Legislature(2009 - 2010)BUTROVICH 205

02/17/2010 03:30 PM Senate RESOURCES

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03:34:56 PM Start
03:35:37 PM SB267
05:04:18 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
<Bill Hearing Canceled>
Bills Previously Heard/Scheduled
               SB 267-OIL AND GAS PRODUCTION TAX                                                                            
3:35:37 PM                                                                                                                    
CO-CHAIR  MCGUIRE,  sponsor  of  SB   267,  said  her  intent  in                                                               
introducing  the  bill  is  to  recognize  the  changes  made  in                                                               
Alaska's  Clear and  Equitable Share  (ACES)  and about  possible                                                               
significant deterrents  it made to  drilling and job loss  in the                                                               
state. She said  small business owners, in  particular, have lost                                                               
a  number of  opportunities for  employees  and as  a result  had                                                               
3:36:47 PM                                                                                                                    
She said  SB 267  combines a  few elements,  but the  biggest one                                                               
pertains  to the  progressivity elements  in ACES.  She explained                                                               
that this committee was a big part  of the work that was done; it                                                               
was here  for months  looking at charts  and graphs  knowing that                                                               
the economic  limit factor  (ELF) method of  taxing on  the gross                                                               
was a broken system. In an  attempt to reach a better tax system,                                                               
they looked  at all kinds of  data and had experts  from all over                                                               
the world.  They did the best  they could to establish  a formula                                                               
that would strike  a healthy balance between  the state's royalty                                                               
and severance taxes and private  industry's take on the risk they                                                               
were  taking  to  develop  these oil  resources.  She  said  they                                                               
experimented  with  a  variety of  rates  for  the  progressivity                                                               
element. She  said that SB 267  has a starting point  of reducing                                                               
the progressivity factor from .4 to .2 at $30/barrel and up.                                                                    
3:38:17 PM                                                                                                                    
CO-CHAIR MCGUIRE  said some  people think  that the  marginal tax                                                               
rate,  itself,  becomes  so  high at  certain  points  that  when                                                               
companies are competing  on a global scale for that  kind of high                                                               
risk  investment opportunity  that the  risk/reward ratio  is not                                                               
competitive with other jurisdictions.                                                                                           
She said  the committee worked on  getting some kind of  a credit                                                               
that would  incentivize the hiring  of more in-state workers  - a                                                               
very difficult area  of the law because  in-state hire provisions                                                               
have been thrown out as  unconstitutional based on right to work,                                                               
the  commerce clause  and other  things. But  the question  about                                                               
incentivizing that remained open enough  that they took a healthy                                                               
stab  at trying  to  establish at  various  percentage rates  the                                                               
employing of more in-state workers.                                                                                             
Finally, if  there were a constitutional  challenge, she supposed                                                               
it would be  on the part of an out-of-state  worker working for a                                                               
company or  maybe a  company would challenge  the state  based on                                                               
the fact  they thought  it was  unfair that  another oil  and gas                                                               
company  got the  incentive for  in-state  hire. It  would be  an                                                               
interesting argument  that could play  out in the  state's favor.                                                               
Lastly, she  said, SB 267 incorporates  the Governor's provisions                                                               
that she wanted to hear comment on from the administration.                                                                     
CO-CHAIR  MCGUIRE  said  that  first they  would  hear  from  Dan                                                               
Dickinson,  Legislative Consultant,  about  the  impact of  ACES.                                                               
Then they would  hear from two industry  representatives on their                                                               
perspectives, the administration and others.                                                                                    
3:41:42 PM                                                                                                                    
DAN  DICKINSON, Legislative  Consultant,  Legislative Budget  and                                                               
Audit Committee, said he is a CPA.  In the 1980s and 1990s he was                                                               
an  expert  in  some  tax   and  royalty  cases  brought  by  the                                                               
Department  of  Natural Resources  (DNR)  and  the Department  of                                                               
Revenue (DOR),  and he was in  the DOR for seven  years mostly as                                                               
the director of the Tax Division.                                                                                               
He  said  he was  going  to  talk  to  them basically  about  the                                                               
technical  aspects  of  SB  267  [Technical  Aspects  of  SB  267                                                               
(Version A),  by Dan Dickinson, CPA,  Senate Resources Committee,                                                               
Feb. 17, 2010].  The mechanics of tax issues tend  to be complex,                                                               
he said, and the bill has six changes:                                                                                          
   1. Changes progressivity from .4 percent to .2 percent per                                                                   
   2. Well credit for well work                                                                                                 
   3. Tax rate tied to resident hire                                                                                            
   4. Interest not due on retroactive rate changes until those                                                                  
     regulations are implemented                                                                                                
   5. Interest rate is lowered to fed funds +2 or 11 percent                                                                    
   6. Restore three-year statute of limitations from the six                                                                    
     years that was implemented in 2007.                                                                                        
3:45:10 PM                                                                                                                    
He emphasized that most of the  provisions in SB 267 have nothing                                                               
to do  with the changes he  just mentioned. The bill  changes the                                                               
structure  of the  interest provision,  AS 43.55.225,  which goes                                                               
from being a single section to  sections A and B. This means that                                                               
every  time interest  is  referenced in  Title 43  it  had to  be                                                               
changed; so  most changes in  the bill change the  reference from                                                               
AS 43.55.225 to AS 43.55.225(a) with no substantive change.                                                                     
3:46:03 PM                                                                                                                    
MR.  DICKINSON  said  the  first substantive  change  is  to  the                                                               
progressivity feature.  He reviewed  the current  base production                                                               
tax rate that  is 25 percent on  the net value at  the well (TTV)                                                               
that is combined with a progressivity  tax that can range from 0-                                                               
