Legislature(2009 - 2010)BARNES 124

04/13/2010 09:00 AM House RESOURCES

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09:18:19 AM Start
09:18:50 AM SB305
01:16:29 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued at 1:15 pm Today --
Moved HCS CSSB 305(RES) Out of Committee
Scheduled But Not Heard
+ Bills Previously Heard/Scheduled TELECONFERENCED
        SB 305-SEPARATE OIL & GAS PROD. TAX/ DEDUCTIONS                                                                     
9:18:50 AM                                                                                                                    
CO-CHAIR NEUMAN announced  that the only order of  business is CS                                                               
FOR SENATE  BILL NO. 305(FIN)(title  am), "An Act  providing that                                                               
the tax rate  applicable to the production of oil  as the average                                                               
production  tax value  of oil,  gas  produced in  the Cook  Inlet                                                               
sedimentary basin,  and gas  produced outside  of the  Cook Inlet                                                               
sedimentary  basin and  used  in the  state  increases above  $30                                                               
shall be  0.4 percent  multiplied by  the number  that represents                                                               
the difference between that average  monthly production tax value                                                               
and $30, or the sum of 25  percent and the product of 0.1 percent                                                               
multiplied by  the number that represents  the difference between                                                               
that  average monthly  production  tax value  and $92.50,  except                                                               
that the total rate determined  in the calculation may not exceed                                                               
50 percent; providing  for an increase in the rate  of tax on the                                                               
production of  gas as the average  production tax value on  a BTU                                                               
equivalent  barrel basis  of  gas produced  outside  of the  Cook                                                               
Inlet  sedimentary basin  and  not used  in  the state  increases                                                               
above $30;  relating to  payments of the  oil and  gas production                                                               
tax; relating to availability of  a portion of the money received                                                               
from the tax  on oil and gas production for  appropriation to the                                                               
community  revenue sharing  fund; relating  to the  allocation of                                                               
lease  expenditures and  adjustments to  lease expenditures;  and                                                               
providing for an  effective date."  [Before the  committee is HCS                                                               
CSSB 305, Version 26-LS1577\M, Bullock, 4/10/10.]                                                                               
9:19:18 AM                                                                                                                    
CO-CHAIR  NEUMAN stated  he would  not be  accepting any  further                                                               
amendments  to  SB 305  beyond  those  that were  submitted  last                                                               
9:19:56 AM                                                                                                                    
REPRESENTATIVE SEATON said he has  two conceptual amendments with                                                               
his  name  on  them  that  he  discussed  with  Co-Chair  Johnson                                                               
yesterday.    He  then  opined that  these  amendments  had  been                                                               
properly offered.                                                                                                               
9:20:55 AM                                                                                                                    
CO-CHAIR  NEUMAN said  those amendments  were delivered  at 10:30                                                               
p.m.  last night  and not  to other  members or  the public.   He                                                               
reminded  the  committee  that   he  wasn't  taking  any  further                                                               
REPRESENTATIVE  SEATON pointed  out that  per Mason's  Manual and                                                               
the Uniform  Rules, amendments  can be  offered by  any committee                                                               
member  at the  time the  committee  is meeting  on the  relevant                                                               
legislation.     He  then  related   that  his   amendments  were                                                               
conceptually discussed  with both  Co-Chair Johnson  and Co-Chair                                                               
Neuman  yesterday and  they are  now in  the form  appropriate to                                                               
offer before the committee.                                                                                                     
9:22:04 AM                                                                                                                    
The committee took a brief at-ease.                                                                                             
9:22:55 AM                                                                                                                    
CO-CHAIR  NEUMAN  reminded  members   of  the  24-hour  rule  for                                                               
receiving  amendments  prior  to  a  meeting.    Furthermore,  he                                                               
characterized  conceptual  amendments   as  amendments  that  are                                                               
merely word  smithing.  However, he  recalled that Representative                                                               
Seaton's  conceptual  amendments  are  substantial  changes  that                                                               
would eliminate the  point of production (PoP)  method and remove                                                               
the per barrel of oil equivalent (BOE) method.                                                                                  
REPRESENTATIVE  SEATON offered  his  belief  that Mason's  Manual                                                               
would  apply  here  and  that  he has  the  right  to  offer  the                                                               
amendments,  which aren't  dilatory amendments.   He  agreed that                                                               
the  amendments are  as Co-Chair  Neuman described  them and  are                                                               
significant policy amendments.                                                                                                  
CO-CHAIR NEUMAN  reiterated the  committee's policies,  which are                                                               
established  and delivered  to members  at the  beginning of  the                                                               
year.   He  again reiterated  that the  24-hour rule  applies for                                                               
significant  amendments, adding  that  the rule  is  in place  to                                                               
allow adequate  time for the  co-chairs and committee  members to                                                               
review the amendments.   He emphasized that policy  has been made                                                               
very clear.                                                                                                                     
REPRESENTATIVE SEATON stated that  his amendments address whether                                                               
PoP  or  BOE  should  be  used  as  the  determining  factor  for                                                               
allocating cost.   The aforementioned isn't a  new concept rather                                                               
it's a  clarification of  Version M,  specifically on  the points                                                               
that  have  been discussed  at  every  meeting  on  SB 305.    He                                                               
reminded the committee that the  bulk of the committee discussion                                                               
has been  based on  the BOE  value, which places  the state  in a                                                               
detrimental position.  The amendments  take the presentation made                                                               
