Legislature(2013 - 2014)BUTROVICH 205
02/22/2013 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
SB 21-OIL AND GAS PRODUCTION TAX
CHAIR GIESSEL announced SB 21 to be up for consideration.
3:36:15 PM
SENATOR DYSON moved to adopt CSSB 21( ), labeled 28-GS1647\U, as
the working document.
CHAIR GIESSEL objected for discussion purposes and invited her
staff, Sharon Long, to explain the committee substitute (CS),
starting with a concept that addresses the government take at
high and low prices that was labeled the "35/5 element."
SHARON LONG, staff to Senator Giessel, Alaska State Legislature,
Juneau, AK, explained the provision that flattens the government
take starts on page 4, line 1, and changes the base tax rate
from 25 to 35 percent and adds a $5 per taxable barrel credit
for North Slope production. That credit is not transferrable and
cannot be carried forward; it must be used against the tax
liability for the year in which the barrel was produced and it
cannot be used to reduce the tax below zero in any given year.
3:38:41 PM
MS. LONG said the chair asked this to be modeled by their
consultant, PFC Energy and Mr. Mayer was here to present it.
3:39:11 PM
CHAIR GIESSEL noted the language saying a producer may apply a
tax credit of $5 for each barrel of taxable oil produced during
a calendar year was inserted throughout the bill for uniformity
and was a concept brought forward by Senator Micciche.
3:40:57 PM
JANEK MAYER, Project Manager, Upstream Practice, PFC Energy,
Washington, D.C., explained that a significant impetus for this
CS came from concerns that the bill, while it is a tax decrease
at high oil prices, has a crossover point below which (because
of removing the capital credit) represents a tax increase rather
than a decrease. The point at which that occurs depends a lot on
one's assumptions about levels of capital spending. So a
producer with low levels of capital spending might see that
crossover occur only at the $70-80 price range (looking at the
large mature producing fields and nothing else). But if you also
incorporate new spending and use a higher CAPEX number, the
price level at which this tax increase steadily rises to is more
like $110/bbl.
In the context of overall regime competitiveness, while it
starts off being reasonably competitive at $60/bbl, by $100 or
so it's already up at the average of other regimes and up at the
average of production-sharing contract regimes, which tend to be
some of the highest government take contracts around versus the
average for royalty regimes which is down at $60 and the high
$50s for Organization of Economic Co-operation and Development
(OECD) countries.
MR. MAYER said the CS, based purely on base production
assumptions (not the higher capital costs that come from new
development), by contrast has that crossover at $75 or $80/bbl
and from that point on down represents a steady reduction in
government take, but below that point it is in fact a tax
increase.
CHAIR GIESSEL for clarification said that SB 21 as currently
written has a downward slope and then levels off (above the
yellow line).
MR. MAYER said that was correct, the yellow line being the
average for royalty regimes around the world.
3:44:53 PM
MR. MAYER said there are two fundamental issues here; one being
concerns about the regressive nature of SB 21 in that the
government take steadily falls, particularly earlier in the
price deck and then flattens off, and then the question of the
crossover and how to address that by introducing a different
form of tax credit that is tied to production rather than one
tied to spending and capital development (which has its own
strengths and weaknesses).
His charts compared a number of other possible regime
interventions, but using both discounted and undiscounted rates
for base production an incumbent producer would have rising
rates under ACES and falling government take under SB 21 (from
66 percent at $70/bbl down to 62 percent at $150/bbl).
Raising the base rate to 35 percent and introducing a $5/bbl
production credit per taxable barrel produced only claimable in
that year [in the CS] had a much flatter overall level of
[undiscounted] government take around the 65 percent mark in the
for a base producer (of a mature field at Prudhoe Bay) and the
crossover point there went from about $75/bbl down to $70/bbl.
He also looked at discounted cash flows of government take and
found those to be fairly comparable.
But, he said, that changes when looking at a new development on
a standalone basis (outside an existing producing area including
the gross revenue exclusion (GRE)). In his model of the CS one
saw a slightly higher level of government take with the 35/5
element, but the impact is less evident because one is looking
at a new development rather than base production. Ultimately
what is lowering government take in this case is not any of the
fundamentals of either the base rate or the production credit,
but overwhelming it is the impact of the GRE.
