Legislature(2017 - 2018)BARNES 124
02/24/2017 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB111 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 111 | TELECONFERENCED | |
HB 111-OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
1:01:52 PM
CO-CHAIR TARR announced that the only order of business would be
HOUSE BILL NO. 111, "An Act relating to the oil and gas
production tax, tax payments, and credits; relating to interest
applicable to delinquent oil and gas production tax; and
providing for an effective date."
1:02:56 PM
SCOTT JEPSEN, Vice President, External Affairs and
Transportation, ConocoPhillips Alaska, Inc., provided a
PowerPoint presentation entitled, "House Resources Committee,"
dated 2/24/17. Mr. Jepsen informed the committee HB 111 is a
tax increase that increases the cost of doing business in Alaska
for ConocoPhillips Alaska, Inc. (ConocoPhillips); because
ConocoPhillips does not get cashable credits, and has not
accrued net operating losses (NOLs), the impacts to
ConocoPhillips are the increases to the base tax structure such
as the increase in severance tax, the change in the per barrel
credits, the interest change, and the theoretical migrating tax
credits [slide 2]. Slide 3 was a graph that illustrated the tax
increase brought by HB 111 at Alaska North Slope (ANS) West
Coast oil prices from $30 to $120 per barrel. He noted at lower
prices, there is an increase of 25 percent at a time when
investors are typically losing money, and at higher prices, the
per barrel credit declines from $8 to $5, which increases the
tax rate in the "mid-price range." Mr. Jepsen pointed out one
of the key tenets of Senate Bill 21 [passed in the Twenty-Eighth
Alaska State Legislature] was to level the tax rate over a broad
range of prices, which is undone by the proposed legislation.
He referred to his previous testimony [on 2/1/17] that under all
oil prices the state currently has the largest share of revenue.
Using data from the 2016 Revenue Sources Book (RSB), Tax
Division, Department of Revenue (DOR), he said when investors
are profitable, the state takes 41-46 percent of net revenue,
and when the investment is negative, the cash flow goes to the
state. Referring to previous testimony by the Tax Division,
DOR, related to a hypothetical field under Senate Bill 21, total
state take is about 46 percent, and under HB 111 is about 50
percent. Although the state is always getting the most revenue
of all parties, HB 111 is a tax increase that increases the cost
of doing business in Alaska, which decreases investment,
decreases production, hurts state revenue, and costs jobs.
Turning to Alaska's competition for investment, Mr. Jepsen
directed attention to slide 4, which illustrated the
opportunities for investment that ConocoPhillips has in its
portfolio related to the cost of supply, and a map indicated the
location of emerging and in-production unconventional plays in
Canada and the Lower 48. A graph showed the cost of supply and
the potential resource development at a certain cost. Although
specific opportunities were not identified, Mr. Jepsen said in
Alaska the cost of supply is in the $40-$50 per barrel range,
which is the top-end. ConocoPhillips has made an effort to
reduce costs in Alaska in order to remain competitive with other
investment opportunities. In fact, ConocoPhillips has reduced
its cost of supply at its CD5 [drill site] investment from $60
to about $40. Reducing costs of supply in Alaska is an intense
focus for the company, and the state can help by maintaining a
stable tax policy. He stressed that a key factor in investment
decisions is total cost of supply, including the cost of
royalty, severance tax, income tax, capital expenditure (CAPEX),
and operating expenditures (OPEX), thus debate on tax policy
should not focus on one element of cost, but how an increase to
severance tax in Alaska, which is already a high-cost
environment, "drive[s] us further and further out of the money
in terms of being able to drive investments to the state." He
clarified that the information on slide 4 was representative of
opportunities for the industry as a whole, not only for
ConocoPhillips.
1:10:09 PM
MR. JEPSEN continued to explain that although profit is "on the
margin," ConocoPhillips continues to invest in Alaska because
Alaska oilfields have rates of lower decline and there is
exploration potential at reasonable oil prices. However,
increased cost will move Alaska out of competition for continued
investment, and as a partner with the industry, the state needs
to maintain a stable tax environment with a reasonable fiscal
framework.