by  Mr.  Logsdon  and  select  the criteria  for  PoP,  which  is                                                               
relevant to the discussions the committee has had.                                                                              
9:29:26 AM                                                                                                                    
The committee took an at-ease from 9:29 a.m. to 9:48 a.m.                                                                       
9:48:06 AM                                                                                                                    
CO-CHAIR   NEUMAN,   upon    returning   from   conferring   with                                                               
Representative Dahlstrom, Chair,  House Rules Standing Committee,                                                               
informed the committee that Mason's  Manual applies to the floor.                                                               
The  rules put  out  by the  House  Resources Standing  Committee                                                               
earlier  in  the year  apply  to  that committee,  and  therefore                                                               
proposed  amendments   and  committee  substitutes  need   to  be                                                               
delivered to  Debra Higgins, Staff,  Co-Chair Johnson, or  to Co-                                                               
Chair Johnson or Co-Chair Neuman  24 hours prior to the scheduled                                                               
hearing.  He  reminded the committee that  the aforementioned was                                                               
discussed at  length and  everyone seemed  to accept  the policy.                                                               
However,  ultimately  Co-Chair  Neuman announced  that  he  would                                                               
allow Representative  Seaton to  offer his amendments,  but limit                                                               
discussion and comments.                                                                                                        
9:49:51 AM                                                                                                                    
REPRESENTATIVE  SEATON related  his  understanding  that the  co-                                                               
chair   had   requested   two   amendments/proposals   from   the                                                               
department, which he offered to allow to precede his amendments.                                                                
CO-CHAIR  NEUMAN  said  that he  didn't  believe  anyone  besides                                                               
Representative Seaton was offering any amendments.                                                                              
CO-CHAIR JOHNSON said that he didn't have any amendments.                                                                       
9:50:18 AM                                                                                                                    
REPRESENTATIVE SEATON  moved Conceptual  Amendment 3,  as follows                                                               
[original punctuation provided]:                                                                                                
     The  provisions   in  this  bill  that   de-couple  the                                                                    
     production tax treatment of oil  and gas are limited to                                                                    
     the production  tax treatment of  oil and gas  that are                                                                    
     produced  north of  68 degrees  North latitude.   Those                                                                    
     changes would  include Sections 4,  5, 6, 7, 8,  9, 10,                                                                    
     11, 12, 13, 14, 15, 16, 17, 18, 19, 20, and 23.                                                                            
CO-CHAIR JOHNSON objected.                                                                                                      
9:51:07 AM                                                                                                                    
REPRESENTATIVE SEATON  explained that  Conceptual Amendment  3 is                                                               
meant  to help  implement the  legislation.   If  the entire  tax                                                               
calculation mode  is changed such that  it's decoupled throughout                                                               
the  state, there  would be  significant  administrative and  tax                                                               
burden to the producers as well  as to the administration and the                                                               
Department of Revenue.   Since the [AS  43.90.320] provision only                                                               
applied to  production taxes  levied on  North Slope  gas shipped                                                               
through  firm  transportation  capacity, Conceptual  Amendment  3                                                               
would seek to ensure the industry  the least harm and problems in                                                               
calculating their taxes.  "We'll  be sure that the amendment does                                                               
what it  is intended to  do, and that  is talk about  North Slope                                                               
gas at the start of open season," he remarked.                                                                                  
9:52:33 AM                                                                                                                    
CO-CHAIR NEUMAN  pointed out that  taxes are  calculated monthly,                                                               
but deductions  can still  be taken.   He indicated  concern with                                                               
issues that  could arise  due to the  different treatment  of the                                                               
oil and  gas depending  upon whether  it's north  or south  of 68                                                               
degrees North latitude.                                                                                                         
9:54:34 AM                                                                                                                    
REPRESENTATIVE  SEATON reminded  the  committee  that the  entire                                                               
purpose  of SB  305 is  the AGIA  provisions, which  specifically                                                               
apply only  to North Slope  gas.   The definition of  North Slope                                                               
gas  is  gas  produced  north   of  68  degrees  North  latitude.                                                               
Representative Seaton related  then that SB 305  would change the                                                               
way taxes  are calculated across  the state instead  of targeting                                                               
the gas  that is being discussed  and reducing the impact  on the                                                               
producers  as  well  as  the   department.    He  explained  that                                                               
[Conceptual Amendment 3]  would eliminate the need  to redo taxes                                                               
on about  five of the seven  buckets, discussed in the  Logsdon &                                                               
Associates' presentation.                                                                                                       
9:56:16 AM                                                                                                                    
REPRESENTATIVE  P.  WILSON  requested   that  the  Department  of                                                               
Revenue staff  be allowed  to provide  information that  may help                                                               
committee members understand.                                                                                                   
9:57:08 AM                                                                                                                    
MARCIA DAVIS,  Deputy Commissioner,  Office of  the Commissioner,                                                               
Department  of   Revenue,  remarked   that  she  has   just  seen                                                               
[Conceptual Amendment 3] and certainly  the department could make                                                               
it work.  She informed the  committee that it does have a certain                                                               
mitigation aspect such  that it limits the  decoupling effects to                                                               