50  percent;  so  the  total  effect of  those  two  together  is                                                               
somewhere between  25 and 75  percent. The  current progressivity                                                               
is  triggered when  the net  value  of oil  is $30/barrel.  Under                                                               
current law  it increases .4  percent for every dollar  over $30.                                                               
Then there is  a "bend over point" or "wrap  around point" at $92                                                               
when it  drops down to .10  percent for every dollar.   This bill                                                               
drops the  rate from  .4 percent  to .2 percent  and to  make the                                                               
math work out the bend-over point is at $155.                                                                                   
In  2008,  he said,  the  total  base  tax generated  about  $4.2                                                               
billion;  the progressivity  generated  about  $3.2 billion  (for                                                               
comparison,  roughly the  same  size as  all  royalties and  much                                                               
larger than the income and property taxes).                                                                                     
SENATOR FRENCH  said most of them  know what $30 net  value means                                                               
when progressivity kicks  in, but that is after  all the shipping                                                               
and production costs have been  deducted. He asked him to clarify                                                               
that more.                                                                                                                      
MR. DICKINSON responded  saying, for instance, if  oil is selling                                                               
at $90 on the  U.S. West Coast, it would cost about  $5 to get it                                                               
to that market from the North  Slope (using TAPS and tankers). If                                                               
you are at  Prudhoe Bay, you have to deduct  the costs of getting                                                               
it  out  of the  ground  (operating  expenses);  if you're  at  a                                                               
further field,  like Kuparek, then  you subtract the  pipeline to                                                               
Kuparek (up to  another $1). You deduct the costs  in the field -                                                               
around $20/barrel  and include the  capital investments  that are                                                               
being made  for the future. The  DOR uses $26 for  the difference                                                               
between the value of where the oil  is sold on the West Coast and                                                               
the value on the North Slope.                                                                                                   
SENATOR FRENCH  said from $0-26/barrel, the  company is recouping                                                               
its costs  of doing business  and paying no production  tax; from                                                               
$26-56/barrel it's  paying 25  percent tax  (the base  rate), and                                                               
above $56/barrel is when progressivity kicks in.                                                                                
3:49:50 PM                                                                                                                    
MR. DICKINSON agreed  "roughly," but it's important  to note that                                                               
when  progressivity kicks  in it  applies to  all the  production                                                               
whereas  federal  income  tax  applies  different  tax  rates  to                                                               
different income levels individually.                                                                                           
SENATOR FRENCH asked  if he calculated what the  state would have                                                               
collected under this bill if it had been in effect in 2008.                                                                     
MR.  DICKINSON  answered  no,  but  to a  degree  it's  a  linear                                                               
extrapolation and  the progressivity  would have roughly  cut the                                                               
state's take in half or $3.2  billion down to about $1.6 billion.                                                               
The price  was beyond the bend-over  point two months out  of the                                                               
SENATOR  FRENCH  asked  if  they  were to  give  back  that  $1.6                                                               
billion, how much oil production would  be needed to make up that                                                               
MR.  DICKINSON replied  that obviously,  it would  depend on  the                                                               
SENATOR FRENCH said $80/barrel.                                                                                                 
3:51:47 PM                                                                                                                    
MR. DICKINSON  explained how the  formula works. With  roughly $7                                                               
billion  in  production  taxes  and other  things  to  reach  $10                                                               
billion,  you would  be looking  at  roughly 15  percent of  that                                                               
total.   At  current   production   levels   which  are   600,000                                                               
barrels/day, that would be about 80,000 barrels/day.                                                                            
MR.  DICKINSON went  on to  explain the  marginal rate  that says                                                               
every additional dollar  earned will affect this tax.  So as soon                                                               
as progressivity  is hit (slide  9), the marginal rate  starts to                                                               
jump  greatly.  For comparison,  he  said,  under an  income  tax                                                               
system when one passes from one  bracket to another, his tax rate                                                               
goes  up a  little bit,  but not  by a  large leap  (slides 12-20                                                               
showed how progressivity works compared to personal income tax).                                                                
3:57:59 PM                                                                                                                    
He  said  Governor  Palin actually  proposed  a  less  aggressive                                                               
progressivity tax,  but her proposal  would have been  .2 percent                                                               
hitting a ceiling at 25  percent. The law that eventually emerged                                                               
and became  ACES has a  cap at 50  percent instead of  25 percent                                                               
(slide 23). This  is all on top  of the 25 percent  base tax. His                                                               
graphs  compared progressivity  to personal  income tax.  The net                                                               
effect of changing the  cap is to move the slope  of the rate out                                                               
so it climbs at a less dramatic rate.                                                                                           
3:59:16 PM                                                                                                                    
Under SB  267, Mr. Dickinson  explained, the jump up  in marginal                                                               
rate continues to  grow, but at a lesser rate  than under current                                                               
law.  The  final  graphic  (slide  26) looked  at  not  just  the                                                               
production tax but property, production  and a special income tax                                                               
as  well as  a royalty  that  is paid  by  most of  them. So  the                                                               
nominal rate  that most  taxpayers would  face is  50-60 percent.                                                               
The  marginal rate  under  current  law can  hit  100 percent  at                                                               
certain prices.  He summarized  that the  effective rate  in this                                                               
bill would  fall somewhat lower  than the current  effective rate                                                               
and the marginal rate wouldn't have the dramatic increase.                                                                      
4:00:03 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI asked him how the credits are tiered.                                                                     
MR. DICKINSON replied  that in general the  credits aren't tiered                                                               
or  dependant  on anything,  although  some  provisions apply  to                                                               
producers producing  fewer than  50,000 barrels/day  (those other                                                               
than the  three largest producers).  In general, the  credits are                                                               