1:11:42 PM
PAUL RUSCH, Vice President, Finance, ConocoPhillips Alaska,
Inc., addressed migrating tax credits. In 2014, DOR identified
companies that were moving per barrel credits to certain months
to reduce their tax obligations. ConocoPhillips believes tax
law is clear that production tax is an annual tax with monthly
estimated installment payments, and for the calculation of the
final annual tax liability, in 2014, companies utilized the
amount of annual per barrel credits to determine their full year
tax obligation. He said the changes proposed in HB 111 appear
to be a simple change to fix what DOR perceives as a problem;
however, ConocoPhillips is concerned the change is a move from
an annual tax to a monthly tax, which increases complexity and
"opens the door to even further changes in that direction." Mr.
Rusch cautioned the state and industry are already challenged to
complete audits on the current annual tax in a timely manner
[slide 5].
CO-CHAIR TARR observed oil prices can be higher and lower in
different months, and when prices are higher, the state does not
have the opportunity to take advantage of higher prices, which
is necessary in order for the state to maintain credits and
incentives during periods of lower prices.
MR. RUSCH restated that this is an annual tax, and the state
will capitalize on the higher prices in any month when the
annual tax is recalculated at the end of the year.
1:15:21 PM
REPRESENTATIVE BIRCH observed the most significant share of
state revenue is royalty, and asked whether royalty is paid on a
monthly or daily basis.
1:15:58 PM
MR. RUSCH explained ConocoPhillips makes monthly installment
payments of production tax, with a "true up" at the end of the
year. Mr. Rusch and Mr. Jepsen affirmed that royalty is paid on
a monthly basis as well. Mr. Rusch returned to the
presentation, and recalled DOR testified that applying interest
for a three-year period may encourage taxpayers to delay the
audit settlement process. However, the timeline to complete and
finalize an audit - and the settlement process - is controlled
mostly by the state, and not the taxpayer. Slide 6 was a chart
that highlighted the status of tax audits for ConocoPhillips
from 2006 through 2011, and 2006 was the only tax audit
finalized. The tax audit for the remaining years are still
open; for example, in 2007, the final tax return was filed in
March 2008, followed by six years taken by DOR to complete the
audit and issuance of the audit in 2014. Also in 2014, the
audit was appealed within sixty days, DOR released an informal
decision mid-2016, a formal appeal was made within thirty days,
and the audit is now in the Office of Administrative Hearings,
Department of Administration. He concluded there is limited
ability for the taxpayer to influence the timeline. In
addition, the lengthy schedule for audits leads to assessments
in which the interest component is greater than the underlying
tax assessment, which he characterized as not good for either
side. House Bill 247 [passed in the Twenty-Ninth Alaska State
Legislature] recognized that a high interest rate applied during
an extended audit period is inappropriate, and the three-year
limitation put in place by House Bill 247 was intended to
address the long audit process by also doubling the interest
rate, with the expectation that there would be a reduction in
the audit periods.
1:21:53 PM
CO-CHAIR JOSEPHSON acknowledged extended state audits are
matters of frequent discussion. He pointed out slide 6 shows
the 2007 return is in a hearing, thus there is a dispute. He
recalled other hard fought oil tax and oil revenue issues, and
opined there would be no incentive for industry to reach a
settlement after three years.
MR. RUSCH said ConocoPhillips' decision to appeal an assessment
is not based on the interest rate but on the underlying issue;
in fact, ConocoPhillips' incentive is to reach certainty on
taxes.
CO-CHAIR JOSEPHSON expressed his surprise that the company would
consider the cost of interest irrelevant.
MR. RUSCH said ConocoPhillips does not make its decision on
whether to appeal an item based on the interest rate.
MR. JEPSEN added that if that were the case, ConocoPhillips
would have settled the 2006 audit in 2010; however, sometimes
the courts uphold ConocoPhillips' positions. He pointed out
Alaska's Clear and Equitable Share (ACES), [passed in the
Twenty-Fifth Alaska State Legislature] regulations were not
finalized until 2010, thus the regulations were unknown and
remain without precedent.
REPRESENTATIVE PARISH observed members of the oil and gas
industry have underpaid billions of dollars in taxes, and asked
how to avoid a similar situation in the future. In response to
Mr. Jepsen, he clarified his reference was to the Trans-Alaska
Pipeline System (TAPS) tariff settlement in the state's favor.
1:27:17 PM
MR. JEPSEN cautioned the present court decision may not prevail.
It is assumed TAPS will have a long life and variables include:
increasing costs, increasing state take, low oil prices, older
fields, and mature fields. The assumption by the court may not
be what actually happens.
CO-CHAIR TARR has heard suggestions that the state's tax system
is too complicated to administer, which is validated by slide 6.
