Legislature(2017 - 2018)SENATE FINANCE 532
04/28/2017 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presenation: Senate Fiscal Plan | |
| HB111 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | HB 111 | TELECONFERENCED | |
| + | TELECONFERENCED |
CS FOR HOUSE BILL NO. 111(FIN)(efd fld)
"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;
relating to carried-forward lease expenditures based
on losses and limiting those lease expenditures to an
amount equal to the gross value at the point of
production of oil and gas produced from the lease or
property where the lease expenditure was incurred;
relating to information concerning tax credits, lease
expenditures, and oil and gas taxes; relating to the
disclosure of that information to the public; relating
to an adjustment in the gross value at the point of
production; and relating to a legislative working
group."
1:33:08 PM
Co-Chair MacKinnon discussed the agenda.
1:33:51 PM
AT EASE
1:34:03 PM
RECONVENED
KARA MORIARTY, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
ALASKA OIL AND GAS ASSOCIATION, discussed the presentation
"Senate Finance Committee - HB 111," (copy on file). She
stated that the Alaska Oil and Gas Association (AOGA) was
the state's professional oil and gas trade association; and
its members represented the majority of exploration,
production, and refining companies in the state. She stated
that HB 111 represented the seventh change in oil tax
policy in twelve years.
Ms. Moriarty thought that some had misrepresented AOGA's
position on past oil tax policy changes in the previous
decade. She stated for the record that industry had not
asked the legislature to make any changes in the current
year. She asserted that the current tax structure had
clear, undeniable proof existed that the law attracted new
companies to the state and had created a fiscal climate
that encouraged companies to invest more, which had in turn
facilitated the ultimate goal of getting more oil in to the
Trans-Alaska pipeline system. Ms. Moriarty wondered why the
legislature was considering abandoning and reversing what
she considered to be a successful policy.
Ms. Moriarty looked at slide 3, "House Majority Goals":
There is no silver bullet for solving our fiscal
problem. To maintain the Alaska that we want to live
in, we need a durable solution that includes a
combination of measures: a Percent of Market Value
draw from the Earnings Reserve Account (within the
Alaska Permanent Fund); a reasonable broad-based tax;
a moderate and protected PFD payout; and a
restructuring of the oil and gas tax credits.
Implemented together, these four pillars will lay the
foundation for a prosperous future for all Alaskans.
- Reps. Paul Seaton & Neal Foster (House Finance Co-
Chairs)
Ms. Moriarty discussed slide 4, "Governor Walker's Goals":
Alaska is facing annual deficits of more than $3
billion - even after budget cuts of 44 percent in the
past four years. Without a plan we'll burn through our
budget reserves in less than two years. The New
Sustainable Alaska Plan calls for a combination of
1. Spending reductions
2. Sustainable use of Permanent Fund earnings
3. Modest tax increases
4. Oil and gas tax credit reform
https://gov.alaska.gov/administration-focus/new-
sustainable-alaskaplan/
Ms. Moriarty showed slide 5, "Senate Resources CS for HB
111":
HB 111 "eliminates the state's cash exposure by ending
the program of refundable oil and gas tax credits to
small or new companies. Transitions to a system of
carrying forward operating losses for use against
future tax liability, while protecting the basic tax
components in statute today."
Senate Resources Committee, Summary of Committee
Substitute, 4/24/17
Ms. Moriarty suggested that it was the goal of the leaders
of the House, Senate, and the governor to eliminate cash
credits as proposed by the bill. She thought the
elimination of the credits would increase government take
and impact the economics of several potential projects. She
stated that the version of the bill being considered
addressed several concerns AOGA had outlined in previous
bill hearings. She considered that previous versions of the
bill had multiple sections that had nothing to do with oil
and gas tax credits and were simply tax increases on the
industry. She thought the Senate Resources Committee
version of the bill seemed to be focus primarily on the
goal of eliminating cash credits. She mentioned a memo from
AOGA dated March 13, 2017 that had addressed technical
questions and concerns (copy on file).
1:37:45 PM
Ms. Moriarty spoke to slide 6, "Senate Resources CS for HB
111 Meets Governor's Goals":
HB 1111 resolves four high priority concerns
identified by the governor:
1. Transition Alaska away from the business of
providing cash credits/rebates to the oil and gas
industry
2. Reduce the state's liability related to potential
large future investments
3. Defer the state's direct participation in the cost
of a new project until it comes into production
4. The oil industry should participate as part of the
overall fiscal plan for Alaska
Source: DOR Presentation 4/14/17
Ms. Moriarty referred to a statement by Commissioner of
Revenue Randall Hoffbeck that suggested the blended gross
tax/net tax structure was well designed for the state's
position.
Ms. Moriarty continued discussing slide 6, and believed
that with the elimination of cash credits, the state no
longer had participation in new projects. She emphasized
that not only did the oil industry participate as part of
the state's fiscal plan, but it was the state's largest
taxpayer to date. She continued that the state took the
largest profit share at every oil price, and HB 111 would
increase government take. She referred to a recent report
from OMB that outlined different categories of expenditures
per capita, but failed to mention different income streams
per capita. She detailed that in FY 16, the oil and gas
industry contributed just over $2.1 billion to state and
local governments, which equated to over $2,800 per Alaskan
in the previous fiscal year.
Ms. Moriarty stated that she had a personal stake in
solving the state's fiscal issues. She urged the committee
to not pursue changes that would dramatically impact the
investment climate for Alaska. She thought the state needed
a policy that would continue to put more oil in the
pipeline, which would benefit the entire state economy. She
thanked the committee for the opportunity to testify.
Co-Chair MacKinnon acknowledged Senator Cathy Giessel in
the gallery.