at  face value  and can  be transferred  around; so  the marginal                                                               
effect is not going to be as price-dependent.                                                                                   
CO-CHAIR WIELECHOWSKI  asked if  the credits  are 20  percent in-                                                               
field and 30 percent for exploration.                                                                                           
MR. DICKINSON responded  that he has a slide  that summarizes all                                                               
of that but it was later in the presentation.                                                                                   
CO-CHAIR WIELECHOWSKI said he would wait until they got there.                                                                  
MR.  DICKINSON said  SB 267  also gets  into marginal  rates that                                                               
exceed 100  percent, but  they don't get  there until  prices get                                                               
somewhere north of $200/barrel.                                                                                                 
4:02:09 PM                                                                                                                    
The  second piece  on progressivity,  Mr. Dickinson  said, is  on                                                               
slide  29 and  addressed Senator  Wielechowski's question.  Under                                                               
current law there  is a 30-percent credit  for exploration wells,                                                               
a 40-percent if that well is  both outside of an existing unit by                                                               
more  than 25  miles  and  3 miles  from  any  other wells  (with                                                               
special rules for  Cook Inlet), and finally a  general 20 percent                                                               
capital investment  (not cumulative  if you  take a  dollar under                                                               
one of the other programs)  that would deal with more development                                                               
and production investments.  One of the important  points is that                                                               
under this  bill there is  no change to the  exploration credits.                                                               
This credit has been placed in the AS 43.55.023 credits.                                                                        
4:03:04 PM                                                                                                                    
Compared to the  Governor's proposal, he said, both  create a 30-                                                               
percent credit for well work and  both include CAPEX and OPEX. SB
267 should  be effective on  the first day  of the month  so they                                                               
don't  have costs  within a  month;  the Governor  chose July  1,                                                               
MR. DICKINSON said  the differences are that  the Governor's bill                                                               
places  the  credit in  the  AS  43.55.025  section which  is  an                                                               
exploration  section, renames  it  "exploration development"  and                                                               
rewrites  a  lot  of  that   current  law.  SB  267  places  this                                                               
particular credit in the section  called "Tax credits for certain                                                               
losses and expenditures."                                                                                                       
A  second, critical,  difference  is that  there  is a  different                                                               
definition of well-related expense and  the Governor's bill did a                                                               
systematic rewrite  of the  exploration credits.  Part of  it was                                                               
entirely appropriate  in the sense  that the  exploration credits                                                               
came in  2003 and  have been amended  basically every  other year                                                               
since then; the  structure was getting more and  more bizarre and                                                               
this clarified it. But he had  other concerns that he would cover                                                               
MR.  DICKINSON  explained  that there  are  lots  of  differences                                                               
between  putting the  bill in  to AS  43.55.023 or  AS 43.55.025.                                                               
Basically,  two different  structures are  created. AS  43.55.023                                                               
deals  with capital  costs in  section (a);  it deals  with lease                                                               
expenditures in  section (b) and  the rest of the  sections refer                                                               
back to  sections (a) and (b).  So in some sense,  looking at the                                                               
bill putting well  work credit into AS 43.55.023  fits nicely. AS                                                               
43.55.025 is currently  meant to be just about  explorers; so the                                                               
administration  suggested totally  rewriting and  re-titling this                                                               
work and  talks about "explorers  and producers" instead  of just                                                               
"explorers."   Ultimately none  of that matters, he said, because                                                               
you can  cross-reference, but what  is more important is  how the                                                               
two credits  are structured. Anything  under AS  43.55.023 starts                                                               
out  by being  a lease  expenditure. (AS  43.55.165(e) is  the 21                                                               
specific disallowances - things that  folks cannot do.) So if you                                                               
put a capital  or operating cost in AS 43.55.023,  then all those                                                               
disallowances  apply.  On  the  other  hand,  if  you  go  to  AS                                                               
43.55.025  that has  one  paragraph saying  the  credit can't  be                                                               
these things - the words are  not the same. And as they generally                                                               
know, a  judge seeing  different words  would assume  they didn't                                                               
mean the same  thing. So lots of things, like  how costs that are                                                               
considered internal  transfers or dealing among  related parties,                                                               
are handled differently between AS 43.55.023 and AS 43.55.025.                                                                  
Finally,  he  said,  the  "clawback"  provision  on  how  credits                                                               
interact with  the limitations that  have been put on  Cook Inlet                                                               
gas and  oil taxes (AS  43.55.011(m) all  apply if the  well work                                                               
credit  is  put in  AS  43.55.023,  but not  if  it's  put in  AS                                                               
43.55.025.  These could  all be  cross-referenced, but  if it  is                                                               
simply "dropped in" one or the other, all the rules would apply.                                                                
Another  caution Mr.  Dickinson raised  is if  it's necessary  to                                                               
totally restructure AS  43.55.025 to fit the well  credit in, the                                                               
last thing explorers, who are  comfortable with AS 43.55.025 now,                                                               
and  the  department  that  is  comfortable  with  how  they  are                                                               
auditing under  those rules now, want  to have is a  total revamp                                                               
seven years  later - and  everyone has to  figure out if  the new                                                               
rules apply.                                                                                                                    
4:09:20 PM                                                                                                                    
MR.  DICKINSON  said the  definition  of  "well work"  should  be                                                               
better. SB 267  starts out by talking about  a lease expenditure,                                                               
which immediately presents  pages and pages of law,  but not what                                                               
is considered  a well and  what isn't.  It doesn't deal  with the                                                               
chronological issue  - if he  has to put in  a road and  a bridge                                                               
and a support  camp for a well  - is that part of  the well costs                                                               
or not? It should be better defined in the bill.                                                                                
SB 267  talks about lease  expenditures for the purposes  of side                                                               