In 2006, moving to a net profits system raised questions related
to deductions and led to only one tax audit for ConocoPhillips
completed in ten years. She asked whether the presenters agree
there is a reason to simplify the tax system, so the state can
better administer the severance tax program.
MR. JEPSEN cautioned against starting with a new tax system but
urged for the state to make the existing system work; for
example, the federal government has a net tax system and audits
three to five years of tax returns in one year.
MR. RUSCH urged for the state to reach resolutions on the
outstanding audits in order to establish precedent and find
common issues; in addition, audits should focus on consistency,
protocol, and the materiality of issues, as other fiscal regimes
do.
CO-CHAIR TARR requested additional information in this regard.
1:31:17 PM
MR. JEPSEN summarized HB 111 is a significant tax increase for
ConocoPhillips in base tax structure. The bill moves Alaska in
the wrong direction and increases the cost of supply at a time
when the state has a lot of competition. The changes to the per
barrel credits do not represent a reasonable government share,
and changes to the interest time period add to costs. Another
element of HB 111 is hardening the floor, which is another tax
increase. ConocoPhillips does not get NOLs, but is interested
in gross value reduction (GVR) oil because its new projects may
qualify for GVR. Furthermore, Senate Bill 21 is a key component
in increased investment, more jobs, production, and revenue to
the state. Mr. Jepsen stressed that tax policy matters to
industry and increased cost of supply to the industry will
impact investment.
REPRESENTATIVE BIRCH agreed Senate Bill 21 is working. He asked
how the per barrel tax credit reduction affects rates. The HB
111 fiscal note indicates by 2025, the state will realize a net
gain of an additional $300 million in revenue, and he questioned
how tax credits play a role in the tax scenario.
MR. JEPSEN said ConocoPhillips generates revenue for the state;
in 2016, ConocoPhillips' net income was about $230 million and
the company paid the state about $500 million in royalty,
severance tax, property tax, and income tax, thus the state has
positive oil tax revenue, and can choose where to spend that
revenue. Regarding the per barrel credit, the 35 percent tax
rate on the net was implemented as part of a combination of per
barrel credits and base tax rate. When the per barrel credits
are eliminated, the tax rate is increased by a substantial
amount. He restated that these factors are in place to level
the regressive nature of the tax rate at low oil prices.
1:36:39 PM
REPRESENTATIVE PARISH noted ConocoPhillips is concerned about
the increase in the minimum tax rate from 4 percent to 5 percent
and to hardening the floor. He asked what percent production
tax rate ConocoPhillips currently pays.
MR. JEPSEN said approximately 4 percent, on average for last
year.
CO-CHAIR TARR remarked:
Talking about the per barrel credit ... the way that
is applied ... it's transportation cost deductions,
and then lease expenditure deductions, and then the
production tax value, then the tax at 35 percent, and
then the per barrel credit is added on, and so even
though ... the tax calculation is already done, and
then you add the per barrel credit to that, you
include the per barrel credit in your base tax rate
calculation.
MR. JEPSEN responded:
... I think the actual way you do it is: take your
revenue, gross revenue, less transportation, less
OPEX, less CAPEX, less the per barrel credit,
calculate ... the 35 percent times that revenue ....
CO-CHAIR TARR said, "It's the opposite way."
MR. RAUCH stated Co-Chair Tarr's calculation was correct. The
tax credits are a reduction in the tax amount as opposed to a
tax deduction which would come before. The overall rate, from a
calculation of the net tax, is a function of the 35 percent tax
rate and the impact of the per barrel credit. Previous
testimony from DOR has stated that if per barrel credits were
not part of the current tax law, the 35 percent tax rate would
be lower.
CO-CHAIR TARR suggested if the state were going to make changes
to the per barrel credit, ConocoPhillips' response might be
different if there were also adjustments to the base tax rate.
MR. RUSCH said yes.
CO-CHAIR TARR observed that HB 111 does not deal with the GVR
issue and is hardening the floor against NOLs; however,
ConocoPhillips does not receive NOLs.
MR. JEPSEN remarked:
It's a matter of materiality. We would hope that by
extension, we wouldn't continue to move down that
direction.
1:39:59 PM
REPRESENTATIVE BIRCH has heard in West Texas wells can be
drilled in 14 days that would take significantly longer in
Alaska. He cautioned that as oil prices go up there will be a
point where there will be increased production in the Lower 48
and Alaska will still have competition from the Lower 48.