MR. MAYER noted that one looks at any of these regimes on a
discounted basis, there is a crossover, ultimately, because of
the capital credits (which account for quite a lot in ACES). He
added that when evaluating government take cash flows and not
treating all time periods identically the near term is more
valuable than the future and any one of the options (for a new
development) looks substantially better than ACES from $90/bbl
onwards. That is because the credit helps with the early
negative cash flows that reduces and improves the project
economics.
3:50:59 PM
In raising the cost of a (standalone) new development [in the
CS] from $16/bbl to $25/bbl, the undiscounted government take,
because of the GRE, is lower than ACES, but the crossover point
moves up to $75/bbl. However, overall it is a higher level of
government take than one sees under SB 21 because of the higher
base rate that is compensated at least in part by the production
credit.
MR. MAYER advised that with any high cost development there
comes a point at which government take no longer becomes a
meaningful metric, because there is no divisible income to go
around (at around the $100/bbl mark on the slide) and that
crossover is relatively higher for ACES than it is for the CS.
Looking at incremental analysis for an incumbent producer that
has a new development and subtracting one from the other
resulted in the crossover level being substantially lower for a
$16/bbl development in the CS. But modeling it on a discounted
basis, one sees it's only at very high levels that you get
levels of government take that are lower than they are under
ACES. That is exacerbated further by looking at the $25/bbl
field where the crossover comes at about $85/bbl, but a it is a
relatively lesser tax increase below that point than was the
case under SB 21(before the CS).
MR. MAYER reminded folks that they were looking at 60-65 percent
government take as being in the area of competitiveness. And for
base production the net present value (NPV) at a 12 percent
discount rate per barrel of reserves is significantly improved
in SB 21 with or without the CS (using both a discounted and
undiscounted basis).
3:56:50 PM
A new development on a standalone basis including the GRE has a
crossover point where at a low price level economics look better
under ACES, but for anything above that they look substantially
better under SB 21. However, that crossover point rises with the
CS from $75/bbl to $85-90/bbl for a $16/bbl new development. At
$25/bbl none of these things have positive NPV above about the
$90/bbl mark. The crossover between ACES and the CS rises from
being about that $90/bbl mark to being more like $100-105/bbl.
That is from the impact of a higher base rate that is being only
partially compensated for by the $5 per taxable barrel
production credit.
MR. MAYER said when you look at base production, the 35/5
element looks like the perfect regime - very flat, very neutral
and right where a lot of people want to go in terms of overall
levels of government take. But when drilling down into the
details of new developments, one can find further sources of
concern over improving the way the overall picture works.
3:58:01 PM
He said the crossover point is highest on an incremental basis
and that is because of some of the things he had discussed in
terms of the impacts of buy down and to the extent that one
thinks the incremental rather than standalone economics is the
way to analyze these things. He elaborated that ultimately one
sees a crossover in the low $100s under SB 21 for a $16/bbl/day
new development that has a higher NPV on an incremental basis,
but that moves marginally higher under the CS. Both are
substantially higher in terms of the crossover point when one
looks at it for an expensive $25/bbl new development.
In summary, he said some strong points in terms of overall level
of government take, particularly when looking at the base
portfolio, but more sources of concern in terms of looking at
some of the other economic metrics for a new development both on
a standalone basis (where that is assisted by the GRE for a
completely new producing project), but particularly when the GRE
doesn't apply (when potential sources of concern arise).
3:59:42 PM
MR. MAYER said similarly when it comes to rates of return (IRR)
the crossover under SB 21 becomes higher rather than lower
versus ACES; with the CS that crossover point is relatively
higher (both for the $16/bbl development and the $25/bbl
development). All of them look worse on an incremental basis, if
one thinks that is a good way to look at this.
He explained that the very high levels of IRR a new producer can
get under ACES for on an incremental basis are really the work
of progressivity; and one has the counterintuitive result that
the higher the progressivity the higher the IRR you can get on
an incremental basis for a project that says nothing about the
quality of the project or the economic value that it creates.