the area of  concern, which is when the state  enters a major gas                                                               
sail.   Since the amendment  is conceptual,  much of it  would be                                                               
dependent upon the details of it.                                                                                               
9:58:10 AM                                                                                                                    
CO-CHAIR NEUMAN inquired as to how  Doyon would be impacted if it                                                               
was drilling in the Nenana area and struck large volumes of gas.                                                                
MS.  DAVIS  answered that  if  Conceptual  Amendment 3  decouples                                                               
north  only,  then  Doyon  would   have  the  benefit  of  having                                                               
expenditures associated  with their production under  the current                                                               
law.  Therefore,  Doyon would receive credits and  since Doyon is                                                               
a small  producer, it would have  credits it could sell  to other                                                               
producers until  such time as  they actually produce.   Ms. Davis                                                               
opined  then  that  Conceptual Amendment  3  wouldn't  negatively                                                               
impact Doyon.                                                                                                                   
9:58:58 AM                                                                                                                    
CO-CHAIR NEUMAN  inquired as to  the situation with [gas  in the]                                                               
Cook Inlet.                                                                                                                     
MS. DAVIS  said that since  the decoupling wouldn't  impact those                                                               
in Cook Inlet, it wouldn't  impede the flow of their expenditures                                                               
and etcetera.  In further  response to Co-Chair Neuman, Ms. Davis                                                               
said  it would  depend upon  how  decoupling is  drafted for  the                                                               
North Slope,  which would  then be  reflected in  regulations the                                                               
department  would adopt.   Ms.  Davis  thanked Representative  P.                                                               
Wilson  for the  request  of an  explanation,  but clarified  "it                                                               
wouldn't  be   explaining  this   specific  amendment,   but  the                                                               
underlying W Version and the underlying M Version."                                                                             
9:59:55 AM                                                                                                                    
CO-CHAIR   JOHNSON  maintained   his   objection  to   Conceptual                                                               
Amendment 3 and then called the question.                                                                                       
10:00:34 AM                                                                                                                   
A roll call vote was  taken.  Representatives Seaton, Guttenberg,                                                               
Kawasaki, and Tuck  voted in favor of the  adoption of Conceptual                                                               
Amendment  3.   Representatives  P.  Wilson,  Olson, Neuman,  and                                                               
Johnson  voted against  it.   Therefore,  Conceptual Amendment  3                                                               
failed to be adopted by a vote of 4-4.                                                                                          
10:01:38 AM                                                                                                                   
The committee took an at-ease from 10:02 a.m. to 10:04 a.m.                                                                     
10:04:29 AM                                                                                                                   
REPRESENTATIVE  TUCK  moved  Amendment 4,  as  follows  [original                                                               
punctuation provided]:                                                                                                          
      version W.A:  Page 12, lines 9-12; version M:  Page                                                                       
     31, lines 19-22                                                                                                            
       "When   determining   a   reasonable   method   of                                                                     
      allocating lease expenditures between the production                                                                    
     of oil and the production  of gas, the department shall                                                                  
     consider  allocating lease  expenditures in  proportion                                                                  
     to the BTU  equivalent barrels of oil  produced and gas                                                                  
     produced from each lease or property."                                                                                   
          "When   determining   a   reasonable   method   of                                                                  
     allocating  lease expenditures  between the  production                                                                  
     of oil and the production  of gas, the department shall                                                                  
     to the  extent possible allocate lease  expenditures in                                                                  
     proportion  to   the  gross  value  at   the  point  of                                                                  
     production for oil produced and  gas produced from each                                                                  
     lease or property."                                                                                                      
CO-CHAIR JOHNSON objected.                                                                                                      
10:04:48 AM                                                                                                                   
REPRESENTATIVE TUCK  related his  understanding that  the sponsor                                                               
is  concerned  that   the  state  will  be   in  a  disadvantaged                                                               
bargaining position if the gas [tax]  has to be changed later on,                                                               
which  was one  of  the main  reasons for  decoupling.   He  then                                                               
directed  attention to  the  chart on  page 2  of  the Logsdon  &                                                               
Associates presentation dated April 9,  2010.  The chart compares                                                               
the BOE  method versus  the PoP  method, and  the concern  by the                                                               
sponsor is  that there will be  a total loss of  revenue when oil                                                               
and gas are  together.  The concern  from DOR is that  it will be                                                               
unable to  enter into negotiations  for changes.   Representative                                                               
Tuck  acknowledged that  although under  the decoupling  scenario                                                               
the  state would  collect more  revenue  for the  state, the  gas                                                               
proportion would be about one-third  lower than if the BOE method                                                               
was  utilized.   He opined  that  whether to  couple or  decouple                                                               
comes  down   to  the  gas   portion  of  the   cost  allocation.                                                               
Determining that  on a PoP versus  a BOE method places  the state                                                               
more in the status quo environment than the gas cost allocation.                                                                
CO-CHAIR NEUMAN asked, "In what way?"                                                                                           
10:08:39 AM                                                                                                                   
REPRESENTATIVE TUCK, still  referring to page 2 of  the Logsdon &                                                               