MR. JEPSEN restated that Alaska production comes at higher cost
and thus it is harder to attract investment from a limited
capital environment; in addition, also working against Alaska is
timing, as there are a limited number of rigs available at any
time. Alaska has been slower to "come down," because it has
been a good place to invest under the current tax system,
although prices have stayed low for a long time.
REPRESENTATIVE BIRCH said, "Tax stability helps."
CO-CHAIR TARR recalled at the time the legislature discussed
Senate Bill 21, the focus was on an oil price range of between
$60 and $100 per barrel, and thus the tax system that was
created does not work well in the new lower price environment.
She inquired as to whether those who have testified that Senate
Bill 21 is working had a better idea of its impacts at lower
prices, as the legislature did not model or design the tax
system for lower prices.
MR. JEPSEN expressed his belief that low prices were
contemplated because Senate Bill 21 contains provisions that
continue to "ratchet down" the tax at increments of $25 or $15;
in fact, that was the purpose of the provision that below a
certain level the industry would pay a minimum tax. He said all
parties recognized that low oil prices are not good for the
industry and the state would have lower revenue. Mr. Jepsen
opined the state does not need a different system because it
still has a modicum of revenue, and it is not possible to tax
the industry to get the state out of a budget deficit. He
cautioned that creating a system "anymore imbalanced than it is
right now, you run the risk of losing investment."
1:46:11 PM
DAN SECKERS, Tax Counsel, ExxonMobil Corporation, said the
legislature is once again increasing taxes on the oil industry
in troubling economic times. The proposed legislation will not
only increase industry taxes and change tax policy, but will
undermine investor confidence and weaken Alaska's overall
investment climate. In order to meet the state's long-term
goals, tax policy must provide confidence that changes in the
state's tax policy will not adversely affect investments already
made. Mr. Seckers said HB 111 is purported to establish a
durable tax policy; however, the aspects of durability and
certainty lose their value if their cost is too high. Senate
Bill 21 is working as intended, and has been good for Alaska's
economy, jobs, and state revenue, and for Alaska's global
competitiveness. He expressed ExxonMobil Corporation's support
for previous industry testimony that HB 111 is a significant tax
increase; in fact, many provisions of HB 111 have been carried
over from debate last year on House Bill 247, and the changes
within HB 111 will not improve the investment climate, will not
lead to jobs, more oil and gas in TAPS, or help the economy.
From a tax policy perspective, Section 2 is a 25 percent tax
increase for some companies and an infinite tax increase for
others, and is not a long-term solution for any fiscal problem.
Section 3 would prevent companies from realizing the true
economics of their investment by preventing the use of all
critical tax credits - not just sliding scale credits - and is
an immediate and significant tax increase. Section 3 also
prevents companies from utilizing available earned credits from
one month against their total liability for the year, referred
to as migrating credits. He restated the provision is not
justified because it applies to all credits, and requires
companies to file "perfect monthly estimates." Mr. Seckers
characterized this provision as "very troubling ... and would
change the substance of the law and migrate the tax more to a
monthly tax than the annual tax in which it currently is."
1:54:25 PM
MR. SECKERS continued to Section 5, which would reduce the
amount of NOL deductions or tax credits a company can claim. He
stressed that no company wants to lose money, and Alaska's tax
structure is modeled closely after a net-based tax system and
allowing the matching of revenues and expenses is the
cornerstone of a net tax system, and allows the recovery of
critical investment. The elimination of 60 percent of NOLs will
change how investments are viewed and is a tax increase, and he
gave an example. He questioned whether the state wishes to have
a policy that will indefinitely delay or jeopardize projects.
He said, "So from a practical point of view and a tax point of
view, this provision would penalize companies that make
important decisions, those in the past and those in the future."
Mr. Seckers said Section 7 is not a tax credit reform provision
because sliding scale tax credits are in current policy to
mitigate the increase in the base rate from 25 percent to 35
percent, and were carefully designed to allow recovery and
include an element of progressivity. Furthermore, Section 7
targets legacy fields, which are the backbone of Alaska's oil
industry and provide almost 93 percent of oil revenue. Finally,
he explained Section 10 adversely affects fields that are
located a distance from existing infrastructure - and thereby
are more expensive to develop - by not allowing companies to
consolidate all production for tax purposes, so that a company
with a loss on one field can consolidate with others and "make
the project economic." However, Section 10 would "ring fence"
the field, and the costs of developing certain fields will be
lost. The result would make marginal and remote fields harder
to get funding.
