Legislature(2009 - 2010)SENATE FINANCE 532

03/18/2010 03:00 PM Senate FINANCE

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SENATE BILL NO. 305                                                                                                           
     "An Act relating to the tax on oil and gas production;                                                                     
     and providing for an effective date."                                                                                      
Co-Chair Stedman introduced the bill.                                                                                           
Co-Chair Hoffman  MOVED to adopt  CSSB 305 26-LS1577\S  as a                                                                    
working document. Co-Chair Stedman  OBJECTED for the purpose                                                                    
of discussion.                                                                                                                  
4:11:35 PM                                                                                                                    
ROGER MARKS, LB&A CONSULTANT,  LOGSDON AND ASSOCIATES, began                                                                    
the  power  point presentation,  "SB  305:  CS Version  S  &                                                                    
Amendments" (copy  on file). He discussed  Slide 2, "Version                                                                    
S Committee  Substitute", which lists the  recent changes in                                                                    
the language of the bill:                                                                                                       
   · Title has tightened scope further                                                                                          
   · Technical changes in Section 5                                                                                             
     ƒSome of the proposed changes to AS 43.55.020(a)(1)                                                                       
        did not need to be there- CS reverses those changes.                                                                    
   · Technical change- new Section 8                                                                                            
     ƒGives authority to department to adopt regulations                                                                       
        to allocate AS 43.55.170 adjustments to lease                                                                           
        expenditures between oil and gas.                                                                                       
Co-Chair Stedman requested further  discussion on Section 8.                                                                    
Mr.  Marks   explained  that  in  lease   expenditures  were                                                                    
discussed in  AS 43.55.170. The  accounting could  be tricky                                                                    
and care should be taken  that neither costs nor revenue was                                                                    
double counted.  When discussing  the split  of oil  and gas                                                                    
progressivity, it  becomes necessary  to define  which lease                                                                    
expenditures apply to oil and  which apply to gas. Section 8                                                                    
gives the administration the  authority to adopt regulations                                                                    
concerning how the lease expenditures should be divided.                                                                        
4:15:39 PM                                                                                                                    
Co-Chair  Stedman REMOVED  his  OBJECTION to  the CS.  There                                                                    
being  NO OBJECTION,  the CS  26-LS1577\S was  ADOPTED as  a                                                                    
working document.                                                                                                               
4:16:14 PM                                                                                                                    
PAT GALVIN,  COMMISSIONER, DEPARTMENT OF  REVENUE, discussed                                                                    
the fiscal note. He stated  that the method of acquiring and                                                                    
managing  information  from  taxpayers   would  need  to  be                                                                    
changed prior to the decoupling  of oil and gas, and funding                                                                    
was necessary in order to  implement the changes. Currently,                                                                    
oil   and  gas   production  statewide   is  combined   when                                                                    
determining the  progressive tax rate. The  potential change                                                                    
in state revenue was indeterminate.                                                                                             
4:18:37 PM                                                                                                                    
Commissioner  Galvin   continued.  The  bill   would  affect                                                                    
current producers and the  department had examined potential                                                                    
annual financial impact through  the tax receipts. Refernced                                                                    
in the  fiscal note  was the  range of  tens of  millions to                                                                    
hundreds   of  millions   in  a   given  year.   The  number                                                                    
fluctuates, which has added to uncertainty.                                                                                     
4:20:49 PM                                                                                                                    
Co-Chair Stedman  understood the numbers had  been flexible.                                                                    
Commissioner  Galvin agreed.  He  added  that the  potential                                                                    
impact  was that  more revenue  could be  expected when  the                                                                    
price  of gas  and oil  were  divergent, and  less than  the                                                                    
status quo when prices were closer to the 10 to 1 ratio.                                                                        
Co-Chair  Stedman   requested  that   the  fiscal   note  be                                                                    
rewritten  due  to  changes  made   by  the  amendments.  He                                                                    
referenced  the language  in the  fiscal note.  Commissioner                                                                    
Galvin said  he would provide  as many numbers  as possible.                                                                    
Co-Chair  Stedman said  the committee  would  work with  the                                                                    
department   to   craft   a   comprehensive   fiscal   note.                                                                    
Commissioner  Galvin stated  that  the languase  was not  in                                                                    
reference  to the  expected market  price. Co-Chair  Stedman                                                                    
and   Commissioner  Galvin   discussed   the  semantics   of                                                                    
"normalcy" as  it was written  in the fiscal  note. Co-Chair                                                                    
Stedman's  maintained that  the  normalcy,  under the  price                                                                    
relationship between  gas and oil, was  a different normalcy                                                                    
than between the British Thermal Unit (BTU) equivalency.                                                                        
