Legislature(2015 - 2016)BILL RAY CENTER 208
05/11/2016 09:00 AM House RULES
| Audio | Topic |
|---|---|
| Start | |
| HB247 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 247 | TELECONFERENCED | |
HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G
9:08:43 AM
CHAIR JOHNSON announced that the only order of business would be
HOUSE BILL NO. 247, "An Act relating to confidential information
status and public record status of information in the possession
of the Department of Revenue; relating to interest applicable to
delinquent tax; relating to disclosure of oil and gas production
tax credit information; relating to refunds for the gas storage
facility tax credit, the liquefied natural gas storage facility
tax credit, and the qualified in-state oil refinery
infrastructure expenditures tax credit; relating to the minimum
tax for certain oil and gas production; relating to the minimum
tax calculation for monthly installment payments of estimated
tax; relating to interest on monthly installment payments of
estimated tax; relating to limitations for the application of
tax credits; relating to oil and gas production tax credits for
certain losses and expenditures; relating to limitations for
nontransferable oil and gas production tax credits based on oil
production and the alternative tax credit for oil and gas
exploration; relating to purchase of tax credit certificates
from the oil and gas tax credit fund; relating to a minimum for
gross value at the point of production; relating to lease
expenditures and tax credits for municipal entities; adding a
definition for "qualified capital expenditure"; adding a
definition for "outstanding liability to the state"; repealing
oil and gas exploration incentive credits; repealing the
limitation on the application of credits against tax liability
for lease expenditures incurred before January 1, 2011;
repealing provisions related to the monthly installment payments
for estimated tax for oil and gas produced before January 1,
2014; repealing the oil and gas production tax credit for
qualified capital expenditures and certain well expenditures;
repealing the calculation for certain lease expenditures
applicable before January 1, 2011; making conforming amendments;
and providing for an effective date."
9:08:50 AM
CHAIR JOHNSON reminded the committee that pending from the prior
day's meeting was a motion by Representative Olson to adopt the
committee substitute (CS) for HB 247, Version 29-GH2609\D,
Nauman/Shutts, 5/6/16, as a working document, with objection
made by Chair Johnson. Chair Johnson removed his objection.
9:09:00 AM
REPRESENTATIVE TUCK objected, then removed his objection. There
being no further objection, Version D was before the committee
as a working document.
9:10:20 AM
The committee took a brief at-ease at 9:10 a.m.
9:10:31 AM
CHAIR JOHNSON announced that the committee would hear from the
Department of Revenue.
9:11:01 AM
RANDALL HOFFBECK, Commissioner, Department of Revenue (DOR),
stated that much had been learned over the last four months
about Governor Bill Walker's proposal [the original version of
HB 247], especially regarding prolonged oil prices, the impact
of carrying over losses, and the long-term viability of the
current tax structure. He opined that HB 247 proposes a great
deal to rectify many of those long-term issues associated with
the "carry forward" of net operating losses. Regarding concern
over revenue forecast, particularly as it relates to operating
costs and capital expenditures associated with cuts and costs
made by the industry in a low-price environment, he noted that
the department had provided a document to the committee
comparing forecasted expenditures to actual expenditures. He
said it shows the forecast was in line with expectations; the
forecast was for a reduction in costs, and the operating
expenditures match the forecast, at least through March, while
the capital expenses are a little higher than what was
forecasted. He said DOR knows there would be substantial
changes made in the next few months, and the department would
need to continue to update the legislature on those.
COMMISSIONER HOFFBECK said the price per barrel of oil (bbl) is
higher than forecasted. The forecasted price for 2016 was
$40/bbl, but right now prices are in the $44-$45/bbl range. He
said there would be a price higher than $40 for fiscal year 2016
(FY 16) short something catastrophic happening in the next two
months. He stated, "That is not insignificant, because ...
around that $45 price point is where we start seeing where there
are actually losses to carry forward or not, and so we're kind
of teetering back and forth on that price point." He reiterated
that the forecast and the reality are relatively consistent.
9:14:12 AM
COMMISSIONER HOFFBECK stated another topic of concern that has
been brought up is how to deal with carry forwards in relation
to a net tax. He said he heard discussions about what
Australia, Norway, and the United Kingdom (U.K.) do in terms of
"allowing these to be carried forward in their tax structure,"
but he warned that isolating one component of a tax structure is
"fraught with peril." He recommended looking at information in
a report generated last January by the Oil & Gas Competitiveness
Review Board, beginning on page 73, which compares and
highlights the complexity of tax regimes of the U.S., Australia,
Norway, and the U.K.
COMMISSIONER HOFFBECK, regarding the carry forward, stated the
following:
This is not an income tax; it is a severance tax; and
by definition severance taxes are different than
income taxes. We have chosen to calibrate our
severance tax using that income, but that does not
turn it into an income tax, and therefore we do not
have to follow [Internal Revenue Service] (IRS) rules
or state rules as far as how we treat the severance
tax. We do have a corporate income tax in the state
of Alaska; we do have a separate oil and gas income
tax. Those losses are available to be carried forward
under the income tax regime, but this is a severance
tax, and a severance tax is a tax imposed on the
removal of a nonrenewable resource from the taxing
jurisdiction. And ... it's the opinion of the
administration that that ... simply should not go
below zero; that we should not be able to carry
forward losses on the severance tax portion of our tax
structure.
9:16:30 AM
KEN ALPER, Director, Tax Division, Department of Revenue (DOR),
stated that as not all members of the House Rules Standing
Committee had heard the bill previously, the first few slides in
the presentation reflect basic facts and figures. Following
those, he indicated, would be the specific provisions under and
pros and cons of Version D, along with Governor Walker's
concerns with that version. He stated his concurrence with the
idea that "this is a severance tax and we do not want it to go
below zero."
MR. ALPER directed attention to slide 2, titled "Major Bill
Concepts in Governor's Proposal." He said the governor supports
the sunset of exploration credits, which for the most part were
already scheduled to sunset, and a transition into a post
exploration support environment. The governor also supports:
phasing out of the Cook Inlet drilling credits; putting a cap on
the amount of repurchase to "limit the open-endedness of the
current system"; the removal of exception and loopholes that
lead to unintended consequences in existing law; strengthening
of the minimum tax to ensure that the small revenue the state
got at low prices is protected; the increase of the minimum tax
rate to 5 percent; other technical language cleanup;
transparency; interest rate reform; and "lots of other doo-
dads." He said the governor's bill is a complex bill, and
Version D remains complex, as well.
9:18:38 AM
REPRESENTATIVE MILLETT recalled that Governor Walker had talked
about not changing Senate Bill 21. She said it would be helpful
if Mr. Alper would point out any changes that had been made to
that previous piece of legislation.
MR. ALPER responded that HB 247 was constructed to "dance around
the edges" of Senate Bill 21, but not to "get into the meat of
it." He stated that for the most part, the tax system predated
Senate Bill 21; it was part of Alaska's Clear and Equitable
Share (ACES). The core provisions of the tax system put in
place in 2013 - the 35 percent flat tax, the per-barrel credit,
and the new oil provision for the gross value reduction (GVR) -
were not touched in the governor's proposed bill. He stated,
"The bill has evolved in that now the ... [gross value
reduction] we're talking about sunsetting or graduating new oil
into old - that is probably the most overt imposition on the
core provisions of Senate Bill 21 you'll see anywhere, in this
bill or any other version of the bill."
9:20:12 AM
MR. ALPER continued to slide 4, titled "FY 2007 thru 2015, $7.4
Billion in Credits." He stated that from FY 07, which saw the
passage of production profits tax (PPT) and the transition to a
net profit-based tax system, through the end of FY 15, the State
of Alaska put $7.4 billion in tax credits. Mr. Alper said that
is a little misleading, because more than half, $3.3 billion,
are North Slope credits against tax liability. He said,
"Strictly speaking, those are subtractions from the tax that we
never see, and in most cases those are baked into the tax
system." He said ACES had a high tax, with a 20 percent capital
credit, which adds up to about $4.3 billion. He said Senate
Bill 21 has a high base rate of 35 percent with the per-barrel
credit. He added, "That per-barrel credit is in there." He
stated that DOR believes that if those credits had not existed,
"the underlying tax probably would have been lower in the
legislative consensus of that time," so, "we kind of set that
$4.3 billion aside and talked about the other $3 billion in
credits - ... the refunded credits: $2.1 [billion] refunded on
the North Slope for the new producers and the explorers
developing new fields; $900 million in non-North Slope,
primarily Cook Inlet; and another $100 million ... credits used
against tax liability ... in Cook Inlet ...."
MR. ALPER said under statute there are tax caps in place for
Cook Inlet. The $100 million in credits, shown on slide 4,
reflects the small producer credit used against small gross
taxes that exist in Cook Inlet. Further, there are $500-$800
million in taxes that were not received. He said, "We've tried
to calculate a value to those tax caps that were put in place in
Cook Inlet."
9:22:08 AM
REPRESENTATIVE CHENAULT asked what was paid out of the $4.3
billion under ACES versus under Senate Bill 21.
MR. ALPER said he could get that information. He said almost
all of it is under ACES, because 2014 and 2015 are the years for
Senate Bill 21. He said there were about $600 million in the
per-barrel credit in FY 14 and much less than that for FY 15,
because the numbers were already declining. He concluded that
fewer than $1 billion of the $4.3 billion was paid under Senate
Bill 21.
9:22:58 AM
REPRESENTATIVE TUCK asked, "Was that due primarily because of
prices or because of structure?"
MR. ALPER answered that the structure of Senate Bill 21 is a
sliding scale credit that tends to increase as the price of oil
decreases until about $80, and then it tends to decrease again,
"because the minimum tax gets in the way and cuts off the
ability of companies to use the per-barrel credit." He said in
FY 14, based on the approximate $100 price of oil at the time,
there were about $600 million of per-barrel credits used, at
roughly $4-$5 per-barrel credit; by FY 15, prices were dropping
to where companies might be earning $8 but were only able to
claim $2 or less, depending on what point in the fiscal year it
was. He concluded, "So, it's a little bit of both, I guess."
9:24:06 AM
MR. ALPER directed attention to slide 5, titled "Total Petroleum
Revenue FY 2007 thru 2015." He stated that the petroleum
revenue that came in while the state spent the aforementioned
$7.4 billion is over $61 billion. The largest feature of that
amount, he said, was the [$32.8 billion] production tax for the
North Slope. Also from the North Slope, the state got $15
billion in unrestricted royalties; $4.7 billion in other general
fund (GF) revenue, which is corporate income tax and property
tax from oil; and $8.7 billion in restricted revenue, the great
majority of which is 25 percent or more of royalties that go
into the Alaska permanent fund principal. For the Cook Inlet
[and Middle Earth], the amount was $1 billion [and was made up
of <$0.1 billion in production tax, $0.5 billion in unrestricted
royalties, $0.3 billion in other GF revenue, and $0.2 billion in
restricted revenue.]
MR. ALPER moved on to slide 6, titled "Statewide Tax Credits and
Unrestricted Petroleum Revenue." He drew attention to the red
box, which highlights unrestricted petroleum revenue for FY 15,
FY 16, and FY 17. He said the bar on the left indicates the
revenue before any credits used against liability; the middle
bar indicates the actual revenue that shows in the reports; and
the dark red bar on the right indicates the revenue after
subtracting the refundable tax credits paid to the oil and gas
industry. The latter number has shrunk and, in FY 17, has gone
below zero. He confirmed that in FY 17 the state was paying out
more in tax credits than its total unrestricted gas revenue.
MR. ALPER emphasized the importance of broadening "the context
in time" to understand "why this all exists." He pointed to the
left of the bar chart that shows that in FY 07 the tax credits
were a much smaller offset of a much larger revenue system. He
said when the state was receiving between $4 billion and $9
billion a year in oil and gas revenue, it was logical to invest
a few hundred million dollars in its future to "encourage
tomorrow's oil today." What has happened, though, is that "the
cost of this has stayed the same or even increased, while our
revenue has decreased, and it's gotten to become a much larger
part of the pie as the credits themselves." Mr. Alper said more
troubling is the chart at FY 18 and beyond, where DOR's forecast
shows an oil and gas revenue of less than $2 billion per year,
with the credits maintaining so that there is not that much
revenue to offset.
MR. ALPER noted that the blue line on the chart shows the carry
forward net operating loss (NOL) credits, which is something
that came to be with the spring forecast. He explained that DOR
started to see for the first time major producers having
operating losses that are not cashable because of the way
Alaska's current law is written: if a company produces more
than 50,000 barrels a day, it can't get cash for its credits.
He said, "So, we have to track those separately. Those are
built up over the next couple years and then used up in the
years after that offsetting companies' taxes as the price starts
to recover."
9:27:08 AM
MR. ALPER directed attention to slide 7, which shows that the
governor, through his line item veto, capped the FY 16 fiscal
appropriation to $500 million. Of that, $473 million has been
paid out to date; about $200 million to the North Slope and $273
million to non-North Slope, primarily Cook Inlet and Middle
Earth. There are $27 million left in the fund, with $4 million
in-process claims, which means by the time all those go through
there will be about $23 million left. Meanwhile, he continued,
there are $675 million in applications at DOR, which will be
reviewed by the Tax Division and issued over the summer. He
said the $675 comprises [$10 million] in older NOL credits; [$22
million] in older explorations credits; $552 million in 2015
spending credits - operating loss credits on both the North
Slope and Cook Inlet, and the capital and well lease
expenditure credits, which are Cook Inlet and Middle Earth
credits that will be issued in July. He named the remainder:
$60 million in 2015 exploration credits and $31 million expected
[via amended returns]. He said DOR forecasts $775 million in
actual spending for FY 17. He said based on preliminary
information from producers, $120 million is needed and would
come from some of the first and second quarter capital and low-
lease expenditure credits in Cook Inlet, but the bulk of it
would be exploration credits. He said there are large
exploration projects, the exploration credit system will sunset
on July 1, 2016, and "we're seeing a couple of circumstances
where companies are spending a bunch of money on exploration
projects that might be a little premature for their own business
need, but because we're paying, in some cases, 85 percent of the
cost, it's in their interest to get that work done now before
... those credits sunset."
9:29:41 AM
REPRESENTATIVE MILLETT asked Mr. Alper to clarify if he was
saying that companies are out spending money because the credits
are going away or that they are making poor business decisions.
MR. ALPER responded that he was not saying businesses are making
poor business decisions, but rather that they are making
business decisions in their own best interest. He continued:
From the point of view of the company, on the North
Slope, say, the operating loss credit's 35 percent.
In 2015, it was 45 percent. There's also a 40 percent
exploration credit for expenses that meet that
definition. That is a limited duration credit that's
scheduled to sunset in 2016. So, if a company sees a
possibility - if they own an asset that they want to
drill some exploration wells - it might not fit into
their production plans for a decade or more. We don't
know. But you might be seeing people doing the
exploration drilling now simply because they can get
an 85 percent credit on it, whereas if they waited one
year longer, they'd only be getting a 35 percent
credit on it.
MR. ALPER said, for example, that Caelus Energy Alaska, LLC,
("Caelus") has its Smith Bay asset 60 miles west of Alpine, far
out into the National Petroleum Reserve - Alaska (NPR-A), with
no infrastructure or possibility in the short term of building a
pipeline that would bring oil back to pump station one, but
Caelus embarked upon a drilling exercise last year at an expense
of approximately $100 million. He said that is not oil that is
likely to be seen for a decade or more, but the money was spent
in 2015 because of the 85 percent credit.
REPRESENTATIVE MILLETT offered her understanding that during the
time of ACES and Senate Bill 21, the whole idea behind having
credits was to encourage exploration and get more oil in the
pipeline. She continued, "And so, now, we're blasting folks for
going out and doing exactly the behavior that we wanted to
invest in and wanted to encourage so we could take [the Trans-
Alaska Pipeline System] (TAPS) and have ... a longer lifespan."
9:32:24 AM
COMMISSIONER HOFFBECK responded that "we're not blasting
anybody" for making good business decisions based on the
available tax regime that was in place. He explained that
increased activity around the expiring of a credit is a good
business decision and was mentioned just as a point of
reference.
9:33:12 AM
REPRESENTATIVE KREISS-TOMKINS asked for an historical context of
credits over the last three or four years compared to what DOR
is observing now that the sunset date is approaching.
9:33:49 AM
MR. ALPER said table 8-4, in the spring update of the Revenue
Sources Book, shows the history of the different sub-types of
credits each year. He recollected that DOR has paid out $25-$50
million a year in exploration credits, which have been a small
but steady component of the "overall credit spend" over the
years. He said DOR anticipates an expense in FY 17 that could
approach $100 million because of the last-minute exploration
credits.
9:34:22 AM
CHAIR JOHNSON asked if there are companies that are
"accelerating" with the visible result of more production.
COMMISSIONER HOFFBECK answered yes.
CHAIR JOHNSON suggested that the situation is like a double-
edged sword. He surmised that in order to get production on
line sooner, "we have to sort of pay for it, but we get that oil
in the pipeline to get royalties or wherever it's coming from."
COMMISSIONER HOFFBECK responded, "That's correct."
MR. ALPER added, "Implicit in all of this was ... a desire to
bring new companies to Alaska and diversify the players on the
North Slope, and that has been somewhat successful - ... in some
ways too successful, and now we can't afford it anymore, and
that's why we're here."
9:35:19 AM
REPRESENTATIVE TUCK asked for confirmation that the expiring
credits being referred to are ones that were already set to
expire - that there is nothing in Version D that would change
that.
COMMISSIONER HOFFBECK answered that's correct.
MR. ALPER, in response to a follow-up question from
Representative Tuck, stated that the exploration credit
structure predates PPT and ACES; it goes back to 2003. He said
it was a percentage of expenditures that were "layered in there
on top of [the economic limit factor] (ELF), in 2003," and have
been extended from its original five-year sunset. The most
recent extension moved the sunset to July 1, 2016. He said if
Alaska's fiscal system was in a different position, the
legislature might be considering another extension, but DOR has
not seen disagreement over the plan to let the credits sunset
this year.
9:36:23 AM
REPRESENTATIVE KREISS-TOMKINS asked for clarification that
sometimes the credits result in 85 percent reimbursement in
capital expenditure.
MR. ALPER responded:
Only in 2014 and 2015. The exploration credit has
always peaked out at 40 percent. ... They are so-
called, "stackable," meaning you could earn that
credit and also earn a net operating loss credit. The
operating loss credit on the North Slope during the
ACES arrow is 25 percent. During the first two years
of Senate Bill 21, that was bumped up to 45 percent.
So, there's this unique two-year historical moment
where there was actually 85 percent support of
exploration on the North Slope.
9:37:12 AM
REPRESENTATIVE TUCK said the exploration credits brought
exploration as intended, but did not necessarily bring
development. Now Alaska gives deductions not only for
exploration, but also for capital and operating expenditures.
He said he thinks the state has already done a lot in this
arena. He said the big question regarding operating credits is
whether it is necessary to give them when "that might be stuff
that they might be doing anyway." He surmised that that is why
it is difficult to make decisions without accurate information.
He stated another big question is what the return on Alaska's
investments is.
9:38:46 AM
REPRESENTATIVE KREISS-TOMKINS said he approaches this issue
"from a vantage of economic agnosticism." He said the state has
a finite number of dollars and is trying to create jobs, tax
revenue, and royalty revenue, while getting the greatest return
for those dollars. He said the state has put $100 million into
exploration credits and $700-$900 million into oil and gas tax
credits in sum. He questioned how that return could be compared
with other uses of the money, for example, if someone was given
an 85 percent capital subsidy to "prospect a heli-skiing
operation" or if the Alaska Mental Health Trust was given the
same to "explore the Icy Cape prospect." He opined that an 85
percent reimbursement of capital is a huge subsidy for any
economic sector, and he said he wants to know what the return on
that investment is.
9:40:57 AM
COMMISSIONER HOFFBECK said he thinks there were several policies
in play. First, the high rate of incentives was driven by the
fact that the oil and gas industry was Alaska's bread and butter
- it was paying 90 percent of the state's bills. He indicated
that the economics do not compare to running a heli-skiing
operation. He said the state wanted people looking for oil and
gas, because that was the state's revenue stream. He said he
thinks anyone looking back would not choose to put an 85 percent
credit in place, but it was one that developed over multiple tax
regimes, and some were slated to expire. He said he thinks
having multiple tax regimes over a short period of time "created
a ... circumstance that maybe wasn't fully anticipated."
9:42:21 AM
CHAIR JOHNSON said that pertains to the past and he thinks an
effort is being made to introduce legislation to fix the problem
in the future. He asked that the focus be on "where we're going
from here" rather than "how we messed up."
9:42:46 AM
REPRESENTATIVE TUCK asked how much credit savings would result
from focusing only on exploration and well work, without "the
operating loss and everything else."
9:43:12 AM
MR. ALPER answered that it depends on "how Cook Inlet gets
measured out in what you're describing there." He said on the
North Slope 90 percent of credit spending traditionally has been
on operating loss, while 10 percent has been on exploration
credits. For Cook Inlet, the split is closer to 50/50, because
it's an ACES-based regime where the state is paying credits on
well drilling and qualified capital expenditures. He said, "If
we kept that and got rid of the operating loss, we'd probably
take out about half." To Chair Johnson, he said:
You're absolutely right, and we're looking at a high
point. Historically, the $775 million we're
anticipating paying that would be paid given the full
appropriation in the FY 17 budget - that is ... based
on expenditures that have already occurred. This is
from 2015, which was the peak year of the 45 percent
NOL credit, which had the last year of the exploration
credit, which also has some credits that rolled from
the prior vetoes. There's a little bit of the perfect
storm before you on this slide here, and we openly and
freely admit to that.
MR. ALPER said DOR expects to see this year the first claims for
the refinery credit that was enacted under legislation in 2014
that gave capital credits to instate refineries, who apply for
the credits when they pay their corporate income taxes. He said
the first corporate income tax filings after the effective date
will be in October 2016.
9:44:58 AM
MR. ALPER moved on to slide 8, which parses out where the $3
billion in state-refunded credits went through the end of FY 15:
$1.45 billion to six North Slope projects that now have
production; [$650] million to 13 North Slope projects that do
not have any production, some of which are in process or have
been abandoned; and half of the remaining $900 million to six
projects in Cook Inlet that have production, while the other
half went to eight non-North Slope projects that do not have
production. He reported that of the $1.45 billion toward the
six projects on the North Slope, DOR is able to discern 38.5
million barrels of production through the end of FY 18, which
equals a cost of $37.30 per barrel. He explained that that sum
is a little inflated, because the money has already been spent,
the oil is producing, and the fields are operating, so every
additional barrel will dilute or reduce the per-barrel subsidy
over time. He said those projects had $4.9 billion in total
costs in lease expenditures, meaning that "our $1.45 billion in
credit refund refunded them for 29 percent of their cost." He
added, "That's about our portion of a ... typical, functional
development project on the North Slope over the last ten years."
REPRESENTATIVE TUCK asked Mr. Alper to confirm that the six
[North Slope] projects were not producing prior to the credits
being given.
MR. ALPER answered yes. He added, "This is new oil."
MR. ALPER directed attention to slide 10, titled "Cook Inlet
Refundable Credits." He stated that of the $450 million that
were spent on six projects, DOR was able to discern a 55.9
million barrel of oil equivalent (BOE). He said most of the
production in Cook Inlet is gas; therefore, BOEs must be used to
calculate a definable number. He said, "If you turn all that to
oil, it's $7.80 per barrel; if you look at it at gas, where
there's roughly 6,000 cubic feet of natural gas per barrel of
oil, that's about $1.30 per [thousand cubic feet] (Mcf) - the
state's share through the credit system towards underwriting
that new production. And, of course, like with the other, the
state's share will decrease over time as ongoing production
dilutes our prior investment." He said lease expenditures on
that production were a little less than $1.1 billion, so the
state is into these projects for about 40 percent compared to 29
percent on the North Slope. He said, "... That does roughly
parallel the nature of our tax system. We do have a more
aggressive tax credit support or subsidy system in Cook Inlet,
primarily driven by the higher credits put in place by the 2010
Cook Inlet Recovery Act."
MR. ALPER directed attention to slide 11, titled "Cook Inlet Tax
Caps." He stated that the tax rate in Cook Inlet is effectively
zero; the tax rate on gas is 17 cents per Mcf. He said, "Had
that gas and oil been paying taxes at the underlying tax rate,
they would have paid between $550 and $850 million over the ...
seven years between 2007 and 2013, so roughly $700 million over
a seven-year period are the taxes forgone due to those statutory
tax caps, which are another advantage - another subsidy." He
said the approximate volume of oil and gas produced over that
time period was about 132 million BOE, which means about another
$5.30 per barrel or another 88 cents per Mcf of support through
the tax caps in Cook Inlet.