tracking,  well deepening,  well completion,  and well  workover;                                                               
the sort of comparable list over in the Governor's bill is re-                                                                  
drilling, casing,  cementing, logging, completing well  work over                                                               
operations or  other operations intended  to increase  or enhance                                                               
well production from a known  productive pool. Then there is sort                                                               
of a  flip side provision in  SB 267 that very  specifically says                                                               
you would include  an injection well (designed not  to bring more                                                               
oil or gas  to the surface but  to put liquids in to  force it up                                                               
elsewhere)  whereas  the  Governor's language  specifically  says                                                               
that a service well (the  definition includes an injector) is not                                                               
permitted. Neither is a stratigraphic test well.                                                                                
4:10:22 PM                                                                                                                    
MR. DICKINSON moved on  to the third item - the  tax rate tied to                                                               
resident hire  - and  said according to  the Department  of Labor                                                               
and Workforce  Development (DOLWD),  Alaska has 17,000  oil field                                                               
workers on  the North  Slope, but  as of  2008, roughly  5,000 of                                                               
those don't meet their definition  of resident and are considered                                                               
non-resident hires.                                                                                                             
The general  approach of  SB 267 is  to say there  is a  base tax                                                               
rate of  25 percent.  At the end  of the year,  they go  back and                                                               
look at  the labor that  was part  of their tax  calculation, and                                                               
see how  much of  it was  resident and  how much  of it  was non-                                                               
resident; then  they apply for  a rebate of  taxes if they  had a                                                               
residential hire  rate above  80 percent.  The rebate  could take                                                               
them  from  an effective  tax  rate  of  25  percent down  to  20                                                               
percent.  So  the 20  percent  would  become  the new  floor  for                                                               
someone who had 100 percent resident hire.                                                                                      
CO-CHAIR  WIELECHOWSKI asked  if that  is realistic.  Could those                                                               
5,000 non-resident hires all be filled with Alaskans?                                                                           
MR. DICKINSON  said he didn't  know; but  he observed if  it's an                                                               
issue  of training,  in the  recent  DOLWD regulations,  training                                                               
employees for oil field jobs  is not considered a deduction. That                                                               
might  be worth  looking at  if they  want to  encourage training                                                               
residents, but  he also  had other  mathematical issues  with the                                                               
4:12:29 PM                                                                                                                    
CO-CHAIR  WIELECHOWSKI  asked   if  he  had  any   sense  of  the                                                               
constitutionality of this provision.                                                                                            
MR.  DICKINSON said  he  was addressing  a  number of  attorney's                                                               
there and as a CPA, he  had learned he couldn't get anywhere near                                                               
giving a legal judgment.                                                                                                        
SENATOR STEDMAN remarked that the  25 percent credit amounts to a                                                               
couple billion bucks.                                                                                                           
MR. DICKINSON said  he would give some examples and  if he didn't                                                               
answer  his question,  to remind  him of  it at  the end  of this                                                               
section. Slide  36 showed the  resident hire ratios.  Moving from                                                               
70 to 80 percent has no  effect to the tax rate; the conversation                                                               
doesn't start until one is at  80 percent. After that, between 80                                                               
percent  up to  97.5  percent, basically  for  every 2.5  percent                                                               
increase in hire rate the rebate  goes up by 2 percent. An easier                                                               
way to think about the net effect  is a half percent drop in your                                                               
effective nominal tax rate. Then from  97.5 - 100 percent is just                                                               
a little bit steeper.                                                                                                           
4:13:33 PM                                                                                                                    
An extreme quote  he pulled out of the Anchorage  Daily News when                                                               
the companion  bill, HB 308,  was discussed is that  according to                                                               
DNR hiring  one Alaskan  could mean $30  million in  tax savings.                                                               
But the math  works out just about right. In  his example he used                                                               
calendar year 2009  that had a high  price and a tax  base of $13                                                               
billion. So,  if one  company was responsible  for half  of that,                                                               
the base tax  involved would be $1.6 billion. His  point was if a                                                               
company were  right up against  one of these brackets  and needed                                                               
one  more hour  to complete  its ratio,  in fact,  that one  hour                                                               
could derive the  $30 million effect. He explained  that the bill                                                               
is  based on  the number  of hours  worked by  residents or  non-                                                               
residents not  on the number  of people. But, Mr.  Dickinson said                                                               
he  wanted to  focus  on the  opposite effect,  which  is when  a                                                               
company is  below 70 percent  (which is  where the DOLWD  says we                                                               
are starting). It would have to  add 649 Alaskans as workers, but                                                               
the tax rate would  not change by one iota -  and that would just                                                               
be getting it to where the conversation starts.                                                                                 
4:16:16 PM                                                                                                                    
MR. DICKINSON said that folks tended  to focus on what happens if                                                               
they were right on one side of  the bracket and moved just a half                                                               
a percentage  point to the  other side  and their tax  rate would                                                               
jump by a half  percent - but a half percent  for this purpose is                                                               
hundreds of  millions of dollars.  But equally  true is if  he is                                                               
exactly  at 80  percent  and  kept adding  workers  his tax  rate                                                               
wouldn't change  one bit. So,  a hypothetical company  with 6,500                                                               
contractors,  employees and  laborers could  add 162  workers and                                                               
get no effect on their tax  rate. Mr. Dickinson suggested that it                                                               
would be  very easy to translate  this into a formula  where they                                                               
didn't have these brackets.                                                                                                     
CO-CHAIR MCGUIRE  said that committee staff,  Mike Pawlowski, was                                                               
indicating he would work with him on that.                                                                                      