Associates  report dated  April 9,  2010, highlighted  that under                                                               
the  BOE  method, decoupling  results  in  [tax revenue]  in  the                                                               
amount  of 0.3  billion  while  the status  quo  results in  [tax                                                               
revenue] in  the amount of 1.2  billion.  However, under  the PoP                                                               
method, the gas cost allocation  can be maintained at 0.8 billion                                                               
if the oil and gas are  decoupled.  The aforementioned provides a                                                               
bit more strength in bargaining.                                                                                                
10:09:30 AM                                                                                                                   
CO-CHAIR NEUMAN  explained that the Btu  equivalency was utilized                                                               
as a  way in  which to  measure the  value of  gas.   However, it                                                               
doesn't  recognize that  there are  different gases.   In  fields                                                               
such as Prudhoe  Bay that contain natural  gas liquids, propanes,                                                               
butanes, and ethanes the Btu value  is increased and thus the PoP                                                               
value  changes.   Therefore, if  the  Btu value  is changed,  the                                                               
value of the PoP has to be  able to be adjusted because the value                                                               
of that gas is  different.  "So, if you take  out that portion of                                                               
it, how do you measure that," he asked.                                                                                         
REPRESENTATIVE TUCK  opined that the  PoP would be a  simpler and                                                               
easier  way  of determining  that.    Although the  PoP  wouldn't                                                               
determine the  Btu value of one  gas as compared to  another gas,                                                               
it would  be a  measure of all  production.   Representative Tuck                                                               
related that he prefers the PoP  method as it allows the state to                                                               
ensure it  has the higher  cost allocation for gas.   Decoupling,                                                               
he opined, would protect the state's best interest.                                                                             
10:11:05 AM                                                                                                                   
CO-CHAIR  NEUMAN the  problem with  using the  Btu equivalent  is                                                               
that nobody  would drill  a field  such as  Gubik, which  is just                                                               
methane, because  the value  of that  Btu is  lower.   The actual                                                               
value  of the  product must  be determined,  otherwise how  would                                                               
that product  be taxed, he  asked.  He  noted that the  Btu value                                                               
changes depending  upon the well, how  much gas is coming  out of                                                               
the well, and the types of gas coming  out of the well.  That Btu                                                               
value  [of the  gas] is  then  compared to  oil at  the point  of                                                               
REPRESENTATIVE  TUCK  reminded  the   committee  that  Logsdon  &                                                               
Associates  stated   that  there  are  many   different  ways  to                                                               
determine the  relationship between oil and  gas.  Representative                                                               
Tuck said that  he didn't have an answer to  Co-Chair Neuman, but                                                               
would like to hear the response from DOR.                                                                                       
10:13:35 AM                                                                                                                   
CO-CHAIR NEUMAN  inquired as to  how the  actual value of  gas is                                                               
determined if Btu values are separated from PoP.                                                                                
10:13:56 AM                                                                                                                   
PAT GALVIN,  Commissioner, Department of Revenue  (DOR), said his                                                               
understanding of the amendment is that  it has nothing to do with                                                               
establishing the  value for the  purposes of taxation  other than                                                               
in  the allocation  of  costs between  oil and  gas  in order  to                                                               
derive  a production  tax value.   The  ability to  use a  volume                                                               
based measurement results  in the use of a Btu  value in order to                                                               
properly use  a volume of hotter  gas, the actual heat  value, to                                                               
establish the volume equivalent.   The proportion of that is used                                                               
to divide  costs and  establish the profit  or, as  the amendment                                                               
suggests, the value  of the two streams is  reviewed.  Therefore,                                                               
the  PoP value  of the  oil  and the  PoP  value of  the gas  are                                                               
reviewed [to determine] the proportion  of each.  The total costs                                                               
are then divided based upon  the proportion.  Commissioner Galvin                                                               
said  that  either  way  is  legitimate  and  will  arrive  at  a                                                               
production tax value  from which the tax is derived.   As pointed                                                               
out by Representative  Tuck, the PoP allocation will  result in a                                                               
higher  gas production  tax  that's  locked as  well  as a  lower                                                               
overall  tax  because the  oil's  profitability  will be  reduced                                                               
since more  costs will move  to the oil.   This will be  the case                                                               
when using PoP versus BOE or heat value.                                                                                        
10:16:07 AM                                                                                                                   
CO-CHAIR  NEUMAN inquired  as to  what  the department  currently                                                               
uses to derive the value of gas.                                                                                                
COMMISSIONER GALVIN  answered that currently  regulations include                                                               
both  systems.     In  further   response  to   Co-Chair  Neuman,                                                               
Commissioner Galvin  explained that for  the context in  which it                                                               
was  needed,  DOR   chose  the  allocation  that   best  met  the                                                               
particular  purpose.   "So,  you  need  to  choose one  for  this                                                               
particular purpose," he said.                                                                                                   
10:17:11 AM                                                                                                                   
REPRESENTATIVE SEATON  noted his  agreement with  Co-Chair Neuman                                                               
on the value basis.   However, he wanted to ensure  that PoP is a                                                               
value  and isn't  a  heat  content.   He  expressed  the need  to                                                               
calculate what  people will pay for  the gas whether it's  wet or                                                               