9:49:31 AM
CHAIR JOHNSON said that because the [overall subject of this
part of the presentation] is about credit cost, he wanted to
clarify that "the cap is not a credit." He then asked, "Doesn't
this expire in ... '22 and then the working group is supposed to
work on that?"
MR. ALPER answered yes. He said the Cook Inlet tax caps were
put in place under the PPT bill during a special session in
2006. He said it is a 15-year tax cap - a benefit that will
expire on January 1, 2022, regardless of what the legislature
does. He said the bill before the committee, and many previous
versions of it, introduced the idea of a working group that will
come up with a new tax system for Cook Inlet and other areas of
the state outside of the North Slope to replace that. He said
currently there is no good tax system ready to "step in place"
in 2022. Refocusing on slide 11, he said the sum of the credits
and tax caps put the state "into Cook Inlet gas" for roughly
$2.18 per Mcf.
CHAIR JOHNSON asked, "What other benefits did that have in Cook
Inlet?"
MR. ALPER answered that additional gas was discovered, creating
supply certainty for utilities in Southcentral Alaska. He said
there had been significant concern about shortages and brownouts
a few years ago. He said another benefit might be in keeping
down the price of gas for consumers in Southcentral Alaska.
CHAIR JOHNSON began, "In terms of jobs and the economy..."
MR. ALPER proffered, "Without question. I've been out North
Kenai Road; ... it was quite booming a couple years ago compared
to a few years before that."
CHAIR JOHNSON said he just wanted to point out that "sometimes
these investments don't always pay off back to dollars into the
treasury."
MR. ALPER responded that's correct.
9:51:31 AM
MR. ALPER stated that the next slide, titled "Response to Rules
Committee Substitute," begins discussion of Version D, first
with an introduction, followed by positive features and
concerns, and ending with a summary regarding fiscal impact. As
shown on slide 13, he stated that Version D makes significant
progress in meeting several goals of the administration, such as
reducing future spending by rolling back credit programs,
providing some strengthening of the minimum tax floor, and
moving toward transparency, with greater availability of
information to the public. Highlighting points on slide 14, he
noted that Version D maintains several features of previous
versions of HB 247, including: the inability to increase an
operating loss using the GVR; substantial ramp down of Cook
Inlet credits, which currently pay up to 65 percent of
development costs; restoration of compound interest, with rate
increase, for delinquent taxes; municipal utility lease
expenditure pro-rationing; the repeal of certain dormant
programs and obsolete sections in statute; surety bonding to
offer some protection to local vendors in the event of
bankruptcy, which has been a problem - especially in the Homer
area; and local hire repurchase priority, wherein those
companies that get the state's limited dollars are the ones with
the most aggressive Alaska hire programs.
9:54:01 AM
REPRESENTATIVE TUCK, regarding local hire, asked how DOR would
assign preference if the State of Alaska did not have enough
money for repurchasing some of the tax credits and there may be
companies "a little bit over the map on their local hire."
MR. ALPER responded that Version D would amend statute to
require [DOR] to write regulations to determine what to do if
there is not enough money. He called it a "first in - first
out" regulation, wherein "the oldest applications get paid first
once the new money comes in, say in the next year." He further
explained that DOR is now adding a new requirement, which would
give priority to companies that have at least 80 percent Alaska
hire - they would be paid first. He indicated that DOR had
discussed variations on that regulation idea, such as having a
more complete rank ordering related to local hire. He said
there is also an open question as to whether that language could
be extended to include contractors and subcontractors.
MR. ALPER, in response to a request for clarification from
Representative Tuck, restated that the first in - first out
regulation was created by DOR several years ago, and the
aforementioned level of 80 percent Alaska hire is in Version D.
He offered further detail about the process.
REPRESENTATIVE TUCK encouraged the department to "put as much
weight as possible in those percentages going forward."
9:56:28 AM
MR. ALPER moved on to slide 15, which lists major and minor
concerns with the structure of Version D, including: the
maintaining of large future liability through carried-forward
lease expenditures, because that has a similar net result in
terms of reduction of future taxes for the state; a shift in
favor of incumbent producers; an ongoing liability without any
state pre-approval or other filter; a delay in GVR "graduation,"
when new oil becomes old oil, because the time is being changed
from 5 years to 10; an inadvertent capital expenditure (CAPEX)
tax cut, although that is going to be amended; and technical
language changes that could have unintended consequences.
9:58:13 AM
REPRESENTATIVE HERRON, regarding the delay in GVR graduation,
asked what number DOR would prefer and why it would be a
positive choice for the state.
COMMISSIONER HOFFBECK answered that the administration favors a
five-year graduation, because it would allow a field to ramp up
adequately and be under production while still under the new oil
provisions, without extending into "the more robust time frame."
He said most of the small fields will peak in less than 10 years
and be on the decline. He added, "And quite frankly we think
that 10 year[s] is too long of a time frame." He said even a 5-
year new oil provision is substantially longer than what is seen
in other tax regimes in the Lower 48. He said this issue is not
one that was in the original version of HB 247, but was
something that was discussed and flagged as a major issue, and
the provision that was brought forward by the legislature is
seen [by the administration] as critical.
REPRESENTATIVE HERRON remarked that there has been debate in the
legislature as to whether there should be a period of time where
new oil graduates to mature oil. He said [the administration]
did not support that idea at first, but now is supporting a
five-year period. He questioned, "Is that something that is
good for the state and the industry?"
COMMISSIONER HOFFBECK responded that any time the state pulls
back its support, the industry will view that as bad, because it
would like new oil to stay new oil forever, as would he if he
were in the same position. He opined that the number needs to
be balanced in terms of what also benefits the state and works
within its balance sheet and brings the expected amount in a
severance tax when a nonrenewable resource is severed. He said
internal discussions included consideration of a five-year
sunset. He said he is unsure whether the discussion the
legislature had regarding the five-year time frame was a result
of [the administration's] consideration of it or was totally
independent of it, but "we saw five years as something that
allowed us to get through the startup period but not take all
the way through the ... highest producing years of oil." He
reiterated that [the administration] thinks [five years] is a
good balance.
10:01:35 AM
REPRESENTATIVE TUCK commented that the testifiers had said that
"these are some of the highest production years." Regarding
five years versus ten, he said he would like to know what the
state will lose by not capturing those severance taxes from day
one.
10:02:09 AM
MR. ALPER noted that further slides may expound on the concerns
listed [on slide 15]. He noted that in his presentation
yesterday, Janak Mayer of enalytica, Inc., presented slides,
which showed high impacts under certain price scenarios, and to
whatever extent the state is harming the industry, it is - in
the reverse - benefiting itself. Therefore, there needs to be a
balance. He said the companies currently receiving the GVR have
been getting it for about 2.5 years, because Senate Bill 21 took
effect on January 1, 2014. He said if the term of five years is
chosen, that is five years from the effective date; therefore,
those companies would be getting that GVR for eight years,
because they would have already received it for three years
before the new legislation would take effect. He concluded, "To
the extent we're impacting long-ago investment decisions, it's a
much smaller impact on those fields currently receiving the
GVR."
REPRESENTATIVE TUCK surmised that he would have to invert a
chart that had been shown by Mr. Mayer the day before in order
to see the impact to the state.
MR. ALPER replied that is a reasonable statement.
10:03:49 AM
CHAIR JOHNSON asked if the five years would give a company the
opportunity to plan and spur development and increase oil
production.
MR. ALPER answered that the GVR certainly is an incentive to
make an investment, especially with smaller fields. He said
part of the benefit is the ability to pay back the capital costs
by making a higher profit in the early years. Apparent on all
of the charts is the crossover point whereupon the company is in
positive cash flow. He said, "Once they're in positive cash
flow, it's just a question of the split, and what we're looking
to do is increase the state's share of that cash flow in ... the
later years, once ... they've crossed back over the zero line."
CHAIR JOHNSON asked for confirmation that the governor's version
of HB 247 had no limit on the GVR.
MR. ALPER answered that current law had no limit on GVRs.
[Having a limit] was discussed in the development of HB 247, but
the governor did not want to "get too close to Senate Bill 21"
and "that was perceived as being that." He said once the
legislature "opened the door," the governor frankly admitted he
wanted to [have a GVR limit] but had not wanted to put one in
the first version of the bill.
10:05:18 AM
REPRESENTATIVE TUCK said currently the state is giving credits
toward all qualifying capital and operating expenses, which is a
lot of money being given up front. He questioned when Alaska
would see a return on those investments. He indicated he would
understand giving a GVR if the state was not investing so much
up front, "so a company has some look forward." He said a
balance is needed so that if the state is giving so much up
front, it gets a little more on the back end as companies start
producing. He stated, "If we're not going to give a whole lot
up front, then maybe we should give some sort of credit ... to
get them to recover a little bit."
10:06:10 AM
MR. ALPER directed attention to slide 16, titled "Positive
Features." He stated that Version D has a $75 million per-
company, per-year cap for transition years limited to small
producers or developers. He said the idea is that there will be
no repurchases after 2020, Cook Inlet credits will be eliminated
in 2019, and - at full implementation in FY 21 - there would be
about $300 million in savings to the state. He said, "Between
additional revenue through the hardened floor, as well as
savings through reduced spending on tax credits, this is a
substantial piece of legislation." He said the extended
transition period could lead to large credit liabilities, but
that would be somewhat limited by the per-company, per-year cap.
10:07:37 AM
REPRESENTATIVE KREISS-TOMKINS, referring to the prior slide,
said currently the state is operating a $700-$900 million
subsidy or incentive program, which everyone agrees is
unsustainable in Alaska's current fiscal environment; therefore,
the question is: "With a baseline of zero dollars, how much
does this bill ... create in terms of fiscal exposure for the
State of Alaska? What would the subsidy or incentive program
... cost the State of Alaska per year in full implementation in
... [FY 21]?"
MR. ALPER reiterated that "the $775" is "an aberration - a
historical high point - in our tax credit system." He said
[DOR's] forecasts tend to decline in the out years, because "we
don't know what companies are going to be doing; we only know
what they tell us." He said the forecasted numbers by 2021-2023
are approximately $250 million in total credit support. He
said, "Based on that and based on the fiscal notes of this bill,
the state will be paying out a number fairly close to zero -
certainly less than $50 million a year in tax credits in the out
years."
REPRESENTATIVE KREISS-TOMKINS clarified he wants to know what
the fiscal impact would be of carrying out lease expenditures,
which he said he understands are substantially similar to the
concept of net operating loss tax credits.
MR. ALPER said they are. He gave an example of a company that
loses $100 million developing a project in Alaska. At a 35
percent NOL credit, there would be a $35 million credit. A
large company would have to carry that forward and use it
against future taxes; a small company would apply for and
eventually receive a check [from the state] for $35 million.
Under [Version D], the 35 percent credit goes away, but the $100
million lease expenditure carries forward. So, in some future
year, when the price of oil goes up and there is a lot of
revenue, that revenue can be offset by that $100 million that
was carried forward from the last year. The net result, he
said, would be the same: a savings on $35 million on the tax,
because there is $100 million less in income that will not be
subject to the 35 percent tax. Mr. Alper said in terms of
actual numbers, and as shown in the fiscal note, at the end of
2025, there will be $716 million of future taxes that would be
offset through the carry forward lease expenditures. He said
that number is elastic because of the price of oil and company
spending. He said roughly every dollar shift in the price of
oil impacts company profitability by about $180 million. Given
that there are about 180 million barrels produced in a year with
a 35 percent NOL credit, there is about $60 million in NOL
credit equivalent per dollar in the price of oil per year. He
concluded, "So, we're talking about a nine-year forecast and
widely varying price of oil. It's very hard to pin down that
number, but based on our baseline forecast - based on the spring
projection - there will be $700 million-worth of these so called
accrued offsets for future years at the end of 2025."
10:11:46 AM
CHAIR JOHNSON asked committee members to here-on-out save their
questions to the end of Mr. Alper's presentation.
10:11:56 AM
MR. ALPER turned to slide 17, regarding the limited
strengthening of the minimum tax floor. He said the original
version of HB 247 called for a full strengthening of the floor
and would have been a retroactive change, so that the 5 percent
floor would be applicable back to January 2016. He said the
main concern with legacy oil was regarding the carried forward
NOLs. For example, he said if a company lost money in 2015, it
could use its NOL credit in 2016 to go below the minimum tax.
He stated, "Because there isn't going to be a credit anymore,
... they will be paying the minimum tax, and four of those major
producers will be getting the 4 percent payment." He said the
$0-$8 per-barrel credit, which is currently limited by the
floor, would, [under Version D], become a hardened limit,
because the NOLs cannot go below that. Mr. Alper offered a
caveat:
Before the effective date of the bill, they expect to
see a moderate amount of NOL credits from those
companies that had losses in the past - 2015 and then
in the current year, 2016 - presuming the price of oil
stays about the same. It will take ... three full
years for those NOL credits to be used up, so the
floor payments for FY 17, 18, and 19 will be zero,
because of old NOLs that will be able to be used to go
below them, and we won't actually see a fiscal impact
from that specific change until FY 20.
MR. ALPER said one other issue is that the governor's original
bill had sought to further harden the floor for new oil, meaning
that the $5 per-barrel credit for GVR eligible oil could not go
below that amount. He said there is nothing comparable in
Version D. He said the small producer and exploration credits,
until they sunset, could be used to go below the floor. He
explained that even though the small producer credit has expired
- it had to be claimed by May 1, 2016 - once claimed, a company
can get the credit for nine consecutive years. Therefore, those
companies that waited until the last possible moment will
continue to enjoy the up to $12 million a year credit for the
next nine years.
10:14:15 AM
COMMISSIONER HOFFBECK interjected:
We think as a severance tax, there shouldn't be a
carry forward. But if there is a carry forward, this
does have a significant benefit over the net operating
loss, in that the net operating loss would allow a tax
to go ... from 4 percent to zero. If you use ...
these excess operating costs' carry forward, ... they
would have no real value to the companies until oil
exceeded the minimum tax, so you'd be in a $75 price
point or higher. So, this would allow them to drive
their tax to the minimum ... at higher prices 'til
they use it up, but there would be no circumstance
where they could drive the price to zero. So, that is
a significant benefit from switching to the ... carry
forward.
10:15:03 AM
MR. ALPER next directed attention to slide 18, which addressed
"Transparency." He said Version D would allow the state to make
public the name of each person or company that receives cash
credit each year and the total amount repurchased, which is a
component of what was originally proposed in the governor's
version of the bill back in January 2016. He said there are
some other pieces missing that [the administration] would like
to see. For example, Version D does not require information
about the purpose for which the credits were used; it is written
to exclude the so-called corporate income tax credits, with no
transparency related to who is getting the gas and LNG storage
credits; and because credit repurchases are going to end in
three years, "this transparency section is of limited duration
and somewhat limited value, because we're only going to get
information for a couple years"; and although it would be
"outside the box," [the administration] would like a mechanism
in place to enable the reporting of the amount of carried
forward lease expenditures that companies take with them from
one year into the next, as a comparable feature of the credits,
which are going to end.
10:16:14 AM
MR. ALPER addressed [slides 19-24], which list [the
administration's] concerns with Version D. As stated by
Commissioner Hoffbeck, Mr. Alper relayed that although the issue
was not in the original bill, because [the administration] was
not aware last fall of the extent to which the major producers
might have losses, there is increasing concern with the size and
duration of operating losses and concurrent operating loss
credits from the major producers - hundreds of millions of
dollars in credits that would be carried forward into future
years to offset future-year taxes. He said there was
substantial discussion on how to reduce or even eliminate the
NOL credit from the 35 percent level. He noted there had been
an amendment made on the House floor to HB 247 that would have
reduced the amount to 25 percent, but the amendment failed by a
single vote. He said the issue has been sidestepped by Version
D, because eliminating the NOL credit and turning it into an
offset against future revenue secures the 35 percent value of
those losses through the lease expenditure process and moves
away from any discussion about reducing the number in some
manner. Mr. Alper, adjusting his previous estimate [given in
response to Representative Kreiss-Tomkins], said at the end of
FY 26, producers will hold losses that will offset $715 million
in future taxes. He added, "In other words, if the price of oil
rebounds in 2026 to where we would be expecting $715 million-
worth of production taxes above the minimum tax, we would only
be getting the minimum tax; all of that could be offset by those
carried forward lease expenditures."
MR. ALPER stated that a second concern is regarding the shift in
favor of incumbent producers and away from support for
independents. He said this is because the independents are
currently able to get cash for their credits. Eliminating that
support after 2019 would mean they would be in a position where
they are carrying forward their lease expenditures until they
have production, which is different economically for the new
company versus the older company. He explained that "the older
company's only really holding it until the price of oil goes
up." A major producer, thus, may have a loss, but the following
year if the price of oil goes back to $80-$100, would be able to
capture that value and offset its taxes. Conversely, companies
building major new oil field projects on the North Slope might
be forced to hold that operating loss for five to eight years
until the fields come into production, which diminishes the
companies' economics and could create incentives for them to
sell off their assets to the major producers. Mr. Alper said
[the administration's] modeling showed that its initial proposal
of $25 million per company, per year cap was a manageable number
for the smaller projects, but probably inadequate for a large
project, because that cap would dramatically impact the
economics of a company that is spending hundreds of millions of
dollars a year. The administration was looking at ways to
address that issue for large projects. He said [Version D] goes
in the opposite direction by reducing cash support to zero for a
large project, and he said he is curious to hear the industry's
upcoming testimony. He clarified that the difference is that
incumbent producers will be able to monetize their losses as
soon as prices recover, whereas independents must wait for
production.
10:20:08 AM
MR. ALPER stated that there is no limit [on potential state
liability]. He said although the state is an investor and
partner in these projects, it has no decision-making power and
cannot determine "who goes ahead." He said, "To a certain
extent, this is fixed by the plan of development filter that's
been added for the transition period. We are looking and have
put together some language towards a pre-approval process or
state loan mechanism where the state could step in and say, 'No,
we are not' or 'Yes, we are going to support this project; we
believe it's in the state's best interest.'" He said the plan
of development language in [Version D] is broad enough to
include plans of exploration, which might actually unnecessarily
broaden ... the list of potential applicants. He said, "We'd be
a little more comfortable if it were just developers rather than
explorers." He used the example of Smith Bay, which was a $100
million exploration project in a remote location that the state
may not be in the best economic position to be supporting at the
present time.
MR. ALPER talked about a problem with a conforming amendment in
the bill that deleted AS 43.55.165(e)(18). He continued:
This is what's known in the trade as "the hair cut."
The first 30 cents of capital expenditures are not
deductible. This is supposed to be proxy for the cost
of routine maintenance - keeping the pipes clean and
not rusty - and that ... the legislature determined 10
years ago should not be deductible lease expenditure.
Because we're eliminating the capital expenditure
credit - all references to capital expenditures were
also repealed - we need to put in a definition of
capital expenditures for a couple of technical
reasons, including this one. Otherwise, ...
eliminating that 30 cent restriction will cost the
state $15-$20 million a year in a sort of phantom tax
cut once the price of oil recovers, and I understand
it's not the committee's intent to do that, but that's
the way the CS is currently written.
MR. ALPER, regarding GVR graduation, talked about the prior
debate during discussion of Senate Bill 21 in 2013 being in the
five- to seven-year range; the ten-year concept is new to the
bill and would greatly reduce the benefit to the state. As he
recollected Representative Tuck had remarked, he said, "Fields
are already declining and we're going to be capturing a higher
share of a declining resource at that point, and it is in many
ways the inverse of enalytica's analysis: the longer-term
benefit has a minimal impact on the producers [and] by
extension, it's also of minimal benefit to the state." He said
[the administration] thinks five years is an appropriate number;
seven would not [elicit a big objection from the
administration]; but ten "seems unnecessarily generous."
MR. ALPER addressed new and technical language changes under
Version D. He said there is language broad enough in Version D
such that it would allow credits to be earned in the three-year
transition period by any company, including major producers. He
stated his belief that the intent was to include only non-
producers. He explained the danger of including the major
producers is that it would wipe out the benefit of hardening the
floor. Mr. Alper next remarked that the use of the term
"regular production" for the time clock to graduate the GVR is
unusual and comes from Alaska Oil and Gas Conservation
Commission (AOGCC) statutes. He suggested the term "sustained
production" or "commercial production" might be more
appropriate. He added, "There is some concern that you can game
the clock a little bit by calling something pre-regular - a
pilot production for a couple of years - and the clock doesn't
stop until you meet some ... fairly arbitrary trigger of regular
production. We have some suggested language that could change
the definition and change ... the reference point as to where
the clock should start."
MR. ALPER, regarding carry forward lease expenditures, relayed
that currently taxes are paid by segment: first, North Slope;
second, Cook Inlet oil; third, Cook Inlet gas; fourth, Middle
Earth; and fifth, gas used in state. Version D would have no
language to characterize carried forward lease expenditures by
segment, and he said he was assured by committee staff that "the
way the bill was written, only lease expenditures from ... the
North Slope will be able to be carried forward anyway." He said
if that is the case, "this is less of a concern"; however, the
idea is to ensure that those lease expenditures are limited to
be able to offset only North Slope taxes, and he is not sure if
that is adequately handled in the language of Version D.
MR. ALPER stated that the carry forward expenditure language in
43.55.160(a) is a section that is in effect only through 2022.
He said this is a provision that dates back to Senate Bill 138,
the AKLNG bill of 2014, which brought a 13 percent gross gas tax
separate from the net profit tax on oil, and it rejiggered some
of the conforming language about how lease expenditures are
treated. He said, "We simply need to duplicate this language
for carry forward lease expenditures in the post 2022 section,
so that should it remain in effect in 2022, ... the ability to
carry forward lease expenditures would remain functional the way
it's intended."
10:26:20 AM
MR. ALPER directed attention to slide 25, which gives a summary
of fiscal impact in a side-by-side comparison, for the years FY
17 through FY 20, of the governor's original version of HB 247,
the version that passed out of the House Finance Committee and
was amended on the House floor, and Version D currently before
the House Rules Standing Committee. He said the governor's bill
is aggressive in the immediate term, largely because of the
retroactivity of the hardening and increase of the minimum tax
to January 1, 2016; there is no comparable feature in any other
version. He said, "In the absence of that, it's nearly
impossible to have a large impact on 2017 spending." He called
2017 spending "water under the bridge," because it is tied to
company activity in 2015, thus involves credits that have
already been earned and the state must pay one way or the other.
MR. ALPER remarked that the slide shows strong parallels in FY
17, FY 18, and FY 19, between the bill out of the House Finance
Committee and Version D, but a major diversion in FY 20. He
explained what happens in FY 20 is that many of the delayed
features of Version D would kick in: the elimination of the
refunded credits and the hardening of the floor through the
running through of old NOLs against the floor. The impact in FY
20 is $310 million versus a much smaller impact in the prior
years. He said the last line in the analysis is the NOL carry
forward value, and it is apparent that the governor's original
version of HB 247 had the highest number, and that is because
"while keeping the 35 percent NOL, we were hardening the floor,
and all those credits going back to 2017 - all of those credits
that were not being used to go below the floor - were being
added to the stack." He said that was part of the reason [the
administration] realized it needed to reduce the NOL credit. He
said Version D falls somewhere between what the House Finance
Committee did and what the governor did. He stated that the
fiscal note is complicated, and slide 25 provides the fiscal
information in a more simplified manner. Mr. Alper announced
that he had completed his presentation and was available to
answer questions.
10:28:55 AM
COMMISSIONER HOFFBECK recollected that a concern had been raised
as to why the restricted monies deposited into the permanent
fund were not included on slide 5. He stated the reason was
that "we don't have those to pay the credits." He explained
that the slide shows only "where we had cash in hand to pay the
credits."
10:29:32 AM
REPRESENTATIVE MILLETT said that had been her question, and she
said she still would like to receive information from the
department regarding [the permanent fund money] from FY 07 - FY
15.
MR. ALPER told Representative Millett that the figure of $8.7
billion, labeled "Restricted Revenue," is the permanent fund
share of royalties. He said, "You could take that $8.7
[billion] and the $0.2 [billion] on the non-North Slope - that's
$8.9 [billion] - subtract that $9 billion from the [$62 billion]
and we have about $53 million in unrestricted petroleum revenue
over that time period."
10:30:17 AM
REPRESENTATIVE TUCK directed attention to slide 17, regarding
the minimum tax floor, and offered his understanding that by
[eliminating] the net operating loss credits, "they won't be
able to go below ... production taxes - the severance taxes -
... and offset any revenue that the state may give if you go
below zero." He asked for clarification regarding the floor and
whether the forecasted year would be 2020, "based on how much we
may expect to see the existing net operating losses continue to
go on."