MR. DICKINSON said  one thing that is more  problematic and worth                                                               
focusing on  is the question  of if the law  is put in  place and                                                               
then it  goes to the  folks who are obligated  to try to  pay the                                                               
least tax  possible as long as  it can be done  within the rules.                                                               
They would  say why not  go through the  tax return and  pull out                                                               
every single  non-resident hour; taxes  would go up  because they                                                               
would be pulling out deductions, but  they would get a benefit at                                                               
the other  end when they get  their rebate. For example,  he said                                                               
if  the tax  base is  $10  billion, the  base tax  would be  $2.5                                                               
billion. The  maximum rebate  would be 20  percent or  about $500                                                               
million.  At the  other end,  assuming 5000  workers at  $100,000                                                               
each/year ($.1 million), the total  non-resident payroll would be                                                               
$500 million. If he took that out  of all his costs, his tax base                                                               
would go  up by $500  million (25 percent  of that for  base tax)                                                               
and the  net effect  of not claiming  the non-residents  would be                                                               
$125 million.  But because he  went to 100-percent  resident hire                                                               
by the test that was established in  the bill, he picked up a tax                                                               
benefit of $500 million. So, the net effect of not claiming non-                                                                
resident workers would be a $375-million benefit.                                                                               
4:21:27 PM                                                                                                                    
MR.  DICKINSON said  he had  four suggestions  for avoiding  this                                                               
kind of problem:                                                                                                                
   1. Shift the scale so the maximum tax savings are not 5                                                                      
     percent but 1 percent                                                                                                      
  2. Require that any labor be allowed as a lease expense                                                                       
  3. Focus on new hires only                                                                                                    
  4.  Have the  commissioner of  DOR determine  a tax  rate every                                                               
4:23:58 PM                                                                                                                    
MR. DICKINSON said it is  very important to understand that there                                                               
really  are just  three tax  payers. That's  all they  are really                                                               
talking about  here. The producers  are the taxpayers  in Alaska;                                                               
they have  the working interest  in the  leases. They go  out and                                                               
hire an  operator to  run those leases.  The operators  also have                                                               
employees, but they  generally hire contractors to  do the actual                                                               
work. If  you come right down  to it, direct employment  from oil                                                               
and gas  is 4000;  the oil  field services,  the people  that are                                                               
working on  the leases is  13000. The thing  to focus on  is that                                                               
most of the  employment is with people who are  not taxpayers who                                                               
will not flow through to the tax return as various items.                                                                       
4:24:14 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI  asked under  the bill's  current structure                                                               
if  the resident  hire kicks  in only  for employees  of the  oil                                                               
company or does it pass through to contractors.                                                                                 
MR. DICKINSON replied  it would pass through  to contractors, but                                                               
how  it  passes  through  would  have  to  be  resolved  (not  in                                                               
regulation).   The bill talks  about "labor." The question  is if                                                               
you buy a  module, are you buying  X amount of labor  in a module                                                               
or what happens  if you have a turnkey contract  or a fixed price                                                               
contract. The concept  that becomes a deduction is  fair game for                                                               
the resident hire calculation (slide 47).                                                                                       
4:25:15 PM                                                                                                                    
SENATOR WAGONER  said that it  is pretty evident that  this would                                                               
be much  better structured  in two different  bills, one  for oil                                                               
taxes and one for  local hire. He didn't see SB  267 going a long                                                               
ways  in   the  next  60  days   if  it  didn't  get   a  lot  of                                                               
MR. DICKINSON said slide 49  showed who the largest taxpayers are                                                               
on the  North Slope. Cook  Inlet is another unit  that represents                                                               
about 10  percent of the  state's total production  (mostly gas),                                                               
but it's less than one half of one  percent of the tax due to the                                                               
"J&K" limitations  that basically say  "no production tax  on oil                                                               
and gas is  limited to something like 17.5  cents/mcf." So, total                                                               
Alaskan production is  280,000 barrels and 251,000 of  that is on                                                               
the North Slope.                                                                                                                
4:26:16 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI  asked for  an estimate  of barrels  of oil                                                               
left in Cook Inlet.                                                                                                             
MR.  DICKINSON said  he couldn't  hazard  a number,  but the  DNR                                                               
publishes those numbers.                                                                                                        
CO-CHAIR WIELECHOWSKI asked the tax rate in Cook Inlet.                                                                         
MR. DICKINSON  answered the production  tax rate for oil  is zero                                                               
and the production  tax rate for gas is frozen  (from 2006) at 17                                                               
or 18 cents/mcf.                                                                                                                
CO-CHAIR  WIELECHOWSKI  asked how  exploration  for  oil in  Cook                                                               
Inlet is doing with that low tax rate.                                                                                          
MR.  DICKINSON  said  other  folks   could  speak  to  that  more                                                               
specifically than he could, but some exploration is going on.                                                                   
SENATOR WAGONER  said the tax rate  for oil is at  zero (from PPT                                                               
discussions).  He didn't  know how  much was  recoverable and  he                                                               
reminded them of  a royalty reduction in some  cases depending on                                                               
the amount of production.                                                                                                       
4:29:44 PM                                                                                                                    
MR.  DICKINSON  said a  credit  for  up  to $1  million/month  is                                                               
available  in Cook  Inlet  that  most of  the  players -  Aurora,                                                               
Pacific, Marathon, and  ML&P - would qualify for.  The only folks                                                               
not qualifying  for that would  be ExxonMobil  and ConocoPhillips                                                               
who are also  on the North Slope. The small  players on the North                                                               