1:41:32 PM
DAN SECKERS, TAX COUNSEL, EXXONMOBIL, testified in support
of the CS by the Senate Resources Committee. He was
supportive of the comments of the previous testifier. He
underscored the concern that oil tax credits (cash credits)
reform had been transformed into changing policy in the
state when companies were struggling. He thought that an
effort to raise taxes when companies were losing money
would not help the economy. He thought the proposed CS did
address the central issue of the reform of cashable credits
while allowing the state to remain globally competitive.
Mr. Seckers continued his remarks, and thought that the CS
being considered maintained the core structure of SB 21
[oil and gas tax legislation passed in 2013]. He thought
that SB 21 had led to more production, revenues, and jobs.
He stated that ExxonMobil had never qualified for the
cashable tax credit program, and did not expect to qualify
for the program in the future.
1:44:40 PM
Mr. Seckers mentioned the memo authored by AOGA that was
referenced by the previous testifier. He discussed concerns
about elements of the bill, including the net operating
loss (NOL) carry-forwards. He referred to Section 23 of the
bill, which provided that the NOL tax credit would be
carried forward as an operating loss. He thought the
provision also created an ordering rule, and provided that
the current year expenses were claimed before an NOL was
claimed. He discussed the current tax structure and thought
there would be a crossover point, at which time the tax on
the net profit would equal the tax on gross profit. He
thought the additional deductions had no value. He thought
the recovery of losses was foundational to a net tax
system, and to eliminate the recovery would make Alaska
less competitive.
Mr. Seckers considered the credits that could be used to
reduce the minimum tax. He thought the CS was not clear
with regard to application of credits against the minimum
tax. He thought the more clarity provided in statute, the
better off everyone would be.
Mr. Seckers addressed the issue of gross revenue exclusion,
which he thought many fields would qualify for. He
reiterated the need for clarity in the bill to establish
the intent of the legislature.
Mr. Seckers highlighted an issue in Section 23 of the bill.
The section provided for uplift and he commented that
ExxonMobil was unlikely to ever qualify due to current
production. The section stated that the uplift could only
be used once the field (generating the uplift) began
commercial production, which he thought created an
ambiguity. He recalled that HB 247 [oil and gas legislation
passed the previous year] changed law regarding determining
qualifications for a gross revenue exclusion. He wondered
about the definitions of 'production' and thought there
should be standardization of terms.
Mr. Seckers concluded by saying that Alaska was an
important part of ExxonMobil's portfolio, and the company
planned to be in the state for many years to come. He
thought that if taxes were increased, opportunities would
diminish accordingly. He thought that the goal of having a
globally competitive fiscal regime was one of the most
important issues for the state. He understood the cash flow
crisis, as well as the attention paid to cashable credits
and how the issue was being addressed. He reiterated that
the CS preserved the core structure of SB 21, which he
believed had been working by leading to more production,
and had led to more royalty payments and taxes.
1:51:40 PM
Vice-Chair Bishop asked if ExxonMobil had changed its
capital investment strategy globally since the downturn in
oil prices.
Mr. Seckers relayed that ExxonMobil had taken a harder look
at investments, and stated that in low price environments,
investments received greater scrutiny.
Co-Chair MacKinnon referred to the previous testifier's
mention of SB 21, and asked Mr. Seckers to specify oil tax
policy rather than use a bill number. She asked if he was
familiar with the advisory opinion issued in March by the
tax director from DOR. She wondered if Mr. Seckers would be
challenging the interpretation, and whether he saw the
opinion as a new interpretation, or rather as an accurate
description of tax policy that had been in place.
Mr. Seckers stated that he was familiar with the advisory
opinion, and it was still under consideration by his
company. He thought the impact on the ExxonMobil
Corporation may not be as severe as for other taxpayers. He
did not agree with the opinion. He thought that the opinion
was a strained interpretation and was not sure it matched
the intent of SB 21. He stated that the corporation had
been surprised by the opinion, but would follow the law.
Co-Chair MacKinnon questioned DOR's interpretation of the
Senate Resources Committee version of HB 111. She referred
to Ms. Moriarty's earlier comments and had understood that
DOR took the position that the bill would decrease costs
for taxpayers. She wondered if testifiers were speaking to
the advisory opinion or to the bill being considered. She
thought current policy had been reinterpreted differently
by the administration's tax director. She thought there was
a different alignment as to how different components of tax
policy were in play and how deductions were taken.
1:56:07 PM
Mr. Seckers recalled that the reference to the tax increase
was from the CS rather than the advisory opinion. He
continued that the impact of the bill was relative to
various companies. He did not know the foundation of the
assessment by the department in saying that there was a tax
decrease. He discussed the contents of the advisory opinion
as related to the CS. He thought that the CS would
represent an immediate tax increase for a number of
companies due to being subjected to a minimum tax.
Co-Chair MacKinnon stated that the committee was working
with DOR to understand why the Senate CS would decrease
taxes.
Co-Chair MacKinnon asked if ExxonMobil received cashable
credits from the state.
Mr. Seckers stated that the corporation had never qualified
for, nor received any cashable credits from the state.
1:58:47 PM
AT EASE
2:01:38 PM
RECONVENED
SCOTT JEPSEN, VICE PRESIDENT OF EXTERNAL AFFAIRS AND
TRANSPORTATION, CONOCOPHILLIPS, discussed the presentation
"Senate Finance Committee - SCS CSHB111\P" (copy on file).