It's simply a quirk of the buy-down phenomenon, which he
explained by providing this example: imagine having a 100
percent tax rate where you could receive nothing, but with each
dollar of spending could buy down your rate. That first dollar
of spending that brings you down from 100 to 99 percent would
have infinite rate of return. So, it seemed to him that the
question of high rates of return under ACES looking solely at
incremental analysis is a phenomenon of the problems of using
incremental analysis not a fundamental benefit of ACES as a
regime.
4:01:37 PM
CHAIR GIESSEL said the goal had been to levelize the government
take a bit more and asked for comments.
SENATOR MICCICHE said they heard complaints that the take was
too high of a tax increase at the low end and people, including
many senators, didn't like the slightly regressive nature of the
original SB 21.
CHAIR GIESSEL asked the administration if they had any thoughts
on this.
SENATOR MICCICHE added that they also looked at smoothing out
the curve, but that had its own problems. Their concept was to
create a slightly progressive system without using
progressivity, but to preserve the simplicity of the governor's
proposal. This CS achieves that by raising the base rate and
offsetting it with a per barrel credit. Since the tax rate was
raised they also had to fix the GRE with corresponding changes
by increasing it to 30 percent and increasing the loss carry
forward to 35 percent. They like the curve, the slightly
progressive nature of it and the fact that it's a smaller fiscal
note while still retaining the competitive level with other OECD
producing areas where Alaska wants to be.
CHAIR GIESSEL said that they didn't want to create a runaway
schedule of credits that would incent spending and not
production the administration's consultant had modeled this also
and emphasized.
4:04:19 PM
SENATOR FAIRCLOUGH asked if the fiscal note was in process.
4:05:12 PM
MIKE PAWLOWSKI, Advisor for Petroleum Fiscal Systems, Office of
the Commissioner, Department of Revenue (DOR), Juneau, AK, said
the fiscal impact of the proposed CS is being evaluated, but the
impact of the bill is readily apparent in the government take
numbers, the inference being that at the current range of prices
the government take under the CS is higher than what the
governor asked for.
CHAIR GIESSEL asked if he had any comment on this portion of the
CS.
MR. PAWLOWSKI said they asked their consultant, Mr. Pulliam with
Econ One, to run it through his models.
4:07:09 PM
BARRY PULLIAM, Managing Director, Econ One Research, Inc., Los
Angeles, CA, said he revised the government take line from a
slide he presented last week with the 35 percent flat rate and
the $5/bbl "production allowance." Over the period in a fiscal
note of 2015-2019, it will somewhat increase government take for
all existing producers on the North Slope from the low 60
percent range to a range that approaches 65 percent at prices
above $80 or $90/bbl and reduces government take at prices below
$80/bbl closer to where it was under ACES.
4:08:54 PM
The way it accomplishes this is by modifying the GRE to give an
allowance that is a percent of the production value; in SB 21 it
was 20 percent. That allowance, in terms of a dollar per barrel
amount, would rise with higher prices and fall with lower
prices. Allowing a per barrel allowance is putting in a GRE that
as a percentage increases with lower prices - therefore helping
out more than a standard percentage-based GRE - and declines
with higher prices. So it bends the curve a little bit and
accomplishes the goals of providing some lower taxes at lower
levels (closer to what ACES does) and a little bit higher take
at higher levels (closer to what one sees on average throughout
the world).
4:10:20 PM
SENATOR FAIRCLOUGH said she wanted the fiscal note to reflect
the $5 credit.
MR. PAWLOWSKI said they will put it into the same table format
as was used in SB 21.
MR. PULLIAM proceeded to another revised slide showing how the
system would work with this allowance at different prices ($60-
$160/bbl) with total lease expenditures of $30/bbl. At $60/bbl
(West Coast) the taxable barrel value would be $20 and the
production tax value would be $1 million. A 35 percent rate
would be an obligation of $350 million. Then you would take your
per barrel allowance of $5 against that (assuming a producer of
50 million barrels) which would be $250 million. That reduces
the tax to $100 million and the effective rate goes to 10
percent (in his model). That allowance, while it stays the same
at $5/bbl and going up in price, its value declines on a
percentage basis. So the effective tax rate rises from 10
percent all the way up to 30 percent at $160/bbl; and that is
about where it would cap out.