2:01:47 PM
MR. SECKERS concluded that raising taxes at this time will force
all companies to reexamine short- and long-term investments, and
is inconsistent with the state's vison of promoting oil and gas
development. He recalled previous tax increases occurred when
oil prices rose; however, enacting HB 111 indicates Alaska will
raise taxes when prices go up or when the industry is losing
money, despite the benefits brought to the state by the oil
industry. He cautioned that if Alaska raises its costs,
ExxonMobil Corporation will reexamine its investments and will
take appropriate action, and restated that Senate Bill 21 is
clearly working and has led to increased production and more
jobs. However, increasing taxes on companies that are losing
money will not lead to more jobs, production, or benefits to the
economy.
CO-CHAIR TARR returned attention to past changes in Alaska's tax
policy, and recalled some of the changes were specific to Cook
Inlet and did not affect ExxonMobil Corporation. She inquired
as to whether all of the tax changes are "problematic" for
ExxonMobil Corporation.
MR. SECKERS said yes.
CO-CHAIR JOSEPHSON questioned why the state, as a sovereign, is
not entitled to "a 4 percent, hard floor [tax] in all
circumstances, for the severing of a state resource?"
MR. SECKERS opined the key issue is whether the policy change
will hurt or help industry, especially smaller companies that
need credit recovery to reduce the minimum tax. He pointed out
in addition to severance tax, companies pay royalty, property
taxes, and income taxes.
2:06:41 PM
CO-CHAIR JOSEPHSON remarked:
... the 35 percent tax rate ... [has] never been
operative since, since its advent ... it's come close,
maybe, but ... why the NOL should be at 35 percent
if it's to be paired with a 35 percent tax rate that,
that doesn't happen? Shouldn't it, if there was meant
to be some reciprocity or, or parity there, and one
could question why .... ... Basically I'm asking
about the effective tax rate that is really being
paid, and whether ... the NOL shouldn't better mirror
that effective tax rate.
MR. SECKERS explained most regimes don't have tax credits for
losses, they are carried as losses, and are tied to the
statutory tax rate. [In Alaska] the effective tax rate is an
arbitrary judgement made by the state. Alaska chose to make the
NOL a tax loss credit because its tax system had a progressivity
surcharge under ACES. However, if ACES had not been
implemented, NOLs would be treated as they are in all of the
other net-based regimes in the world: carried forward as
losses. He continued:
And if that were the case then the losses unique to
that taxpayer and that's beneficial to that taxpayer
when they earn money and when they made a profit
against their tax rate, whatever it may be. Whereas,
the disconnect that's created in Alaska is because
you've created it as a credit. And there's only one
way to put that, and that is through some tax rate.
And the best one would be the statutory rate because
that's the only fair rate that's on the books that's
applied to all taxpayers equally.
CO-CHAIR TARR reminded the committee that witnesses have
referred to testimony by DOR provided at the committee meeting
on 1/30/17, slide 24 [of a PowerPoint presentation entitled,
"Alaska's Oil and Gas Taxation - Status Report, dated 1/30/17],
which indicated the effective tax rate is at 35 percent when the
price of oil is about $140 per barrel, when combined with
credits. She said, "You saw the reduction to 15 percent because
that was more where ... the effective tax rate would be at the
more normal prices ...."
REPRESENTATIVE JOHNSON read from previous testimony by Mr.
Ruggiero of Castle Gap Advisors provided at the hearing on
2/20/17 [slide 5 of a PowerPoint presentation entitled,
"Developing Petroleum Fiscal Policy," dated 2/20/17] as follows:
Working from a common understanding ... will help
everyone better understand the input that will be
received from various respondents putting forth ...
self-serving opinions.
REPRESENTATIVE JOHNSON continued [from slide 10] as follows:
Operators routinely deploy these top three detractor
themes: instability ... negatively impacts new
developments and investments; competitions, other
regimes will be more attractive in comparison; and
jobs, jobs are at risk due to potential lower
activity.
REPRESENTATIVE JOHNSON said these seem like valid concerns, but
they were characterized by the presenter as self-serving
statements, and she asked whether ExxonMobil Corporation would
consider the foregoing as valid business concerns when making
its evaluations.