He turned to slide 2, "Activities Since Tax Reform (SB21)
Passed":
· Added two rigs to the Kuparuk rig fleet, 2013-2014
· Two new-build rigs delivered in 2016
•Doyon 142 and Nabors CDR3
•Averaged 4.5 rigs at Kuparuk/Alpine during 2016
· Sanctioned ERD Rig in 2016
· North East West Sak - DS1H
· New drill site at Kuparuk (DS 2S) - on stream a year
ago
· Sanctioned 18 additional wells at Alpine CD5
· Sanctioned Greater Mooses Tooth 1 in 2015
· Permitting Greater Mooses Tooth 2
· Willow discovery and acquisition of 737,000 state
and federal acres in December 2016 lease sale
· Significant other industry investment
Mr. Jepsen emphasized that the list of activities on the
slide represented billions of dollars of investment and
tens of thousands of barrels of new production coming on-
stream. He highlighted the Will discovery, which could
equate to 100,000 of barrels per day and billions of
dollars of investment. He relayed that SB 21 had a
substantial impact on the state in terms of production,
jobs, revenue, and getting more oil down the Trans-Alaska
pipeline system. He discussed the Greater Mooses Tooth 1
project, which had employed 1,000 people. He mentioned new
exploration potential.
Mr. Jepsen thought everyone was well aware that production
had increased in 2016. He discussed increased production in
2017. He directed attention to a bar graph on the lower
right hand corner of the slide, to show ConocoPhillips'
capital investment in the state. He highlighted that 2012
was the last year of Alaska's Clear and Equitable Share
(ACES), and the company had invested about $800 million
while oil prices were about $100 per barrel. Every year
since the company's capital budget had gone up.
Mr. Jepsen noted that ConocoPhillips peak year as a
corporation was 2014, when it spent about $17 billion. The
company had about $1 billion invested in Alaska. He stated
that part of the reason ConocoPhillips still invested in
the state was because there was a competitive investment
climate. He thought SB 21 had been a key to sanctioning
various projects. He stated that the decision to invest in
all of the projects listed on the slide had been dependent
upon the economics and tax investment climate at the time.
2:06:43 PM
Senator Micciche asked what increased production did for
reducing the proportion of expense for a company and
therefore the return to the state.
Mr. Jepsen explained that when ConocoPhillips produced an
incremental barrel on the North Slope, it decreased the
overall transportation cost for every barrel that went down
TAPS. He stated that the company's cost for TAPS was
largely fixed, so the greater the number of barrels, the
cost per barrel decreased, which in turn increased the
taxable value for the state (both for royalty taxes and
severance tax purposes).
Senator Micciche asked if increased production resulted in
a lower transportation cost per barrel and a greater
proportion of dollars that went to the state.
Mr. Jepsen answered in the affirmative.
Mr. Jepsen looked at slide 3, "FY 2017 Cash Flow - Current
Law - all 2016 RSB Assumptions," which showed a graph. He
wanted to expand on a comment by a previous testifier. He
stated that ConocoPhillips was not a member of AOGA, but
did support Ms. Moriarty's testimony provided earlier in
the meeting. He thought that the company was in line with
most of her earlier comments with regard to the bill. He
thought that one of the goals of SB 21 had been to provide
a leveled share of revenue over a broad range of prices,
and he thought the chart demonstrated the accomplishment of
the goal.
Mr. Jepsen continued to discuss the bar graph on slide 2
and pointed out the y-axis that depicted net cash flow, and
the x-axis showed oil price. He described the colored bars
which represented the different shares of cash flow under
current law. He highlighted the state share in the $60 -
$100 per barrel price range, which he felt demonstrated
that the intent of SB 21 had been accomplished. He noted
that the graph showed that the state share was always the
largest of the categories. He highlighted that in the lower
price quadrant, the state share was positive while the
investor share was negative. He alleged that the state
share had components of gross taxes including royalty and
property tax.
Mr. Jepsen continued discussing slide 3. He observed that
the state share was always approximately 20 percent greater
than the investor share. He thought that SB 21 had achieved
a balance and had provided a better investment climate. He
thought that if the balance was changed by increasing taxes
to order to increase the state's take, it would impact
investments in the state.
2:10:15 PM
Mr. Jepsen showed slide 4, "Summary":
• Total cost matters. Alaska is a high region -
increasing taxes increases costs and makes Alaska less
competitive.
• The House version, CSHB111, would significantly
increase the tax structure and would negatively impact
ConocoPhillips investment decisions.
• SCS CSHB111 addresses refundable cash credits and
keeps Alaska competitive.
• NOL carry forward provisions may not provide
benefit at low oil prices.
• The fundamental structure of SB21 is working - it
has it has stimulated investment, resulting in jobs
and increased production for the first time in 14
years. Let it continue to work.
Mr. Jepsen felt that there was currently significant
competition for investment dollars, particularly from the
shale plays in the Lower 48. He pointed out that prices
were down, cash flow was down, and the ability to invest in
new projects was limited by the amount of cash that was
available. He discussed large purchases of acreage in the
Permian Basin [a sedimentary basin largely in Western
Texas]. He commented that in the area of the basin wells
were cheap to drill, cheaper to operate, closer to market,
had lower transportation costs, and fewer regulatory issues
than in Alaska.
Mr. Jepsen discussed the concept of total cost and factors
such as taxes, royalty rates, capital costs, and
transportation costs. He asserted that Alaska was high-
cost, and for ConocoPhillips, the cost of supply was
approximately $40 to $50 per barrel. In other locations,
the company could develop resources for $35 per barrel or
less, which he thought was consistent across the industry.
He warned that if the legislature increased the cost to
companies, the companies would be less competitive and
would thereby direct less profit to the state.