SENATOR MICCICHE said they heard through testimony that this
helps companies in analyzing projects.
MR. PULLIAM answered that it does and without the messiness of a
progressive net tax, which is important. One of the things he
liked about it was that the credit was tied to production and
the value of it increases at the lower prices and fades away at
higher prices where it isn't really needed. It achieves a flat
take over most ranges and gets progressive at the lower prices.
4:15:07 PM
He also looked at the impacts on new projects at $16/bbl and
$25/bbl incorporating the 35/5 element with the 30 percent GRE
and compared it with SB 21 (with the GRE). That indicated that
NPV at all price levels was enhanced by the CS as were all of
the other investment metrics; and government take would be about
60 percent for new investment. While the present value of the
project isn't as attractive at the $25/bbl level, it's more
attractive under the CS than SB 21. In summary it accomplishes a
lot of what they want to do in a meaningful way.
SENATOR MICCICHE commented that he looked forward to hearing
from the stakeholders. It accomplishes what he want to
accomplish - improving economics on the low end at the price
where they hear companies evaluate projects; he also liked the
fact that it's slightly progressive without using progressivity
and has a little more take for Alaskans, but doesn't put us out
of the ballpark on being competitive. He thanked the
administration and Mr. Pawlowski for their work.
4:17:37 PM
SENATOR MCGUIRE remarked that Senator Bishop had worked hard on
this as well.
SENATOR BISHOP said the modeling showed it as being as close to
hitting the sweet spot as possible.
4:19:15 PM
CHAIR GIESSEL asked Ms. Long to explain the expansion of the
gross revenue exclusion (GRE) to include legacy fields and
enlarging the PAs.
MS. LONG explained that section 28 on page 26, line 26, through
page 27, lines 3 - 11 had language that allows expanded PAs in
existing units. Another change on line 3 changed January 1 to
December 31, 2011,
4:20:41 PM
She said Mr. Bullock suggested including a definition of
"participating area" on line 10.
CHAIR GIESSEL highlighted that the GRE was altered from 20 to 30
percent on page 26, line 29.
MS. LONG added that was triggered by the 35/5 element. Line 30
had another small adjustment changing "land" to "lease".
4:21:51 PM
JOE BALASH, Deputy Commissioner, Department of Revenue (DOR),
Juneau, AK, said that language was on page 27, lines 3-8 and it
makes an addition to the two ways in which you can qualify for
the GRE relative to the governor's original bill. This was to
include expansions of a participating area, because as the
committee has heard in testimony from various operators, new
technology is allowing companies to reach certain parts of the
reservoir that weren't available previously. As that kind of
work unfolds, it seems expansions of those original PAs will be
needed and it seems reasonable to apply the same logic and
policy there as in new participating areas as long as they are
able to track and count the barrels.
4:23:23 PM
CHAIR GIESSEL said Bill Barron had explained about how new
technology had affected industry and Senator McGuire was
concerned about broadening PAs. ConocoPhillips said the GRE was
not broad enough and that the legacy fields need to be part of
the GRE and that is what this change was intended to capture.
SENATOR MICCICHE thanked the chair for going through the process
and embracing the concepts talked about in TAPS Throughput
Committee.
4:24:53 PM
MR. BALASH returned to page 26, line 30, the first test for
qualifying for the GRE that the oil and gas is produced from a
lease or property that does not contain a lease that was within
a unit as on January 1, 2003. He said the original language read
"did not contain land" within a unit, and Brooks Range testified
on Monday that some of the leases they hold today that are part
of the Mustang unit on that date were actually part one of the
legacy units and didn't qualify. So they had to be specific as
to the lease not the land, because in the intervening time the
land was contracted out of the Kuparuk River Unit and re-leased
to Brooks Range for development. This fix should correct that
problem.
SENATOR BISHOP asked him to elaborate on tracking and counting
barrels.
MR. BALASH said page 27, line 6, referred to the expanded PA,
saying "and the producer demonstrates to the department that the
volume of oil and gas produced is from an area added to an
existing participating area." And that is where the taxpayer has
the burden to demonstrate to the Department of Revenue that
those barrels are being counted.
SENATOR FAIRCLOUGH asked him to explain how new production would
be quantified in this instance for department analysis.