2:12:09 PM
MR. SECKERS opined the aforementioned are not themes but are
facts; ExxonMobil Corporation and other companies look at a wide
range of variables, including the stability of a regime over a
long period of time, such as whether the tax in Alaska next year
is known or unknown, which adds uncertainty and unpredictability
to the investment decision. He assured the committee these are
valid concerns in the business world, and the level of
uncertainty will be compared to that of other regimes. Mr.
Seckers gave several examples of the business decision-making
process.
REPRESENTATIVE PARISH asked what rate ExxonMobil Corporation
paid in severance tax last year.
MR. SECKERS said ExxonMobil Corporation's taxpayer information
is confidential, and it paid the amount it was required to pay
by law. Furthermore, ExxonMobil Corporation does not file
fraudulent tax returns, and its returns are prepared by
accountants, reviewed by lawyers, and are finally reviewed and
audited by managers who complete a checks-and-balances process.
REPRESENTATIVE PARISH inquired as to what Mr. Seckers would
attribute the major settlements that have been paid by the oil
industry to the state.
MR. SECKERS acknowledged any two reasonable people can disagree
on the interpretation of law. ExxonMobil Corporation will
defend its position and will also honor settlement decisions
made by the court. Regarding production tax settlements, he
said challenges are brought when necessary, although he pointed
out that the percentage of taxes in dispute is small relative to
the amount of taxes paid.
CO-CHAIR TARR referred to the court case that required
development at Point Thomson and that is believed to have caused
ExxonMobil Corporation to earn net operating losses, which "the
state is sort of paying for." She has heard criticism that the
"duties to produce" concept, which was litigated in order to
force development at Point Thomson, should not result in
ExxonMobil Corporation earning losses.
2:19:32 PM
MR. SECKERS declined to address Point Thomson litigation. He
said Point Thomson is a very challenged resource; however, the
state will benefit whenever the Point Thomson field is
developed, and the treatment under the law would have been the
same. Although ExxonMobil Corporation is the operator, it has
partners in the development, and penalizing a certain
development because it "took longer" is poor tax policy.
REPRESENTATIVE JOHNSON asked how Alaska compares with other
governments as far as stability and tax changes.
MR. SECKERS advised Alaska is close to the top of regimes that
repeatedly reexamine their tax systems; in fact, research that
has been previously provided to the committee showed that in
2016, regimes were lowering taxes to keep investment and to
prevent companies from relocating. Alaska is "going in the
other direction," and he expressed his understanding that in
this price environment, most regimes want to spur investment,
and thereby retain jobs, royalty, property taxes, and benefits.
CO-CHAIR TARR observed utilizing NOLs are generally a function
of a corporate income tax provision, but in Alaska also applies
to severance tax. She asked whether other regimes offer NOL
deductions as a credit, and also as a function of the severance
tax calculation, rather than corporate income tax.
MR. SECKERS was not aware of any region or taxing jurisdiction
that offers NOLs as a credit. He offered that this provision
was intended to "capture the high end of prices every month, so
that's why it was put in as a credit." For example, if there is
a loss, under the progressivity of ACES, the production tax
value upon which the progressivity is based would come down. As
a credit, it didn't, thus Alaska got the highest tax rate
possible. Furthermore, he said he has not seen a tax loss
carry-forward applied to production tax, and as far as he knows,
Alaska has a unique system.
2:25:41 PM
CO-CHAIR TARR acknowledged Alaska has marginal, economically
challenged, and remote fields that need to be developed; the
state seeks to support challenged fields without assuming undue
risk. She asked how the state would assess such fields.
MR. SECKERS cautioned against ring fencing fields. Oilfields
are consolidated for tax filing purposes, and separating
challenged fields invites complexity and puts additional burdens
on challenged resources. In order to incentivize challenged
resources at less cost to the state, he suggested continuing the
gross revenue exclusions, which apply once a field is producing.
Remote fields need to be developed, and he questioned whether
the state seeks to limit the geographic search for oil and gas
to close to existing fields. The gross revenue exclusions help
remote fields, although challenged fields may not yield the
highest amount of severance tax; however, there would be revenue
from property tax, income tax, jobs, and royalty. He urged for
the committee to look at tax policy in its entirety.
CO-CHAIR TARR inquired as to an approval process to better
scrutinize challenged fields and developments.
MR. SECKERS said Norway and others have advanced approval
processes; however, this raises concerns about information
disclosed to competitors, perhaps in violation of federal anti-
trust law, and the unwanted sharing of proprietary information.