dry gas so  that the PoP is the actual  value associated with the                                                               
gas and is for what it will sell.                                                                                               
COMMISSIONER  GALVIN replied  yes, adding  that to  determine the                                                               
PoP value a  conversion of heat value isn't used  to convert that                                                               
to volumes rather it's the value they sold for in the market.                                                                   
10:18:19 AM                                                                                                                   
CO-CHAIR  NEUMAN inquired  as  to how  the value  of  the gas  is                                                               
measured if the Btu isn't used.                                                                                                 
COMMISSIONER GALVIN  responded that it's measured  by total sales                                                               
of  the entire  stream less  transportation costs,  which is  how                                                               
it's [calculated now].  He further  responded that the PoP is how                                                               
the attributed gas  tax is determined under the status  quo.  The                                                               
only time BOE is used is to  separate the oil from the gas within                                                               
a  particular field  of  Cook Inlet  in order  to  compare it  to                                                               
Alaska's Clear  and Equitable  Share (ACES)  for purposes  of the                                                               
"lower of."                                                                                                                     
10:19:07 AM                                                                                                                   
REPRESENTATIVE P. WILSON ascertained  that Conceptual Amendment 4                                                               
seems to do  the same thing as  Representative Seaton's amendment                                                               
[that  he has  yet to  offer].   However,  it appears  Conceptual                                                               
Amendment   4  may   provide  more   flexibility   to  DOR   over                                                               
Representative Seaton's pending amendment.                                                                                      
MS. DAVIS  surmised that the debate  here is how to  get at value                                                               
better  and Co-Chair  Neuman  has  been asking  how  such can  be                                                               
accomplished  without  considering  the  Btu, which  is  how  the                                                               
market tends to evaluate the  value.  Conceptual Amendment 4 gets                                                               
at the  heart of value  because going to  the gross value  at the                                                               
PoP is the closest measure of  how the market values the product.                                                               
Ms.   Davis  explained   that  the   sales  proceeds   minus  the                                                               
transportation  costs results  in  the gross  value  at the  PoP,                                                               
which  is  the  best  indicator  of the  value  of  the  product.                                                               
Conceptual  Amendment 4  proposes  to  allocate expenditures  and                                                               
costs [based on  the notion that] the producers  will spend money                                                               
because of  how much  money they  will receive  for that  oil and                                                               
gas.  The  best indicator of what they will  receive for that oil                                                               
and gas is what  people paid for it.  The gross  value at the PoP                                                               
provides that  benchmark, and thus  is being used as  the measure                                                               
for allocating the lease expenditures.                                                                                          
10:22:57 AM                                                                                                                   
CO-CHAIR NEUMAN inquired as to what the value is.                                                                               
MS. DAVIS  confirmed that one of  the values is Btu,  but pointed                                                               
out that  there are  other values.   Still,  the best  measure of                                                               
value is what someone will pay for the product.                                                                                 
CO-CHAIR  NEUMAN  then inquired  as  to  how this  measure  would                                                               
impact propane shipments since [propane] is a higher value Btu.                                                                 
MS.  DAVIS answered  that it's  captured because  the marketplace                                                               
values that  stream and if there's  good propane they will  pay a                                                               
price, which will be apparent in the gross proceeds.                                                                            
CO-CHAIR NEUMAN interjected, "Takes the stream out of the gas."                                                                 
MS. DAVIS  indicated that to be  the case, adding that  the price                                                               
will be  evident for  the product  that continues  downstream and                                                               
thus the value of it will be known as well.                                                                                     
CO-CHAIR NEUMAN pointed  out that by taking out  the propane, the                                                               
Btus are  lowered and  the value  of the gas  that is  shipped is                                                               
also lower.   He  suggested that  perhaps it  could make  it more                                                               
difficult  to   have  a  successful  open   season  because  [the                                                               
producers] are counting on those Btus to amortize their cost.                                                                   
MS.  DAVIS specified  that for  this purpose  she would  consider                                                               
what the  marketplace paid for that  volume of gas and  the sales                                                               
prices [from the various products in the stream] could be added.                                                                
10:24:39 AM                                                                                                                   
REPRESENTATIVE  TUCK   opined  that   the  May  1st   date  isn't                                                               
necessarily the  issue.   The goal  at this  point, in  the first                                                               
open  season, is  to define  the portion  of combined  tax that's                                                               
derived from  gas.  He reminded  the committee of an  earlier DOR                                                               
presentation that  illustrates whether the  BOE or PoP  method is                                                               
used  the [gas  cost allocation]  is equivalent  in a  status quo                                                               
environment.  However, if the oil  and gas is decoupled, there is                                                               
a  significant  difference  in  the  gas  cost  allocation.    To                                                               
preserve  the sponsor's  intent  for the  state  to avoid  losing                                                               
revenue,  [Conceptual Amendment  4] puts  the state  in a  better                                                               
position as it  only determines the gas cost  allocation and then                                                               
moves  forward.   Representative Tuck  then asked  if [Conceptual                                                               
Amendment  4] is  a simple  method  of determining  the gas  cost                                                               
COMMISSIONER  GALVIN   replied  yes.     Furthermore,  Conceptual                                                               
Amendment  4 provides  good direction  to  DOR without  mandating                                                               
[the use  of the allocating  lease expenditures in  proportion to                                                               