MR. BALASH explained the department manages oil and gas leases
through leases, units, and then participating areas (PA). Leases
and units are measured in two dimensions; a unit is a way of
managing multiple leases that contain an oil or gas reservoir.
That reservoir rests in a third dimension and as those deposits
are shaped across the different leases within that unit, certain
parts of that reservoir when penetrated with a well actually
contribute to the production in that well; reservoir engineering
and analytics is used to determine which parts of the reservoir
are actually contributing to that production in the well bore.
It is through that analysis that PAs are then defined in the
unit. By identifying specifically new participating areas they
are talking about parts of the unit that today are not
contributing to production and so, by definition, would be new
production. Expansion of an existing PA is land that previously
was not determined to have been contributing to production -
rather new parts of the reservoir that will in the future to be
contributing new barrels that will help sustain TAPS.
4:29:42 PM
SENATOR FAIRCLOUGH asked if other jurisdictions sell royalties
based on that third dimension.
MR. BALASH answered that they had at times talked about
segregating the state's leases vertically, but hadn't done it
yet. But even in Alaska, they will sell the oil and gas rights
in the subsurface but not necessarily the coal rights or the
gold rights. To a degree there is a distinction, but the
participating area concept is common to the industry.
4:30:26 PM
MS. LONG said Chair Giessel had requested language about not
rewarding the industry for what it would produce anyway and this
amendment [on page 27, lines 6-8] puts the burden on industry to
prove that it is new oil.
4:31:57 PM
MS. LONG went over details of the Competitiveness Review Board
that had been talked about over a couple of legislatures on page
27, line 12, through page 29, down to the membership, how they
are appointed, the information that will be provided by it, and
a sunset provision for it.
CHAIR GIESSEL invited Senator McGuire to speak to this.
SENATOR MCGUIRE thanked the chair, Mr. Pawlowski and Mr. Balash,
and complimented Senator Giessel, the best first time
chairperson she had experienced for driving this bill through
the process in the allotted time while respecting that the
public's wisdom and experience would warrant at least 30 minutes
to speak and then for getting all of their ideas incorporated
into this document.
She said the idea for this board would have not been right
without the proper rollback of ACES. She said the state's budget
is 90 percent dependent on this particular revenue and if we
don't get our act together quickly we're in a whole heap of
trouble. It struck her that the discussions in her 13 years here
have been so politicized when it comes to oil and gas taxes and
she has thought that putting together a board, in this case it
would be nine members - the commissioners of DNR DOR DEC, the
chairperson of the Alaska Oil and Gas Conservation
Commission(AOGCC) and five members of public to be selected by
the governor including a petroleum engineer, a geologist and an
economist all with at least three years' experience in the
field, a person from the Alaska Oil and Gas Association (AOGA)
and the Support Industry Alliance - to serve without
compensation and be eligible for per diem and travel expenses.
This board would meet at least four times annually and report
its recommendations to the legislature about how to keep Alaska
competitive - without a political agenda.
They would look around the globe and at the Lower 48 to see what
the emerging trends are, how other places are staying
competitive, and at what kinds of things Alaska could do in its
fiscal regime and regulatory process; they would review
historical, current and potential levels of investment, rig
counts, factors that affect investment in oil and gas across the
world and make recommendations to the legislature to increase
Alaska's competitiveness. She said the legislature makes the
ultimate decisions about how to change the fiscal system, so
they would not be delegating anything about that ultimate
control.
SENATOR MCGUIRE wrapped up by relating a personal story about
how this idea came to her. When she was president of the Pacific
Northwest Economic Region, her friend, Mel Knight, the Minister
of Energy for the Province of Alberta, said they went through a
very similar situation. They had high oil prices and the public
wanted to capture more of it and so they adopted a windfall
profits tax much like ACES. The backlash was immediate with oil
companies "voting with their feet" and moving their rigs and
operations to Saskatchewan and British Columbia.
Alberta suffered immensely, because it is their bread and butter
and having a parliamentary system, many were voted out of
office. So they put together a competitiveness review panel that
came back with a series of recommendations, which the parliament
put into place and now Alberta is back on track and extremely
competitive. It was her hope that this will be a part of
Alaska's governance for the future much like the Permanent Fund
Board that sits in perpetuity outside of the legislative
structure.