Slope - Nenana, Doyon, Forest, ENI,  and Pioneer - are covered by                                                               
that.  The $1-million  credit would  eat into  what Anadarko  and                                                               
Chevron owes, but they would  probably still owe something and so                                                               
the 95/5  split is probably closer  to 97/98 being paid  by three                                                               
taxpayers with 2 percent being paid by the remaining two.                                                                       
According  to  DOLWD  data,  he said,  the  employers  are  ASRC,                                                               
CH2MHill,  Nabors,  and Schlumberger  -  the  oil field  services                                                               
companies. He remarked that H2MH                                                                                                
instead of  mandating local  hire, the  whole theory  behind this                                                               
bill is when  BP and ConocoPhillips go out and  hire operators or                                                               
when  the operators  go out  and  look for  contractors that  the                                                               
resident  hire ratio  is important.  And, therefore,  it's a  bid                                                               
4:32:10 PM                                                                                                                    
Slides  55-60 show  how the  mechanics  of the  change would  fit                                                               
together and  his next two  issues concerned the  regulations now                                                               
coming out  on the new  set of  rules the Legislature  created in                                                               
2007. The question is if a  producer didn't know he owed tax, and                                                               
suddenly a rule change says he  owes tax, under current rules, he                                                               
would  owe an  interest all  the way  back to  when that  tax was                                                               
first due.  SB 267  and the  Governor's bill  set up  a situation                                                               
where  the interest  would not  start running  until some  period                                                               
after  the  regulation had  taken  place.  When  SB 267  was  put                                                               
together  it  was  with  the   real  intent  of  not  having  any                                                               
retroactive rules. But for this  particular issue it is very hard                                                               
to  come up  with a  rule that  isn't backward  looking. Governor                                                               
Parnell's bill is retroactive.                                                                                                  
4:33:32 PM                                                                                                                    
Slides  60-61 show  state and  federal fund  interest rates;  the                                                               
federal rate is  calculated with the formula of the  base rate +5                                                               
percent.  From June  1991  until  now, except  for  a handful  of                                                               
months, the state's  has always been below  that. So, essentially                                                               
the state has  an 11 percent interest rate. Now  the federal fund                                                               
rate is .5 percent and the  interest, which is not supposed to be                                                               
a  penalty,  is  at  11  percent. He  hoped  to  illustrate  that                                                               
historically when  the 11  percent was put  in the  interest rate                                                               
situation was  very different than  the one we find  ourselves in                                                               
today. The numbers that this  bill incorporates are very close to                                                               
what the  federal income tax  uses. The major difference  is that                                                               
this  bill also  puts in  a ceiling  of 11  percent; the  federal                                                               
funds have no ceilings or floors.                                                                                               
4:35:17 PM                                                                                                                    
The last issue is simply  changing the statute of limitations the                                                               
department has  to assess  tax from  three years  to six  and now                                                               
back to  three. It's important to  understand that if there  is a                                                               
false or fraudulent return or  intent to evade taxes, the statute                                                               
of limitations  doesn't apply. This  items is just in  the course                                                               
of events when the department issues an assessment for a change.                                                                
4:36:04 PM                                                                                                                    
JOE MATHIS,  President, Nana  Pacific, a  wholly-owned subsidiary                                                               
of Nana  Development Corporation, Anchorage, said  he was invited                                                               
to present here today because his  is one of the larger companies                                                               
that lost a lot of jobs in the  last two years. He said that Nana                                                               
Development  Corporation  has  many  areas of  business  that  it                                                               
conducts in the  oil field, primarily in the  security business -                                                               
protecting  the  oil  field,  along   with  some  food  services,                                                               
maintenance  of  shops,  housing, engineering,  construction  and                                                               
personnel services.                                                                                                             
He  said that  approximately two  years  ago they  had about  650                                                               
engineering-related jobs in Anchorage. Now  they are down to just                                                               
over 350.  It would  be nice to  be able to  say they  lost those                                                               
jobs  to  competition,  but  they  disappeared  because  projects                                                               
disappeared. When  Nana had the  650 employees they  were looking                                                               
at  lots of  projects  coming  up and  they  leased a  tremendous                                                               
amount of  space for them. Now  they have a lot  of vacant office                                                               
space in  mid-town, down-town and  south Anchorage. He  said that                                                               
unfortunately  those  people  who  lost  their  jobs  don't  have                                                               
another  project to  move  to; they  are going  to  have to  move                                                               
Outside where the demand is.                                                                                                    
MR. MATHIS  said their other  business sectors have seen  about a                                                               
12-percent  decrease  in  employment.  This  particular  one  was                                                               
related to  project engineering and  it was severely  affected by                                                               
the cutbacks.                                                                                                                   
SENATOR WAGONER asked  for a breakdown in the  kinds of engineers                                                               
he lost.                                                                                                                        
MR.  MATHIS   answered  mechanical,  electrical,   and  petroleum                                                               
4:40:13 PM                                                                                                                    
DAVE CRUZ, President, Cruz Construction,  Palmer, Alaska, said he                                                               
is also  president of Associated  General Contractors.  He wanted                                                               
to speak  firsthand about the impact  they had seen on  the North                                                               
Slope.  His company  supplies ice  roads, rig  moving, oil  field                                                               
support, rig maintenance, rig service  and various other services                                                               
associated directly  with the oil  companies up North,  small and                                                               
large. Two  years ago they worked  solid from October to  May and                                                               
ran 200  folks in their field  operation; last year at  this same                                                               