Mr. Jepsen commented that HB 111, as it had passed the
House, represented a substantial tax increase that would
have negatively impacted investments by companies such as
ConocoPhillips. He was pleased that the Senate Resources
Committee had adopted a CS that did not change the
fundamental tax structure, but did address cashable tax
credits. He commented that like ExxonMobil, ConocoPhillips
had never qualified for cashable credits and had not
generated an NOL to date.
Mr. Jepsen thought the provisions in the bill did not
affect ConocoPhillips; and if the bill passed in its
current form, it would not have a significant impact on
investments. He asserted that the CS preserved the core tax
framework under the current tax law, which he thought was
important. He emphasized the importance of how the bill
would be translated from statute into regulation.
2:14:15 PM
Mr. Jepsen spoke to the issue of NOLS. He referred to the
comments of previous testifiers, and he thought that NOLS
might not provide benefit to the investor at low oil
prices. He observed that since 2013 there had been
significant investments in the state, which had been
leveraged by having a positive tax climate. He mentioned
increased jobs, greater production, benefits from
throughput in TAPS, and greater revenue to the state. He
thought the bill preserved the core of the current tax
framework, and thought it would result in continued
investment in the state.
Senator Hughes asked if Mr. Jepsen could speak about the
NOL carry-forwards at low oil prices.
Mr. Jepsen discussed the carry-forward of NOLS. He stated
that currently if a company incurred a NOL, it would be
carried forward as an expense, and the amount would be
deducted from cash flow before calculating taxes and using
per-barrel credits. If there was a period of low prices, a
company could meet the minimum tax without needing to use
the NOL carry-forward. He explained that if the NOL was
applied before the per-barrel credits, the NOL was not
providing a benefit.
Senator Micciche asked to turn back to slide 3. He inquired
about the negative cash flow reflected on federal taxes,
and asked if the tax impact was not isolated to Alaska.
Mr. Jepsen answered in the negative. He stated that when
there was negative cash flow, it would be reflective of the
overall position as a company.
Senator Micciche asked if there would be negative cash flow
on federal taxes if Alaska was isolated.
Mr. Jepsen stated that ConocoPhillips could still incur a
negative federal tax liability.
2:18:03 PM
PAT FOLEY, SENIOR VICE PRESIDENT - ALASKA OPERATIONS,
CAELUS ENERGY, testified about the bill. He commented on
the price of oil and the budget deficit. He stated that
Caelus had laid off about 20 percent of its workforce in
the previous year and a half. He informed that Caelus
previously had capital budgets of approximately $200
million, but in 2017 the capital budget was less than $2
million. He expressed admiration for the tenacity that the
state government was displaying in tackling the state's
fiscal problems.
Mr. Foley understood that there would be a transition away
from cashable tax credits. He beseeched the committee to
find a way to get earned tax credits paid. He stated that
Caelus viewed its relationship with the state as a
partnership. He believed that the long-term solution for
the state was to grow North Slope oil production. He
emphasized that tax policy would affect future investment
in the state.
Mr. Foley referred to a presentation the previous day by
Rich Ruggiero (copy on file), and his reference to
competitiveness. He agreed with the presenter that Alaska
needed to remain competitive to attract future investment
dollars. He recounted that the consultant had pointed out
the complexity of the tax structure in the state. He
referenced slide 15 in Mr. Ruggiero's presentation, which
showed what a project would look like if a company had cash
credits. He discussed the bill as it had been passed from
the House.
Mr. Foley discussed the difficulty of attracting funding
for projects with an unexpectedly lower rate of return. He
drew attention to slides 20 through 24 of Mr. Ruggiero's
presentation, which addressed the difference of the same
tax regime between legacy producers versus a new entrant.
He found it surprising that in the $70 per barrel
environment, the same big project was worth six times more
(net present value) to a large company. He explained that
the difference had to do with the tax efficiency of lease
expenditures. He alleged that when a large company made
investments, it could avoid a tax liability immediately.
Conversely, when a new entrant made the same investment, it
received the benefit of the investment dollars 5 or more
years in the future.
2:23:54 PM
Mr. Foley further discussed the presentation by Mr.
Ruggiero, and could not prove or disprove the claims made
therein. He opined that the cashable tax credit was put in
place to help level the playing field to make the
investment of a new entrant on similar footing to that of a
big producer.
Mr. Foley discussed Caelus' purchase of assets from
Pioneer, and considered that Pioneer left the state because
they could make a greater return on investment dollars in
their core Texas business. He stated that Caelus bought the
assets because the price was right, the assets were worthy,
and there was an attractive tax policy in place. The tax
credits reduced the capital that was required to make some
investments.
Mr. Foley discussed tax credits and subsequent earnings by
the state. He mentioned Caelus' Nuna Project, which had $1
billion yet to be expended for oil production starting in
2019. He estimated that peak oil production for the project
would be 25,000 barrels per day. He referred to the
company's Smith Bay project, and after drilling two wells
the company believed there was more than six billion
barrels of oil in place. He thought extraction of the
resource would cost about $10 billion in future
investments, and was unsure of when and how much oil could
be extracted commercially.
2:26:26 PM
Mr. Foley discussed HB 111, which he thought represented a
significant tax increase after losing the benefit of tax
credits. He opined that the bill destroyed project value,
did not encourage investment, and did not result in more
oil through TAPS. He thought the Senate Resources Committee
version of the bill was a great improvement over the bill
that was passed from the house. He thought the new version
of the bill expanded utilization of the tax credit
certificates he had.
Mr. Foley asked the committee to consider two minor
modifications of the bill: the addition of a production
threshold in Section 23 (pertaining to lease expenditures),
and expansion of a definition in Section 12 (pertaining to
alternate tax credits for exploration). He explained his
reasoning and gave examples of how the modifications could
be made and what entities might benefit from the changes.