the gross  value at  the point  of production].  He characterized                                                               
Conceptual Amendment 4 as a good balance.                                                                                       
CO-CHAIR  NEUMAN interjected  that use  of the  term "shall"  [in                                                               
Conceptual Amendment 4] makes the difference.                                                                                   
COMMISSIONER  GALVIN  pointed  out that  Conceptual  Amendment  4                                                               
inserts language  in Section  21 of Version  M, which  would also                                                               
need  to  be inserted  in  Section  22  on  page 32,  lines  1-6.                                                               
Section  21 addresses  cost allocation  and  Section 2  addresses                                                               
adjustments to cost allocation.   In response to Co-Chair Neuman,                                                               
Commissioner Galvin  said that although  today is the  first time                                                               
he  has seen  Conceptual Amendment  4, he  is familiar  with this                                                               
type of  amendment because  the committee  has discussed  it over                                                               
the last week.                                                                                                                  
10:28:50 AM                                                                                                                   
REPRESENTATIVE TUCK  agreed that the committee  talked about this                                                               
all last week  and was the purpose of  Co-Chair Johnson's request                                                               
of DOR  to present the one  bucket and two buck  worlds under the                                                               
BOE  and PoP  methods.   He  reiterated that  if  the status  quo                                                               
continues, it doesn't  matter.  However, if the  state decides to                                                               
decouple, it will  change the gas cost allocation  for the state.                                                               
Representative Tuck  said if  the state  does decouple,  he would                                                               
prefer  using the  PoP method  because it  would bring  the state                                                               
more status quo.                                                                                                                
10:29:43 AM                                                                                                                   
CO-CHAIR NEUMAN  inquired as to how  much gas is produced  on the                                                               
North Slope.                                                                                                                    
COMMISSIONER GALVIN answered  that on the North  Slope little gas                                                               
is produced  for the purpose of  sale in comparison to  the total                                                               
volume brought out from the ground and sent back down.                                                                          
CO-CHAIR  NEUMAN posed  a scenario  in which  the language  being                                                               
inserted  by  Conceptual  Amendment  4 didn't  include  the  term                                                               
"shall".   He then asked  how such  a situation would  impact [AS                                                               
COMMISSIONER GALVIN responded that such  a change would result in                                                               
a significant  difference in the  way cost allocation  would take                                                               
place when  gas is produced  for sale.  The  aforementioned would                                                               
then  result  in a  significantly  different  tax burden  on  the                                                               
taxpayer.   In  further response,  Commissioner Galvin  said, "If                                                               
there is no expectation of  what the department's regulations may                                                               
use  for cost  allocation, the  potential tax  burden would  vary                                                               
significantly  depending  upon  what the  department  chooses  to                                                               
use."    The  existing  language [using  "shall"]  in  Conceptual                                                               
Amendment  4  tells  the  department   the  legislature  wants  a                                                               
particular cost  allocation method to  be used in order  that the                                                               
window  of  potential  deviation   by  the  regulations  will  be                                                               
narrower than if left undirected.                                                                                               
CO-CHAIR NEUMAN clarified  that his point is that  one word could                                                               
have a significant impact and difference.                                                                                       
COMMISSIONER GALVIN  emphasized that  the effect  of this  law is                                                               
that  it  has significant  impacts  on  the state's  revenue  and                                                               
should be considered very carefully.   In further response to Co-                                                               
Chair  Neuman,  Commissioner  Galvin highlighted  that  [SB  305]                                                               
locks  in  [the  tax]  for  potentially  10  years  not  2  days.                                                               
Commissioner  Galvin characterized  it as  "a two-day  gimmick to                                                               
lock something in for 10 years."                                                                                                
10:32:27 AM                                                                                                                   
REPRESENTATIVE  TUCK  pointed  out that  Conceptual  Amendment  4                                                               
replaces  "shall   consider  allocating  lease   expenditures  in                                                               
proportion  to  the  BTU  equivalent barrels  of  oil"  with  the                                                               
language   "shall  to   the   extent   possible  allocate   lease                                                               
expenditures in  proportion to  the gross value  at the  point of                                                               
production".    Therefore,  the "shall"  already  exists  in  the                                                               
legislation  and Conceptual  Amendment 4  merely changes  it from                                                               
the BTU equivalent BOE to PoP.                                                                                                  
CO-CHAIR  NEUMAN  said that  months  were  spent to  develop  the                                                               
system proposed  in SB 305,  which was  deemed the most  fair for                                                               
the state.   To change  that with an amendment  is inappropriate,                                                               
he opined.                                                                                                                      
COMMISSIONER  GALVIN   clarified  that   there  is   no  previous                                                               
statutory  direction  for a  cost  allocation.   The  legislature                                                               
hasn't  addressed  the  issue  previously   because  it's  not  a                                                               
necessary part of a combined tax  system.  In further response to                                                               
Co-Chair  Neuman,  Commissioner  Galvin explained  that  the  Btu                                                               
equivalent per  barrel was developed  for a  completely different                                                               
purpose  than cost  allocation.   The Btu  equivalent per  barrel                                                               
related to  a methodology for how  to compare gas streams  to oil                                                               
streams for the  purposes of determining the tax  value, which is                                                               