MR. ALPER prefaced his answer by stating that during ACES and
PPT, when the floor was put in place, the tax was 4 percent of
the gross, but credits could go below that. Back then there was
a big, 20 percent capital credit on the North Slope, so
effectively there was no floor, because everyone had enough
spending to "off" the minimum tax. He added, "The price never
got low enough during that era where the floor kicked in." With
the elimination of the capital credit under Senate Bill 21, "we
thought the floor was hardened." The per-barrel credit is what
is limited by the floor; "they have to pay the 4 percent from
legacy production on the North Slope - from old fields." He
continued:
What we learned was credits can still go below it, but
we didn't think the majors would be earning any
credits. The credit ... they could still earn is this
operating loss credit. If they have a loss in one
year, they could use that credit to offset their
minimum tax from the next year. So, we started seeing
- beginning in 2016 and through FY 21 - very, very low
production taxes under status quo because of operating
loss credits going below the floor.
So, what this bill does is, it says, "You're not going
to earn any more operating loss credits. By carrying
forward your lease expenditures, you're not turning
them into a credit, and therefore, you can't turn them
into something that you can go below the floor with."
But before the effective date, which is January 1,
2017, you have any operating loss credits that you
might have already had by that point. Now, based on
our estimates, that number is $500-$600 million,
something like that. So, that $500-$600 million will
be enough to use up three years' worth of floor
payments, and that's how you get ... [to] 18, 19, and
into FY 20 before they use them up.
So, based on the forecast, yes, it's 2020. The
reality is that comes down to what's the price of oil
for the rest of 2016. And if the companies don't have
losses this year - actually make a couple of dollars -
then that number's going to be much smaller and, in
effect, will have a hard floor in 2017. But if we
have a few hundred million dollars in losses this
year, then that'll delay the hard floor for another
one, two, or three years.
10:33:46 AM
REPRESENTATIVE TUCK asked Mr. Alper to describe the main
differences between the governor's hard floor at 5 percent and
that in Version D, and how the price of oil may affect those
numbers.
MR. ALPER answered that the governor's hard floor maintained the
existence of 35 percent NOL credits, so companies that had
losses would earn the credit, but could not use that credit to
go below the floor, but instead must carry it forward and "build
up a taller stack of credits." Under the governor's plan there
is an increase in the carry forward numbers over the status quo,
because the companies are not "using up their NOLs going below
the floor." He continued:
So, that's the one difference is that the ... NOL
credit had to be carried forward and used into the
future, and that was immediate. Whereas, using the
lease expenditure model, there's the delay, because
all the old NOL credits could go below the floor for
so long as they can.
MR. ALPER said another major change [in the governor's original
version] was the hardening of the floor against other credits.
He explained he was talking about the $5 per-barrel for new oil
- the GVR oil - that under current law can go to zero. He
added, "And there's no change in this bill; that could still go
to zero." He said there is a small producer flat credit of up
to $12 million per producer, which could go below the floor
under current law. He said, "There's no change to that in this
bill." He explained, "So, the governor was hardening the floor
against some of these secondary credits, as well as the NOL, and
it was immediate." He continued:
The committee substitute is just against what amounts
to the NOL, but it does so by ... eliminating the NOL
and ... moving it into the future. ... It retains the
ability of using existing NOLs against the floor. The
issue there is there's only so many of them;
eventually they're going to get used up, and at that
point the floor kicks in.
REPRESENTATIVE TUCK surmised that the NOL was "just kind of
halfway discovered" and the impacts were not [anticipated]. He
asked, "When did the administration discover this, and ... would
the governor have done something differently with his first
proposal on HB 247?"
MR. ALPER answered that the concept of operating losses has been
in existence since PPT, since the day the state first talked
about switching to a net profits tax. He continued:
In general those were used by companies that were in
development - that didn't have production yet. We
never really contemplated people actively producing
oil all year and losing money at the act of doing so.
... That is a relatively new concept, given the low
prices we're in right now and, frankly, ... the higher
costs that companies are experiencing because of cost
inflation over the last few years and declining
production.
So, we didn't see substantial numbers of major
producers having losses until ... we started working
on the spring forecast in February and March of this
year - well into the legislative session. At that
point, we started seeing the preliminary numbers and
kind of had a "holy heck moment," like this is much
different than anything you've seen before. ...
Suddenly the universe of NOLs has increased by a
factor of 10. It's not just about new guys in
development; it's about our major legacy producers
that produce all of our oil and all of our revenue.
If they're suddenly having quite possibly billions of
dollars in losses turning into many hundreds of
millions of dollars of operating loss credits, how
does that build up and how does that affect our ...
future revenues? And that's why, in March, you
started seeing the commissioner and the governor and
others talking about the need to change the nature of
the NOL credit itself.
MR. ALPER concluded that if the fall forecast had looked like
the spring forecast, he would have expected the original bill
version to look different; [the administration] would have been
seeking to modify the NOL credit initially.
10:38:10 AM
REPRESENTATIVE TUCK directed attention to the comparison chart
on slide 25 and remarked, "It doesn't sound like ... doing
anything with the NOLs really is a Senate Bill 21 change, since
that was something that we've always had under PPT."
MR. ALPER responded that NOLs have been around since PPT. The
NOL credit usually has been tied to the base rate of tax, but
not universally. He said under the PPT, the base rate was 22.5,
with progressivity on top of that. The NOL was actually 20
[percent], and ACES base rate and NOL was 25 percent. When
Governor Sean Parnell introduced Senate Bill 21, it was a 25
percent flat tax, with a 25 percent NOL - there was no
progressivity. He continued:
The decision was made in committee to go to that 35
percent tax, with a per-barrel credit. ... That was a
revenue neutral decision. At the expected prices, we
were going to get the same amount of money from 35
minus 5 as we were from the 25 percent. The
difference was a little bit of progressivity, meaning
a little bit more revenue at the high end, a little
bit less revenue at the low end, and that was the
desired decision. But there was no real need at that
moment to bump up the NOL credit rate to 35 percent.
That just sort of was carried along for the ride with
the change to 35/5. In that there was no revenue
benefit to the change in tax, why did we need to
change the credit? That was the realization we had,
and that's why it was fairly easy for us to come
around and say, "Well at [the] very least, we should
reduce the NOL rate down to 25 percent."
... Since then the conversation's gone ... in more
aggressive directions, talking about a ... sliding
scale or an elimination of carry forwards and that
kind of thing.
REPRESENTATIVE TUCK, referring to the chart with the summary
analysis of the bill versions, asked how much of a factor the
elimination of the NOLs would have been to the governor's
numbers for FY 17-20.
MR. ALPER answered that the change would have been minimal to
"the dollar value of the bill." Where the change would have
made an impact would be the bottom line - the carry forward
number, which represents an off-set against future taxes; once
the prices go up, that number would decrease dramatically.
10:41:15 AM
REPRESENTATIVE KREISS-TOMKINS offered his understanding that Mr.
Alper had said that with [Version D], there is a potential for
major producers to accumulate a small fortune in NOL credit
subsidies, which would effectively wipe out any production tax
liability through approximately 2020. He asked what the price
forecasting was when [the administration] came up with "that
$500- to $600-million figure." He said he also would like to
know the relationship between the quantity of NOL tax credit
subsidies and projected production tax liability "over those
three years." He emphasized his conviction in ensuring that the
state does not lose money on its oil resource through any tax
credit mechanism but, in this case, specifically through the NOL
tax credits.
MR. ALPER responded that the spring forecast for oil price is
about $39 from now through the end of FY 17. He offered his
recollection that the FY 18 amount is $43, while the number for
FY 19 is about $48, and there is a big difference between those
numbers, because the break-even price is about $46. He
explained that is the moment where companies stop accumulating
losses. He said there is another slide, which he had not
included, which tracks carry forward losses and credits through
multiple years and addresses the statutory minimum credit
repurchase. The take-away from that slide, he said, is that in
FY 19, 20, and 21, the price of oil is well above the break-even
price, such that companies would have a tax liability in the
hundreds of millions of dollars. However, the state's
production tax revenue during those years was de minimis at $10-
$15 million. He said the reason was that all of the carry
forward losses from FY 16-18 were offsetting the forecasted
taxes that were due in FY 19-21.
10:44:25 AM
COMMISSIONER HOFFBECK added, "We are really at that ... breaking
point on whether the carry forwards will occur or not based on
oil price." He mentioned an article in Bloomberg about
producers, at a $50 price point, being able to get their prices
down and worldwide "stop bleeding red" and "start turning
production back on." He said if that is the case, "we are going
to be hovering around this territory for quite some time." He
continued, "Regardless of whether we're going to be above or
below that threshold in that coming year, I think we still need
to ... the dynamics of what happens when we fall below it and so
I think we need to correct the issue, whether we have the carry
forward issue or not; in the coming year ... I think we need to
put something in statute so it lets everybody know what happens
if we fall back below that line again."
10:45:29 AM
REPRESENTATIVE KREISS-TOMKINS, regarding the subject of
preapproval and incentive applications, mentioned the $100
million in exploration credits coming in under the wire and
other credits for speculative investment. He said the state is
subsidizing the industry and wants a return on such an
investment, and he opined that a clear return needs to be
demonstrated when using public dollars. He expressed interest
in what DOR's thinking has been in terms of "how that filtering
or approval process might work." He said farmers and fishermen
in Alaska don't get automatically approved for financing; they
get denied if they are not credit-worthy. He asked what DOR's
conversations have been in terms of creating a return to the
State of Alaska and "the people who are financing, subsidizing,
or incenting this development."
COMMISSIONER HOFFBECK answered that that was exactly the
conversation held when considering whether to include a
preapproval process in the original legislation. He said, "We
left the NOLs in as kind of a playing field leveler between the
independents and the producers - again because of kind of
teetering on ... [Senate Bill] 21 - and went maybe a step too
far." The discussion included consideration of whether to
replace the other credits with some kind of preapproved credit
process "where we could be much more surgical in where we would
spend our money" and look at the long-term benefits of a Smith
Bay project, for example. He said, "There may be some reason
that we would want to be involved in a project like that,
because it may be pushing the horizons out to some place that we
think they should be." He said another view is to consider the
net present value of the return to the state and whether "X"
amount of dollars invested into a project would ultimately
result in a return in a certain period of time. He said, "We
really wanted to ... make it more of a business decision on the
credit structure than what we have now. I think there is still
a place for the state to be involved in exploration and
development, but I think we need to do it very project-
specifically with a much more surgical form in place ... for
approval." He mentioned a film tax credit that was cut last
year, which had a very specific approval process, including a
committee that reviewed the proposal and approved a "specific
amount of credit for a specific project for a specific period of
time," and he said he thinks that is [a method] that could be
duplicated for the oil and gas tax credits so that Alaska could
participate without such an open-ended system as it does
currently.
10:49:13 AM
The committee took an at-ease from 10:49 a.m. to 11:02 a.m.
11:02:00 AM
CHAIR JOHNSON announced that the committee would next hear a
presentation from the Alaska Oil and Gas Association related to
HB 247.
11:02:20 AM
KARA MORIARTY, President/CEO, Alaska Oil and Gas Association
(AOGA), noted that her ensuing testimony was supported
unanimously by AOGA members. She paraphrased the first segment
of her written testimony, which read as follows [original
punctuation provided]:
We recognize that many of you are looking for ways to
fill the state's budget gap and see increasing taxes
on the oil industry as part of the solution. However,
to be completely candid, the CS in question will
result in disastrous long-term economic consequences
to our state that will far outweigh the temporary and
modest short term gains.
Before I get into more detail about how this bill will
unquestionably have a negative impact on Alaska, let
me first lay the foundation for those comments. I
begin by asking you, our state lawmakers, what is your
vision for Alaska? With that in mind, how can this
proposed legislation serve your ultimate endeavors?
What will the bill do to production and how will state
revenues be impacted by this bill next year or even
five years from now? What will Alaska's economy look
like following the adoption of this bill?
More to the point, is the CS likely to increase or
even provide stable throughput in the Trans-Alaska
Pipeline System, "TAPS"? Will the CS incentivize
workovers and production from more mature fields, or
encourage new companies to invest here? Will the CS
increase the diversity of companies operating in
Alaska? Perhaps your vision is a stampede of new
activity on the North Slope, where companies compete
fiercely for acreage and resources as they forge ahead
with multi-million and even multi-billion dollar
projects? Or perhaps you are focused on Cook Inlet and
your CS is designed to provide energy security for
South Central Alaska by encouraging increased
investment and production in Alaska's first oil basin?
I would imagine that increased production and a
healthy economy are the foundation of your long-term
vision for Alaska, which is why it is paramount that I
advise you that the CS will drastically undermine
those goals and jeopardize Alaska's future.
As we read through this latest CS, it is unfortunate,
but very clear that the CS does create new principles
for Alaska. Those principles include eliminating
refundable tax credits, which were the catalyst for
several companies investing in Alaska. Those credits
have provided, and continue to provide, a strong
return for the state's investment. Another newfound
principle appears to be to raise taxes on an industry
that is already losing money in the state, regardless
of the consequences to not only that industry but also
the Alaskan economy. This CS is a flagrant money grab
that will, without question, lead to less oil
production, less investment, fewer Alaskans working,
and ultimately, and somewhat ironically, less revenue
for the State.
We understand the politics associated with this issue
are challenging. We get it. And yet, to my member
companies, the politics are largely irrelevant to the
core of what drives decision-making, and that is
economics. My member companies will not pursue
projects that don't pencil out. They will not keep
more Alaskans on the payroll when the State decides to
take an even bigger bite out of the bottom line,
which, at the moment, for some companies, is awash in
red ink. The industry, recognized in the state's own
data, does not have the current revenue to pay their
daily bills, and it will be forced to constrict even
more if a bill like this becomes law. This inevitable
result will not be based on emotions or politics. It
is simply a mathematical calculation. Numbers dictate
investment, and a bill like this makes the numbers
worse. End of story.
Ironically, with this CS, the State actually is
setting the stage for an inevitable loss of revenue
regardless of what credits it removes or taxes it
raises. Getting back to the economics, the barrels of
oil that remain in legacy and new fields, which we
know are there for the taking, but require significant
capital investment to recover, would lead to greater
revenue to the State. And yet, instead of trying to
facilitate the recovery of those volumes, this CS will
raise the production tax, thus making those barrels
less likely to be produced when oil prices inevitably
come back up.
Again, here's the irony: Under this CS, the State will
see lower oil and gas production, which will then
drain State finances.
11:08:28 AM
MS. MORRIARTY drew attention to a couple PowerPoint slides she
had provided. The first slide shows projected production decline
curves. She said the numbers shown were sourced from recent,
publicly available data. She continued to paraphrase her written
testimony, which read as follows [original punctuation provided]:
For example, the owners of Prudhoe Bay just updated
their plan of development and have estimated that
production will decline 20,000 - 60,000 barrels per
day due to the shut-down of 3 rigs and less well
workovers being completed due to the low price
environment. This lost drilling time could result in a
10-30% decline in Prudhoe Bay alone, which is in line
with what industry has often said that the natural
decline is about 10-15% without increased investment.
The tax increase proposed by this CS will not help
turn this around.
MS. MORIARTY referred again to the slide and stated that by using
both DOR's production and price forecast, AOGA charted declines
of 7, 10, 15, and 20 percent [shown alongside 4 percent], which
she explained is the current forecast, even with hoped for
investment. All these percentages are calculated to show
production decline from 2016 to 2021. She said a 10 percent
decline results in about 300,000 barrels per day in five years.
She stated, "If you look at the cumulative reduction in royalty
values under those same percentages, you will see that this chart
highlights the possible ramification of ... [exacerbating]
production decline. So, a 10 percent decline every year for the
next five years would result in just under $800 million less in
royalties alone, and a 20 percent decline in production will
result in a very dramatic and terrifying loss of almost $2
billion in royalties alone."
MS. MORIARTY returned focus to production decline curves and
continued to paraphrase her written testimony, which read as
follows:
Adding insult to injury in this scenario, the
technical aspects of operating TAPS are made more
challenging because of those lost barrels, and thus
more expensive. Alyeska as stated that TAPS faces a
significant operational obstacle at throughputs at
around 300,000 barrels per day. Despite some of the
best and most innovative people in the industry
focused on this scenario, an operational solution has
not yet been identified to sustain TAPS operation at
this level.
The other unfortunate irony is that this resulting
loss of production would come on the heels of the
first year-over-year increase in oil production we've
seen in 15 years. Under this ... [CS], Alaska throws
out that progress with the bathwater.
So again, I ask all of you, what is your policy? In
years past, focus was placed on several key components
of a balanced oil and gas tax structure, including
production, predictability, certainty, and
competitiveness. From our view, this CS negatively
impacts every company in Alaska and violates every one
of those tenets. In addition, it has the dubious
distinction of making a bad situation worse by
bringing in even less long-term revenues to the state.
Alaska has been focused on increasing production on
the North Slope and Cook Inlet and for good reason,
because the state needs its economic engine to be
successful. More production means more jobs and
revenue for the state.
11:13:08 AM
This CS is a dramatic shift in Alaska's policy as it
essentially eliminates key tax credits within the next
2-3 years and adversely changes some of the key
elements of the existing production tax system. After
weeks and weeks of analysis and examination, this
committee substitute makes yet again more drastic
alterations. The rapid tax credit sunset will surely
have major adverse impacts to projects currently under
development, and discourage others from ever seriously
considering investment in Alaska in the future. The
change in the application of future potential net
operating losses represents an immediate tax increase
and devaluation of this essential element of a net
based tax system.
Alaska is the only state in the nation considering
increasing taxes or eliminating incentives at this
time of low price. This CS will require an even higher
oil price for companies to invest in Alaska,
especially for companies that are looking to explore
in Alaska's very high cost environment.
If Alaska wants to retain the strong benefits it
receives from the industry that develops its resources
and provides over 80% of the state's revenues, there
needs to be confidence that the underlying tax
structure is stable and predictable. This CS certainly
does not promote the stability that will encourage
industry to continue investing in Alaska. In fact, it
sends a strong signal to the world that Alaska is
constantly changing tax policies, regardless of oil
price, and regardless of the economic condition of the
industry.
As an example of instability, the CS creates a new
policy regarding Alaska resident hire. Let me be
clear, the industry strongly supports hiring as many
Alaskans as we can. It makes economic sense for the
industry to do so. The current language of this
provision is unclear [and] creates questions of
retroactivity and questions of implementation, all of
which creates additional uncertainty for industry.
In closing, the industry is not asking for a tax
decrease or for tax or royalty relief while we
struggle though extraordinarily low prices, and we
have asked that you proceed with caution when changing
tax policy.
It is my job to let you, our elected officials, know what
impacts your decisions will have.
• The CS will not increase production from the Slope or
Cook Inlet.
• It will not encourage new companies to invest in
Alaska.
• It will not lead to more long-term revenues for the
state.
• It will not increase the number of companies operating
in Alaska, and will likely drive some companies out of
the state.
• It will not lead to a stampede of new activity.
• It will not provide long-term energy security.
All this CS will do is provide a small amount of
short-term revenue for the state, while significantly
jeopardizing Alaska's long-term future.
11:16:46 AM
MS. MORIARTY offered to answer questions from the committee.
11:17:01 AM
REPRESENTATIVE HERRON asked if Ms. Moriarty could name anything
good about Version D.
MS. MORIARTY answered that unfortunately none of the changes
proposed in any iteration of HB 247 would provide anything
positive to the industry, and ultimately that would not be
positive for Alaska.
11:17:51 AM
REPRESENTATIVE KREISS-TOMKINS said that as he read through
written testimony, "the language of money grabs" seems strong.
He asked whose money is being grabbed. He offered his
understanding that currently Alaska is subsidizing the industry
with $775 million, which Mr. Alper said is a temporary rise that
will drop to about $500 million in future years "if nothing
changes." He observed that it is the state's money, yet
"there's an assumption that it's your money that we, the State
of Alaska, are grabbing." He asked Ms. Moriarty to comment.
11:19:15 AM
MS. MORIARTY responded that from AOGA's perspective, the state
is collecting more revenue from the industry as a whole than the
industry receives in credits, whether refundable or not. For
example, over the past eight years, the state has generated $61
billion from the industry while paying out approximately $8
billion. She said that is a policy that the state created and
to which the industry responded. She explained that the reason
for characterizing this as a money grab is that the state is
looking for additional money - whether in the form of less
credits given, which will affect investments, jobs, and
production, or through increased taxes - for an industry that is
losing money today. If prices stay at $40, the state is
forecasting that the industry is going to lose over $1 billion
this year, yet the state is looking to generate more money from
the industry "in that scenario." She concluded, "That's why we
think it's money grabbing."
REPRESENTATIVE KREISS-TOMKINS questioned who the owner of the
resource is. He pointed out that while oil prices were high,
there was a "sharing of that huge windfall that occurred." He
said, "You noted it's simply a mathematical calculation where
companies invest their dollars, and similarly, to me, it should
be a mathematical calculation how the State of Alaska incents or
subsidizes certain industries to get a maximum return on its
dollars." He asked Ms. Moriarty if she had any thoughts
regarding Mr. Alper's or Commissioner Hoffbeck's suggestion that
the state should use a filtering or preapproval process to
determine a demonstrated return on investment when it incents or
subsidizes the industry and whether she sees that mathematical
calculation working in both directions.
MS. MORIARTY responded that she is hesitant to remark on a
preapproval process before seeing what it would look like;
however, AOGA has always suggested it is dangerous to establish
a policy in which winners and losers are chosen. She said AOGA
believes the tax policy should work regardless of company, size
of project, or whether that project is for exploration or
development. Further, she said AOGA has long-felt that even
though its members did not agree with every component of Senate
Bill 21, the current structure is a solid tax policy that allows
for any company to know what the rules are and to be successful
in Alaska. Regarding whether the mathematical equation is fair,
she emphasized that it is up to the state whether to change its
policy to get more money from the industry or provide less
credit to the industry, but doing so will result in a change in
the industry's behavior leading to less activity, fewer jobs,
and a decline in production.
REPRESENTATIVE KREISS-TOMKINS, regarding winners or losers,
indicated that deferring exploration and capital costs is
essentially an upfront grant for development. He mentioned
again other industries, such as agriculture and fishing, which
deal with revolving loans, for which they either are approved or
rejected. Those other industries must prove they are worthy of
receiving the money from the State of Alaska. He said, "In a
certain sense, it's picking winners or losers. I think in a
more accurate sense, it's vetting ... [which] operations are
economic and going to provide a safe and reasonable investment
and which operations are not." He said if the State of Alaska
approved every revolving loan fund application, which he offered
his understanding would be similar to the tax credit system,
then there would be a lot more jobs and more investment, but it
would be a "paper industry" that cannot sustain itself because
it relies on subsidies to exist.
MS. MORIARTY responded, "These are not grants up front." She
said the companies do not apply for the credit, get the credit,
and then go spend the money. The companies spend the money and
create the jobs first, then apply for the credit, which may or
may not be redeemed, and then get reimbursed 18-24 months later.
She emphasized that this is not the same concept as a loan or
grant program. The credit that is applied for after the expense
is incurred is, when received, put right back into the business.
She suggested that the upcoming testifiers from the industry
could offer further information regarding the use of the
credits. She said changing from a credit program to a loan
program completely shifts the economics and feasibility of the
projects.
11:27:41 AM
REPRESENTATIVE TUCK stated his belief that there are few places
where the industry "has it any better" than in Alaska. He said
he finds the idea of Alaska as a money grabber problematic,
because the state has been reimbursing the industry and doing a
good job in partnering with it. He said during ACES and when
the price of oil was high, not only was Alaska able to put money
in savings, but the industry made record profits. He said "we"
have been preparing for a rainy day, and he speculated that the
industry has done the same. He said Version D suggests a
reduction in some of the cash payments. He said [the State of
Alaska] jump started the industry in Cook Inlet. He noted that
Mr. Mayer had testified that Cook Inlet is profitable at
anywhere between $5 and $7 per Mcf. The state knows that what
it did to give incentives and get fields into production and
have sustainable gas was successful. Now the state is not
collecting anything in terms of corporate or production taxes.
He spoke of the promise of Senate Bill 21, the announcement by
BP of a 40,000 barrel a day reduction, and the layoffs that have
been taking place in spite of everything the state has been
giving to the industry. He questioned how much more money the
industry needs from the State of Alaska to prevent those layoffs
and the 40,000 barrels per day reduction.