He qualified that his suggested changes did not address
issuances or validity of tax credits, but rather only the
time frame.
2:29:24 PM
Mr. Foley referred to previous testifiers comments
regarding the ordering of tax calculation. He asked that
the will of the legislature be captured in statute, rather
than relying upon regulation and departmental practice.
Mr. Foley believed Caelus could be part of the solution. He
thought the goal of the legislature was to increase North
Slope production and increase oil through TAPS. He asserted
that the tax policy and decisions made by the legislature
would affect how much investments were made and would
thereby affect job and future revenues. He appreciated the
challenge faced by the legislature, and believed the Senate
had a good plan to provide for a complete resolution of
some of the fiscal problems faced by the state. He pleaded
the committee to take immediate action.
2:32:06 PM
Senator Micciche commented that the state was obsessed with
leveling the playing field. He asked if there were any
wells that Mr. Foley knew of that differentiated companies
by size in an attempt to level the playing field through
credits and other benefits.
Mr. Foley asserted that it was not an issue of company
size. He thought that Alaska had a tremendous oil business
for 40 years, and there had been a narrowing number of
participants. He thought if the state's goal was to have
more companies on the North Slope, he thought it made sense
to have tax policy that encouraged newcomers.
Vice-Chair Bishop asked if Caelus had changed its position
on how it directed capital around the world in the last two
years.
Mr. Foley restated that historically the company had spent
about $200 million on an annual capital budget, and in 2017
the company's capital budget was $2 million. He reported
that currently Caelus was putting 100 percent of its
capital into Alaska.
Senator Olson referred to Mr. Foley's comments about the
legislature acting expeditiously to resolve the state's
fiscal issues. He wondered Mr. Foley had also considered a
broad-based tax as part of the state's fiscal solution.
Mr. Foley had no opinion about the right solution for
Alaska's fiscal issues. He believed in finding a solution
that did the greatest amount of good for the greatest
number of people in the state.
2:34:58 PM
DAMIAN BILBAO, VICE PRESIDENT OF COMMERCIAL VENTURES, BP
(via teleconference), thought the Senate Resources CS for
HB 111 was an improvement from the version passed by the
other body. He asserted that the bill would amend current
oil policy that had a proven record of positive results
including increased production in TAPS, additional
exploration success, and new players on the North Slope. He
encouraged the committee to put policies in place that
would enable future production.
Mr. Bilbao shared four principles that BP used to assess
oil fiscal policy:
1. Does the policy encourage more oil production
through TAPS.
2. Is the policy an extension in the life of Prudhoe
Bay and the Kuparuk River Unit.
3. Does the policy increase the number of independent
companies on the North Slope.
4. Does the policy refrain from picking winners and
losers.
Mr. Bilbao made note of increased oil production in TAPS in
2016, and as well in the first quarter of 2017. He asserted
that Prudhoe Bay and Kuparuk were the backbone of the North
Slope, with new fields needing production from the legacy
fields to be able to continue to flow down TAPS. BP
believed that more companies on the North Slope was good
for the state and good for industry. He thought that
increased government take and an unstable fiscal
environment discouraged new independent companies from
coming to Alaska. He thought that the bill fell short of
satisfying BP's fourth principle of oil fiscal policy.
2:38:06 PM
Mr. Bilbao read excerpts from an editorial entitled "Oil
taxes would be bad for young engineers," written by
University of Alaska Fairbanks engineering students and
published in the Juneau Empire on April 19, 2017 (copy not
on file):
That same dream is what compels us to voice our
thoughts on the debate going on in Juneau. In our
mind, implementing punitive taxes on the industry that
serves as the backbone of our state's economy is
short-sighted and at odds with prudent long term
endeavors.
In our view, House Bill 111, the current oil tax bill,
will jeopardize the opportunities we young Alaskans
are preparing for in school. It is not a question of
whether Alaska has sufficient natural resources, like
oil and gas, to sustain our economy for decades into
the future. Just this year, Alaskans have heard about
incredible new discoveries that could provide a major
boost to the state's oil production. Companies like
Caelus, ConocoPhillips, and Repsol are sitting on huge
finds that could re-energize our oil and gas industry
for decades. As engineers in training, we want the
opportunity to be a part of bringing those projects
from concept to reality.
…as students looking at the prospect of trying to find
meaningful employment in Alaska in the coming years,
we hope our views will carry some weight to those
receptive to our plight. We are a diverse group of
individuals from all over the world who bring
different viewpoints and experiences with us. What
unites us is a passion for engineering and a deeply
vested interest in Alaska's future. Squeezing the
industry that serves as our state's bread and butter
will not improve our prospects, or those of any
Alaskans, for family-sustaining jobs.
Please, to our elected officials and policymakers, as
you struggle with the pressing issue of how to solve
the state's cash flow problem, take no actions that
might provide a short-term boost, but will lead to
fewer opportunities for the next generation of
Alaskans. Regardless, we appreciate the hard work of
our public servants who are working around the clock
to plug the budget hole, and trust that policy will
outweigh politics when deciding which choices will
benefit Alaskans most in the long run.
Mr. Bilbao thanked the authors of the editorial on behalf
of BP.
2:41:38 PM
AT EASE
2:44:23 PM
RECONVENED
JEFF HASTINGS, MANAGING MEMBER, KUUKPIK SAE AND CEO,
SAEXPLORATION, discussed the presentation "Senate Finance
Committee" (copy on file). He thanked the committee for
giving him the opportunity to offer the perspective of an
Alaskan contractor.