a different purpose than what's described [in SB 305].                                                                          
10:33:50 AM                                                                                                                   
REPRESENTATIVE TUCK surmised that the  state would be in a better                                                               
position now even  if decoupling never occurs than  it would were                                                               
the  petroleum  production profits  tax  (PPT)  program still  in                                                               
effect.  The goal is to  protect the interests of Alaskans, which                                                               
he  opined  is accomplished  with  the  status quo.    Therefore,                                                               
Conceptual Amendment  4 attempts  to maintain  the status  quo as                                                               
much as possible while decoupling.                                                                                              
10:35:15 AM                                                                                                                   
REPRESENTATIVE TUCK specified his question as follows:                                                                          
     In comparing  to the  PPT that was  before ACES,  if we                                                                    
     keep  everything the  status  quo, isn't  the State  of                                                                    
     Alaska still collecting more  revenues than we would've                                                                    
     been  under PPT?   Are  we safe,  we're not  losing the                                                                    
     revenues that's been  so feared in decoupling.   I mean                                                                    
     we are going  to be losing some revenues,  but it would                                                                    
     never be  as much  revenues as we  would've lost  if we                                                                    
     would've continued with PPT.                                                                                               
COMMISSIONER GALVIN answered yes.   As a result of Representative                                                               
Tuck's question the other day, DOR  did run an analysis and found                                                               
that in the  various price relationships between oil  and gas the                                                               
status quo  brings in significantly  more revenue than  under the                                                               
PPT.    The  analysis  further  found  that  in  many  instances,                                                               
particularly when  the parity relationship is  wide, the increase                                                               
from PPT  to ACES is much  smaller than the increase  from status                                                               
quo to  decoupled.   However, if the  PPT was  decoupled, whether                                                               
based on  BOE or PoP,  the result is  a situation similar  to the                                                               
status quo.  Therefore, Representative  Tuck is correct that even                                                               
with the  proposed cost  allocation, compared  to PPT  the status                                                               
quo  remains  the  same  without  going  to  the  decoupled  cost                                                               
allocation world.                                                                                                               
10:37:21 AM                                                                                                                   
REPRESENTATIVE TUCK requested that  Senator Paskvan be allowed to                                                               
speak to Conceptual Amendment 4.                                                                                                
10:37:55 AM                                                                                                                   
The committee took a brief at-ease.                                                                                             
10:38:57 AM                                                                                                                   
SENATOR JOE  PASKVAN, Alaska State  Legislature, related  that he                                                               
is intrigued  by Representative  Tuck's comment on  the potential                                                               
of a win-win  situation.  He then related that  he has no problem                                                               
with moving  SB 305  with decoupling  with the  PoP method.   The                                                               
aforementioned  accommodates  the  interests  of  protecting  the                                                               
state.    He  concluded  by   stating  he  has  no  objection  to                                                               
[Conceptual Amendment 4].                                                                                                       
10:40:05 AM                                                                                                                   
CO-CHAIR  JOHNSON  called  the  question  and  then  removed  his                                                               
CO-CHAIR NEUMAN then objected.                                                                                                  
10:40:28 AM                                                                                                                   
A  roll  call  vote  was   taken.    Representatives  Guttenberg,                                                               
Kawasaki,  Tuck,  P.  Wilson,  and   Seaton  voted  in  favor  of                                                               
Conceptual  Amendment  4.   Representatives  Olson,  Neuman,  and                                                               
Johnson voted against it.   Therefore, Conceptual Amendment 4 was                                                               
adopted by a vote of 5-3.                                                                                                       
10:41:29 AM                                                                                                                   
REPRESENTATIVE  SEATON  asked  if  the  charts/slides  that  were                                                               
referenced earlier had been introduced to the committee.                                                                        
CO-CHAIR NEUMAN  related his  belief that  they were  provided to                                                               
committee members, although they have  not been introduced to the                                                               
CO-CHAIR  JOHNSON   recalled  that  the  charts   were  from  the                                                               
presentation   that  Commissioner   Galvin   isn't  making,   and                                                               
therefore members could discuss them  with him after the meeting.                                                               
He, too,  related that the charts/slides  haven't been introduced                                                               
to the committee or used in the committee.                                                                                      
10:42:49 AM                                                                                                                   
REPRESENTATIVE GUTTENBERG surmised  that the charts/slides mostly                                                               
deal with PoP versus  BOE.  He then asked if  the issue was taken                                                               
care of with Conceptual Amendment 4.                                                                                            
COMMISSIONER GALVIN  answered that to  the extent that  DOR would                                                               
perform  an economic  analysis on  SB  305, with  the passage  of                                                               
Conceptual  Amendment 4  the department  would use  the PoP  cost                                                               
methodology  to  run  the  economics.   In  further  response  to                                                               
Representative  Guttenberg,  Commissioner Galvin  confirmed  that                                                               
Conceptual  Amendment  4  provides the  department  direction  in                                                               
terms of whether to use the BOE or PoP methodology.                                                                             
10:44:09 AM                                                                                                                   
CO-CHAIR  NEUMAN, upon  ascertaining  no one  wished to  testify,                                                               