4:40:34 PM
CHAIR GIESSEL asked Ms. Long to discuss "cleanups."
MS. LONG said they start on page 10 that combines sections 7 and
8 from the previous bill; that was suggested by Legislative
Legal. On page 15, they also suggested better phraseology on
lines 9 and 10, 17 and 18. The other cleanup was having the
definition of participating area to be included within the GRE
amendment, which had already been talked about.
4:42:11 PM
CHAIR GIESSEL went on to the exploration incentive credit (EIC),
an element advocated by the AOGA and Brooks Range.
MARGARET DOWLING, staff to Senator Giessel, Alaska State
Legislature, Juneau, AK, explained that the EIC was discussed by
the committee; in response a change was made on page 18. They
took the current law which allows an EIC that is set to expire
in 2016 and extended it to 2022. In addition, on page 20, lines
18-20, the three-mile restriction was eliminated because Brooks
Range said the distance around the well was too tight for them
to qualify for an additional credit.
CHAIR GIESSEL noted AOGA's recommendation for extending the EIC
and reminded the committee that Brooks Range showed them a slide
of the very tight three-mile boundary around a well. She invited
DNR to speak to this portion.
4:44:31 PM
MR. BALASH explained that language on page 20, line 8, creates a
gate for getting this .025 exploration credit. It requires that
the commissioner of DNR must make an affirmative determination
as to the geological objective of the well. So this credit
mechanism has a gate; you have to come in and demonstrate to the
technical guys in the Division of Oil and Gas (DOG) that in fact
something new is being looked at or looked for in order to
qualify as an exploration credit. Assuming that threshold is
met, that is a front end gate, then the well is drill and the
costs accounted for; the information from that well needs to be
shared with DNR again in order to qualify for the credit and
receive it. So, there is a check on the front end and one on the
back end that makes sure the state gets something for a generous
credit, as the state is taking risk with a company on what is
the riskiest part of oil and gas development, the exploration
side.
MR. BALASH explained that in years past, limits have been tied
to unit boundaries and distance from other wells. This
eliminates all of those. So even if they are talking about an
exploration well within a unit, as long as it is targeting
something new, you have the potential to qualify. That should
help in taking on some of the opportunities that are close to
the nearer the existing producing units that they believe are
out there and quite prevalent.
SENATOR FAIRCLOUGH asked the potential liability to the state of
the exploration credit on a percentage basis and a dollar
amount.
MR. BALASH answered that this credit is set at 40 percent and
typically the cheapest winter exploration well drilled on the
North Slope costs around $15 million. That cost goes up
depending on how far away it is, building ice roads and maybe
setting up a temporary man-camp. So 40 percent of that is in the
range of $6 million.
4:48:24 PM
SENATOR MICCICHE asked if this credit has to be taken against
production; so the state is not exposed.
MR. BALASH answered that these particular credits fall in the
category of those which are available for a transfer or
refunding on the front end.
4:49:04 PM
SENATOR FAIRCLOUGH, using the example of Fairclough and Co.,
asked if there are any qualifying criteria for these companies
we hope will be part of our renaissance to be able to apply for
the credits. So that people with prospects who can actually
follow through on production are the ones being incentivized.
MR. BALASH answered that that still needs to be spelled out
somewhere.
SENATOR MICCICHE said that could be added to the existing letter
of intent. He also said that while this definitely helps some of
the smaller companies for initial exploration, the folks that
know best all say the most new oil likely to arrest the decline
will likely come from infield areas and this makes access to
those credits available to the legacy companies as well.
MR. BALASH said that was correct and he emphasized that the role
for credits to play is to incentivize those activities to find
the oil and then allow the value of the oil itself to drive the
economic decisions makings and ultimately the development as
opposed to the credit cycle.
CHAIR GIESSEL asked Mr. Mayer to comment on the generosity of
this credit.