time they ran 150. Today he  has 8 people working out of Prudhoe.                                                               
He has  seen a significant  downturn; no projects are  coming out                                                               
and  he attributed  it to  strangling the  only industry  we have                                                               
that has been sustaining jobs.                                                                                                  
4:42:21 PM                                                                                                                    
CO-CHAIR MCGUIRE asked what kind of lead time projects need.                                                                    
MR. CRUZ replied  that projects generally need a  year in advance                                                               
for planning and budgeting.                                                                                                     
CO-CHAIR  MCGUIRE asked  if he  talks to  producers who  hire him                                                               
about why there isn't project development.                                                                                      
MR. CRUZ  answered yes;  he is  being told that  Alaska is  not a                                                               
good  place to  do business  in because  of the  current taxation                                                               
system on oil. It takes about  two weeks to get a drilling permit                                                               
in Alberta, but in  Alaska it takes about a year.  There is a lot                                                               
of work  that goes into getting  a drilling permit in  Alaska; so                                                               
things  are substantially  more  expensive here  than working  in                                                               
other places.                                                                                                                   
SENATOR  HUGGINS said  what  he is  saying  is very  interesting,                                                               
because they  are seeing bar  graphs that essentially  describe a                                                               
very  rosy-colored scenario  about employment.  But then  hearing                                                               
people like  him and Mr.  Mathis describing what is  happening to                                                               
their  employment force  you get  a different  picture. Then,  he                                                               
also  listened  to Kevin  Banks,  Division  of  Oil and  Gas,  in                                                               
particular, who  said that  in 2009  there were  13 developmental                                                               
permits, but  in the  prior year  there was  33, the  year before                                                               
that  there were  39,  and before  that 43.  That  is a  dramatic                                                               
decrease that  tells a  completely different  story that  is very                                                               
4:45:56 PM                                                                                                                    
JIM GILBERT,  President, Udelhoven Companies,  Anchorage, Alaska,                                                               
said he was asked how long it would  take for him to see a change                                                               
in business  if ACES  passed. His  answer is  almost immediately.                                                               
His  personnel work  is in  project management  for the  producer                                                               
companies,  primarily  in  capital   expansion.  They  were  just                                                               
starting  to staff  a job  involved in  long-term western  region                                                               
development at Prudhoe  Bay - at least four to  five years with a                                                               
sealift  of large  modules -  and less  than two  years into  the                                                               
project it  was canceled.  He had about  a dozen  skilled project                                                               
engineers  working  on that;  about  half  of  them have  had  to                                                               
relocate to  Louisiana on two  projects they started  down there.                                                               
Mr. Gilbert said he thinks ACES  is broken and needs to be fixed.                                                               
Progressivity  seems  to  be the  biggest  component  that  needs                                                               
He related  that at about  the same time in  2007, ConocoPhillips                                                               
was  preparing  to  start its  ultra-low  sulphur  diesel  (ULSD)                                                               
project  and Udelhoven  already  had people  working  on it;  but                                                               
there  again, because  of the  tax situation,  they canceled  the                                                               
project. It's not a coincidence; ACES is broken.                                                                                
MR. GILBERT  said that  many projects don't  make it  through the                                                               
review stage,  because they  cannot withstand  the tax  or bottom                                                               
line scrutiny.  As production continues to  decline, people can't                                                               
stand  in  the   way  of  the  means  and   methods  to  increase                                                               
exploration, development production, but  ACES does just that. It                                                               
blocks  efforts  by  producers  to  increase  production  and  it                                                               
stifles development. It hurts Alaska.                                                                                           
SENATOR  FRENCH thanked  him for  coming down  and bringing  them                                                               
some real stories.  He said he had  a pair of graphs;  one is for                                                               
U.S. workover rigs  and the other is for rotary  drill rigs. Both                                                               
show a  dramatic drop in  drilling activity across the  nation in                                                               
2008/09  that happened  coincidentally when  ACES was  passed. He                                                               
didn't  think that  ACES affected  the U.S.  drilling activities;                                                               
something  else did.  Everyone knows  that oil  prices went  from                                                               
$145/barrel down to much lower.  He was interested in stimulating                                                               
jobs in  Alaska, but he wanted  to be cautious about  drawing too                                                               
many conclusions  in seeing this  kind of drop across  the nation                                                               
in drilling activities.                                                                                                         
4:49:50 PM                                                                                                                    
MR. GILBERT said he wasn't  sure where Senator French's data came                                                               
from, but  he knows that areas  in the Gulf of  Mexico, Texas and                                                               
Louisiana, are booming.                                                                                                         
SENATOR FRENCH  said his data  came from the most  recent edition                                                               
of  a magazine  called "World  Oil" that  he found  in the  State                                                               
CO-CHAIR  MCGUIRE said  she would  be  interested, generally,  in                                                               
taking suggestions  on what kinds  of things Texas  and Louisiana                                                               
governments do to make it easier  to do business in those places.                                                               
She said  on a  broader perspective, that  the state  hadn't been                                                               
competitive the  way they would like  to be in terms  of drilling                                                               
wells, ACES aside.                                                                                                              
MR. GILBERT  said it's really a  single word - taxation.  He said                                                               
he has  an office in  Canada also and  agreed with Mr.  Cruz that                                                               
they can get a drilling permit in  two weeks there - the same for                                                               
the Gulf  of Mexico where  Udelhoven has been doing  business for                                                               
eight years.  He sees an  adversarial relationship in  this state                                                               
with industry.                                                                                                                  
4:53:19 PM                                                                                                                    
SENATOR HUGGINS thanked  him for testifying. He  also pointed out                                                               