MS. MORIARTY replied that the industry is not asking for any
more money from the State of Alaska, royalty relief, a tax
deduction, or a tax deferral. She said those changes that are
happening on the [North] Slope are a condition of a low-price
environment. She said AGOA is saying that in that environment,
increasing taxes or the removal of incentives will increase the
time it takes to bring the rigs back on line. She recollected
the news had reported that Prudhoe Bay may not see those rigs
come back on line until 2018. Adding additional cost, she said,
will increase that timeline. She further noted that at the
current price environment, the government is currently at "100
percent government take." She questioned how much higher the
government should go, in terms of that take, in the current
price environment. Finally, she said she does not believe the
million barrels a day was ever a promise by the previous
administration; she recollected that it was a goal, which
included not only production from state land, but also federal
outer continental shelf (OCS), "which we see now will be at
least another generation before we see that come on line."
11:32:12 AM
REPRESENTATIVE KREISS-TOMKINS stated that he thinks [HB 247] is
a modest proposal; therefore, he is incredulous about and finds
troubling Ms. Moriarty's reaction to it. He recounted that Ms.
Moriarty had said she is not asking for more money from the
State of Alaska, but he said it sounds like she would like the
same amount of money to continue to be given. He discussed the
changes in focus and price environment over the years. He
asked, "Is the only acceptable scenario, to you, the status quo
- that we don't change anything?"
MS. MORIARTY answered that production has increased from last
calendar year to this calendar year; the production has been
stemmed and is holding steady; and the decline rate for the next
five years is a reflection of an improved environment before
Senate Bill 21. Referring to the projected production decline
curves slide again, she highlighted that back in 2013, the
forecast for 2020 was about 400,000 barrels a day. She said the
blue line at the top of the chart, at 2020, shows more than
about 50,000 barrels per day, more than the forecast was back in
2013, before Senate Bill 21 was passed. She pointed out that
that forecast had about a $50 higher oil price than is seen
today. She said, "So, Senate Bill 21 is giving you a more
competitive environment than you saw previously - even at lower
prices."
MS. MORIARTY confirmed that AOGA supports the status quo,
because it is important to have a stable tax environment. She
reiterated her warning that tax increases or the elimination of
incentives or credits would have a negative impact on activity,
jobs, production, and royalties. She indicated she had not
intended to be a source of incredulity, but was just stating, as
the responsible head of the trade association for the industry,
"how the industry will be impacted by the policy change proposal
in front of you."
CHAIR JOHNSON asked that the discussion maintain focus on
Version D of HB 247 rather than wandering back to the PPT, ELF,
or Senate Bill 21.
11:36:57 AM
CHAIR JOHNSON announced that the committee would hear next from
Dan Seckers of the ExxonMobil Corporation.
11:37:31 AM
DAN SECKERS, Tax Counsel, ExxonMobil Corporation, stated that
ExxonMobil Corporation supports Ms. Moriarty's testimony that
while Version D is an improvement over the governor's original
bill, it still is troubling legislation. He explained that
Version D would make changes to existing production tax that
would raise the tax in the future, and for that reason
ExxonMobil Corporation opposes Version D. He stated that every
time the State of Alaska responds to market fluctuations or
needs money, it targets the industry to raise taxes, which
creates further instability in Alaska's investment climate and
undermines the economics of investments made in the past and
those being considered for the future. Further, he said Version
D would devalue a number of the key components of the tax
structure.
MR. SECKERS said the structure the state has had since PPT is a
net-based tax, not a gross tax. One of the key components of a
net-based system is the balancing of revenues and expenses.
Version D would take the critical NOL tax credit and turn it
into an NOL loss. He continued:
Now, while this concept is consistent with most net-
based tax systems, this change would represent a
significant and substantive change to the current
Alaska system, because it would disallow or prevent
those losses from going into credits to be carried
forward and used against the minimum tax. This would
represent an immediate and significant tax increase.
By preventing companies from realizing the true
economics of their investments, by disallowing ... or
deferring their ability to recover operating losses
against future tax liabilities, penalizes those
companies that made prior year investments when the
companies were losing money, and would penalize those
companies that are considering making investments
today, tomorrow, and into the future.
Such a provision and such a change would significantly
and negatively impact Alaska's investment climate and
the perception of Alaska's investment climate to any
investor by announcing to the world that Alaska is
willing to adversely affect the economics of past and
essential future investment solely for short term
revenue needs.
11:40:41 AM
MR. SECKERS stated that another problem with the proposed
legislation is the increase in the interest rate. He said
ExxonMobil Corporation believes that increasing the interest
rate by going to 5 percent over the federal discount rate, with
added compounding, will address the symptom, but will not solve
the problem. He indicated that ExxonMobil Corporation thinks
the problem is the length of time it takes the Department of
Revenue to audit production tax returns. He illustrated that
point by emphasizing that ExxonMobil Corporation received its
2009 production tax assessment six years to the day after filing
it, with "interest tolled that entire time." He added that that
interest is not abatable under Alaska law.
MR. SECKERS stated that Version D would increase taxes at a time
when industry is losing money, and it would increase taxes on
the very activity on which the industry is losing money. He
questioned the soundness of such a tax policy. He asked the
committee, "Is it your belief as policy makers that increasing
taxes on an industry that's losing money making investments that
we all need ... [will] lead to more production, more jobs, more
investment, more long-term, sustainable revenues?" He concluded
that in ExxonMobil Corporation's view, it will not.
11:42:51 AM
CHAIR JOHNSON announced that the committee would next hear from
Pat Foley, of Caelus Energy Alaska, LLC.
11:43:02 AM
PAT FOLEY, Senior Vice President, Caelus Energy Alaska, LLC,
acknowledged the daunting task of the legislature to find
solutions for Alaska's fiscal crisis and reconsider changes to
the tax policy. He said Caelus Energy Alaska, LLC, ("Caelus")
operates exclusively on the North Slope. He said he would speak
to three items in Version D: cashable credits, the GVR, and the
tax reporting and disclosure requirements in Section 9.
MR. FOLEY said it seems like the conversation is focused on the
cashable net operating loss credits, while not being focused on
"the avoided tax liability that other companies have." He said
it troubles him that people refer to a cashable credit as a
subsidy, because that is not what it is. He said an exploration
incentive credit could be characterized that way, but a
refundable NOL is not a subsidy or incentive, but was designed
solely to level the playing field between a new investor and
current legacy producers, by allowing the new investor to make
lease expenditures that would result in a loss, and the state
would pay that investor at 35 percent to that loss in the form
of a refundable tax credit. He clarified that he is not saying
that "you should tax them and not tax me," but rather that "some
elements of this bill are very negatively discriminatory against
new, small companies trying to incubate their business up here."
MR. FOLEY said he heard someone say that the legislature is
doing its best to protect new buyers and projects, but he opined
that in reality the state has not accomplished that goal. He
said, "If there's a window with a $75 million cashable credit,
and it's phased out after three years, it is helpful for a
project like Oooguruk or (indisc.) activity - it allows us to
kind of safely unwind that business - but it does nothing to
safeguard a project like Nuna or Smith Bay or a large
exploration block off to the east." He reminded the committee
that Alaska North Slope projects have a long cycle time from
exploration drilling to first oil, typically between 5-10 years.
He said when Caelus made the commitment to explore Smith Bay and
to buy leases east of Prudhoe Bay and shoot a high resolution
three-dimensional (3D), Caelus did so with the expectation of
fiscal tax stability for the life of the project - not for three
years.
11:47:40 AM
MR. FOLEY stated that a small company, such as Caelus, needs to
"go Outside" for capital from large lending institutions, and to
obtain that capital, it must have good prospects, a great track
record, good relationships with regulatory agencies and
contractors, and - most importantly - fiscal stability. He said
he has heard people say that Alaska cannot afford the credits,
but he maintained that the state cannot afford to discontinue
North Slope cashable credits. He said he thinks North Slope oil
operations have been the lifeblood of Alaska's economy for over
40 years, and he hopes that it continues to be for many years to
come. He reiterated the role of cash credits to new operators.
He stated, "A high volume producer takes those same lease
expenditures, and that results in immediate tax liability
reduction."
MR. FOLEY opined that through its tax policy of the last several
years, the state got exactly what it hoped for, which was to
attract independent companies committed to explore, develop, and
produce. He relayed that Caelus developed its Oooguruk leases.
He stated that Nuna is a project that is just waiting on a
little oil price recovery; it should have first oil two years
from price recovery. He said two exploration wells were drilled
this year at Smith Bay, and Caelus made $120 million-worth of
expenditures. In the east, Caelus has a large block of leases
that were shot at 3D, at a cost of $40 million. All of that was
with an expectation that Caelus would continue to earn credits
throughout the life of development. He continued:
If you look to our neighbors just to the west, with
Armstrong and Pikka, they, too, were exactly the kind
of company that I believe the State of Alaska intended
its tax policy to attract. My fear is that if you
change that tax policy, you're going to destroy all
the value that was created by the past tax policy and
you're going to chase the new investors away. So, I
believe if you eliminate the North Slope tax credits,
you will discriminate against the new players, you'll
advantage the current, large high volume producers,
and will discourage new companies from making
investments. And my biggest fear is it's going to re-
concentrate North Slope operations to the big three
legacy producers.
11:50:46 AM
MR. FOLEY next addressed the issue of the GVR. He said
currently a project like Oooguruk qualifies for a 20 percent
GVR, and there is conversation about limiting the duration of
that GVR. He continued:
To me, I think it is simply a re-trade of all the past
fiscal policies; it does nothing to address the
current tax problem. And I think the ... fiscal
problem is a result of low oil price. So, as you seek
solutions, find solutions that fix the problem in a
$30, $40, $50 oil world, but don't make changes that
destroy the attractiveness of the state to make
investments at higher prices.
MR. FOLEY noted that Section 9 of Version D would require any
company that receives a tax credit certificate to make certain
disclosures regarding its operations.
So, right now I think ... under the bill it would be
limited to companies like Caelus, Armstrong, Repsol,
perhaps [the Arctic Slope Regional Corporation]
(ASRC), perhaps Servant. And honestly, I'm totally
fine with the transparency of this, but the provision
does nothing to shed light on other companies that
take lease expenditures and transfer those into a tax
avoidance.
MR. FOLEY, in closing, encouraged committee members to take a
long, long view and to not worry so much about today's oil
price, but instead to find a way to not destroy the healthy
North Slope environment when prices recover. A new company like
Caelus has limited capital and is able to take the credits that
it earns and make more swift investments, faster development,
and faster production, and eliminating the cashable credits will
result in reduced investments, jobs, productions, and state
revenue. He urged the committee to support the continuation of
North Slope cashable credit program in order to be in the best
position to "take advantage of price recovery once it happens."
11:52:57 AM
REPRESENTATIVE TUCK asked how the length of the GVR affects
royalty reductions.
MR. FOLEY answered that Caelus has two royalty reductions: one
is at Oooguruk and the other is at Nuna. He said, "The one at
Nuna will be expiring by its own terms, because we will have
failed to have started production as required under that royalty
modification."
REPRESENTATIVE TUCK asked about the definition of new and old
oil and whether that has any effect on royalty reductions.
MR. FOLEY answered yes, adding that "Oooguruk in its total, so
Oooguruk (indisc.) production, and Nuna would qualify as new oil
and they both qualify as GVR."
REPRESENTATIVE TUCK asked, "So, that will have an effect on you
one way or another?"
MR. FOLEY answered yes.
11:55:04 AM
The committee took a brief at-ease at 11:55 a.m.
11:55:55 AM
CHAIR JOHNSON announced that the committee would next hear from
Scott Jepson of ConocoPhillips Alaska, Inc.
11:56:04 AM
SCOTT JEPSEN, Vice President, External Affairs, ConocoPhillips
Alaska, Inc., directed attention to a PowerPoint presentation
and listed positive things that had happened since the passage
of Senate Bill 21, as shown on slide 3, including: the addition
of two rigs to the Kuparuk River Unit ("Kuparuk") fleet; two
new-build rigs ordered for 2016; the approval and construction
of the first new drill site in Kuparuk in the last 13 years; the
expansion of viscous oil operations in Kuparuk at drill site
(DS) 1H; approval of new development of Greater Mooses Tooth 1
(GMT1), in the National Petroleum Reserve - Alaska (NPR-A);
permitting underway for Greater Mooses Tooth 2 (GMT2); and an
active exploration program, with two wells drilled in 2014 and
the acquisition of GMT1 seismic in 2015. Mr. Jepsen stated that
none of the new production brought on by ConocoPhillips Alaska,
Inc., qualifies for the GVR. He clarified that some of it could
have qualified, but based on cost, a decision was made not to
pursue it for those particular operations.
11:58:02 AM
MR. JEPSEN indicated that ConocoPhillips Alaska, Inc., has had
as many as six rigs running between Kuparuk and Alpine, but
currently has four, with two rigs running in the Lower 48. He
said that what drives investments include a positive investment
climate, and it takes more time to ramp up production in Alaska
than it does to ramp it down. He said ConocoPhillips Alaska,
Inc., is investing in the future and hopes for a stable tax
climate in Alaska, but he said if that changes, the company can
"ramp stuff down at a fairly rapid basis," although it hopes it
will not have to do so.
MR. JEPSEN next offered information regarding "how much we're
investing in Alaska compared to our corporation." He said in
2014 his company's corporate capital spend peaked at about $17
billion; currently the latest estimate for the entire
corporation is about $5.7 billion. He estimated that
ConocoPhillips Alaska, Inc., would spend about a billion dollars
in 2016 and would "maintain that course," unless there are
negative changes made relating to taxes.
MR. JEPSEN said one thing to consider is that the State of
Alaska "always has positive revenue." He said, "The State of
Alaska collects royalties, severance taxes, property taxes,
[and] income taxes, and some of that - like royalties - is
completely price independent." He continued as follows:
Even down to $30 a barrel, using data from the 2016
Revenue Sources Book [(RSB)] for fiscal year 2017, we
estimate the State of Alaska taking about $1.2
billion. Investors on the North Slope ..., at that
price, using the ... 2016 RSB assumptions, would lose
about $2 billion. As prices go up, the state is
always in a better position than the investors.
MR. JEPSEN said investors are losing money, and increasing costs
will have a negative impact on investment opportunities and
actions.
12:01:00 PM
MR. JEPSEN directed attention to the slide titled, "Tax Credits
and Applicability to COP." He said the slide highlights
activity pertaining to tax credits, because it is not always
clear where the benefits go. He said large producers, such as
ConocoPhillips Alaska, Inc., receive very little of "the tax
credits that have been so much a part of the conversation." He
directed attention to the column marked, "Tax Credit Type,"
which lists: [net operating loss, exploration, small producer,
per-barrel production credit, and Cook Inlet and Middle Earth].
He said column [2] summarizes all the FY 17 tax credits, as
estimated by DOR to be approximately $908 million. Following
that is [column 3], titled, "total reimbursable," the sum of
which is $772 million. Of that, he said, large producers, like
ConocoPhillips Alaska, Inc., are eligible for zero, [as shown in
column 4]. He said column 5 describes the total used against
severance tax liability. He said the first item [82] relates to
the NOL, which he acknowledged had been the subject of much
discourse previously in the hearing.
MR. JEPSEN said that to-date, ConocoPhillips Alaska, Inc., has
not incurred a net operating loss credit. He said, "It's
possible for 2016, because they've seen some very low prices in
the ... first part of the year. Whether or not we incur one is
going to be dependent upon price and how well we control our
costs." He continued:
The other thing about net operating losses is that
they are self-correcting. We're not in the business
of operating at a loss; we don't try to accumulate
losses so that we can apply them against future tax
liability. So, that [if] we end up with a long period
of time - a long period to me is two years or so of
low oil prices - we ... invariably will take action to
make sure we get back the cash flow and make sure that
we're cash flow positive.
MR. JEPSEN offered his understanding that the number used
against severance tax liability for exploration is zero, because
those tax credits expire at the end of June; however, [as shown
in column 6], he said it is possible ConocoPhillips Alaska,
Inc., may take some tax credits on new wells it drills in 2016.
ConocoPhillips Alaska, Inc., is not eligible for the small
producer credit. The per-barrel production credit is dependent
upon price and costs, he said, but "if any part of that
materializes, we're going to be a pretty small part of it."
Regarding the Cook Inlet and Middle Earth credit, he said if
ConocoPhillips Alaska, Inc., is successful in divesting its
remaining assets there, then it will not qualify for those
credits. He reiterated that the number of tax credits that
pertain to ConocoPhillips Alaska, Inc., is minimus. He said the
point he would like to make is that producers such as
ConocoPhillips Alaska, Inc., are really not part of the problem;
they have continued to pay taxes, as he indicated was predicted
to happen at the passage of Senate Bill 21.
MR. JEPSEN directed attention to the bottom of the slide, which
summarizes the obligations ConocoPhillips Alaska, Inc., has
incurred to the State of Alaska in 2015: Approximately $660
million in obligations for royalties, property taxes, severance
taxes, and income taxes, and with a negative cash flow in excess
of $100 million. In the first quarter of 2016, ConocoPhillips
Alaska, Inc., incurred obligations of approximately $77 million,
and - because of extraordinarily low prices - a negative cash
flow of about $100 million. He stated that negative cash flow
numbers are not the same as net operating losses: not
everything spent to support the operations of ConocoPhillips
Alaska, Inc. is eligible for deduction for NOL purposes.
MR. JEPSEN said the point he wants to make is that
ConocoPhillips Alaska, Inc., is still a severance tax payer, is
still continuing to invest, and - if significant changes in the
tax framework are made - will have to take action to get back
into a positive cash flow position, which means less investment
and production on the North Slope.
12:05:37 PM
PAUL RUSCH, Vice President, Finance, ConocoPhillips Alaska,
Inc., said his comments would cover both the original bill
version of HB 247 and Version D and the adverse impacts on the
corporation's investments in Alaska. He said his comments
pertain primarily to slides 7 and 8 of the PowerPoint
presentation begun by Mr. Jepsen. He stated that the increase
in the minimum tax from 4 percent to 5 percent proposed in the
original bill version represents a 25 percent increase in the
minimum tax during periods of low prices, while the industry is
in a negative cash flow position. He said that increase would
have a chilling effect on the industry and future investment in
Alaska. He said hardening of the minimum tax floor,
particularly by taking away the ability to recover losses, also
effectively serves as a tax increase, with the potential to lead
to reduced expenditures on drilling and other similar activities
in producing fields during periods of low prices, and this could
negatively impact future production, he warned.
MR. RUSCH said Version D improves this by allowing the recovery
of any losses that may be incurred in 2016; however,
ConocoPhillips Alaska, Inc., would like to see this extended to
2019 "for consistency with the treatment of NOLs for the smaller
producers." He said ConocoPhillips Alaska, Inc., does not
expect to be in a long-term loss position, but would like to
ensure it has the time necessary to react to price changes and
adjust its spending accordingly.
MR. RUSCH referred to slide 19, from DOR's presentation, which
showed that in FY 26, producers will be holding losses at $715
million in future taxes. He offered his understanding that in
the matter of gross total, the industry would experience $2
billion in losses over the next 10 years. He said the industry
would not likely operate at such a loss for that many years;
therefore, "that number is likely exaggerated." He suggested
that if the committee believes that number, then this would be
the time to question an increase in taxes.
MR. RUSCH said ConocoPhillips Alaska, Inc., shares the same view
as expressed by ExxonMobil Corporation regarding interest rates
being increased while DOR takes such a long time to complete
audits, which are often followed by a lengthy appeals process.
He said this process can take 9 to 10 years, and because of the
long time period, the interest component of the assessment often
can exceed the underlying principal amount. He stated that in
previous testimony, ConocoPhillips Alaska, Inc., had recommended
improvements in the audit process prior to increasing the
interest rates, and he noted that this issue has not been
addressed in Version D. He said the 10-year limit for DVR
incentives included in Version D would make any new oil
developments less competitive. He said as was highlighted in
the testimony by enalytica yesterday, this could reduce the
project net present value (NPV) by up to 20 percent, which Mr.
Rusch said could be significant enough to drive investment to
other regions.
MR. RUSCH stated that two final concerns ConocoPhillips Alaska,
Inc., had regarding the original bill have been addressed in
Version D; however, he said he would bring them up in order to
ensure they would not return. First, he said ConocoPhillips
Alaska, Inc., does not agree with DOR's previous portrayal of
"migrating tax credits across months." He said production tax
is an annual tax with monthly payments that represent an
estimate of the annual obligation. Second, the disclosure
requirement in the original bill had the potential to violate
Securities Exchange Commission (SEC), IRS, and other taxpayer
confidentiality regulations. He said Version D resolves this
concern by limiting disclosure to reimbursable tax credits only,
including the company and the amount.
12:10:21 PM
MR. JEPSEN stated that overall ConocoPhillips Alaska, Inc.,
thinks Version D is a significant improvement over the original
bill version introduced by the administration. He said what
concerns him and could jeopardize future investment in Alaska is
"that we continue having this conversation." He said there have
been numerous tax changes over the last 11 years; it has only
been 20 months since voters ratified Senate Bill 21; and the
conversation continues today. He said ConocoPhillips Alaska,
Inc., will make changes to its investment plans according to
significant and impactful changes made to the tax framework. He
expressed his hope that the corporation could instead maintain
its momentum in Alaska.
12:11:12 PM
REPRESENTATIVE HERRON noted that Mr. Rusch's testimony is
consistent with that of others regarding the six-year wait for
the audits with which DOR is involved. He asked how long a wait
ConocoPhillips Alaska, Inc., would find acceptable.
12:11:43 PM
MR. RUSCH answered that three years would be reasonable and give
DOR the time it needs to review the information.
12:12:01 PM
REPRESENTATIVE KREISS-TOMKINS asked Mr. Jepsen if he had
experienced the same length of turnaround time as had been
mentioned by the representative from ExxonMobil Corporation.
12:12:21 PM
MR. JEPSEN deferred to Mr. Rusch.
MR. RUSCH said yes: a turnaround of six years and three months,
based on tax filing.
MR. JEPSEN offered his understanding it was 2006.
MR. RUSCH confirmed that "2006 is the last year that we closed
out completely."
MR. JEPSEN said it took about 10 years for the 2006 tax audit to
be closed out. He said once the findings are received from DOR,
the company goes through "a series of negotiations and protests"
before arriving at the final amount that may be owed in addition
to what was already paid.
REPRESENTATIVE KREISS-TOMKINS expressed his appreciation of
slide 7, which showed how ConocoPhillips Alaska, Inc., related
to the tax credit program. He referred to the slide with "net
operating loss tax credits" in "the top line," and recollected
that Mr. Jepsen had testified that ConocoPhillips Alaska, Inc.,
"is a big goose egg, a zero, not eligible." He then directed
attention to the slide that stated a $100 million negative cash
flow in 2015 and the first quarter of 2016. He stated his
understanding that ConocoPhillips Alaska, Inc., would be
eligible to claim net operating loss or negative cash flow. He
asked, "How did those two ... statistics jive with each other
and, I guess more pointedly, has ConocoPhillips Alaska, Inc.,
claimed any net operating loss tax credits thus far, to date?"
MR. JEPSEN answered that having negative cash flow does not
equate to net operating loss. He explained the reason is that
there are significant costs that ConocoPhillips Alaska, Inc.,
incurs in the running of its business in Alaska that are not
deductible from the severance tax calculation. He estimated
there was an excess of $115 million that were not deductible,
"if those still go toward the negative cash flow calculation for
us." He said his time and the money the corporation spends on
AKLNG are examples of that which is not deductible, and "there
are a number of other statutory areas that are not deductible
from a severance tax calculation." He said, "So, that's why you
can end up with a net cash flow that's negative, that's still
not incurring net operating loss." He said to date
ConocoPhillips Alaska, Inc., has not taken advantage of any NOL
credits, and whether or it does in 2016 will depend upon how
well the corporation can control its costs and what the price of
oil is.
12:16:28 PM
REPRESENTATIVE OLSON noted that several months ago the director
of the Tax Division indicated that the interest for the 2006
close out was about $100 million. He asked if that was correct.
MR. JEPSEN answered that he would have to take a look at the
context of [the director's] comment. Notwithstanding that, he
surmised that that number had to relate to the industry as a
whole.
12:17:23 PM
CHAIR JOHNSON offered his understanding that the director of the
Tax Division, who was present in the room, had nodded his head
to affirm that that number pertained to the industry as a whole.
12:17:33 PM
REPRESENTATIVE HERRON remarked that the House is trying to get
[HB 247] passed out of its body, but the issue of the GVR is a
sticking point. He asked if 10 years is doable or if
ConocoPhillips Alaska, Inc., is opposed to it.