Mr. Hastings looked at slide 2, "Kuukpik - SAE - Born in
Alaska":
· Our team has been partnered with the Kuukpik
Corporation for the past 20 years
· The company employs an average of 400 people per year
· The Kuukpik-SAE JV is a consistent revenue source to
o Kuukpik Corporation and its shareholders
o The village of Nuiqsut
o The hundreds of Alaskan families that benefit
from each program
· We are committed to preferentially hire Native
Alaskans, Alaska residents and Alaskan Contractors
o We are proud of our 80%+ Alaskan hire rate
Mr. Hastings relayed that Kuukpik-SAE was a prime
contractor, sometimes an explorer, and a holder of tax
credit certificates. He directed attention to the graph on
slide 2 entitled 'Aklaq 3D Seismic Program,' which showed
the effect on various groups in the state. He pointed out
that the Aklaq program had benefitted more than 1,000
Alaska families. The project had generated about $57
million in revenue, $49 million of which was earned by
Alaskan contractors and suppliers.
2:46:37 PM
Mr. Hastings turned to slide 3, "Our Core Business -
Collecting Seismic Data":
· Seismic Operations are the pointy end of the spear -
we create the data so exploration wells can be drilled
· Seismic data is critical information, essential to the
success of an exploration program
· Recently, use of new technology is producing higher
resolution images of the subsurface
o Information that is a direct correlation to the
new discoveries which have recently been
announced
· The information gathered from the seismic data is
critical to finding new opportunities, new reserves to
sustain us into the future.
Mr. Hastings likened the collection of seismic data to
owning and operating a cat scan.
Mr. Hastings showed slide 4, "Why is Seismic Exploration
Different?":
· We do not drill for or develop oil
o We do the CAT scan…we are not the surgeons
· When the Tax Credit Program was created by the State
and affirmed by the voters-we started and completed
several multimillion dollar projects under the program
o Special provisions were written for .023 and .025
credits specifically to incentivize companies to
collect seismic data because without it, there is
less exploration drilling
o Seismic is treated differently because the
companies that pay to have seismic collected may
not be the company that will ever drill wells.
o The State receives something of immediate value
when Seismic tax credit projects are completed
and the data is delivered.
2:49:07 PM
Mr. Hastings discussed slide 5, "Historical Seismic
Investment," which showed a graph representing historical
annual seismic revenue from 2012 through 2017. He noted
that embedded in the blue bars on the graph was the number
of seismic programs that were shot in each year for the
entire industry in the state.
Mr. Hastings drew attention to three vertical red bars on
the graph representing milestone dates for the passage of
SB 21, and tax credit appropriation cuts. He pointed out a
dramatic increase in revenue and the number of seismic
programs acquired after the passage of SB 21. He asserted
that there had been an increase in capital spending, an
increase in exploration drilling, and increased production
as a direct result of SB 21. He pointed out an over 50
percent reduction in the amount of activity in the seismic
industry in the state after the tax credit appropriation
cut. He observed that the cuts had negative effects
including decreased capital spending within the contractor
community, less confidence in the state to settle what it
owed, and reduced liquidity to continue investments.
Mr. Hastings continued discussing slide 5, and thought that
the chart represented a barometer of the health of the
exploration industry in the state. He thought the state had
asked the industry to invest in seismic and exploration
drilling; and the companies had done so in partnership with
the state. He felt that investment confidence had been
eroded.
Senator Micciche asked about the average mean on the graph
on slide 5. He considered the five to ten years for
permitting, development, and production; and wondered if
there was a right spend estimate for adequate data
available.
Mr. Hastings thought that there had been a dramatic
increase in the number of programs, and the amount being
spent after the passage of SB 21. He pointed out that there
had not been many independents or seismic explorers going
to work in 2013. He discussed the expense of new
technology, and thought SB 21 had allowed for the use of
advanced technology to find bigger deposits that had been
previously overlooked.
2:54:43 PM
Mr. Hastings spoke to slide 6, "The Impact of HB 111 SRES
CS on Kuukpik/SAE":
· 120 day clock on seismic .025's is a great start
o Our applications are simple
o Once data is delivered and verified by the DNR,
DOR has the ball
ƒBoth of these tasks should be able to run in
parallel
· Bill language does not fully address DOR Tax Division
Advisory Bulletin 2017-01
o This bulletin destroyed the secondary market for
pure seismic explorers
· Expand the corporate income tax language
· Set a payment schedule
The State of Alaska created a program to incentivize the
seismic industry to invest millions and hire thousands of
Alaskans. Our work is the first step in putting more oil
down the pipeline. We played by the rules you set out and
now we need the State to live up to their end of the
deal.
Mr. Hastings lauded the Senate Resources Committee for its
work in making changes to the bill. He thought there was
good elements in the committee's version of the bill, but
suggested some elements could be tweaked. He reminded that
an absence of cash payment from the state, the industry had
to rely on the secondary market. He considered that in a
low price environment, there was not a way to get to a
credit if the floor was hardened. He thought that there
would be no way to be paid back for what the explorers were
owed. He suggested there should be a consideration for NOLs
that could not be carried forward for seismic explorers -
either add the ability to go below the floor, or expand the
tax language to include other corporate taxpayers in the
state.
Mr. Hastings continued to discuss slide 6. He emphasized
that his company was accountable to its shareholders. He
emphasized that without a plan to be reimbursed for the $80
million in tax credits it was owed, it was detrimental to
the fiscal health of his company.
Mr. Hastings considered that the state had created the
program to incentivize the seismic industry, which was the
first step in getting oil to the pipeline. He wondered how
to return to what had been considered an investment between
the state and the seismic proprietors.