2:30:46 PM
PAT GALVIN, Chief Commercial Officer/General Counsel, Great Bear
Petroleum, provided a PowerPoint presentation entitled, "House
Resources HB 111," dated 2/24/17. Mr. Galvin informed the
committee Great Bear Petroleum is an exploration company that
seeks to become a production company, and after extensive
investment in its exploration phase, hopes to move into
production through discovery or acquisition. As such, the
provisions of the tax code affect his company in a different
way. He suggested there may be other ways to address the
objectives of HB 111 such as how the state will afford to pay
the tax credits, and how to balance state revenue with
attracting new investment [slide 1]. To address the tax credit
payments, he provided a DOR graph from last year and stated most
of the Cook Inlet credits were eliminated by House Bill [247].
Further, exploration incentive credits (EICs) have expired, thus
the state's cash outlay looks significantly different now
[slides 2-4]. In addition, DOR information related to the size
of individual payments to companies - in relation to the overall
payment - has changed in that very large payments now have a cap
to limit how much will be available to each company per year.
For example, $3 billion was paid over a nine-year period: one
taxpayer received a payment greater than $200 million in a
single year, five times one company received payments between
$100 million and $200 million in a single year; eleven times one
company received payments between $50 million and $100 million
in a single year. Mr. Galvin pointed out between $1.3 billion
and $2.3 billion were paid out in large payments that are no
longer going to be made, but payments now will be made over a
period of years and the drain on the state's budget is no longer
the same problem [slides 5 and 6]. Therefore, most of the tax
credits have been eliminated, and the state's annual cash
exposure has been largely mitigated. He said the remaining NOL
tax credits are intended to level the playing field between new
companies coming into the state and existing incumbents who are
able to get a tax benefit for their expenditures immediately.
The reason for this policy still exists, and is just as strong
today as before [slides 7 and 8]. He stressed the need for
credits to provide benefits to new entrants remains, and many
provisions in HB 111 are detrimental solely to new entrants in
the state. He opined the changes made by [House Bill 247],
"tilted the scale towards the incumbents, this will further tilt
it in favor of the incumbents even more." Detrimental
provisions in HB 111 include: lowering NOL credit rate to 15
percent; eliminating the "refundability" of NOL tax credits; not
having a production threshold for a minimum tax floor affects
small producers disproportionately [slide 9].
2:40:39 PM
MR. GALVIN turned attention to how the tax program affects
investments by incumbents versus investments by new companies.
For example, an incumbent with a $1 billion investment in a new
project is able to immediately deduct its investment against
current revenue. Further, the per barrel exclusion affects the
35 percent tax rate; in fact, the effective tax rate will differ
for each taxpayer, understanding that DOR projections of tax
rates at a certain price are "a gross simplification of
basically aggregating every taxpayer and showing you if they
were all either all similarly situated or it was all one
taxpayer, this is what they'd be paying." In reality, each
taxpayer is in a very different position in regard to their
effective tax rate. For this presentation, Mr. Galvin used a 25
percent effective tax rate, which he characterized as a
reasonable approximation; however, there is no single number.
In the example, a 25 percent tax rate taxpayer would immediately
save $250 million on their tax payment, so the project cost is
$750 million, not $1 billion [slides 10 and 11]. Mr. Galvin
compared this situation to a new company that spends $1 billion,
and which under HB 111, earns a 15 percent tax credit that is
not refundable. The new company will not receive its tax credit
until it begins production, then the minimum tax will limit its
ability to use its NOL, and thus will not receive economic value
for its expenditures for many years. He stressed an exploration
production company works in an expensive environment and not
receiving the credit for three to seven years reduces the value
of the credit to one-third [slide 12]. Currently, the new
company would receive a $350 million credit, paid at $35 million
per year - subject to appropriation - and thus nearly equivalent
to what is received by an incumbent at an equal level of
investment [slide 13]. Mr. Galvin said the difference also has
implications for project development if two taxpayers in
different situations are joint partners. He gave an example of
50/50 partners with investments of $1 billion each, but due to
unequal tax treatment have poor project alignment. Solely
because of the tax system, the new company would have spent $865
million for the same interest the incumbent acquired at a cost
of $735 million, which would delay and complicate the project
[slides 14 and 15]. He suggested a more balanced approach -
which in the aforementioned example - the incumbent gets
immediate tax savings of $250 million and the new company gets a
cash rebate from the state of $250 million, and there would be
project alignment because the two companies would not have to
negotiate additional terms [slide 16].