MR. JEPSEN answered that any time there is a change in tax
framework that reduces various economic metrics considered when
making investment decisions, the competitiveness of the project
is reduced. He said at 10 years probably 100 percent of the
benefit of the GVR is preserved; however, at 5 years there is a
significant hit on the competitiveness of a project.
12:19:13 PM
REPRESENTATIVE KREISS-TOMKINS, regarding net operating losses or
the carrying forward of lease expenditures, said, "It seems like
a tradeoff." He said the point has been made by industry
members that "this is a really tough time" and cash flow is not
always positive. He said he can empathize with that. He stated
that currently the state is subsidizing those losses to a
certain extent. He said the question may be more palatable if
"on the upside we're also sharing ... in windfall profits." He
said with the conversion - Senate Bill 21 - "we ... effectively
eliminated that provision." He stated that he struggles with
the notion that the State of Alaska needs to take a hit on the
losses, as well, "if we don't have that upside." He concluded,
"And, to me, that's the balance or the partnership that ...
we've got."
12:20:40 PM
REPRESENTATIVE TUCK asked where the largest investments of
ConocoPhillips Alaska, Inc., are currently going.
MR. JEPSEN said he would have to obtain the latest report, but
looking at the total cap of expenditure for 2016, the Alaska
operation represents about 18 percent of the corporation's total
capital expenditures. He said that certainly is a
disproportionate size when considering the rest of the
corporation's worldwide operations.
12:21:50 PM
CHAIR JOHNSON announced that the committee would hear next from
Mr. Armstrong of Armstrong Oil and Gas.
12:22:17 PM
BILL ARMSTRONG, President, Armstrong Oil and Gas, expressed his
love for Alaska, in which he has been working for the last 15
years, and said his company and the state have worked well
together. He stated his and his shop in Denver's involvement in
the inception of Oooguruk Field, which he said became the sixth
largest operating field on the North Slope. He said the second
ever independently operated field on the North Slope is
Nikaitchuq Field - also started by his company. Mr. Armstrong
indicated his partner company is a Spanish company called Repsol
and together they made "a spectacular new discovery up on the
North Slope," and the former head of the Department of Natural
Resources, Mark Myers, was the only person outside of his
company and Repsol that knew about it. He offered his
understanding that Mr. Myers had said publicly that the new
discovery may be the second biggest find ever discovered on the
North Slope, second only to Prudhoe Bay.
MR. ARMSTRONG emphasized the great potential [for oil discovery]
still left in Alaska. He recognized the constant bombardment of
negativity related to Alaska's best days being in the past
because the state's industry is waning, but stated that he is
"the living, breathing, hardworking testimonial that that view
is absolutely, 100 percent false." He opined that the state's
best days are to come. He further emphasized the importance of
making Alaska an appealing place in which to do business. He
estimated that in the 15 years in which he has worked in Alaska,
he has experienced and had to adjust to five or six tax laws.
He opined that Senate Bill 21 was arguably one of the best tax
laws in the world, because it "hit the perfect balance" between
the oil companies, which he described as "the risk takers," and
the State of Alaska, which he called "the landlords." He said
both parties had a winning hand under Senate Bill 21, and the
tax regime was working, as evidenced, he maintained, by what has
been happening with ConocoPhillips and Caelus, and his company
with Repsol. He said he knows the debate is now about HB 247,
and he reminded the committee that during a previous hearing on
the bill, he had shared that his company's nickname for the
proposed legislation is: "Hell-bent 24/7 on kicking everybody
off the North Slope." He said based on Version D, he would now
change the nickname to: "Hell-bent 24/7 on kicking all the new
players off the North Slope." He explained that Version D is
"heavily stacked" to benefit the three existing large producers
on the North Slope. He concluded that if the goal of the state
is to have a monopoly or oligopoly, then Version D will serve
that purpose.
12:27:23 PM
REPRESENTATIVE TUCK expressed appreciation for Mr. Armstrong's
description of the effects of Version D on independents and new
competition on the North Slope, and he remarked that Mr.
Armstrong was not the first person to have expressed that
opinion.
12:27:45 PM
CHAIR JOHNSON invited Mr. Seckers back to the witness table to
answer a question.
12:28:16 PM
REPRESENTATIVE KREISS-TOMKINS said the testimony he heard from
ConocoPhillips Alaska, Inc., prompted him to query whether
ExxonMobil Corporation has, to date, claimed any NOL tax
credits.
12:28:52 PM
MR. SECKERS answered that although that is a valid question,
ExxonMobil Corporation is not authorized to disclose its tax
return information or what credits it can or cannot claim or has
claimed. He underscored that DOR's information is correct that
companies are losing money and that it is possible for
ExxonMobil Corporation to have an NOL this year depending upon
how prices proceed. He indicated concern that it is understood
what an NOL is. He explained that it easy to "throw around"
that topic and to suggest getting rid of them. He said that as
ConocoPhillips Alaska, Inc., mentioned, nobody wants to be "in a
loss." He stated that "this is not a credit that is ordinarily
given to ... a net operating system," but rather is a loss to
report, and that is not a source of pride. He opined that to
suggest getting rid of [NOL credits] because "the industry
doesn't need them" would result in "a tremendous change in the
substance of the law."
MR. SECKERS indicated that every time the state makes these
changes - whether reducing a credit or taking away a deduction,
for example - it is migrating its system to a gross tax. He
said that may sound reasonable, but he asked the committee to
consider that the current tax rate in Alaska is 35 percent,
which is almost three times the next highest severance tax
production rate, which he said he understood to be 12.5 percent
in Louisiana. Therefore, he said every time Alaska limits
deductions and takes away credits, it raises the industry's tax
hugely relative to Alaska's competitors. He continued as
follows:
Subsidies and credits are two distinctly different
things. So, again, it's your policy. If you want to,
you know, address some of that, we get that, and, as
Ms. Moriarty indicated, you know, the industry will
take whatever actions needed. But you're ... taking
away what is a cornerstone of a net-based system, and
that is the ability to recognize revenues and expenses
by limiting the revenues; you're in effect migrating
away from the core tax that you currently have in
place.
12:31:18 PM
REPRESENTATIVE TUCK noted Pat Foley of Caelus Energy Alaska,
Inc., had talked about credits versus subsidies. He asked Mr.
Seckers to describe the main difference between the operations
of the two.
MR. SECKERS prefaced his answer by suggesting the question would
be better asked of the state's consultant. He then stated his
view from a tax perspective. He said a subsidy generally is a
redistribution of money from a government to individuals. Tax
credits, he said, are just a way to calculate a tax: "They are
a reduction of the tax liability a company or person provides to
the tax authority that then redistributes by virtue of
subsidies." He said hearing the two terms used together "as
equals" makes him cringe. He said social security and the
permanent fund dividend arguably are subsidies.
REPRESENTATIVE TUCK asked, "Is it safe to say that both of them
have something to do with changing behavior - activity?"
MR. SECKERS answered, "Absolutely, without question." He said,
as Ms. Moriarty had alluded, there is the question of which
comes first. He said a subsidy is usually given before an
activity is undertaken or for no activity at all, "just as a
benevolent action of a taxing authority, so to speak." He said
a credit usually requires qualification, with the exception of
an NOL credit, for which, he maintained, no one wants to
qualify. He said, "To me, it's just a question of which is the
intent behind the action being taken." He said there are
numerous ways to structure a tax regime. He compared Alaska's
production tax rate to that of a federal income tax rate - both
being extraordinarily high.
12:33:41 PM
CHAIR JOHNSON recessed the House Rules Standing Committee
meeting to a call of the chair, which he estimated would be 30
minutes after the end of the House floor session.
2:43:38 PM
CHAIR JOHNSON called the House Rules Standing Committee back to
order at 2:43 p.m. Present at the call back to order were
Representatives Olson, Chenault, Herron, Kreiss-Tomkins, and
Johnson. Representative Tuck arrived as the meeting was in
progress.
2:43:59 PM
BENJAMIN JOHNSON, President/CEO, BlueCrest Energy, Inc.,
prefaced his testimony by stating BlueCrest Energy's support of
the testimony given previously by AOGA. He said he would speak
to issues particular to the Cosmopolitan Unit. He recalled that
during previous testimony, the committee had heard that what is
bad for the oil companies is good for the state. He emphasized
that with regard to what BlueCrest Energy is doing in Cook
Inlet, the tax credit program is an extremely good investment
for the state. He called it "a win-win situation for Alaskans."
He explained that the state's investment in Cosmopolitan,
through the credit program, will provide significant future,
positive value to the state, even at low oil prices.
MR. JOHNSON directed attention to his PowerPoint presentation,
to slide 2, titled "Cosmopolitan Project Area." He relayed that
the Cosmopolitan Unit is located about three miles off shore in
Cook Inlet, just a few miles north of Anchor Point. He said all
the productive area in the unit is on state leases. Turning to
slide 3, titled "Cosmopolitan Unit Development," he said the
unit consists of two separate development projects: productive
gas zones directly above underlying oil zones. He said the gas
reservoirs are not connected to the oil reservoirs. He said
BlueCrest Energy has not yet begun development of the off-shore
gas zones; that development is currently on hold because of
uncertainty surrounding long-term stable demand and future tax
credits. He said the development of the deeper oil reservoirs
is more straightforward, and two years ago BlueCrest Energy
committed to development of the oil reserves.
MR. JOHNSON directed attention to slide 4, titled "Cosmopolitan
Progress as of 05/10/2016." He said the company essentially has
completed the construction process and is continuing to run
final operational tests. He said BlueCrest Energy will have the
most powerful drilling rig in Alaska ready to begin drilling the
new wells by July 2016. Turning to slide 5, titled "Tangible
Results," he stated that just last month BlueCrest Energy "began
the very first sales of oil from a new Cook Inlet field in 15
years." He said the company is currently producing from an
existing exploratory well, but the main production will come
when it brings on the new wells and begins drilling in the
second half of 2016.
2:46:49 PM
MR. JOHNSON turned to slide 6, titled "Continuation of Cook
Inlet Credits," and he spoke of the value that Alaska could
receive from the Cook Inlet tax credits. He first emphasized
that the value resulting from new Cook Inlet oil production
should not be discounted. He explained that because of the
lower infrastructure costs and the fact that all Cook Inlet oil
is used within the state, it offers higher royalty values than
most North Slope production. He said the importance of the tax
credits here is that they allow [BlueCrest Energy] to continue
to drill at lower oil prices. Continuation of the existing well
lease expenditure (WLE) credit would mean that the company could
keep bringing its new wells "at $10 lower oil price than
without." He said if oil prices stay low and the credits are
substantially reduced next year, BlueCrest Energy will probably
be forced to suspend drilling, which would result in the loss of
roughly 300 Alaskan jobs. He asked the committee to keep in
mind that starting a drilling program is expensive and requires
even higher oil prices to justify the wells.
MR. JOHNSON stated that the bottom line is that the state
receives tremendous investment returns if [BlueCrest Energy] can
keep on drilling. He said the wells represent low risk and high
reward for the state. He drew attention to slide 7, titled
"State's Investment Return through Royalties from Each New
Cosmopolitan Well," which he said shows the calculation of
expected return to the state for each new well, as a result of
retaining the WLE credit into the future. He said, assuming a
$40 million well cost, a 40 percent WLE credit would amount to
about $15 million per well. He asked the committee to keep in
mind that the state can receive the benefits from this well only
if the company can drill it. He said the slide shows that at
any oil price above $24, the state makes a profit off the tax
credits, and the state's royalties - not even including future
production taxes that may occur in Cook Inlet and at a lifetime
oil price average of about $60 - would be approximately $38
million. He said that is a return of about 250 percent, which
he opined is "not bad economics."
2:48:42 PM
MR. JOHNSON turned to slide 8, titled "Per-Company Limits for
Cash Payments." Regarding tax credit purchases, he emphasized
how important it is to BlueCrest Energy's survival that it
receive the money - at least for investments to which it has
already committed based on existing law. He said if the
repurchase limits apply to the company's spending for future
time periods, it will have to adjust; but it has already entered
into contracts and commitments through at least the end of 2016.
MR. JOHNSON moved on to slide 9, titled "Effective Date." He
said most important to BlueCrest Energy is the timing of the
implementation of any changes, whatever they may be. He stated
that this project was a large one for the company, which
carefully mapped out a plan for how it would pay for
development. He said BlueCrest Energy figured that it would
take approximately $525 million to reach that point of self-
sufficiency, thus, it made certain that it would, under the laws
current at that time, have enough funds to complete construction
of the drill site and reduction facilities, to bring in the most
powerful drill in Alaska, and to use that rig to drill at least
the first two new oil wells. He said that drilling cannot start
until the second half of 2016. He said the table on slide 9
shows how the company planned the complete funding before it
ever started. Further, he said it shows that the tax credits
are a critical component, "making up just under 30 percent." He
said it is now May, and the proposed changes in the original
version of the proposed HB 247 were supposed to take effect on
July 1, 2016. He noted that [Version D] would move that date
back, which he said helps, but may not solve the problem. He
said BlueCrest Energy spent a lot of money to get to the point
of drilling, and an abrupt termination of the tax credits, on
which the company based its entire financial planning, would be
devastating. He said any failure to receive those payments for
the credits for the company's spending to at least early 2017
could trigger the end of the benefits that Alaska would receive
"from Cosmopolitan's future."
MR. JOHNSON reiterated that his company has done a lot of work
and spent considerable money and is relying on the existing
credits based on the laws that were in place when it entered
into its financial commitment. In conclusion, Mr. Johnson drew
attention to slide 10, and he reemphasized the importance of
phasing into any changes over a reasonable time period. He
said, "We'll deal with whatever changes may come in the future."
However, he also urged the committee not to ignore the large
future benefits the state would receive from future credits. He
opined that most importantly, the state should not "kill the
projects that are underway now" and risk "greater long-term loss
to the state."
2:51:45 PM
REPRESENTATIVE KREISS-TOMKINS referred to slide 7 and expressed
keen interest in the benefit to cost ratio. He said if a well
costs $40 million and the State of Alaska chips in $15 million
in credits, it would get $38 million over the life of the
project. He said that seems like "a pretty favorable return on
investment." He asked Mr. Johnson, "Could you get [the Alaska
Industrial Development and Export Authority] (AIDEA) financing
to ... finance a well like this, given 5 million barrels at $40
well cost?" He said those numbers seem "pretty positive."
MR. JOHNSON answered, "Not now." He stated that AIDEA is not
loaning money for oil development, for drilling. He said
BlueCrest Energy has secured about $150 million in loans for the
facilities and the drilling of the first few wells, but that
loan amount was difficult to obtain. He explained that until
wells are producing, it is difficult to get a loan for drilling.
He said since BlueCrest Energy has already secured the loans, it
would be very difficult to go back and ask for more money for
each well, because the entire loan program was based upon the
assumption of the tax credits in place.
REPRESENTATIVE KREISS-TOMKINS offered a scenario in which
BlueCrest needed $15 million in capital and, instead of getting
it in credits, received it as a revolving loan fund. He said
the state would get back $38 million in royalties. He said his
calculations show that the company would be getting a lot of
money over the lifetime of the well. He asked if the company
would have the ability to repay the loan with interest through a
revolving loan fund. He clarified, "Is there potential to
convert a tax credit system to something that's more sustaining
and offers ... loan-based financing?"
MR. JOHNSON answered that at some point in the future a loan
program or "some type of reasonable investment fund" could work;
however, BlueCrest Energy has already committed to drilling the
first few wells, so "it practically couldn't happen in time."
He asked Representative Kreiss-Tomkins to remember that anyone
from whom the company borrows money has to have the first lien
on all the reserves; therefore, it does not work to have two
different vendors - one with the first lien and one with the
second. He said, "We would have to be able to finance the
entire program through that, and ... that's a large amount."
2:55:35 PM
REPRESENTATIVE CHENAULT congratulated Mr. Johnson on the event
of the first production from the Cosmopolitan Unit, which he
noted went to the Tesoro refinery. He asked about the output.
MR. JOHNSON answered that the company's first well is
exploratory and "choked back." It is being produced gradually
in order to test all the equipment. He added, "It's several
hundred barrels a day right now."
REPRESENTATIVE CHENAULT, regarding the initiation of financing
for exploration wells, asked, "Are all of them productive?"
MR. JOHNSON told Representative Chenault that that is a good
question. He stated there is a huge difference between
exploratory wells and development wells. The development wells
are "a very high chance factor"; they are "pretty much proven,"
and the money has to be spent to complete the wells. He said 90
percent of exploratory wells, on average, are "dry holes." He
added that in North Dakota, that percentage of success is
higher, because "it's a different type of program."
2:57:42 PM
CHAIR JOHNSON announced that the committee would next hear from
Joe Reese of BP.
2:57:54 PM
JOE REESE, Senior Managing Tax Counsel, BP Exploration (Alaska)
Inc., provided BP Alaska's views on tax policy related to HB
247, "in particular, the committee substitute, draft M." He
said BP operates the Prudhoe Bay Unit, is a member of AOGA, and
supports the testimony given previously today by AOGA. He said
the success of Alaska's oil and gas policy is critical to BP.
He mentioned the AKLNG project and said many Alaskans benefit
directly and indirectly from the successful exploration,
development, and production of the state's gas. He said a
durable, predictable, and administrable oil and gas tax policy
must be in place to unlock those benefits.
MR. REESE said BP interprets durable as meaning something that
will be the same tomorrow as it is today. He said predictable
means that BP can accurately model the tax policy and make an
investment decision based on that. He stated that administrable
means that BP can file its tax returns when they are due.
MR. REESE said BP is committed to maintaining a safe and
compliant business in Alaska that is sustainable. He said in
2015 BP paid $263 million in royalties and taxes, which resulted
in a financial loss of $194 million. He said under current
market conditions, BP Alaska is spending more cash than it
brings in, which is not sustainable. As a result, BP Alaska has
undertaken an approximate 17 percent reduction in its workforce,
and the Prudhoe Bay working interest centers have reduced
activity levels.
3:00:08 PM
MR. REESE indicated that Prudhoe Bay economics are at a point
where further tax increases in the cost structure would result
in even lower activity levels and would be detrimental to BP
Alaska's business in the state. For example, he said an
increase of 1 percentage point to the minimum tax is equal to
about six months of Prudhoe Bay rig work. He said operating on
a predictable, durable, and administrable oil and gas tax policy
is essential to maintaining the activity level at Prudhoe Bay
and the long-term viability of an AKLNG project. He stated that
BP Alaska is committed to complying with the tax laws in a
responsible manner and having open and constructive
relationships with the tax policy makers.
MR. REESE relayed that one of the major costs to BP's business
in Alaska is oil production tax. He said while the company is
currently "cash flow negative," its oil production taxes are not
zero or negative, because certain cash costs, such as the
investment AKLNG project and other specific excluded costs, are
not deductible for production tax purposes. He said, "At
current prices, Prudhoe Bay production does not attract oil
production tax credits."
MR. REESE said just as the industry is struggling to make ends
meet, the state is also facing severe budget shortfalls. He
opined that although reasonable people have worked to suggest a
new tax policy, now is not the time to make those changes,
because [those changes] would increase taxes and further inhibit
BP Alaska's ability to maintain the activity level at Prudhoe
Bay.
3:01:04 PM
MR. REESE next made comparisons between the original bill
version proposed by the governor and Version D. He said the
original bill version proposes an increase in the minimum tax,
which for BP of Alaska would mean an increase of 25 percent, and
the increase would come at a time when the company needs its
cash to maintain its activity level. He reiterated that the
increase would equal about six months of rig work at Prudhoe
Bay. He said Version D would leave the rate unchanged, which he
said would be helpful. Next, he said the administration
proposed a material increase to the interest rate on tax over
payments and under payments. He said that as ConocoPhillips
Alaska, Inc., testified, BP Alaska also experienced the six-year
lag in receiving the assessment from DOR on its oil production
tax payments. He said increasing that rate of interest would
only serve to benefit DOR's delay in providing the industry with
those assessments.
MR. REESE stated that the administration has proposed
limitations on the use of the NOL credit. He said BP Alaska is
in favor of the tax policy that was provided under Senate Bill
21 and does not recommend any changes to it. He said, "We
believe that the net operating loss credit provides a matching
of ... expenses to revenue and that that should be allowed to be
taken in the future when ... they're available." He said the
administration also proposed "an erosion of taxpayer
confidentiality." He mentioned "the basic principles of a self-
reporting tax, like the production tax," and he said BP Alaska
does not support any erosion of the confidentiality of taxpayer
information.
MR. REESE said the administration has proposed retroactive
changes, which BP Alaska does not support because it is neither
predictable nor administrable to make changes after investment
decisions have already been made and dollars have already been
spent.
MR. REESE concluded by stating that HB 247 would increase taxes,
and increased taxes mean less money available for investment.
3:04:06 PM
REPRESENTATIVE KREISS-TOMKINS asked Mr. Reese to confirm that he
had said that even though BP Alaska currently is cash flow
negative, because some expenses are nondeductible, at this time
BP has not claimed any NOL tax credits.
MR. REESE answered that there are actually a couple
calculations. The first, he said, is a financial book loss,
which for BP Alaska is currently $190 million. He explained
that is not production tax. From a cash flow perspective, which
pertains to "the dollars we take in versus the dollars we
spend," BP Alaska is also negative, which means the company is
spending more money than it makes. He continued:
However, from a production tax perspective, we are not
in a net operating loss, and the reason for that is
certain of our expenditures that ... drive us negative
(indisc. -- coughing) purposes and for cash flow
purposes are not deductible for production tax
purposes. And therefore, we are not in a net
operating loss.
3:05:41 PM
CHAIR JOHNSON announced that the committee would hear from David
Wilkins of Hilcorp Energy.
3:05:58 PM
DAVID WILKINS, Senior Vice President, Hilcorp Energy, said he
had testified numerous times over the past few months on the
governor's oil and gas industry tax bills. He stated Hilcorp
Energy's strong support of the testimony given today by Ms.
Moriarty of AOGA and its message to protect the future of the
oil and gas industry and Alaska. He said in Alaska Hilcorp
Energy operates in both Cook Inlet and the North Slope;
therefore, the company is "in the unique situation of being on
both sides of the debate on credits and tax increases." He
related that just over 500 full-time employees support Hilcorp
Energy's operations in Alaska, and he expressed his pride that
nearly 90 percent of those are Alaska residents. He said the
company operates approximately 53,000 gross barrels of oil per
day and sells 150 Mcf of gross gas per day from approximately
500 producing wells, for a total net production of approximately
57,000 barrels of oil equivalent per day. He stated that from
Hilcorp Energy's perspective, the credits in question - both
refundable and those credits against tax liability - have
resulted in more investments and more production in Alaska, both
on the North Slope and Cook Inlet basins.
MR. WILKINS, regarding Cook Inlet, stated that it is no secret
that Hilcorp Energy has been a big part of reviving energy
security in Southcentral Alaska. He said since the company came
to Alaska in 2012, it has invested over $1 billion in projects
and has drilled over 50 wells in the Cook Inlet area. The
result for Alaska has been threefold, he said. First, there is
more oil refined and used in Alaska at the Tesoro refinery. He
said Hilcorp Energy has doubled oil production in four years,
through hundreds of drill wells through its smaller scale
projects, and this has resulted in more near-term and long-term
oil royalty going to the state. He said some estimates indicate
that 20 to 30 million more barrels of oil will be produced over
the next few decades - oil that would have been "plugged and
abandoned forever" if Hilcorp Energy did not do these projects.
He said 100 percent of Cook Inlet oil is refined by Tesoro in
Nikiski.
3:08:59 PM
MR. WILKINS said the second benefit for Alaska is more jobs for
Alaskans. He said the company's activity in the state has
supported thousands of jobs for those in Alaska. In 2015 alone,
the company's operation supported nearly 3 million man hours,
which in total equates to more than 1,400 full-time positions.
MR. WILKINS stated that the third benefit is energy security for
Alaska's largest population hub. Because of Hilcorp Energy's
success over the past four years in the Cook Inlet area, it is
now making gas supply commitments with local utilities into
2023, "at lower prices to our customers than when we first
entered into Alaska." He said the company made a commitment to
Alaskans' energy needs first, and it stands by that commitment.
He said his team works hard every day to ensure a reliable and
affordable energy source for this largest population hub.
MR. WILKINS emphasized that developing oil and natural gas in
the Cook Inlet Basin requires a high cost of production and
investment, coupled with decline rates that vary from 15 to 50
percent annually, depending on the field. He said, "We can't
declare victory in the Cook Inlet; we need to continue to invest
in projects to offset these high declines. In fact, I would say
we need to work on increasing the supply and the demand market
and benefit more Alaskans going into the future."