2:59:11 PM
Mr. Hastings turned to slide 7, "The Reality":
· For SAE, the delayed tax credit payout forced the
company to a crossroads
o Option 1: seek protection under the chapter 11
bankruptcy code and leave all our Alaska vendors
hanging
o Option 2: restructure the company and work with
our Alaskan subcontractors and suppliers to find
a way to extend payments
· We chose to restructure - eliminating 98% of our
shareholders equity, the majority of which was held by
employees, many of whom are Alaskans
We are Alaskans and are committed to staying
Mr. Hastings commented on the effects of volatility in the
tax structure. He commented that the appropriations vetoes
had forced the company to consider bankruptcy or to
restructure the company to adjust outgoing payments. He
discussed his history in the state, and discussed lost
equity in the company. He was appreciative of the work the
Senate Resources Committee had done, but felt more needed
to be done to change the bill.
He reiterated that the seismic business was a barometer of
the health of the oil and gas industry, as it was first in
the exploration effort and the first expense to be
eliminated when areas were no longer deemed competitive. He
thought the state had the ability to continue the working
partnership with industry that developed after passage of
SB 21. He asserted that the industry needed confidence in
the state's plan to pay its liabilities and have a reliable
tax system. He urged the committee to work to keep the
industry competitive.
3:02:36 PM
Senator Hughes asked about the value of tax credits that
were not paid to Mr. Hastings' company, and for an estimate
of the total owed to all seismic companies.
Mr. Hastings shared that his company had certificated $24
million of $90 million worth of tax credits that had been
assigned. The company was still waiting for the remaining
balance to be issued by DOR. He qualified that for this
reason the company had thought that the Senate Resources
Committee's addition of a 120-day clock on issuances of the
credits was important. He referred to the 023 versus the
025 credits, for which there was no timeline. He thought
that his company had about $44 million worth of assigned
025 tax credits.
Senator Micciche asked if all of the seismic data
commissioned by potential producers that controlled
acreage, or if the company sometimes independently
collected seismic data. He wondered about the proportion
between the two activities.
Mr. Hastings explained that as a prime contractor the
company was contracted by legacy producers or independent
companies to collect data, which the producers owned and
was proprietary. He relayed that an area where there might
be fractured lease holes, or in times of low capital budget
spending; there was a more vibrant speculative seismic
industry. He thought that increased activity from SB 21,
especially the increased seismic program, had been 70
percent proprietary work and 30 percent speculative work.
Senator Micciche assumed that the $66 million in owed
credits was all speculative.
Mr. Hastings answered in the affirmative.
3:06:40 PM
Senator Olson asked about the company restructuring (due to
unpaid tax credits) that Mr. Hastings had mentioned, and
asked what kind of effect it had on the people of Nuiqsut.
Mr. Hastings stated that the people of Nuiqsut were a
direct beneficiary of the revenues of the company (it was a
51/49 partnership) and there was a net profitability share
to the village. When the company did not receive revenues
that were owed, the village did not as well. He specified
that the village had not received expected revenues for the
last two years.
Senator Olson referred to earlier comments and asked if Mr.
Hastings was in favor of the concept that seismic activity
was the only activity that benefitted from a 120-day time
clock.
Mr. Hastings remarked that his company's tax credits were
not under a scenario that could move an NOL forward. He
stated that if the tax credits and the application of the
tax credits were not complex in nature, he did not see a
reason why they should not be a benefit. He thought that if
types of tax credits were not equal perhaps they should
have a slightly different time frame; however in no case
should the tax credits be open-ended.
3:09:22 PM
Vice-Chair Bishop was frustrated that the state was not
paying its bills. He thanked Mr. Hastings for the preferred
hiring practices of his company. He wondered about the
hiring practices of other companies. He asked if the
company rented all its rolling stock and camps.
Mr. Hastings stated that when SB 21 was put in place,
Kuukpik/SAE had partnered with Alaska Equipment Rentals
(AER) in Fairbanks to purchase rolling stock and invest.
The partnership continued, which had been favorable for
both companies over the previous few years. He commented
that Alaska sub-contractors had extended themselves
financially, and he appreciated AER doing so.
Vice-Chair Bishop commented that after AER went out on a
limb, it was now perhaps bankrolling the state.
Mr. Hastings viewed the investment in seismic projects as a
partnership.
Vice-Chair Bishop apologized to Mr. Hastings, and all other
parties that had not been paid for outstanding tax credits.
He remarked that a promise made was a debt unpaid.
3:11:58 PM
Senator Hughes referred to questions by Senator Micciche
regarding the remaining $66 million in tax credits, and
speculative seismic work. She wondered if there was a way
to determine what portion of speculative work yielded
production. She referred to slide 5, and the illustration
of dropping activity after the tax credit appropriation
cut. She commented on the future and wondered what
prospects could expected for future generations based on
seismic data gathering. She asked if Mr. Hastings could
speak to the importance of speculative and proprietary
work.
Ms. Hastings thought that new technology had clearly
demonstrated how important seismic activity was in finding
new reserves. He used the example of Colville River area, a
small area of the North Slope. He commented that there also
new drilling technology to increase drilling recovery and
increase production. He observed that the increase in the
amount of seismic activity was directly related to
discoveries that had happened. He thought that the drop on
the graph on slide 5 was related to the combination of a
low commodity price and a lack of confidence working in the
state.
Mr. Hastings thought that unless the level of seismic
activity and exploratory wells continued to increase, there
would be an issue with the amount of product in TAPS. He
was concerned it would not be possible to replace reserves.
He thought the industry needed confidence that there was a
good investment environment in the state, and an
environment that was competitive on a global scale.
3:16:15 PM
Senator Hughes asked Mr. Hastings to speak specifically to
the speculative work and what percentage turned out to
bring in revenue.