MR. MAYER said that, in general, exploration risk is by far the
largest risk in upstream oil and gas development and the part
that governments around the world usually seek desperately to
avoid. Alaska is unusual in the degree to which it happily takes
it exploration risk, particular as it stands as a 40 percent
exploration credit and the 25 percent net operating loss credit
if there is no production. So if Fairclough and Co. decides to
drill up some random moose pasture, they are drilling with $.65
on the dollar paid for by the state of Alaska. If Fairclough and
Co. is an existing producer using the buy down it could get even
higher support than that.
SENATOR FAIRCLOUGH disclaimed owning an oil exploration company.
4:55:17 PM
SENATOR BISHOP said Mr. Mayer was a little bit cautious and he
felt that the credits were a skosh generous, but they had heard
for the last several weeks how much it costs to do business in
Alaska, and he felt confident in taking a little risk in getting
the new production going.
SENATOR FAIRCLOUGH thanked Mr. Mayer for commuting back and
forth from Washington D.C. to testify before the committee.
CHAIR GIESSEL said the last element included in this bill is
innovative came from the TAPS Throughput Committee's letter of
intent that talked about Alaska hire and Alaska purchase. She
invited Ms. Long to explain that section.
4:58:13 PM
MS. LONG explained that language on page 2, line 10, called the
corporate income tax break, was for Alaska manufacturing. A
primary concern in the legislature and all over the state was to
have jobs for Alaskans and to encourage manufacturing here. The
Department of Law (DOL) and the courts don't agree with a lot of
ideas, but they came up with this one that they think will pass
muster. It's a corporate income tax break for oil and gas sector
goods made or modified in the state. It is transferable and is
capped at $10 million per year. If a company does not have a tax
liability that credit can be carried up to seven years.
4:59:36 PM
BRUCE TANGEMAN, Deputy Commissioner, Department of Revenue
(DOR), Juneau, AK, added that this is for expenditures directly
attributable to instate manufacturing or instate modification of
tangible personal property in exploration, development and
production of oil and gas. It's a very targeted tax credit aimed
specifically at the manufacturer and building of items that are
related to the oil and gas industry.
CHAIR GIESSEL asked if Fairclough and Co. was a manufacturing
company located in Fairbanks and produced something for the
North Slope, how this would play out for that company.
MR. TANGEMAN replied that expenditures attributable to an oil
and gas depreciable item that the company would make would be
allowed a 10 percent tax credit against the expenditures that go
into that item.
5:01:25 PM
SENATOR DYSON said he suspected that the 10 percent credit would
then allow that company to bid on a product or services at a
lower rate than a competitor who may also be bidding on it from
somewhere else.
MR. TANGEMAN answered yes; that's the intent.
CHAIR GIESSEL asked if a company that is actually based in North
Dakota and producing a tangible item that is being used on the
North Slope get this credit.
MR. TANGEMAN answered no; they would need to have a corporate
income tax or be an entity within the state of Alaska.
CHAIR GIESSEL asked if they built a manufacturing facility in
Fairbanks and actually were producing that product in Alaska
would they qualify.
MR. TANGEMAN answered yes and it would go the opposite way.
5:03:11 PM
CHAIR GIESSEL said this piece is aimed at incentivizing or
helping our companies that are here on the ground in Alaska
employing Alaskans and helps bolster diversification of our
economy.
5:03:34 PM
SENATOR FAIRCLOUGH asked how this will affect Alaska's bottom
line. Is it stackable on other benefits someone might receive?
Could a company accumulate up to $60 million worth of credits
because of the carry forward and those would enter a market at a
discounted rate possibly for a larger company that is paying
taxes, because they are transferable?
5:04:40 PM
MR. TANGEMAN explained the intent is that the tax liability is
less than the credit they would receive and it is transferable,
but that should also go into the economics of the pricing
involved in manufacturing of whatever they are producing in the
state.
5:06:26 PM
SENATOR DYSON said he was startled that an Alaskan company could
get this credit for products going to the Outside.
MR. TANGEMAN replied that it's for the sale of a product that
was built in Alaska but sold to North Dakota, for instance.
SENATOR DYSON said we want jobs, but he was questioning about
they would pick out this particular industry to subsidize above
others like the fish boat manufacturer. He said it might also
have title problems because this whole thing has to do with oil
and gas in the state and all of a sudden a section was slipped
in talking about subsidizing an industry that is selling
products outside of the state that has nothing to do with our
oil and gas.