MR. WILKINS warned that North Slope oil production is also at
risk without continued investment. Hilcorp Energy has increased
production from its North Slope asset since it came on to the
slope in 2014. Without significant spending in the fields that
it operates on the North Slope, he explained, the company
anticipates an average decline of 13 percent. On the North
Slope alone that would mean nearly 2 million barrels less per
year, which would mean less oil to tax, upon which to collect
royalty, and to go into TAPS. He said, "It's not a small
number, although it's a small fraction of the total loss the
state is likely to see overall, as a result of less investment
from the other producers. The simple fact is that if we're not
spending money on projects that bring on new production, we
cannot bring on new production, we cannot curb these declines."
He stated it is the belief of Hilcorp Energy that it is in both
its own and the state's best interests to continue to spend
dollars in the effort to produce more oil and gas. He said the
only way to do that is to have a system in place that is stable
and predictable, and one that incentivizes - not jeopardizes -
continued investments.
MR. WILKINS acknowledged that Hilcorp Energy is not alone in
facing difficult decisions and realities during this difficult
time. He further recognized that members of the House Rules
Standing Committee and the legislature have much to consider
regarding what is best for Alaska's future. He asked the
committee to consider the uncertainty that is created by change
and the effect that uncertainty has as a deterrent on investment
and jobs. He opined investment, whether for exploration or
development, is the only way to increase production, and
"increased production is the only way we can help you to get out
of this situation." He posited that the proposed bill before
the committee will not help "achieve any of this." Conversely,
Hilcorp Energy estimates that the proposed legislation will add
tens of millions of dollars to the industry's tax burden over
the next five years.
3:13:00 PM
MR. WILKINS described what Hilcorp Energy would do as a result
of HB 247. First, he said the company would cut its Alaska
investments. He said the company would spend what is required
to meet its commitments to local utilities and maintain safe
operations; however, investment beyond that is likely to see a
significant cut. He said Hilcorp Energy will be forced to cut
costs, which will mean less contract labor and fewer jobs for
Alaskans. He said Hilcorp Energy will produce less oil and gas
compared to what its production would be under a stable and fair
tax regime. He said that the company would look for other
places to invest many of its dollars that might otherwise be
invested in Alaska. He asked the committee to trust that he
wants to keep Alaskans working and to increase production in the
state, and he wants Hilcorp Energy to be Alaska's long-term
partner. He said the company simply is not going to continue to
invest hundreds of millions of dollars in the state every year,
especially if the price environment and fiscal structure
continues to change and "aims to kick while we're down."
3:14:22 PM
REPRESENTATIVE KREISS-TOMKINS, regarding lease expenditures in
Cook Inlet, stated that the turnaround that Hilcorp Energy had
effected there is "pretty impressive," as are the company's
operations throughout the state. He asked what the cumulative
rate of tax credits are from those lease expenditures.
MR. WILKINS responded that Hilcorp Energy has invested a billion
dollars, doubled the oil production, and added a lot of gas
production going into the Southcentral market. In terms of the
return to the state on that investment, he said, "In our view,
we've done exactly what the state intended to do." He
reiterated that solely from the oil increases, the company has
added 20 to 30 million barrels of recoverable reserves over the
next few decades, which will well exceed any of the tax credits
that were put in place to spur activity. He said the company
views that Alaska has benefited much and seen positive results.
REPRESENTATIVE KREISS-TOMKINS questioned of that billion
dollars, "how many tax credits are in there?"
MR. WILKINS said he did not have that number in front of him,
but he does know that the royalties and property taxes the state
has collected from the activity, plus the jobs that have been
created, equal multiple returns on the state's incentive
program. He added that before Hilcorp Energy came to Alaska,
contracts in the Anchorage market were short-term and short-
lived, and people were buying generators because of the threat
of brownouts. He said, "So, the longevity of the oil and gas
situation in the Cook Inlet was ... very much in question."
Now, he said, Hilcorp Energy is signing contracts for long-term
gas commitments in Southcentral Alaska.
3:18:17 PM
CHAIR JOHNSON announced that the committee had heard all the
invited testimony for the day, and he asked Ms. Delbridge to
speak.
3:18:33 PM
RENA DELBRIDGE, Staff, Representative Mike Hawker, Alaska State
Legislature, placed on the record a document, titled "Answers to
questions on Rules CS," which was prepared by enalytica and is
included in the committee packet. She said enalytica was
forwarded questions related to comparing and understanding
different net profit systems around the world, and in the
handout articulates some of the differences between various net
profit systems, including the differences between income taxes
or specific petroleum taxes. She recollected there had been
some discussion earlier in today's meeting about that. She said
enalytica points out the one example of a net profit system it
is aware of that "for one small component does not allow carry
forward of expenses." Further, enalytica articulates that in
the petroleum profits tax, it finds few, if any, instances in
which carry forward losses might be limited. In particular,
enalytica cites systems similar to Alaska's, in which an
escalator is provided on the carry forward or some additional
benefit is added to it.
MS. DELBRIDGE next explained why Version D proposes a shift to a
system of lease expenditure deductions as a means to carry
forward losses. She said that started with a policy discussion
related to eliminating NOL credits. She reviewed that a credit
essentially implies "an immediate obligation to the state,"
while "still years away from actual production that the credit
is designed to incentivize ...." She said in eliminating the
credit, there was still a desire to find a way to allow
companies to recover losses, as in any net profit system - in
particular a net profit petroleum system - therefore, Version D
would allow that those lease expenditures that are eligible
expenses exceeding revenue can be carried forward and applied
against future revenue.
MS. DELBRIDGE continued, as follows:
The policy intent was largely to provide that
relatively stable playing field for ... an incumbent
or a new developer. The state has had the ability and
has chosen to use the policy of providing cash up
front for that new developer, and certainly than
there's been this discussion going on through the
session as to whether the state can afford to do that
and in what context. Everyone, whether you're a new
developer or incumbent producer, would have the
ability to carry forward your lease expenditures for
use against your future liability.
Part of the policy decision that went into this was
... in a sense making sure that the system's
beneficial to any company - allows every company the
same opportunity, but also starts ... to fence off
some of the risk that the state has in ... putting out
an upfront credit, absent ... the actual behavior that
has been incentivized. Once that behavior, that
production, occurs, then this company can fully use
that ... lease carry forward against its production
tax revenue.
3:22:20 PM
CHAIR JOHNSON recessed the House Rules Standing Committee to
4:00 p.m.
4:02:20 PM
CHAIR JOHNSON called the House Rules Standing Committee back to
order at 4:02 p.m. Present at the call back to order were
Representatives Olson, Herron, Kreiss-Tomkins, and Johnson.
Representatives Chenault and Tuck arrived as the meeting was in
progress.
CHAIR JOHNSON opened public testimony on HB 247.
4:02:50 PM
ALLISON BARNWELL testified that she is a young person who grew
up in Alaska and remained in the state. She expressed concern
over Alaska's fiscal crisis and the state's continued practice
of giving more to oil companies than it does to its own
Department of Public Safety and University of Alaska system
combined. She acknowledged that Alaska's infrastructure was
built with revenue from the oil and gas industry, and she said
she is grateful for that; however, she advised the need to be
realistic about the negative effects [the continued use of] oil
and gas has on climate change and to recognize the tremendous
potential in renewable energy and the boost that can be given to
local economies by investing in those renewable resources. She
encouraged the state to put its focus on renewable energy
instead of paying more to oil companies, which may never be able
to pay back the money they owe the state. Ms. Barnwell opined
that the state cannot afford to pay out over $700 million to
companies. She emphasized her desire for Alaska to have a
sustainable future. She urged the committee to "take up the
original bill that the governor introduced" and reject [Version
D].
4:04:46 PM
NORMAN VAN VACTOR said he has "a deep sense of optimism about
the future of the state." He urged the committee to support the
original version of HB 247. He opined that everyone should pay
his/her fair share; the state cannot hand out checks to any
industry while slashing the basic services to its citizens. He
opined that when considering all the options, a comprehensive
(indisc.) solution has to be put in place. He indicated
solutions may include initiating a state income tax, and dealing
on some level with the permanent fund dividend (PFD), but first
the discussion must be about what the state is giving away to
"the industries." He expressed frustration that the date is
already May 11 and "we" still have not addressed a comprehensive
budget solution.
4:06:27 PM
WILLIAM JOHNSON began his testimony by mentioning the passage of
Senate Bill 21. He then stated that Alaska is paying $775
million in credits to the richest corporations in the world,
which have been on an 8- to 10-year run of the highest oil
prices in the world. He said even under ACES, with the highest
oil taxes, the oil companies were still making more money in
Alaska than anywhere else in the world - especially compared to
what they made in the Lower 48. He opined that for those
reasons, the state should discontinue paying the companies tax
credits, because it cannot afford to do so. He further opined
that the oil companies are gouging the citizens and do not need
$775 million, which he called "chump change." He said if the
state is serious about raising revenue, it needs to do away with
its tax policy that allows the oil companies to write off their
losses in other parts of the world against their operations in
Prudhoe Bay. He recommended going back to a (indisc.) and
getting away from a net [operating] loss system.
MR. JOHNSON related that he was born in the Territory of Alaska
and helped build the Haul Road and the Trans-Alaska Pipeline
System, which he said was supposed to last 30 years. He
indicated that was 38 years ago. He said three-quarters of the
oil has been taken, and at one point 2.1 million barrels of oil
a day was being extracted. He said that would never be seen
again unless the Arctic National Wildlife Refuge (ANWR) is
opened. He reiterated that the state should not be paying
credits to the richest corporations in the world.
4:09:36 PM
ANN RAPPOPORT testified that she has lived in Alaska for 37
years and has two grown children in their 20s, who are out of
state for school, and whom she wishes will have the opportunity
to return. She expressed concern that the actions of the
legislature will affect the state, because she thinks the
legislature has cut essential services - such as education,
senior support, health care, public safety, and local government
- too deeply. She opined it is time to focus on raising revenue
to offset Alaska's budget crisis, and that includes looking at
oil tax credits.
MS. RAPPOPORT expressed disappointment in the legislature's
recent amending of the proposed HB 247, because she said she
thinks the proposal in the governor's original version to
eliminate approximately $800 million in tax credits is
reasonable and responsible. She said, "I think everybody's
going to have to start paying now." She said Alaska has become
an entitlement state, wherein everyone thinks that oil will pay
for everything, but she opined that that is not realistic,
because oil is not a renewable resource and there are other
types of energy sources that could better address climate
change.
MS. RAPPOPORT suggested the state may need an income tax, so
that those who make more would pay more. She further stated
that Alaska may need to have a sales tax, which she suggested
could be higher in the summer when there are visitors to the
state, because "we all pay taxes when we go visit them." She
asked the legislature to revisit HB 247 first and eliminate the
oil tax credits and then consider adding taxes on some of
Alaska's other industries so that "everybody pays a little
something to help us through this crisis."
4:11:30 PM
DIANNE MACRAE testified that she thinks consideration needs to
be made that oil companies' focus is on making money. She said,
"The fact that they need to be so subsidized is a concern to
me." She said she feels oil companies are profitable. She said
"they made out like a bandit" when the Exxon Valdez oil spill
occurred, while other people "had to suck it up, deal with it;
some committed suicide." She continued:
This is not the end of the world for them not to get
all that money. They can pay their fair share;
they're making money hand over fist ... throughout the
nation and throughout ... the world. I think that it
... almost seems like nepotism, sort of - cronyism.
Why are we so afraid that they're going to bolt up and
leave? They're not going to. The oil's there;
they'll get it; they'll make money; they just won't
make as much money.
MS. MACRAE recommended that the committee abandon Version D and
return to the original version of HB 247 presented by the
governor.
4:12:59 PM
DAVE HANSON testified that he is a fiscal conservative, who has
been a resident of Alaska for 40 years. He opined that Alaska
cannot afford the oil production tax credit program. He stated
opposition to Version D and expressed support for the governor's
original version of HB 247, which he said is generous and
provides a balance between the needs of the people of Alaska and
the oil industry. He noted that the representatives of the oil
industry were given hours in which to communicate with the
legislature, and he asked the committee to remember that
[legislators] represent "all the people of Alaska" and all the
interests of those people.
MR. HANSON posited that the credit program is not an effective
way to increase oil production. He said there is no
prequalification of projects that get to receive credits. He
said, "Due to the program's confidentiality, we do not know who
gets the credits, how they use the money, how many Louisiana
jobs are funded, or how many Alaska dollars end up in Texas."
He also noted that oil companies are already being given a huge
tax break, because if the price of oil is under $73 per barrel,
the industry is not even paying a production tax credit. He
continued:
That's why they're concerned about taking their
credits. They're not even paying taxes to do credit
against. And that's why they all want it to be rolled
forward. We should realize there's two kinds of
incentives [that] were given: One we've already got,
with no production taxes; the second one we should cut
way back on and definitely not roll it forward to
burden our future.
MR. HANSON said Hilcorp Energy is an example of the need for tax
credits to be tied to a requirement that a corporation must meet
all requirements in order to receive the credits. He said
recently Hilcorp Energy was noted by the Alaska Oil and Gas
Commission as being in "endemic disregard for Alaska
regulations" and was fined $20,000. He said Hilcorp Energy has
had over 25 regulatory transgressions in the last few years.
Mr. Hanson stated, "Obviously, this should be a requirement that
you obey the law if you're going to get any of this help money
from us." He wished the committee luck and asked that it return
to the original bill version.
4:15:53 PM
TRISTAN GLOWA testified that he would like the committee to stop
working on Version D and return to the original version of HB
247. He said he is a student, a young person, and a community
organizer in Fairbanks, and he works with young people who are
trying to plan for their future in Alaska. He said cuts to
public schools and universities are being made, without "leaving
much room for sharing the sacrifice here." He related that he
grew up in Fairbanks, studied Outside, and had been taking time
off school, and he had initially thought he could return to
school in Alaska, while serving his community, but that dream
has been "snuffed out," because immense cuts to the university
have ended programs through which he would have continued his
community service. Mr. Glowa said, "So, the sacrifice is ...
hitting ... my generation very hard, and here you are proposing
to benefit these ... corporations more." He opined that the
state cannot afford to do so.
MR. GLOWA called Alaska "a textbook petro state," and he
indicated that Alaska needs to be diversifying its economy and
revenue stream; it needs a tax base that is independent of the
oil and gas industry. He said the first step should be to stop
giving money to the corporations, which he said are driving
climate change. He stated the need for Alaska to have a stable
economy. He stated, "It's incredibly irresponsible at this
point for ... you as our legislator to be ... proposing to
continue to subsidize these oil and gas corporations." He
opined that the committee should return to the original bill
version proposed by the governor, because "that's the kind of
leadership that we need" for a sustainable fiscal [plan]. He
expressed his hope that the committee will listen to what its
constituents are saying and not just be listening to the oil and
gas industry.
4:18:46 PM
JAMES JACOBSON testified that he has lived in Alaska for 50
years, and he opined that providing any credits to oil and gas
companies, whether large or small, is akin to former Governor
Sean Parnell's years-long push to replace ACES with Senate Bill
21. He continued:
One might just as well throw a pocket full of money
into a wind storm [and] expect or hope that some of
the bills will blow back to the buttoned pocket. It
ain't going to happen. It doesn't make economic sense
at all. When the oil and gas marked their (indisc.)
that Alaska's petroleum products are financially
feasible to drill and pump, rest assured the oil
companies will be seeking them, with or without
credits from the state - hopefully without.
Oil and gas companies are cutting back on their
efforts and expenses. That makes sense. The State of
Alaska should do the same, and we should not
underwrite or insure their oil and gas company
business adventures.
MR. JACOBSON offered his understanding that if the annual tax
credit is exceeded by a company, the overage can be carried
forward to a future year. He said this serves to give the oil
companies a throttle hold on Alaska's petroleum products, which
he opined is unacceptable because the overall fiscal health of
Alaska is suffering needlessly from oil and gas credits. He
added, "So, stop that, and bring the audits of the oil companies
up to date." He posited that because the legislature cannot
predict the future of a complex international petroleum
situation, it should cease gifting the state's money to the oil
companies. He concluded, "We're not partners with oil and gas
companies. Remember Amerada Hess [Corporation]."
4:20:24 PM
STEVEN SUTHERLIN testified that he appreciates the concern about
the state's budget, but said it seems the idea is that there
needs to be a change regarding tax credits or that the PFD needs
to be accessed. He indicated that [the oil and gas industry] is
a "long-term business," and he said he thinks [the legislature]
sometimes takes heat for taking the time to try to make a
careful adjustment on tax credits. Regarding drilling in
Alaska, he said it sometimes can take 10 years to bring product
on line; therefore, he said he thinks care needs to be taken
when cutting out credits. He offered his understanding that
some of the early credits during ACES were a kind of "payback
... to try to make less of a bitter pill out of some ... bonding
requirements and regulatory ... roadblocks that sometimes get in
people's way."
MR. SUTHERLIN encouraged [the state] to work with the industry.
He opined that if there is a price war with the Saudi Arabians,
then "we need to fight for our own share - whatever that is."
He reiterated his caution to "keep a steady hand on the till"
and take care in how quickly changes are made. He remarked that
there have been some large fields discovered by smaller
companies. He mentioned an environmental impact statement being
done for (indisc.) well project up north where there is a great
deal of oil and gas that will "provide more money for everything
later."
MR. SUTHERLAND relayed that he is a graduate of the University
of Alaska Anchorage (UAA), and he thinks that the University of
Alaska needs to take a look at whether it is monetizing its land
resources as well as it can. He indicated that he helped to
establish a preservation bank at UAA. He said it hurts him to
see budget cuts, and he indicated that care must be taken not to
kill off the business.
4:24:28 PM
ANDY BOND testified that he has worked in the Alaska oil
business for 30 years, and he related the benefits that his
family has reaped from the industry, including a comfortable
existence and school tuitions. He said he would love for his
grown children to return to Alaska after college to raise their
own families; however, he said the future looks bleak, and he
warned that another tax change will greatly hamper the future of
the oil industry. He said the state cannot survive without a
healthy oil industry that is investing massive amounts of
capital. Mr. Bond stated that the recent downturn in oil prices
has caused huge layoffs in the oil industry across all
companies; capital investments for Alaska oil exploration and
development have been slashed; and he has seen many friends lose
jobs over the last few months. He warned that additional taxes
to the oil industry will further reduce investments and require
higher oil prices.
MR. BOND stated that he has seen many changes over the years of
tax policies, companies, and oil prices, and many times the
changes appear to be knee-jerk reactions to oil price changes or
"other factors."
MR. BOND stated his opposition to "the changes represented in HB
247," because he said they will not result in more investment,
jobs, or new oil in Alaska. He opined that Senate Bill 21 was
beneficial for Alaska, because it attracted new investments over
the last few years, and tax credits have supplied Southcentral
Alaska with gas for many years in the future, which was
something unexpected years ago. He said, "Tax credits counter
Alaska's high-cost environment and allow the state to compete
with other international oil investments." He said higher taxes
will discourage future investment. Further, he said companies
are also nervous about another change to the tax structure; tax
stability is a key factor for companies, and another change may
cause them to look elsewhere to make investments. He opined
that tax stability will encourage more investment, which in turn
will get more oil into the pipeline.
MR. BOND opined that the state needs to reduce the deficit first
by making substantial cuts to state government and services; it
needs to react as the private sector does during difficult
fiscal times. He said state spending has gotten out of control
over the last few years. Mr. Bond posited that the next source
of savings should come from the many savings accounts that the
state has, because he said that was the design of those
accounts. He stated that all those sources should be exhausted
first, and the state should examine whether there has been a
recovery in oil prices before even considering any additional
taxes on the oil industry or individual income or sales taxes.
MR. BOND urged the committee to reject HB 247 completely and
continue with the balance that was struck with Senate Bill 21,
which he said would give Alaska the best chance to recover from
the price downturn and get investments going again to fill the
pipeline.
4:27:13 PM
JEANIE PIERCE testified in opposition to Version D. She opined
that the legislature should call a special session to debate
this issue between everybody. Regarding the 4 percent
production tax floor under Senate Bill 21, she said [the public]
was misled that "it was not going to get underneath there." She
then stated, "All the taxes get underneath there but a few."
Ms. Pierce continued:
We give an 85 percent reimbursement for capital
expenses. That's a huge subsidy, and we aren't even
partners. I mean, you guys call us partners, but I
haven't seen anything written in paper. What kind of
partner pays 85 percent? That's called a sucker. ...
Under the version, ... it's not even vetted by a
bankruptcy attorney. This is an old pattern of you
guys. You guys need to return to the ... table again
and readdress these things - revisit what you did.
... All these things getting underneath here - ...
this is bad policy.
... The operating loss on the North Slope: 90 percent
of the credit is used as a loss; 10 percent for
exploration credits. Does anybody think there's
something wrong with this picture here?
MS. PIERCE expressed her hope that the Democrats, Independents,
and moderate Republicans would "just say no" to this bad deal
that will favor the oil companies again, which the state cannot
afford. She questioned whether the state's paying out more than
it is receiving in production tax was "a head scratcher" for any
legislators, because she posited that "it sure was to Alaskans."
She implored [the legislature] to do things right, to "start
representing Alaskans, not your back pocket." She said the
state has a good governor, whom she called "a rock star," who
the people of Alaska like, because they know he makes good
choices. She stated that she thinks the people of Alaska want
the legislature to "come on board with him."
4:29:40 PM
JAMES SQUYRES testified as "an Article 1, Section 2 Alaskan"
opposed to Version D. He noted that he is also a certified
public accountant (CPA). He called the proposed CS "a budget
buster" and implored the committee to get the credits down to
where the overall budget is "$4.5 billion total spend," which
closely aligns with the Institute of Social and Economic
Research (ISER) Goldsmith economic plan - one of two he said
does not include an income tax or recalculation of the PFD. Mr.
Squyres opined that $4.5 billion is a serious goal worth
obtaining. He stated that the oil and gas credits by themselves
are the crux of the issue: because less aggressive cuts were
taken elsewhere, the legislature has "painted" itself "into a
corner." He continued:
I understand [the] Wilson/Seaton proposal brings us
much closer to where we need to be, and I support and
applaud their effort, although it may still not be
enough. This unlikely coalition should be a clear
indicator to those on this committee of how far off
this current CS is.
Continuing the oil and gas program and not stopping
the accrual sooner rather than later, while it may
benefit some, likely comes at the expense of the
overall Alaska economy. If the subsidies require new
revenue, the overall Alaska (indisc.) will contract as
a result, and it's a clear violation of the last
phrase in Article 1, Section 2, that you swore to
uphold, and it's not the desired direction for an
overall economy already in an oil and gas recession.
I understand the CS already puts the handwriting on
the wall for oil and gas companies in 2020. Why wait?
Stop the accruals of fiscal year 2017. This version
is bad trade if you're seriously entertaining a change
to the calculations of [the] PFD; it not only drops
the PFD by $1,000, but catches all the future
appreciation of the dividend forever. The time [of]
these credits ... [has] passed and [they] are expenses
that Alaska can no longer afford. They should be
terminated sooner rather than later. Keep the budget
at 4.5 or less.
4:31:54 PM
REPRESENTATIVE KREISS-TOMKINS expressed his appreciation of Mr.
Squyres' testimony that "it's a zero sum game" and the means to
balance the budget "doesn't come from here," it will be from a
tax or income tax "or something."
4:32:11 PM
WILLIAM JOHN NEUMEISTER testified that he has been following
legislative proceedings on the television. He related that back
in 1975, during an oil embargo, The Flying Tigers sued an oil
company over the price of jet fuel at the Anchorage
International Airport. He said, "That oil company lost; the
airline prevailed; they're still here doing business in Alaska."
He related that his father used to be an auditor for the Public
Utility Commission in Pennsylvania, and "they asked him to
change numbers," to which his father replied, "No, I don't work
for them, and I don't work for you; I work for the people of
this great state." Mr. Neumeister concluded by thanking
legislators for the hard work they do.
4:33:27 PM
BRAD FLUETSCH mentioned a media report, and he stated his
understanding of the report is that the legislature approved tax
credits between 2006 and 2014 totaling $7.4 billion. He said if
that is true, then 2015 and 2016 would bring the total to $8.5
billion in tax credits in the last decade. He remarked that
production barely increased. He opined that currently Alaska's
economy is overly concentrated in oil and gas, and he said he
speculates what $8.5 billion could have done to diversify the
state's economy if Alaska had "used those funds more
appropriately." He stated his belief that the State of Alaska
should cease 100 percent of all oil and gas subsidies, because
he said it is ridiculous to pay to have oil pumped and receive
no revenue. He said "most of us" cut production when prices
drop and increase it when they rise. He expressed admiration
for Governor Walker, whom he indicated talked about Alaska being
an owner state. He questioned what happened to the Republican
Party and asked what happened to the honest, hard-working values
of Governor Hickel's administration. He concluded:
And so, I'm very disturbed that you want to reach in
to the Alaskans' pockets and take $1,000 ... [from]
every man, woman, and child and just hand it over to
the oil and gas industry. You should be ashamed of
yourselves. ... This is just unbelievable. I hope
you reconsider this. I hope you cut oil and gas
subsidies to zero this year, in this budget, because
no one takes you seriously in any other budget this
session.