that the one  state agency that substantiates what  he is telling                                                               
them  about the  numbers is  the Alaska  Department of  Labor and                                                               
Workforce Development  and they  have to  pay attention  to those                                                               
CO-CHAIR MCGUIRE  thanked him, too,  and said they  offered equal                                                               
time to the Department of Revenue.                                                                                              
SENATOR WAGONER said they have  heard the same story continuously                                                               
about  permitting times  for the  eight years  he had  been here.                                                               
Maybe they should  bring someone in from  the permitting division                                                               
and walk through  the permitting steps when they  have some time.                                                               
He knew  the owner of Pelican  Oil had walked his  permit through                                                               
himself much faster than one year.                                                                                              
CO-CHAIR  MCGUIRE  said she  had  heard  that some  jurisdictions                                                               
around the world have people  apply for "bundled" permits. So she                                                               
thought permitting would have opportunities as well.                                                                            
4:54:01 PM                                                                                                                    
COMMISSIONER  PAT GALVIN,  Alaska  Department  of Revenue  (DOR),                                                               
Anchorage, Alaska,  agreed with Mr. Dickinson's  presentation. He                                                               
said  that  Senator Stedman  [Finance  Committee]  had asked  the                                                               
department  to present  a lot  of this  kind of  information that                                                               
would be beneficial  to anybody looking at this  issue. He didn't                                                               
have much to add.                                                                                                               
COMMISSIONER  GALVIN said  that  Mr.  Dickinson had  successfully                                                               
walked  them through  the different  issues  associated with  the                                                               
current  structure in  SB  267 regarding  resident  hire and  the                                                               
opportunities   to   change   that   structure.   He   said   the                                                               
administration  is  interested  in   doing  anything  it  can  to                                                               
encourage local  hire. It  is a  struggle the  state has  been up                                                               
against in terms of the constitutional limitations.                                                                             
4:58:18 PM                                                                                                                    
The issue  they have with the  concept of providing a  tax rebate                                                               
is that  they want  to insure  it is done  in the  most efficient                                                               
manner and has  the desired results.  This  philosophy would also                                                               
carry over  to the issue  of the  30 percent credit  for drilling                                                               
and  the change  in  the progressivity.  They  are interested  in                                                               
pursuing a  way to get what  they are all striving  for, which is                                                               
more investment  in more  drilling rigs  and more  Alaskans being                                                               
hired to ultimately result in more production.                                                                                  
CO-CHAIR MCGUIRE said  that she thought this was  a worthy credit                                                               
to give.  It's an  incentive not a  requirement. And  she invited                                                               
him to  continue to offer  suggestions to the Legislature  on how                                                               
to do that.                                                                                                                     
CONMMISSIONER  GALVIN said  they had  presented the  mechanics of                                                               
how the  credit would work for  resident hire. He added  that Mr.                                                               
Dickinson  in his  presentation also  provided a  picture of  the                                                               
choice that has to be made if  they are looking at putting the 30                                                               
percent  drilling   credits  into  AS  43.55.023,   the  standard                                                               
credits, or into the exploration credits in AS 43.55.025.                                                                       
With regard to  the interest rate, they share the  goal of trying                                                               
to  insure that  the retroactive  application of  the regulations                                                               
does not operate as an unfair  penalty for those who are affected                                                               
by it  in a good faith  attempt to actually comply  with the law.                                                               
He thought they had a fairly straight-forward way to get there.                                                                 
5:02:35 PM                                                                                                                    
With  regard  to the  change  in  the interest  rate  calculation                                                               
method, Commissioner Galvin  said his primary concern  is that it                                                               
may  provide an  incentive for  a taxpayer  to basically  use the                                                               
state  as a  bank  by not  paying  a tax.  If  the interest  rate                                                               
calculation method  provides a rate  that is  substantially below                                                               
either what a  taxpayer would get by borrowing  from a commercial                                                               
bank or  what their  normal cost  of capital  would be,  it would                                                               
provide  a disincentive  for them  to make  a payment  in a  more                                                               
expeditious manner.                                                                                                             
COMMISSIONER  GALVIN  said he  shared  the  recognition that  the                                                               
current methodology might  not be the best with  the automatic 11                                                               
percent  floor  given  where  current  interest  rates  are,  and                                                               
probably an area in between would actually work for both sides.                                                                 
5:04:18 PM                                                                                                                    
Finally, he  mentioned the statute  of limitations is an  area of                                                               
concern he  would have if they  bring it back to  three years. It                                                               
was discussed  in detail during  the ACES session with  regard to                                                               
the complexity of  the tax system and the  issues associated with                                                               
how  to mechanically  be able  to  accomplish an  audit in  three                                                               
years. Three  years is  not an  adequate time  to have  a certain                                                               
fairness  between the  taxpayer  and the  state in  accomplishing                                                               
that  exercise. If  three years  were imposed  given the  current                                                               
system in place, the  state would be in a position  at the end of                                                               
that time  to basically  put a  "blue sky  number" out  there and                                                               
just say  this is what  we're going  to assess simply  because we                                                               
don't have the data to give an accurate reflection.                                                                             
COMMISSIONER GALVIN said he would be happy to talk about any of                                                                 
these issues in more detail as they go forward with evaluation                                                                  
of this and the Governor's bill.                                                                                                
CO-CHAIR MCGUIRE found no further discussion or questions from                                                                  
the committee and adjourned the meeting at 5:06.                                                                                

Document Name Date/Time Subjects
Dan Dickinson - SB 267.pdf SRES 2/17/2010 3:30:00 PM
SB 267