SENATOR FAIRCLOUGH said the tax credits have to stay within
Alaska, but there are still some dynamics at play in terms of
incentivizing an industry. She was thinking about the
fabrication of pipe. At one time there was a conversation about
rounding pipe here and that kind of company would qualify for
this credit. She wanted to think the concept through.
MR. PAWLOWSKI supplemented that saying one of the things they
had heard consistently is the impact of the high cost of doing
business in Alaska on the oil industry in that we have a net tax
system, and there is a relationship between a vibrant service
industry and support industry to a healthy oil industry. One of
the attempts here is to increase the health of that sector and
hopefully drive down costs.
He said it was focused towards oil and gas specific property
considering the relationship of the ultimate revenues the state
gets from the more profitable projects. The state has a profits
based tax, the less expensive the property that goes into the
cost equation actually does have a feedback loop to the revenues
of the state.
5:10:27 PM
SENATOR FAIRCLOUGH said she thought "manufacturing" was probably
defined somewhere in code, but it wasn't having a product and
adding a bolt to it and that should be clarified for the general
public.
MR. TANGEMAN pointed to page 3, line 10, where "manufacturing"
was defined as "needs to perform substantial industrial
operations in the state to transform raw material into tangible
personal property with a useful life of three years or more for
use in the exploration and development and production of oil and
gas regardless of whether the oil or gas is located in the
state."
Line 14 defined "modification" as "an adjustment, equipping or
other alteration to existing tangible personal property that has
a useful life of three years of more and is for use in the
exploration, development and production of oil and gas
reserves."
5:11:32 PM
MR. PAWLOWSKI said the important caveat in that section was on
page 3, line 17, that said, "modification does not include minor
product alterations or inventory activities." He said they would
continue to work with the committee and the legislature on this
going forward.
SENATOR FAIRCLOUGH asked if they had consulted the oil industry
or someone manufacturing somewhere about what that product might
be and if there was an example. And why choose $10 million?
MR. TANGEMAN said he had some initial conversations, but looked
forward to hearing more from the service sector. It seemed they
thought it would be beneficial to their business in promoting
business growth in Alaska. The $10 million cap is a threshold;
they are hoping it will be a boom, but they have to see how it
works through the process.
MR. PAWLOWSKI said the sincere intent in the bill overall was to
protect the state treasury in any ongoing obligations. They
heard testimony from PFC that when there are credits, that
offering transferability of credits to be used against a tax
liability is a viable mechanism to provide some protection.
SENATOR BISHOP commented said this is another way to make Alaska
competitive and the more you do here the cheaper it is to do it.
5:16:00 PM
CHAIR GIESSEL said that summarized the committee's ideas in
addition to those of the TAPS Throughput Committee. She said
some amendments were not included in the CS and those would be
heard on Monday.
5:18:08 PM
CHAIR GIESSEL removed her objection and CSSB 21( ), labeled 28-
GS1647\U, was adopted and held in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| CSSB 21 vs U.pdf |
SRES 2/22/2013 3:30:00 PM |
SB 21 |
| SB 21 Econ One Presentation Pulliam SRES 2013.02.22.pdf |
SRES 2/22/2013 3:30:00 PM |
SB 21 |
| SB 21 Letter DougSchwartz 2013.02.20.pdf |
SRES 2/22/2013 3:30:00 PM |
SB 21 |
| SB 21 Letter WilliamArmstrong 2013.02.20.pdf |
SRES 2/22/2013 3:30:00 PM |
SB 21 |
| SB 21 Letter RonRice 2013.02.20.pdf |
SRES 2/22/2013 3:30:00 PM |
SB 21 |
| SB 21 PeterStokes 2013.02.20.pdf |
SRES 2/22/2013 3:30:00 PM |
SB 21 |
| SB 21 Written Testiomy EricFox 2013.02.20.pdf |
SRES 2/22/2013 3:30:00 PM |
SB 21 |
| SB21 PFC Energy. Mayer. 35% tax plus $5 barrell & GRE elements 2013 02 22.pdf |
SRES 2/22/2013 3:30:00 PM |
SB 21 |