closed public testimony.                                                                                                        
10:44:38 AM                                                                                                                   
REPRESENTATIVE TUCK  echoed earlier  statements that  this really                                                               
isn't  a May  1st  issue.   The legislature  has  the ability  to                                                               
decouple  at any  time and  there's no  urgency to  decouple now.                                                               
Furthermore,  DOR's  draft  regulations  define  the  portion  of                                                               
combined tax  that comes  from gas.   Any decoupling  that occurs                                                               
after the open season is locked  in due to [AS 43.90.320] and has                                                               
no   affect  on   what  the   state   can  bring   in  for   oil.                                                               
Representative  Tuck offered  that he  likes having  oil and  gas                                                               
coupled together  because it offers  an incentive for  a gasline.                                                               
While the  state would  potentially receive  less revenue  if the                                                               
state didn't decoupled,  the gas producers would be  able to take                                                               
the lowest gas cost allocation  method under [AS 43.90.320], this                                                               
merely establishes a ceiling for  what the producers will have to                                                               
pay for  a gasline.   Furthermore, the  legislation only  gives a                                                               
tax break  if gas prices are  extremely low and there  is a large                                                               
parity.   If there's a situation  in which gas prices  are so low                                                               
that  a  pipeline isn't  necessary,  then  this discussion  isn't                                                               
necessary.   [The legislation]  is for  determining the  gas cost                                                               
allocation at the  point of first open season and  only that.  In                                                               
summary,  Representative Tuck  related  that  he supports  having                                                               
incentives in  place that allow  the producers to move  their gas                                                               
down a gasline.                                                                                                                 
10:47:15 AM                                                                                                                   
CO-CHAIR  NEUMAN  surmised  then that  Representative  Tuck  will                                                               
support  the  governor's  legislation.   He  then  opined,  "It's                                                               
because  a  person's  gas  production  tax  obligation,  the  tax                                                               
obligation  calculated under  the  gas production  tax that's  in                                                               
effect on  the day that  [open season] starts, that's  where it's                                                               
at."   The  value was  artificially  inflated up  because of  the                                                               
calculations of  oil and  the price of  oil.   Those calculations                                                               
weren't  accurate,   he  opined.    Co-Chair   Neuman  noted  his                                                               
agreement  that   the  legislature  should  ensure   the  state's                                                               
interests  are secure.   He  also  noted his  agreement that  the                                                               
state has  the ability to go  back and re-negotiate and  that the                                                               
state should ensure  industry has an environment in  which it can                                                               
thrive.  In  conclusion, Co-Chair Neuman related  his support for                                                               
this legislation.                                                                                                               
10:48:57 AM                                                                                                                   
CO-CHAIR  JOHNSON  moved to  report  HCS  CSSB 305,  Version  26-                                                               
LS1577\M,  Bullock, 4/10/10,  as amended,  out of  committee with                                                               
individual recommendations and the accompanying fiscal notes.                                                                   
REPRESENTATIVE GUTTENBERG objected.                                                                                             
10:49:21 AM                                                                                                                   
REPRESENTATIVE  GUTTENBERG  related his  belief  that  SB 305  is                                                               
neither necessary  nor ready to  be moved.  He  expressed concern                                                               
that  the   next  committee  of   referral,  the   House  Finance                                                               
Committee, doesn't have time to address SB 305.                                                                                 
10:51:01 AM                                                                                                                   
REPRESENTATIVE OLSON  recalled that one  of the co-chairs  of the                                                               
House Finance Committee said that if  he received SB 305 today he                                                               
would have time  to properly vet the legislation.   Therefore, he                                                               
opined that it's  imperative to forward the  legislation today if                                                               
it's the will of the committee.                                                                                                 
CO-CHAIR JOHNSON  said he believes  the groundwork has  been laid                                                               
for the  House Finance  Committee and  it's important  to forward                                                               
this time sensitive legislation.                                                                                                
REPRESENTATIVE  P.  WILSON noted  that  she  has reservations  in                                                               
terms of some  of the provisions in SB 305.   However, Conceptual                                                               
Amendment 4  will result  in less  loss to  the state,  which she                                                               
partially  attributed to  the  fact  that oil  is  still king  in                                                               
Alaska  and the  state needs  more oil  [exploration].   Although                                                               
this  legislation  isn't  perfect,   it's  time  to  forward  the                                                               
10:53:23 AM                                                                                                                   
CO-CHAIR JOHNSON called the question.                                                                                           
10:53:30 AM                                                                                                                   
A  roll  call  vote  was taken.    Representatives  Kawasaki,  P.                                                               
Wilson,  Olson,  Seaton, Edgmon,  Neuman,  and  Johnson voted  in                                                               
favor of  reporting HCS CSSB  305, Version  26-LS1577\M, Bullock,                                                               
4/10/10,  as   amended,  out   of  committee.     Representatives                                                               
Guttenberg  and  Tuck voted  against  it.   Therefore,  HCS  CSSB
305(RES)  was  reported  out  of  the  House  Resources  Standing                                                               
Committee by a vote of 7-2.                                                                                                     

Document Name Date/Time Subjects
HB 246 Packet.pdf HRES 4/13/2010 9:00:00 AM
HB 246
SB 305 amend Tuck 4.13.10.pdf HRES 4/13/2010 9:00:00 AM
SB 305
SB 305 PoP minus BOE v2.pdf HRES 4/13/2010 9:00:00 AM
SB 305
SB 305 4.13.10 Response to Rep Tuck_V4 [Read-Only].pdf HRES 4/13/2010 9:00:00 AM
SB 305
SB 305 Explanation to Amendments.pdf HRES 4/13/2010 9:00:00 AM
SB 305