Mr. Hastings discussed the speculative market, and the 10-
year period before the data became public. He stated that
the speculative market allowed (especially at a low
commodity price) for more people to participate, look at
the seismic data, lease the property, and more exploratory
wells to potentially be drilled.
Co-Chair MacKinnon noted that the legislature had tried to
pay for tax credits multiple times, but had not been
successful.
3:18:21 PM
KATE BLAIR, GOVERNMENT AND PUBLIC AFFAIRS MANAGER, TESORO,
read from her written testimony (copy on file):
For the record, my name is Kate Blair and I am the
Public and Government Affairs Manager for Tesoro in
Alaska.
Tesoro Corporation is an integrated refining,
logistics, and marketing company with assets across
the western United States. We operate 7 refineries in
6 states, including our first in Nikiski. We also own
a series of pipelines, tank farms, marine, rail
assets, and a network of retail fuel stations. We have
a proud 48 year legacy in Alaska, supplying jet fuel,
gasoline, and diesel to Alaskans.
Tesoro does not weigh in on oil and gas production
taxes in Alaska, as we are not a production tax payer,
however any loss of production in Alaska would affect
the in-state refinery and potentially make our
economics more challenging. We have therefore
testified on previous versions of this bill to ask
that your colleagues be mindful of any changes to the
current production tax system and its potential effect
on overall production.
Tesoro relies on access to in-state crude from the
Cook Inlet and the North Slope. We refine every drop
of oil that comes out of the Cook Inlet basin, and we
purchase approximately one-third of TAPS throughput,
160,000-170,000 barrels of North Slope crude per day,
shipping it from Valdez for refining in Nikiski or to
our refineries along the west coast. Last year, Tesoro
signed a royalty oil contract with the State that
allows us to purchase 20,000- 25,000 barrels per day
of the State's royalty share of oil, with a benefit to
Alaska of $45-56 million.
The testimony of the producing companies will inform
you on how the current CS will affect their investment
decisions and ultimately, production. We would,
however, like to comment on the changes made to the
refinery infrastructure tax credits, which directly
affects Tesoro.
Tesoro is not advocating for an extension or changes
to the refinery tax credit itself. Our concern is with
how the credit's value will be realized with the
removal of the Tax Credit Fund.
The CS maintains the cashability of the credit,
however it creates ambiguity in how credit refunds are
paid through the appropriation process, which could
create a system where the state is picking winners and
losers. The CS directs the Department of Revenue to
adopt regulations, standards, and procedures to
allocate the money among claims. Without clearly
defined regulations, such as those established for the
tax credit fund, we are concerned that the department
could consistently allocate funds in a way that favors
one type of tax payer over another. We ask that you
consider adding language in Section 6 that requires
the appropriation of funds to reflect the same process
and regulations as the current tax credit fund, with a
statutory limit and a clear process to allocating
available money.
3:22:10 PM
Ms. Blair continued speaking from her written testimony:
Additionally, because the credit is subject to
appropriation by the legislature without a statutory
lower limit, it is possible that no funds could be
allocated to refund credits and those credits must be
carried forward to future years, however, the current
carry-forward limit is five years. Hypothetically, if
there is no money appropriated over a five year
period, those earned credits could expire before their
value is realized by the company that has earned them.
We recommend that the committee alter the carry-
forward period on the credit from the current five
year limit to mirror production credits that do not
have a carry-forward time limit and provide an uplift.
This would provide consistency in the tax policy, and
ensure that companies that make qualified investments,
under the current refinery infrastructure tax credit
program, can realize the value of the credits that
they earn and the time value of their money. Further,
because the bill is scheduled to sunset in 2019, this
would be a relatively short commitment by the state
and would provide the refiners assurance that the
credits they earn will retain their value if money is
not appropriated for their rebates.
Senator von Imhof asked for a copy of Ms. Blair's written
testimony.
Ms. Blair agreed to provide a written copy of her
testimony.
Senator Micciche discussed Alaskan ownership of companies.
He mentioned the preferential hiring practices as discussed
by Vice-Chair Bishop. He asked about the proportion of
resident hire at the Nikiski refinery.
Ms. Blair spoke to the company's resident hire rate, which
was approximately 97 percent for employees in Alaska. She
reminded that resident hire was calculated by permanent
fund dividend eligibility.
Co-Chair MacKinnon discussed the schedule for the following
day.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 042817 Revised 4 28 17 SFC SB26.pdf |
SFIN 4/28/2017 9:00:00 AM |
SB 26 |
| 042817 COP HB 111 Senate Finance Testimony Apr 28 2017.pdf |
SFIN 4/28/2017 9:00:00 AM |
HB 111 |
| 042817 Hastings_HB111 Senate finance testimony final.pdf |
SFIN 4/28/2017 9:00:00 AM |
HB 111 |
| 042817 AOGA Testimony SFIN HB 111 04 28 17.pdf |
SFIN 4/28/2017 9:00:00 AM |
HB 111 |
| 042817 HB 111 SFIN Official Testimony Tesoro.pdf |
SFIN 4/28/2017 9:00:00 AM |
HB 111 |
| HB 111 Marks Cost Recovery Hard Floor Crossover 042817.pdf |
SFIN 4/28/2017 9:00:00 AM |
HB 111 |
| HB 111 Public Testimony Letters 1.pdf |
SFIN 4/28/2017 9:00:00 AM |
HB 111 |
| HB 111 Public Testimony Letters 2.pdf |
SFIN 4/28/2017 9:00:00 AM |
HB 111 |
| HB 111 Public Testimony Crondahl.pdf |
SFIN 4/28/2017 9:00:00 AM |
HB 111 |