Co-Chair Stedman MOVED to adopt Amendment 1.                                                                                    
Co-Chair Hoffman OBJECTED for the purpose of discussion.                                                                        
Mr.  Marks   continued  to  Slide   3,  "Amendment   1:  Tax                                                                    
Neutrality on  Current Activity", which explains  the intent                                                                    
of the amendment:                                                                                                               
     · Currently some producers produce oil and gas.                                                                            
     · If you separate oil & gas for calculating                                                                                
        progressivity, progressivity on oil will be                                                                             
        undiluted by gas and taxes will increase.                                                                               
     · It is not intent of bill to raise taxes on current                                                                       
        oil and gas activity                                                                                                    
     · Amendment 1                                                                                                              
        ƒCredit equal to difference between tax determined                                                                     
          under bill and tax determined now                                                                                     
        ƒCredit expires in 2015                                                                                                
4:26:45 PM                                                                                                                    
Co-Chair  Stedman  noted that  the  credit  would expire  in                                                                    
Mr.  Marks explained  that the  2015  expiration date  would                                                                    
protect the state from a collapse  in oil revenue if an AGIA                                                                    
plan  is  implemented,  without  causing  taxes  on  current                                                                    
activity.  Hopefully discussions  on  a tax  regime for  gas                                                                    
will have occurred by the 2015 date.                                                                                            
Senator  Thomas inquired  about Cook  Inlet gas  production.                                                                    
Mr. Marks responded  that there were sets  of producers that                                                                    
had North  Slope oil  and Cook  Inlet gas.  Those producers,                                                                    
based on  current activity, would see  tax increases without                                                                    
the amendment.                                                                                                                  
Co-Chair  Stedman  REMOVED  his OBJECTION  to  Amendment  1.                                                                    
There being no further OBJECTION the amendment was ADOPTED.                                                                     
Co-Chair Hoffman MOVED Amendment 2.                                                                                             
Co-Chair Stedman OBJETED for the purpose of discussion.                                                                         
4:30:52 PM                                                                                                                    
Mr.  Marks continued  his  presentation.  He explained  that                                                                    
Prudhoe Bay  was producing 270,000  barrels of oil  per day.                                                                    
Oil   cannot  be   removed  from   the  earth   without  the                                                                    
accompaniment of natural gas. The  gas is separated and some                                                                    
is placed back in the  ground to re-pressurize the field for                                                                    
oil production. If  in the future the gas  is also marketed,                                                                    
Prudhoe  Bay would  become  an oil  and  natural gas  field,                                                                    
which most fields are. The costs  to produce oil and gas are                                                                    
joint, which  makes it necessary  to allocate  costs between                                                                    
oil  and gas  in  order  to tax  them  separately. Slide  5,                                                                    
"Amendment 2: Cost Allocation",  details the changes made by                                                                    
amendment 2, and are as follows:                                                                                                
   · Retain current agency authority, and                                                                                       
   · Consider BOE approach                                                                                                      
   · Costs to produce oil and gas are truly joint costs:                                                                        
     the same process that produces one produces the other                                                                      
   · Benefit of current approach (AS 43.55.165(h)) that                                                                         
     gives department authority to adopt regulations for                                                                        
     allocation costs between oil and gas:                                                                                      
     ƒAs recipient of confidential cost data they are in                                                                       
        the best position to evaluate costs                                                                                     
     ƒA regulatory process allows more time                                                                                    
     ƒThe regulator process is public                                                                                          
Mr.  Marks   explained  the  BTU  Equivalent   Barrel  (BOE)                                                                    
Approach. He stated  that it was the same  approach that was                                                                    
currently  embraced  in  the departmental  regulations.  The                                                                    
mechanics (AS 43.55.900(3)) read:                                                                                               
1 barrel of oil= 1 BOE                                                                                                          
6 mmbtu's to the barrel                                                                                                         
Gas mmbtu's/6= gas BOE's                                                                                                        
Mr. Marks  said that the  rationale for the BOE  approach is                                                                    
that the same  costs that produce oil also  produce gas. The                                                                    
BOE method puts  oil and gas on an "apples  to apples" basis                                                                    
in terms of relative produced volumes.                                                                                          
4:34:50 PM                                                                                                                    
Mr.  Marks   continued.  Slide   7,  "Problems   with  other                                                                    
Methods", which details the  different approaches that could                                                                    