2:50:18 PM
MR. GALVIN continued to other issues raised by HB 111, such as
the "hard floor, and what that does for small producers." He
restated that every taxpayer is in a different situation; a
small producer is going to be expending money on exploration and
new development, thus a system that does not recognize their
costs creates a disincentive to production. For example,
companies start with the first phase of limited production and
progress to higher levels of production. The bill may encourage
producers to forgo the first phase, because a modest amount of
production creates the hard floor and denies credits that would
otherwise be generated [slides 18 and 19]. The small producer
credit is a credit available to companies with production up to
50,000 barrels of oil per day; however, the qualification period
has ended, and companies that previously qualified were promised
this benefit for a period of 10 years, and based their
investment decisions upon the benefit. Although - from the
state's perspective - eliminating the small producer credit is
not significant, the change will "potentially devastate a number
of companies in terms of their expectations on the projects that
they're pursuing." He restated the importance of a balance
between the revenue to the state and the impact to taxpayers
[slides 19 and 20]. Mr. Galvin observed during the past 10-15
years, the tax debate has transitioned from a focus on
exploration to a focus primarily on production; however, in
order to have future production, he cautioned that there must be
exploration for new discoveries, or there will be certain
decline [slides 21 and 22]. He provided a chart from 2007 that
illustrated balancing revenue with investment climate,
transparency with economic flexibility, and incumbents with new
entrants, are all universal, ongoing, and significant factors
[slide 23]. His past experience with oil tax debate began at
the time between the Petroleum Production Tax (PPT) [passed in
the Twenty-Fourth Alaska State Legislature] and subsequent
changes to oil tax policy. The administration at that time
focused on a return to a gross tax, thus consultants and the
administration's economic team were tasked to identify a gross
tax that would benefit the state. However, it was found that a
combination of a gross tax and various credits would not achieve
the state's desired revenue without risking projects that were
underway, therefore, the state retained a net tax [slide 24].
He said he was troubled that there are those who mistakenly
believe a gross tax is a simple solution that eliminates any
risk, gains state revenue at any price, and protects new
projects. Mr. Galvin closed as follows: a problem of tax
credits does not exist; don't put new companies at a
disadvantage; balance revenue and investment across all
taxpayers [slide 25].
3:00:23 PM
REPRESENTATIVE BIRCH appreciated [slides 3-5] that segregated
North Slope and non-North Slope credits. Turning to the
financial viability of projects, he recalled DOR "referenced
about a 10 percent discount or hurdle rate, in their ...
analysis, and if I recall, the Department of Natural Resources,
like with Caelus, I think they were in the 15 to 20 percent."
He asked for a reliable discount rate for comparison purposes.
MR. GALVIN expressed his belief the DNR analysis of 17.5 percent
for Caelus is more accurate in terms of "what actual E&P
companies experience and what we would use in terms of our own
analysis ...."
REPRESENTATIVE BIRCH agreed "a 15 to 20 percent range that DNR
is using is probably a more valid range."
MR. GALVIN clarified that the discount rate assigned by DOR is
representative of what the state's appropriate discount rate
should be for forgone revenue; however, for the company, the
higher rate is appropriate because of the nature of the cost of
capital and associated risk.
REPRESENTATIVE BIRCH recalled there was discussion in 2013 that
the tax credits were proposed with the intention to draw new and
small companies to Alaska for oil exploration and research. He
asked whether the tax credits were effective.
MR. GALVIN said, "It was effective in perhaps more than the
state intended in some instances."
[HB 111 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB111 Opposing Document-ConocoPhillips HRES 2.24.17.pdf |
HRES 2/24/2017 1:00:00 PM |
HB 111 |
| HB111 Opposing Document - Great Bear Petroleum HRES 2.24.17.pdf |
HRES 2/24/2017 1:00:00 PM |
HB 111 |
| HB111 ver O 2.8.17.PDF |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/20/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM |
HB 111 |
| HB111 Fiscal Note DOR-TAX 2.12.17.pdf |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM HRES 3/13/2017 1:00:00 PM |
HB 111 |
| HB111 Sectional Analysis 2.12.17.pdf |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/20/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM |
HB 111 |
| HB111 Sponsor Statement 2.12.17.pdf |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/20/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM HRES 3/13/2017 1:00:00 PM |
HB 111 |