.   Unfortunately, the  auditor who                                                               
has the account for that company  is tied up trying to complete a                                                               
three-year statute of  limitation, so she must  tell this company                                                               
that it will have  to wait for its credits to  be processed.  She                                                               
cautioned that if  HB 308 passes and all of  the six-year statute                                                               
of  limitations  become three-year,  all  the  efforts to  create                                                               
credits  for  returning  money  back to  investors  will  not  be                                                               
realized because  the department  does not  have the  manpower to                                                               
process a  three-year audit  limitation and  get the  credits out                                                               
because both  are done by  the same people.   She said  she could                                                               
hire more  staff if  it was  politically popular  and financially                                                               
doable, but that is not the situation right now.                                                                                
CO-CHAIR JOHNSON  stated he  is "not wrapped  around the  axle on                                                               
the statute  of limitations" and if  the bill passes out  of this                                                               
committee he will  work with the House Finance  Committee in this                                                               
regard to help provide the department what it needs.                                                                            
3:02:28 PM                                                                                                                    
MS. DAVIS,  in response to Representative  Seaton, explained that                                                               
the $300 million in impact for  Version P in the fiscal year 2010                                                               
[page 5  of Ms. Davis's  handout] represents actual data  for the                                                               
month  of  January  and  the   other  11  months  are  what  were                                                               
forecasted for fall 2009.                                                                                                       
REPRESENTATIVE SEATON  observed that  over the past  three years,                                                               
Version P  would have  reduced the state's  revenue by  over $1.7                                                               
billion in  actual income.   In response to Co-Chair  Johnson, he                                                               
pointed out that the chart compares  the impacts of Version E and                                                               
Version P to current law under ACES.                                                                                            
3:04:03 PM                                                                                                                    
REPRESENTATIVE SEATON  further observed  that the chart  does not                                                               
include  the impact  to state  revenue of  the proposed  credits;                                                               
thus, the  total decrease  in revenue  to the  state from  HB 308                                                               
would be  well over $2  billion.  He  pointed out that  there has                                                               
been no identification  as to what would be cut  from the state's                                                               
budget as a result of this  revenue decrease.  For example, would                                                               
forward funding  of education or university  capital construction                                                               
be cut out?                                                                                                                     
CO-CHAIR JOHNSON  responded it  would mean  the state  would only                                                               
have $11 billion  in reserve instead of the  current $12 billion,                                                               
so he  does not  think anything  would be  cut and  instead there                                                               
would be less surplus.                                                                                                          
3:05:06 PM                                                                                                                    
REPRESENTATIVE  SEATON   argued  that  the  forward   funding  of                                                               
education is  part of what  the co-chair is calling  the surplus.                                                               
Just  this  year  the  state  finally repaid  what  it  owed  the                                                               
constitutional budget  reserve fund,  so when talking  about what                                                               
things could  be swept  out, such as  the Alaska  Housing Finance                                                               
Corporation (AHFC), that is true.   He said he needs to look more                                                               
at the economic impact of the bill.                                                                                             
CO-CHAIR JOHNSON  replied there will  be that opportunity  in the                                                               
House Finance Committee and on the House floor.                                                                                 
3:05:54 PM                                                                                                                    
REPRESENTATIVE  SEATON   maintained  that  more   information  is                                                               
needed.  He moved to table HB 308.                                                                                              
A  roll call  vote was  taken.   Representatives Kawasaki,  Tuck,                                                               
Seaton, Edgmon, and Guttenberg voted  in favor of tabling HB 308.                                                               
Representatives  Olson,  P.  Wilson, Neuman,  and  Johnson  voted                                                               
against it.  Therefore, HB 308 was tabled by a vote of 5-4.                                                                     

Document Name Date/Time Subjects
SB 195.pdf HRES 3/26/2010 1:00:00 PM
SB 195
SB 195 Fiscal Note.pdf HRES 3/26/2010 1:00:00 PM
SB 195
SB 195 Sponsor Statement.pdf HRES 3/26/2010 1:00:00 PM
SB 195
SB 195 GPUA map 4.pdf HRES 3/26/2010 1:00:00 PM
SB 195
SB 195 Image 1.jpg HRES 3/26/2010 1:00:00 PM
SB 195
SB 195 - Image 3.JPG HRES 3/26/2010 1:00:00 PM
SB 195
SJR 27 Bill Packet.pdf HRES 3/26/2010 1:00:00 PM
HB 308 Amendment P.2 3.24.10.pdf HRES 3/26/2010 1:00:00 PM
HB 308
HB 308 Amendment P.3 3.25.10.pdf HRES 3/26/2010 1:00:00 PM
HB 308
HB 308 Amendment P.4 3.25.10.pdf HRES 3/26/2010 1:00:00 PM
HB 308
HB 308 Ltr CP.pdf HRES 3/26/2010 1:00:00 PM
HB 308
CSHB308(RES)-REV-TAX-03-23-10 Oil and Gas Production Tax.pdf HRES 3/26/2010 1:00:00 PM
HB 308