be  taken  to  allocate  costs.  He  discussed  the  various                                                                    
approaches and the scenarios that could come into play:                                                                         
   · Item by item attribute                                                                                                     
     ƒInappropriate where costs are truly joint                                                                                
   · Dominant use (either all oil or all gas)                                                                                   
     ƒInappropriate when large volumes of both are                                                                             
   · Deemed approach (deemed one unless item id 100 percent                                                                     
     the other                                                                                                                  
     ƒInappropriate when large volumes of both produced                                                                        
   · Reserves                                                                                                                   
     ƒUncertain numbers/subject to taxpayer control                                                                            
   · Gross value                                                                                                                
     ƒUpstream costs should not change with downstream                                                                         
4:36:55 PM                                                                                                                    
Mr. Marks continued to Slide 8, "A Note on 15 AAC 55.220":                                                                      
   · Department of Revenue's proposed regulation on AGIA                                                                        
     uses the Gross value approach to allocate the total                                                                        
     tax between oil and gas                                                                                                    
   · Allocation tax is different than allocating costs                                                                          
   · Gross value is a very material determinant of the                                                                          
     differences in tax value between oil and gas                                                                               
   · Allocating tax by gross value for this purpose is                                                                          
Mr. Marks addressed  the concern for the  treatment of Point                                                                    
Thomson. Slide  9, "A  Note on  Allocation of  Capital Costs                                                                    
Associated with Developing Pt. Thomson", reads:                                                                                 
   · High development costs will be incurred prior to gas                                                                       
     sales: these costs will allocated against oil                                                                              
   · Pt. Thomson is also an oil (condensate) field (est.300                                                                     
     million barrels)                                                                                                           
   · Could be developed such that it produces condensate                                                                        
     years before it produces gas                                                                                               
   · PPT/ACES were deliberately designed so that cost                                                                           
     deductions and credits would be utilized immediately                                                                       
4:41:59 PM                                                                                                                    
Mr.  Marks   reiterated  that   the  amendment   allows  the                                                                    
department  to  maintain  authority for  the  allocation  of                                                                    
lease expenditures.                                                                                                             
Co-Chair  Stedman removed  his OBJECTION  to the  amendment.                                                                    
There being NO OBJECTION, Amendment 2 was ADOPTED.                                                                              
Commissioner Galvin expressed  appreciation for the language                                                                    
in Amendment  2. The  desire of the  department would  be to                                                                    
put the language into statute  in order to avoid problems in                                                                    
the regulatory process.                                                                                                         
4:45:55 PM                                                                                                                    
Co-Chair Stedman  stated that  the committee  was determined                                                                    
to work  with the department  on the language  pertaining to                                                                    
cost  allocation. He  asserted that  this was  not the  main                                                                    
reason  that  the bill  was  on  the  table but  hoped  that                                                                    
significant conversation  on the  issue would be  had before                                                                    
2015.   Commissioner Galvin replied  that if  the allocation                                                                    
was to  be based on  current or projected costs,  there were                                                                    
significant costs  that would be joint  costs in production.                                                                    
He felt other  considerations would need to  be examined. He                                                                    
assured the committee that the  department would continue to                                                                    
work  with the  committee,  but felt  that further  guidance                                                                    
would be necessary.                                                                                                             
4:48:12 PM                                                                                                                    
Co-Chair  Stedman said  that a  solution  was necessary.  He                                                                    
requested that the department provide  records from the last                                                                    
three  years on  the impact  of the  dilution, dealing  with                                                                    
Cook Inlet and the North  Slope, to educate the committee on                                                                    
the  numbers.  Commissioner  Galvin said  that  Amendment  1                                                                    
makes the  fiscal note  moot. Co-Chair  Stedman said  that a                                                                    
new fiscal  note would be  needed to ensure that  the public                                                                    
has  the opportunity  to  see the  language  and the  fiscal                                                                    
4:50:09 PM                                                                                                                    

Document Name Date/Time Subjects
New CSSB305-REV-TAX-03-16-10 Oil and Gas Decoupling.pdf SFIN 3/18/2010 3:00:00 PM
SB 305
SB 305 031810 Proposed CS SFC Version S.pdf SFIN 3/18/2010 3:00:00 PM
SB 305
SB 305 Amendment 2 031810 SFIN .pdf SFIN 3/18/2010 3:00:00 PM
SB 305
SB 305 031810 Amendment 1 .pdf SFIN 3/18/2010 3:00:00 PM
SB 305
SB 305 2010 04 18 Marks SB305 CS&Amends SFC.pdf SFIN 3/18/2010 3:00:00 PM
SB 305
CSSB 305(FIN) 031910 Version P.pdf SFIN 3/18/2010 3:00:00 PM
SB 305