4:35:47 PM
MARLEANNA HALL, Executive Director, Resource Development Council
for Alaska, Inc., (RDC), paraphrased from her written testimony,
which read as follows [original punctuation provided]:
Good afternoon. My name is Marleanna Hall, and I am
the executive director of the Resource Development
Council. RDC is a statewide trade association
comprised of individuals and companies from Alaska's
oil and gas, mining, forest products, fisheries and
tourism industries. RDC members are truly the life-
blood of Alaska's economy. We believe the best
approach to expand the economy and generate new
revenues for the state is to produce more oil, attract
more tourists, harvest more fish, and mine more
minerals.
With regard to Committee Substitute HB 247, raising
taxes on companies that are reporting record losses
and are in negative cash flow is not sound fiscal
policy.
Increasing taxes on our natural resource industries
will not increase production for the Trans Alaska
Pipeline System, it will not encourage the development
of new mines in Alaska, it will not attract more
tourists, and it will not increase investment in the
fishing industry. Higher taxes in this low-priced
commodity environment will likely deter investment and
lead to lower state revenues and a weaker private
sector over the long run.
As you're aware and have heard over and over today and
the last four months, the oil industry is struggling
with low oil prices and tight capital markets.
Companies are cutting budgets and making tough
investment decisions. Increasing taxes on the industry
at this time will jeopardize new investment, further
damaging our private sector economy.
This morning, Kara Moriarty with AOGA asked the
questions that should be asked: Will the CS increase
investment, jobs, energy security, production? Because
that is what is vital to Alaska's future. Changing the
tax regime now will make a bad situation worse.
When you incentivize something, you get more of it. We
need to incentivize the industry to drill more, create
more wealth, create more activity, and aim for next
year's production to be even higher than this year's.
The current tax policy has brought new exploration,
jobs, and continued investment to the state. The oil
industry is truly the foundation of Alaska's economy
and keeping it strong is the key to sustaining the
private sector, Alaskan jobs, state government, and
the overall economy.
Conversely, this bill moves us in the wrong direction.
It represents the sixth major tax change in Alaska in
the last 11 years. Make no mistake, this CS
fundamentally changes the entire tax system again.
My members are not asking for a tax decrease during
this time of low commodity prices like other states
and countries are considering, but we do request that
as the state considers changes to tax policy, it do no
harm to the state's largest industry.
I thank you for the opportunity to offer RDC's
perspective on CS HB 247 today and urge you to reject
this legislation.
4:39:00 PM
CARL PORTMAN testified that he does not support increasing taxes
on the oil and gas industry, as proposed under Version D. He
said Alaska cannot increase oil production by raising taxes,
especially considering that North Slope oil is selling for less
than it costs to produce. He stated that the industry is losing
hundreds of millions of dollars annually and is being forced to
cut jobs and expenses; therefore, any tax increase will have a
direct impact on future investment in Alaska and future
production. He said the current oil tax policy is working: it
has encouraged new industry investment in the state, which has
"stabilized a long, steep slide in production." He said
production is up 1 percent in the past 12 months, which is the
first increase since 2002. He stated that is significant.
MR. PORTMAN said some legislators say the oil tax bill is
necessary because "the oil industry needs to have skin in the
game and feel the pain like everyone else." He continued:
... Such thinking ignores the fact that the industry
already has skin in the game. For decades it has
accounted for over 80 percent of the state's
unrestricted general fund revenues. It also ignores
the fact that the industry is feeling the pain,
projected to lose a billion dollars in Alaska this
year from low oil prices.
MR. PORTMAN opined that passage of HB 247 would not encourage
future investment, but would instead do just the opposite. He
said the bill would not result in new production, either,
because with less investment comes less production and less
state revenue over the long term to fund education and public
services. He warned that increasing taxes and costs on the oil
industry will make matters worse on both the private and public
sectors. He predicted that while Version D may provide a small
amount of short-term revenue for Alaska, it would be at the cost
of jeopardizing Alaska's economy over the long term. He urged
the committee to reject Version D.
4:41:36 PM
ROY J. TANSY, JR., Executive Vice President, Ahtna Netiye',
Inc., testified that he is a shareholder who is requesting that
the Middle Earth Frontier Basin tax credits, which are due to
expire June 30, 2016, be extended to at least the end of
December 2016. He continued:
Ahtna wants the opportunity to conduct and complete an
exploratory well on state land near Glennallen. Ahtna
has endured some significant setbacks recently. These
include two outside investors pulling entirely out of
the project and Ahtna assuming 100 percent ownership
of Tolsona. The most recent hurdle was just last
month when the Cook Inlet drill rig we were about to
use became unavailable. The reason being that this
contractor party decided to drill another well. The
Saxon drill rig, which is part of our entire
permitting process was based upon, will not become
available until approximately July 1, 2016.
We are currently in the unfortunate position of
evaluating whether or not to go forward, based on tax
credits and other major expenditures for seismic,
engineering, permitting, and permanent construction
that have already been completed.
Ahtna is utilizing the Middle Earth ... and Frontier
Basin tax credits to promote local economic
development and long-term (indisc.) for local
residents.
If our finds prove to be significant, it could ...
change the direction of energy development in Interior
Alaska. One line in Ahtna's vision statement is:
"Our land sustains us." We believe that our land
truly takes care of us, whether it's for hunting,
shelter, or to provide a mineral, earth, energy, or
timber resources we need in order to survive.
I know you've all been immersed in the legislative
session since January, and I can't (indisc.) strongly
enough how heartwarming it is to see the thousands of
truckloads haul gravel in the Ahtna region to build
the pad on the (indisc.) land. The people are
working. This is economic development activity. The
civil construction of the road being completed by our
new construction company, with two-thirds of the
employees being Ahtna shareholders.
... The (indisc.) started by (indisc.) approved
exploration license and application (indisc.). Our
shareholders live in a remote and beautiful region and
believe in hard work, ingenuity, and prayer. We are
the perfect example of an Alaska region that is trying
to develop a local natural resource to meet our energy
needs, and we have the pioneer spirit [and] strength
within us, and we are committed to the program, which
would not be possible without the development
incentives of the Middle Earth/Frontier tax credits.
We're trying to do our part as Alaskans to be self-
sufficient.
Energy resource development such as the Tolsona
program that we are heavily invested in is Ahtna's
commitment to a long-term energy solution. It could
have great local impact in terms of energy relief, and
it could have an even larger significance to the state
if it proves to be substantial. The point is we are
doing something for Alaska. We are not wringing our
hands hoping...
[Because of technical difficulties, the remaining portion of Mr.
Tansy, Jr.'s testimony was not recorded.]
4:45:34 PM
The committee took a brief at-ease at 4:45 p.m. to address
technical difficulties.
4:46:02 PM
MARK MORRIS paraphrased his written testimony, which read as
follows [original punctuation provided]:
This is a time of great turmoil, great difficulty, and
a time of great sacrifice. This is a time when true
leadership is indispensable. Our state faces great
financial trouble. Short term solutions that
compromise our long term fiscal health are very
tempting, but we must not take that road!
Tax credits to developers of our State's North Slope
resources are a tried and true investment that produce
revenue to our State in our future. I am not writing
to address Cook Inlet tax credits.
The pipeline (TAPS) is approximately ¼ full. It used
to be full. All Alaskans have benefited from our
State's vast oil reserves when they have been
converted to revenue by the oil companies; big and
small.
But we face a perilous future.
The oil decline in TAPS must be stopped and better
yet, reversed. If it isn't, the difficulties we face
now will pale in comparison to what we will face in
our future. Our State Government is dependent upon
the revenues we receive when our oil is converted to
revenue by oil companies; big and small.
The small oil companies need financing to convert our
oil reserves into revenue. We split the financial
gains with approximately 2/3 going to our State &
Federal Government and 1/3 going to the oil companies.
That is a great investment! Tax credits are used as
guaranteed returns to help the small oil companies
receive financing from out of state banks. This sends
money into our State to convert the oil reserves we
own into revenue for our State.
Fiscal year 2015 data for the North Slope shows a
total "Government Take" of approximately $2.2 Billion
dollars, while spending $0.2 Billion ($224 Million)
dollars in credits. (source: enalytica. See
attached)
The tax credits we provide are an investment that
provides revenue to our State for many decades.
Our oil reserves have provided the revenue our State
Government has used to help our local communities:
· maintain roads and airports
· build water systems for safe drinking water
· build wastewater collection and treatment systems to
protect our health
· assist with funding our schools
· build new schools
· provide health and social services to Alaskans in need
· build and renovate our harbors
· reduce the cost of heating oil and electricity where
it is very high and other great programs.
We have built great university and vocational training
and then we have assisted our children in attending
these schools and other post secondary education with
loans and other State programs.
All of this is at great risk if we fail to continue
converting our oil resources into revenues.
Tax credits work! Small oil companies have a track
record in both finding and developing our oil reserves
as well as taking older developments that bigger
companies have developed and re-working them to
produce more oil.
However, we need tax credits to work for all oil
companies, big and small. We have much more oil that
has not been developed into revenue. We need to
invest in the development of this oil to secure a
bright future for Alaska. Tax credits do that. They
are an investment in our future.
These are the "Jay Hammond" days again. By that I
mean decisions face Alaska's leaders that can provide
another 30-40 years of prosperity for our State. But
to do that sacrifices have to be made as they did then
through Gov. Hammond and the Alaska Legislature's
leadership.
We each individually, and together, have to make
concessions to provide a bright future for our
children.
Let's come together to do this. Leave North Slope tax
credits alone. They work for our future; both
individually and collectively.
Thank you for your time. Make good decisions.
4:50:59 PM
DOUG WOODBY testified that his wife is a teacher, and he has a
son who works in town and another son who is away, but whom he
hopes can return to Alaska and be employed in a sustainable
economy. He said his family is prepared to pay income tax and
do without the majority of its PFD, if that is what is necessary
to help the state maintain its governmental services; however,
he said they are not willing to see the revenue they would
contribute to the state transferred over "to subsidize the
wealthiest corporations in the world." For that reason, he said
he is requesting that the committee return to the governor's
original proposal in HB 247 to use that as a starting point.
4:52:07 PM
JUDY CRONDAHL testified that she has lived in Alaska for over 50
years, which she said is long enough to know "some of the giants
that were instrumental in putting together the Alaska
Constitution" and the governorship of Jay Hammond, whom she said
did not "roll over to the oil companies." She recollected when
Alaska did not have big oil companies and when she paid a state
income tax. She said she lived in Alaska through "the big
money," and she speculated that she would live here during a
time when there is not so much money. Ms. Crondahl emphasized
the need to protect Alaska, and she opined that Governor Walker
is "every bit the giant that Jay Hammond was." She said
Governor Walker put together a budget that will get Alaska
through lean times, and she encouraged the return to his
original proposal on the oil tax credits.
MS. CRONDAHL encouraged legislators to be brave enough to adopt
a state income tax, so that those who can afford to pay can make
that sacrifice. She included herself, the legislators, and the
oil companies in the list of those who could make that
sacrifice. She talked about the cuts in services to schools,
social services, and senior programs, while money is being spent
on "a great big legislative office in Anchorage," oil tax
credits, and an extended legislative session. She opined that
it is time for the legislature to show the same courage shown by
Governor Walker and make tough decisions, because if it does not
make them this year, the decisions will grow increasingly
tougher each year.
4:54:39 PM
JOHN SONIN testified that he is a 15-year resident of Alaska who
is taken aback by the legislature's persistence in "demeaning
the quality of life for us Alaskans in the face of profit." He
opined that priorities are skewed when people are being made to
"endure the stress of companies ... maximizing the profit." He
mentioned the loss of money for seniors and education, and he
stated that he would gladly give up his entire PFD if he knew
the money would go to education, because children are the future
of the world. He questioned having a 10-year forecast for
maximizing a budget when it could ruin opportunities in the
future. He said, "We all know that oil is not going to go on;
you have to stop here before we run out." He said the oil
belongs to [Alaskans], who should be receiving the maximum
benefit from it. He said he had nothing else to say, because
previous testifiers were so "on the mark." He asked the
committee to consider the owners before making it easier on the
producers of the oil to reap "the benefits of our wealth."
4:57:29 PM
RICHARD STEELE testified that he is a retired teacher, who has
lived in Alaska since 1979 and would like the committee to
return to the governor's original version of HB 247 and lower
the tax credits to oil companies. He opined that Alaska needs
the money more than the oil companies do.
4:58:10 PM
BILL WARREN testified that he is a 65-year resident of Alaska.
He also relayed that he is a member of Local 367 Pipefitters,
who welded on TAPS from Ketchikan to Barrow. He stated support
for the governor's version of HB 247 as a balanced approach to
the crisis in which the state finds itself currently. He said
he sides with the Democrats and moderates, although he is Non-
partisan. He opined that Alaska is the best place in the world
to live. He said he got through the depression of the mid-'80s
and is stronger for it. He opined that [the legislature]
"really screwed up" when it did not align with the Alaska
Natural Gas Development Authority (ANGDA) and get the natural
gasline back in 2002, and he indicated that with that, the state
would not have to worry about instate energy "and all this
hassle."
MR. WARREN said he supports the gross barrel tax and letting the
federal government "worry about all the write-offs, welding
rods, et cetera ...." He stated, "You guys have it so
complicated, nobody can figure things out. Get it simple." He
recommended that if the state is going to spend money, it should
"get a payback for it." He said he would support the Agrium
deal if it would mean work for Alaskans and would be "a bona
fide deal." Further, he indicated he would support Donovan
Mine. He mentioned Richfield and said, "They found oil in
Swanson River and they found oil in Prudhoe Bay, and they didn't
have any handouts. And consequently, they've all made billions
of dollars - billions of billions - and we come out pretty good,
too. But we're in a tough spot now." Mr. Warren said we all
need to get through this as Alaskans, and he opined that the
state needs to diversify as the governor desires. He continued:
I don't know what kind of agenda the House majority's
pulling off here, but all I know is when pipefitters
make a mistake repeatedly, they get laid off. ... You
guys have got to get off the dime here and do
something. And I think you guys carry too much
baggage with the oil companies; I think you guys have
got a lot of campaign contributions, et cetera, et
cetera, so, ... let's go for Alaskans.
MR. WARREN opined that there was a lot of good testimony given -
most of it from Alaskans who believe in the state - and he asked
the committee to take it to heart and do its job and move Alaska
forward.
5:01:37 PM
GEORGE PIERCE observed that committee members who had been
present to hear from all the big oil companies had disappeared
now that it was time to hear the public's testimony. He said,
"Shame on you." He then told the Democrat members of the
committee to stand their ground, because they are the only ones
who can "stop this giveaway." He admonished the committee to
keep their hands off his PFD, which he said comes from his
resources. He indicated that if the oil companies cannot
produce "with all these giveaways," they should get out of
Alaska, and [the state] should end all the credits and
subsidies. He said legislators are "in bed" with the oil
companies and should get out, because legislators are supposed
to represent Alaskans - not oil companies.
MR. PIERCE stated that the Republican-led legislature has had
six oil and gas tax changes in the past eleven years, and he
said the state cannot afford it. He opined that the oil
companies got themselves into "this mess" and should get
themselves out of it. He said Senate Bill 21 was a giveaway
that promised more production and more hiring, but neither one
happened. He said the legislature continues to extend oil and
gas tax credits - for up to eight years - and wants to take his
PFD right now. He stated, "We see who you cater to." Mr.
Pierce urged legislators to vote against "this heavily gutted HB
247," which he said looks nothing like the governor's original
bill version, which would recoup lost revenue for the state.
MR. PIERCE referred to the promised 4 percent production tax
floor, and he said credits dip below that, because there are
endless credits, which include those for net operating loss,
small producers, various exploration credits, and per taxable
barrel credits. There are also subsidies, he added. He stated,
"Stop giving Cook Inlet credits and subsidies." He said Alaska
gives corporation welfare subsidies in the billions of dollars:
up to 75 percent of the cost to develop a well and 65 percent
for new oil development. He said he has heard the word
"partner" thrown around, but emphasized, "These companies are
not our partners."
MR. PIERCE, in response to Chair Johnson, said he would wrap up
his testimony, but commented that he wished the same had been
asked of those testifying for the oil companies. He continued:
But anyway, you guys have to stop what you're doing.
We've got an $8 billion resource, and we've got $1.2
billion, and we get to pay oil companies subsidies out
of our money. You guys need to get out of what you're
doing. Do us a favor and quit your job and let
somebody else get in.
CHAIR JOHNSON reminded Mr. Pierce that everyone gets the chance
[to vote for candidates] every two years.
5:05:55 PM
DAVID OTNESS testified that as a third - out of five -
generation Alaskan, who has lived in the state for 65 years, his
concern runs deep for the future of the state. He related that
he had worked on the pipeline and all over the state, from
Ketchikan to Barrow to Prudhoe Bay. He expressed his hope that
the legislature would consider that it is making history through
its decisions, while also considering the result of former
policies. He emphasized that Alaska is hurting while there is
an insistence on giving out credits egregiously in the face of
the state's financial downfall. He spoke of all the years that
money was coming in when the state should have had its financial
plan in order, but "here we are just sort of wobbling around
looking towards any way out of the water." He expressed his
hope that "sane heads prevail," realize that "we're doing this
to ourselves at this point and it's really wrong," and have a
change of heart.
5:08:16 PM
DANIEL DONKEL, Donkel Oil & Gas, indicated that he first leased
in Cook Inlet in 1983, had his first production (indisc.) at
Soldotna, (indisc.) Marathon. He opined that Alaska is one of
the most wonderful states in the Union. He stated his belief
that Alaska could fill the Trans Alaska Pipeline, and that the
Cook Inlet could "go back to the highs of 270,000 barrels a
day." He said he has met geologists that work for the major oil
companies. He said that in 1973, Cook Inlet held the highest
average well rate in the nation of 14 (indisc.) barrels a day.
He opined that Cook Inlet is amazing and is the most
underexplored basin in the country. He said, "I'd go out in
Apache; I sold them 200,000 acres in 2000." He quoted Bill
Armstrong as saying that [Alaska] has it made, because there is
more oil under its ground than Saudi Arabia and many of the
other Middle East countries combined. He posited, "Alaska's
problem isn't the resources. You've got so much oil every one
of you should be extremely wealthy." He said he thinks a lot of
Alaskans know that the state is two and half times the size of
Texas. He said, "Your (indisc.) sales are killing you. Your
(indisc.) is killing you." He questioned what store owner, who
cannot sell a product, would increase the price of the product
by 18 percent. He mentioned there were no bidders in the
Beaufort Sea last year, and he said he sent a letter to the then
acting director a year ago regarding the high price of acreage
rental.
MR. DONKEL recommended the legislature soften the monopoly to
allow in more independent producers. He said, "If you go back
to the way the rules were when (indisc.) drilled, you would fill
the pipeline. And you need to change the rules. ... And you
wouldn't need any of these credits or these incentives, and you
would have a lot of money in royalty income."
5:12:57 PM
BOB SHAVELSON, Executive Director, Cook Inletkeeper, testified
that he is representing over 1,200 Alaskans. He said he likes
what Mr. Warren from Nikiski said about the need to simplify,
because as the state continues to take money away from its
agencies, it diminishes its capacity to stand toe to toe with
the oil and gas industry. He encouraged the committee to return
to the governor's original bill version of HB 247, because if it
does not, it will be "staring at close to $800 million in
refundable cash credits to the oil companies in fiscal year
2017, and that doesn't even include the credits deducted from
the tax liabilities."
MR. SHAVELSON stated that having looked at Cook Inlet for over
20 years, he sees a zero production tax on oil and a close to
zero production tax on gas. He said recently there was a jack
up rig in Homer, and everyone on the rig was from Louisiana. He
added that they were independent contractors not getting
worker's compensation, and "local guys were getting pushed out."
He said there was some revenue coming into the community, but
certainly not as talked about during discussion of Senate Bill
21, where "production and jobs were going to go through the
roof."
MR. SHAVELSON stated that the oil and gas industry is a boom or
bust industry; the resource is a finite one being taken out of
the ground. He said if Alaska truly wants a sustainable
economy, it better consider renewable energy. He said Cook
Inlet offers renewable energy options, including volcanoes
geothermal and the second-highest tides in North America [for
hydro power]. He stated that Alaska is standing on the
frontlines of rapid climate change, and it is not diversifying
its energy sources as it should. Instead, he said, the state is
"going all-in on the same things that have failed us in the
past." He expressed his hope that the state can present a
bright future for its future generations.
5:15:28 PM
PAMELA THROOP testified that she has lived in Fairbanks for
almost 41 years and is self-employed as a commercial real estate
broker. She stated support for the governor's original version
of HB 247. She expressed her belief that the state cannot
continue to give away its money to legislators and its wealth to
the oil companies. She said, "We should all be ashamed of
ourselves; we were spending like drunken sailors. The party is
over." She said she feels like the state has "taken all the
diamonds out of the ground" and is now just "scratching." Ms.
Throop described the cuts being made to every agency and
department in the state while not one bit is being cut from the
oil and gas credits as "absolutely astounding and appalling."
She said she wants her extended generations to live in Alaska if
they want to do so. She said she did not support Senate Bill
21. She said about three or four weeks after the bill [was
enacted] ConocoPhillips Alaska, Inc., laid off "a ton of people"
and BP closed down two or three out of five of its rigs on the
North Slope. She said none of the giveaways of oil, resources,
and money have gained the state anything. As a business person,
who deals with other business people, she emphasized the
importance of running the State of Alaska as a business. She
said she doesn't know anyone who "pays for ... the business to
come in the front door." She expressed her hope that the
legislature will have the courage to make the tough decisions.
She emphasized that she does not want the PFD touched. She said
people are struggling in Fairbanks as it is, and losing money
from the PFD would take too much from the economy. She said Jay
Hammond was an incredible statesman and governor, and she stated
her belief that Governor Walker is as capable and as much a
visionary as former Governor Hammond was. She continued:
I think that all of us ... have to make these tough
decisions. If the oil companies can't make money
here, then they can't make money here. It will
equalize at some point. I would rather it equalize
and be real than equalize and be unreal and we all
continue to live in a false economy.
25 percent of our budget this year, if you give away
that money, will be spent on that $800 million -
nearly a billion - $8 billion in the last several
years. My God, what we couldn't have done with that
for business development in this state.
MS. THROOP reiterated that she would like the committee to
return to the original bill version and "take out all the
giveaways to the oil and gas companies."
5:19:21 PM
MERRICK PEIRCE testified that he likes the original version of
HB 247, submitted by the governor, and he does not support "the
watered down version of this legislation." He said the state
has a crippling deficit that is about to destroy the Alaska
economy, and he does not think the legislature is fully
comprehending the magnitude of the deficit the state faces if it
does not have legislation in place "to fix what's been going on
with these liable, generous credits and subsidies that don't
exist in any other country in the world." He said the state
will never get on top of the $4 billion deficit if the
subsidies, which are almost a billion a year, are not stopped.
MR. PEIRCE asked the committee to consider that the subsidies
paid to date failed to demonstrate any real benefit to the
state. He said some estimates are that the state has paid over
$3 billion in subsidies for Cook Inlet development. He opined
that Alaska should have the lowest cost energy in the United
States - in the world - but it does not. He said the wholesale
price of gas in Cook Inlet is $6-$8 per one million British
thermal units (MMBtu), whereas the Henry Hub price for gas in
Louisiana, where there are no subsidies in play, is less than
$2. The consequence for the community of Fairbanks is that gas
cannot be delivered there for a price that is comparable to
firewood or fuel oil. He asked the committee to consider the
difference that would be made if the Interior Energy Project was
able to buy gas at the Henry Hub price versus the $6-$8. He
surmised that price difference may make all the difference in
allowing the project to succeed. Conversely, because of the
disproportionality of the way the subsidies are being paid,
"we're not seeing (indisc. -- shuffling papers) to Alaskans."
MR. PEIRCE mentioned secrecy in the manner in which credits are
paid. He continued:
I think it opens the possibility for legislators to
bribes (indisc.) being employed by a certain company
that I'm aware of that disconnected the amount of
money that we paid out in subsidies to proportionality
for the benefit gained. For example, as I mentioned
before, the Henry Hub price of natural gas is about
$2. With federal developments in the Cook Inlet, the
amount of money that we've paid out could result in
the cost of gas paid for by the state over $50 per
MMBtu. And we don't even own the gas at the end of
the day. We're practically the only region in the
world where we own the oil and the gas, we pay up to
85 percent subsidies to develop the well, and at the
end of the day, we don't have any ownership interest
in the well. That doesn't make the slightest bit of
sense.
5:22:40 PM
KATI CAPOZZI testified in opposition to HB 247, including the
original version and all the proposed committee substitutes.
She said she thinks changing the tax structure on any industry
or business six times in eleven years hurts that business. She
urged the committee to "do no further harm to an industry that
is operating at a loss and making painful, necessary cuts that
go along with periods of low revenue." She opined that a vote
for HB 247 is a vote for job losses for Alaskans.
5:23:23 PM
MICHAEL JEFFERSON testified in opposition to HB 247 in all of
its forms. He stated that changing the tax structure six times
in eleven years is bad, not only for the oil and gas industry,
but all industries that consider operating in Alaska. He opined
at a time when the economy is bad and the deficit is huge, the
state should be looking for ways to cut the budget, while at the
same time "getting more businesses up here to employ people."
He posited, "The best way to cut the budget is to not have
people need those state services, and the best way to do that is
to give them good paying jobs." He predicted that HB 247 will
reduce oil and gas work in Alaska - some of the best paying jobs
available. He said while neither he nor likely his children
will ever work for an oil company, he wants those jobs there,
because he makes money off the people who work for the oil
companies. He explained that he is in the service industry,
thus he needs [the oil and gas industry] to have good jobs so he
can keep his job. He implored the committee not to pass HB 247
in any of its iterations.
5:24:58 PM
WILLIAM TOPEL testified as a fiscal conservative and resident of
Alaska since 1966 in opposition to Version D of HB 247. He said
the state needs innovation to get through its fiscal crisis. He
posited that that innovation is a sustainable budget, macro-
economic approach conceived by Professor Scott Goldsmith of
ISER, "with no need for taxes or a cut to the PFD or a change to
the permanent, while giving our permanent fund investments as
part of our revenue stream." He continued:
The legislature can stay at $4.5 billion for FY 17 and
our vision is intact. The legislators' vote in March
did that. The continued tinkering with Governor
Walker's original HB 247 has resulted in about a $700
million budget busted overage and a continuation of
the oil and gas tax credits program that originated
with ACES under former Governor Palin.
Your (indisc.) for HB 247 are not much better. The
current version's still [a] budget buster that
continues for four more years. That program has cost
the state about $3-$8 billion or more, with little
benefit to Alaska, except to some oil companies. That
program is the only one of its kind in the whole world
for the oil and gas industry. The program may have
been a good idea at one time, but we can't afford this
program any more. It needs to be ended, as the
original HB 247 recommended. Since the original bill
also allowed for a transition time to pay for existing
accrued credits earned, so the state can honor its
previous legal commitment subject to appropriation.
If you don't leave this tax credits program now,
there'll be increased pressure to tax Alaskans or to
cap the PFD, which was structured as a permanent fund,
or to increase oil taxes. Those are not necessary if
you continue to control spending along a sustainable
budget path, as outlined by several economists now.
I want the entire Alaska economy and oil companies in
the private sector to flourish - not just some and not
just the public sector. If you continue with this
credits program, you are subsidizing some in Alaska
while threatening a majority of Alaskans. While the
state cuts back on programs and services, but
continues to pay some oil companies to do business in
Alaska, that's no different to an ROI - a return on
investment - and an average voter will see the
unfairness in what you are doing.
MR. TOPEL concluded by urging the committee to discard Version D
and restore the original bill version.
5:28:01 PM
LISA HERBERT, President/CEO, Alaska Chamber, expressed
appreciation for the efforts of the legislature. She testified
that the chamber is aware of the administration's efforts to
find revenue to fund state government, including increasing
taxes on oil production and removing tax credits on oil and gas
exploration. She said the chamber is concerned that many of the
proposals are shortsighted and will discourage investment,
stifle economic activity, and reduce jobs. She said the chamber
thinks that the future of Alaska lies in finding and developing
more oil - not taxing it more. She said in general the chamber
believes it is unwise to force any industry to pay more taxes
when it is losing enormous amounts of money. She indicated that
broad-based taxes when necessary, instead of targeted measures,
are more balanced, may be better received by investors, and do
not "pit the industry against one another." Notwithstanding
that, she said the chamber further believes that before turning
to taxes, the state must reduce spending to an affordable level
and use permanent fund earnings, neither of which has been done
yet.
MS. HERBERT said modifying the NOL carry forward, the gross
value reduction, and the gross minimum tax that will increase
the effective tax rates on North Slope producers should not be
adopted. She said Senate Bill 21 made substantial changes to
oil and gas taxes roughly two years ago. She offered her
understanding that recent evidence indicates that North Slope
oil production is "up," which she said is "positive news in an
otherwise gloomy industry picture." She said the existing
incentives for oil and gas exploration were effective in
generating exploration and contributed to the resurgence of Cook
Inlet production; however, the credits are a significant cost of
state treasury. She stated that the chamber supports the
state's review of exploration credits and encourage changes to
those credits that are not efficient, no longer necessary, or do
not produce the desired result. Nevertheless, she said state
should pay for credits already incurred, because "a deal is a
deal" and stability is an essential part of a tax policy that
has attracted investment to Alaska. She said the Alaska Chamber
encourages the legislature to continue its efforts to reduce the
cost of government. She added that until it does so, tax
increases are premature.
5:30:33 PM
ROBERT BULMER testified that he was born in Alaska, and he asked
why Alaska's government would want to change its tax policy at
this time. He stated that many more taxes will decrease the oil
industry capability and desire to produce more oil. He asked
the committee to consider the trials and costs the oil industry
is facing with the drastic reduction of the value of oil today
compared to what it was in the past. He questioned why, with
the greater demand put upon the oil industry and the price of
oil today, the industry would want to produce at all. He said,
"Give oil a break. We need more oil - not less. We need
incentive - not more taxations. My company does no business for
the oil industry."
5:31:47 PM
STUART COHEN testified that as a business owner of about 30
years, who imports and sells between many countries of the
world, he understands what it is like to have good times and bad
times. He acknowledged that sometimes it is necessary to invest
during the bad times; however, he stated that when he makes
decisions about investments, they are based on whether it is
feasible to get a return on the money invested. He questioned
whether, with current prices and production rates, the state can
actually see a return on its tax credit investments. Mr. Cohen
surmised that if the state is underwriting, for example, 60
percent of development and 85 percent of some of the other
costs, not only may it not get equity, but it may not even get
interest on equity. He said he does not understand that.
MR. COHEN said he hears people talk about the need to have a
stable tax regime, but he does not recollect hearing that
sentiment during the three years former Governor Sean Parnell
was attempting to get taxes lowered. He opined, "Taxes are just
what you pay to live in a modern, democratic society, and we're
going to have to pay them and oil companies also have to pay
them." He said he understands that the state does not want oil
companies to leave the state, because they have generated a lot
of wealth for Alaskans; however, he said he thinks things have
changed, the credits being paid are excessive, thus he supports
Governor Walker's original version of HB 247.
5:33:53 PM
CURTIS THAYER, President/CEO, Alaska Chamber, relayed that the
Alaska Chamber represents over 700 companies that employ over
100,000 Alaskans. He opined that Senate Bill 21 effectively
incentivized more oil exploration and discovery. He said
ConocoPhillips Alaska, Inc., increased investment on the North
Slope; ExxonMobil Corporation is producing now out of Point
Thomson; and there are new companies involved in the last five
years, such as Hilcorp, Caelus, Armstrong, and BlueCrest. He
said all those companies moved to Alaska because of the reformed
tax environment. He added that in the last 10 years "we" have
received over $50 billion in revenue to the state, which he said
is "a pretty good return on investment" with tax credits of $700
million.
MR. THAYER recollected that a previous testifier had stated that
[his company] has a project under the current tax regime that
can add 120,000 barrels of oil a day to the pipeline. He said
that is 44 million barrels a year and 88 in two years. He
warned that if the state changes its tax policy, it might be
2024 before that oil comes on line. Mr. Thayer emphasized that
the government's take on 88 million barrels is huge. He said
the state must realize that it is in a partnership with the
industry and, with that, it gets royalties, production tax,
property taxes, and corporate income taxes that are the highest
in the country. He told the committee that the question to ask
when considering the tax policy in HB 247 is whether it will
increase production on the North Slope, encourage new companies
to invest in Alaska, and be a long-term revenue solution for the
state. He posited that the answer to all those questions is no.
MR. THAYER said HB 247 attempts "to do a mathematical equation
to fix a budget cap by our overspending over the years," rather
than having a long-term, stable tax policy on which the State of
Alaska, the industry, and the people of Alaska can rely. He
stated that keeping the current tax structure in place is good
for business. He stated the need to look to the future and to
not be short-sighted on this issue. He said the legislature
needs to deal with the state's spending problem and industry
needs a tax policy and there needs to be an end to daily layoffs
of people from their jobs, which he indicated is caused by low
oil prices and high taxation.
5:37:28 PM
PAM GOODE testified:
Woe to you politicians, who continue to spend money we
don't have and continue to make promises you can't
keep. I oppose this bill. I don't like it. I don't
like the way it was constructed.
MS. GOODE stated that the legislature's number one task this
session was to achieve a $4.5 billion budget, and now the
legislature [has extended the length of the regular session] and
is "wasting more of the people's money that we don't have,
because you couldn't figure it out earlier." She opined that if
the tax credits are so important, then the legislature should
have "cut somewhere else," but it chose not to do so. She
stated that "the second-most important task of this year" was
for the legislature not to do anything that it would regret -
anything that would prevent achieving a budget next year of $4.3
billion or less. She said, "We've got to get the spending down
to at a reality. We're not there yet."
MS. GOODE recommended cancelling all future oil and gas tax
credits, sticking to a $4.5 billion budget this year, and using
the "ISER Goldsmith Kingsley" model. She concluded, "Do not
touch the PFD calculations. Do not touch the income from sales
tax."
5:39:06 PM
TIM ROBINSON quoted [Abraham Lincoln], whom he said tried to
ensure the survival of America's representative democracy, that
the "government of the people, by the people, and for the people
shall not perish from this earth." He asked the committee to
remember the people's connection to the government. He
expressed appreciation of Mr. Warren's and Mr. Peirce's
testimony and knowledge of the industry. The tax credit
adjustments, he said, are being contested by the oil companies
and their contractors. He said approximately three weeks prior
he had heard a representative of an oil company testify to beg
the legislature not to take away the tax credits, because his
company had been losing money for eight years drilling oil in
Alaska. Mr. Robinson said he is flabbergasted that someone
would remain in business for eight years when losing money that
entire time. He questioned how many of the committee members
would remain in a business with that much loss or if they lost
money for each year they served in the legislature.
MR. ROBINSON recollected testimony today from an oil exploration
company from Colorado, in which the testifier said the tax
atmosphere in Alaska currently was the best in the world. He
recounted that the next testifier from ExxonMobil Corporation
stated that Alaska taxes the highest. Mr. Robinson questioned
which testifier was being honest. He said ExxonMobil
Corporation made a $16.2 billion profit last year, and although
he predicted the company would not make that kind of money next
year, he said it would still make billions of dollars. He said
he cannot comprehend why "people are running around saying
they're losing money" when it is "only on paper that they're
losing money." He stated, "Every one of you in that room that
are in business knows what it means to lose money on paper. Tax
credits help you lose money on paper."
MR. ROBINSON related that he has lived in other states where oil
companies have existed. He said those companies negotiate with
landowners to drill, and when they want to stop production, they
sit on that well and pump again when the price of oil goes back
up. He said, "They're not losing a penny by sitting on that
oil, but Alaska is." He said the companies all flooded into
Alaska because they saw an opportunity to get oil cheaply,
without having to pay Alaska its fair share.
MR. ROBINSON recalled that the testifier from [AOGA] had talked
about oil producers starting to shut down production if the tax
credits do not remain. He said this is a similar situation to
that of the private land owner and the shutting down of
production when there is no money in it. He continued:
If they don't think they're making enough money, then
let's get somebody else in there to operate those
wells. This is Alaska's oil; it's Alaska's money.
They don't care about Alaska or Alaskans, and if they
did, they'd hire more Alaskans, but they don't. They
need to pump our oil and turn the contract over to
someone else if they don't want to.
5:43:04 PM
HAROLD BORBRIDGE testified in support of the governor's original
version of HB 247. He said when the tax credits were formulated
several years ago, nobody predicted that the price of oil would
be fluctuating so much. He said there has to be a return on
investment for the money that the state spends. He encouraged
the legislature to "revisit this" and set a reasonable level of
credits for oil companies, "so that they can weather the storm,
so to speak, and address the budget crisis that faces Alaska."
5:45:02 PM
SCOTT KANYA testified that he is a small family business owner
who was "not very well represented by Mr. Thayer and the Chamber
in his very un-businesslike recommendation." He indicated that
in response to money loss or [a declining] economic climate, his
business is "battening down the hatches" and is witnessing
people spending less discretionary dollars, which impacts his
business. He expressed fear that the legislature's response to
the present fiscal crisis could make the situation worse. He
said there is an analysis that says if the legislature taps the
PFD, a recession will occur, which would cost the most impact to
jobs and the private sector economy. He urged the committee to
"axe these oil tax credits." He said he would like to see a
change in oil tax revenues that would get Alaska its fair share.
He described his amazement that since Governor Jay Hammond, he
cannot think of anybody who has done more for Alaska than
Governor Sarah Palin. He said she put "a couple ten billion
dollars" in the bank by adjusting oil taxes. He said the state
would have been broke a couple years ago if she had not done so.
MR. KANYA opined that "we" need to do what is right for Alaska
and "what is going to take care of our house." He said the
credits need to be brought down to $70 million through low-
interest loans or - as he recollected some people from the
industry were suggesting - an equity investment on behalf of
Alaska, which would spur additional investment and exploration.
Mr. Kanya stated that oil companies made "a shift" right after
Senate Bill 21 [was enacted] by giving pink slips to "our fellow
Alaskans and other oil patch workers ...." He said the
companies are making adjustments to the new economic climate,
and he opined that the state needs to do the same. He said he
does not understand what's taking so long. He said, "It's just
... business." He added, "And ... we can't afford $700 million
at this point."
5:47:57 PM
LYNNETTE CLARK testified that she came to Alaska as a child in
1951 and settled in the Interior in 1975. She said that as the
chair of the Alaska Independence Party, she represents close to
15,000 Alaskans, whom she said believe in independence rather
than the dependence offered by HB 247. She cited Article VIII,
Section 2, of Constitution of the State of Alaska, which read as
follows:
The legislature shall provide for the utilization,
development, and conservation of all natural resources
belonging to the State, including land and waters, for
the maximum benefit of its people.
MS. CLARK opined that HB 247 will violate that promise of the
constitution, which she reminded committee members they all took
an oath to defend. She said she thinks the bill should not be
passed. She specified that she does not even like the
governor's version of HB 247, although she suggested perhaps the
committee could incorporate portions of the governor's original
bill to craft a better piece of legislation. She said she looks
at what has come out of the House Rules Standing Committee and
"it's like reading hieroglyphics." She stated, "We need to
stick to what was committed by this House and the Senate ... in
March ... [to] hold the overall spending to $4.5 billion." She
indicated she wants neither the permanent fund touched nor an
income tax nor "any of the obscene sales taxes that are coming
down the pike" instated. She opined there are programs that are
pet projects that need to be cut. She further opined that the
legislature needs to "clear the deck or Alaskans are going to
clear it for you in November." She spoke of repealing Senate
Bill 21 and getting the state back on firmer foundation for the
maximum benefit of the people of Alaska.
MS. CLARK continued:
I just don't believe that we're in the dire straits
that we're in, by people that call themselves fiscal
conservatives when they went down... [to] Juneau. I
think we have gotten - across the aisle -
"Republicrats" and "Demrepublicans" playing a
political game instead of standing firm and standing
up for the citizens, the people of this state. I'm
committed to ask you to please listen to us - not the
chamber of commerces, not the lawyers of Exxon, not
any of those people. The testimony you're getting is
overwhelming against this bill. I thank you for your
time; I know you're committing a lot of effort to it;
but I don't think you're doing a good job.
5:50:59 PM
CARLY DENNIS testified that she is a junior at Chugiak High
School who supports the governor's original version of HB 247.
She opined that it is time for the state to solve its fiscal
crisis rather than reducing budgets from places that cannot
afford to have them reduced, such as schools. She said as a
student, she finds it painful to watch great school teachers and
programs being cut, while oil companies continue to receive so
much money. She said that is one reason "all these oil
subsidies really need to go away."
MS. DENNIS relayed that she works closely with Alaska (indisc.)
Environment. She continued:
And so, I think this bill would be a really -
(indisc.) - would be a really great step in happily
(indisc.) the budget problem, as well as (indisc.). I
think it was the man from Homer, Bob, who (indisc.)
diversify our energy, and that's ... a great point.
We can't keep relying on oil as our main source of
revenue, because it's bad for the budget and the
economy, but it's also bad for the climate. And so, I
think if you get rid of these subsidies, that would be
a really great step in diversifying that energy and
moving toward renewable energy, and I know it would
make a lot of people in my community really happy.
MS. DENNIS concluded by imploring the committee to stop paying
oil companies so much money.
5:52:56 PM
CATHY WALLING testified in support of the original version of HB
247. In response to previous testimony, she emphasized the
importance of investing the state's money in "renewables" and
not giving tax credits, which she opined the state cannot
afford, particularly in light of the state's multi-billion
dollar deficit. She said she is not aware of any other place in
the world that allows such huge tax credit subsidies in
comparison with the oil revenue received. Further, she said she
is not aware of empirical proof that the credits are
incentivizing investment in Alaska by the oil companies.
Conversely, she said oil companies invest mostly based on the
oil prices and the quality of the oil reserves. She said she is
"thinking of $800 million next year alone," and it strikes her
that that ends up being the equivalent of each Alaskan giving up
$1,000 of his/her PFD.
MS. WALLING urged the committee to work to reduce the state's
budget deficit. She offered her understanding that it cannot
happen with cuts alone. She said she would choose to give
$1,000 of her PFD to support education and other [programs] that
support quality of life in Alaska. She further urged the
committee to look at the big picture and to be bold and tough
enough to make the big decisions. She said each year that goes
by will be harder. She thanked the committee for its work and
encourage its members to make the courageous moves that are not
necessarily popular and to put the good of the state above the
focus on [how a decision may affect getting reelected]. She
said that kind of action from a legislator is what inspires her,
and she hopes to see more of it.
5:56:23 PM
MICHELLE WILSON NORDHOFF testified in opposition to Version D.
She said her biggest concern is that the climate crisis is not
being addressed, including the fires in Alberta, Canada. She
said, "We're not drawing these links." She said that discussion
is not happening while the focus is on funding the oil industry
in the state. She opined that it is outrageous to be giving so
many millions of dollars to the most highly profitable industry
on the planet. She opined that [the oil companies] will do
fine, but money is needed for education, health care, and so
many other applications throughout the state. Ms. Wilson
Nordhoff said she feels like ExxonMobil Corporation is a bully,
and she wants the legislature to create a new path with the
industry and cease giving handouts.
5:57:34 PM
EMILY FERRY testified that her kindergarten twins told her they
aspire to go to the University of Alaska Southeast in Juneau
when they grow up, and she said it made her proud that there is
a university system in the state that her children aspire to
attend. She said she would like it to stay that way, but as it
stands now, the state is going to give more money to the oil and
gas industry than it is going to put into its university system.
She said that does not bode well for the future of her children.
She said she supports the legislature in "doing the difficult
work" it is doing in "taxing the oil and gas industry" and
repealing those subsidies. She said, "We all need to pay our
fair share, and I'm one of the many, many, many Alaskans that
feel that we can and should have an income tax and that Alaskan
citizens also need to be a part of this equation in paying into
our government, having an ownership stake in what happens here
in Juneau." She encouraged the committee to return to the
governor's original version of HB 247.
5:59:07 PM
LOIS EPSTEIN prefaced her testimony by relating that she has
been an engineer working on oil and gas issues for 25 years, 15
of them in Alaska. She indicated that she is a licensed
engineer, who has sat on several federal advisory committees for
three different federal agencies, doing work related to
refineries, oil pipelines, and offshore operations. Her most
recent experience related to the BP spill in the Gulf of Mexico.
Ms. Epstein said she would offer some general principles she
thinks are important for the committee to consider while
developing any legislation related to oil and gas taxes and
credits.
MS. EPSTEIN said she thinks it makes sense to eliminate all oil
and gas credits. She said the price of oil is, by far, the
greatest driver of the industry's decisions. She said, "I think
we've seen a lot of that in action in the past year or so, as
the price of oil has gone down so dramatically it really
affected our production. So, what we're doing here is really
working at the margins." She said a second principle she
supports is the elimination of any oil taxes based on net
profits. She said she does not believe the state has or will
ever have the resources to fully audit the industry in the way
it needs to for that approach. She said short of redoing the
whole structure, she would say that the best option would be to
support the governor's original version of HB 247.
6:01:42 PM
PAMELA MILLER testified in support of the original version of HB
247 and in opposition to Version D. She opined that from
everything she has read, it is not in the state's best interest
to "continue the status quo with the subsidies." She indicated
that a change to the industry "taking that money out forward
instead of today" is a balancing of the books of state
government that is misleading to the public. She said she
thinks "the amendments that have been proposed" will not bring
new revenue to the State of Alaska. She added, "And we're
really not talking about new revenue; we're talking about a
program that is relatively recent in its full construction of
how many tax credits and subsidies are offered to the oil and
gas industry." She continued:
It's kind of the approach of if we build these ...
ways that they have less of their own risk that
they'll come. There's no proof that that'll happen.
There's no empirical evidence of the effectiveness of
it. What we know is that state revenues would not
come in that are ... deserved to the people of Alaska
and that that amount of total subsidies is roughly the
... equivalent to $1,000 per year per Alaskan. It's a
very big amount of money.
MS. MILLER questioned why the state is contemplating the
continuation of unproven subsidies now when the price [of oil]
is so low and when decades from now, "if you were going to
pursue oil, that oil that then would be produced might actually
bring in some revenue to the State of Alaska." She questioned
whether all Alaskans would be getting their fair share from the
oil produced in Prudhoe Bay over the next 50 years.
MS. MILLER stated that she does not think the original version
by the governor goes far enough; however, she asked that the
committee step back and not approve [Version D]. She concluded,
"We need to deal with industry paying its fair share first
before we ask Alaskans to provide the income tax, which I would
support."
6:05:14 PM
CHAIR JOHNSON closed public testimony on HB 247.
[HB 247 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB247 DOR Overview for HRLS 5-11-16 final.pdf |
HRLS 5/11/2016 9:00:00 AM |
HB 247 |
| AOGA Slides for HRUL 05 11 16.pdf |
HRLS 5/11/2016 9:00:00 AM |
HB 247 |
| 05 11 16 AOGA Testimony HRUL HB 247 FINAL.pdf |
HRLS 5/11/2016 9:00:00 AM |
HB 247 |
| May 11 2016 House Rules COP.pdf |
HRLS 5/11/2016 9:00:00 AM |
HB 247 |
| COP-Tax Credit Table one-pager.pdf |
HRLS 5/11/2016 9:00:00 AM |
HB 247 |
| BlueCrest House Rules Testimony Slides 05-11-2016..pdf |
HRLS 5/11/2016 9:00:00 AM |
HB 247 |
| HB 247 fiscal note 5.10.16.pdf |
HRLS 5/11/2016 9:00:00 AM |
HB 247 |
| HB 247 Fund Capitalization.pdf |
HRLS 5/11/2016 9:00:00 AM |
HB 247 |
| HB247 cost reduction charts 20% SQ-GOV-RLS ds_20160510.pdf |
HRLS 5/11/2016 9:00:00 AM |
HB 247 |
| FY16 LSE Comparison_mm_05022016.pdf |
HRLS 5/11/2016 9:00:00 AM |
HB 247 |
| enalytica memo - Answers to questions on Rules CS.pdf |
HRLS 5/11/2016 9:00:00 AM |
HB 247 |
| HB 247 Written Testimony A.pdf |
HRLS 5/11/2016 9:00:00 AM |
HB 247 |
| HB 247 Written Testimony B.pdf |
HRLS 5/11/2016 9:00:00 AM |
HB 247 |