Legislature(2011 - 2012)BUTROVICH 205
03/25/2011 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SJR2 | |
| SB85 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SJR 2 | TELECONFERENCED | |
| += | SB 85 | TELECONFERENCED | |
SB 85-TAX CREDIT FOR NEW OIL & GAS DEVELOPMENT
3:52:17 PM
CO-CHAIR WAGONER announced SB 85 to be up for consideration in a
much revised version. He said Mr. Pawlowski, staff to Senator
McGuire, another sponsor of the bill, would co-present the new
version with Ms. Jackson.
CO-CHAIR PASKVAN moved to bring CSSB 85( ), version 27-LS0484\E,
before the committee.
CO-CHAIR WAGONER objected for discussion purposes.
3:53:47 PM
MARY JACKSON, staff to Senator Wagoner, sponsor of SB 85, said
the new committee substitute (CS) is a joint effort between
Senator McGuire and Senator Wagoner. When this bill was last
before the committee, Senator McGuire expressed a willingness to
participate to expand the original bill so that credits would be
offered for areas within units subject to certain provisions
that she would go over in the sectional analysis.
MIKE PAWLOWSKI, staff to Senator McGuire, presented a power
point and said the first slide showed a Department of Revenue
(DOR) comparison of the projected production based on fall
revenue forecasts going back for the last 10 years and said in
considering the challenge facing the state about declining oil
production they determined it was important to go a little bit
deeper than just looking at this graph by itself. The next two
graphs indicated the actual forecasted production taken from the
appendices in the back of the fall forecast, his point being
that it seems like the forecasting has a pretty good idea of
what the production of Prudhoe and Kuparuk will be, but didn't
explain why there were some discrepancies. Well, the
discrepancies largely come from the Prudhoe Bay and Kuparuk
satellites. This was the concern that Senator McGuire was trying
to get to. These pools are necessarily part of the major field,
but are separate accumulations within the unit.
MR. PAWLOWSKI said most of the North Slope actually is unitized
at this point. So, looking at Senator Wagoner's goal of getting
at new oil, Senator McGuire felt there was opportunity within
the existing units to go after some satellite provisions. That
is part of the reason for the departure in the CS. The table
shows that the percentage of new oil rose throughout the years
as production in existing units declined. So, the target that
Senator Wagoner and Senator McGuire jointly came together to
focus on was really new oil.
Therefore, [CS] SB 85 adds a new development cost credit in AS
43.55.026 that is based on 100 percent of qualified development
expenditures which are linked back to the qualified capital
expenditures. To avoid the problem of stacking credits, in that
some are monetizable and can be accumulated on top of each
other, the qualified capital expenditure credit in AS
43.55.023(a) and the net operating loss carry forwards in AS
43.55.023(b) are subtracted from the 100 percent qualified
development credits. So, it's not truly a 100 percent credit; it
ends up being whatever is the net known (explained in a further
slide). The key is that targeting new oil is for undeveloped
pools within existing units or leases or property that have not
been involved directly in sustained production as of December
31, 2010. That is the universe to which the credit is intended
to apply.
3:58:09 PM
MR. PAWLOWSKI provided an example to demonstrate the net effect
of the way the CS handles the .026 credit. On the left was a
producer with a tax liability (conceptually he would not
necessarily have a net operating loss carry forward under
.023(b)) - so conceptually he is making a $10 million capital
expenditure. Then they are accumulating an .023(a) credit of $2
million on that expenditure, which would leave an .026 credit of
$8 million. However, a producer with no tax liability making the
same $10 million expenditure would get the same .023(a) credit,
and assuming that they had a carry forward loss of $10 million,
a 25 percent of that $10 million, for an additional $2,500,000
credit, leaving the .026 credit at $5,500,000.
3:58:58 PM
SENATOR WIELECHOWSKI asked if these credits are taken at the
time the expense is incurred or at the time of production.
MR. PAWLOWSKI answered if he was talking about the specific
mechanics within the Department of Revenue of when the credit
certificate application is received that he didn't feel
comfortable talking about it, but said the department would talk
about that on Monday.
SENATOR WIELECHOWSKI asked if under this bill, the credit would
be taken at the time of production.
MR. PAWLOWSKI replied that the credits would be taken as a
certificate, but can't be used until the field goes into
production. That brings them to the limitations on the .026
credit. Part of Senator Wagoner's original goal was to directly
link the provision of the credit to production. So, the .026
credit on page 2, line 30, through page 3, line 1, is not
transferable and may not be used for a person's tax liability
under AS 43.55.011(e) below zero - the key being that some of
credits (like .023 and .025) can either be sold back to the
state or taken against one's current tax liability.
He repeated that Senator Wagoner wanted to make sure the credits
are held until production starts and a tax liability is
generated. The tax levied under AS 43.55.011(e) is apportioned
in the current bill. So, the tax credit as Senator Wielechowski
was asking can be applied not only when the unit goes into
production but only in apportion to the actual production from
that new oil on which the credit was earned. So, if you think
about a unit currently producing 100,000 barrels a day and a
credit is earned on something that leads to 10,000 barrels a
day, the producer would only ever be able to use up to 10
percent of their tax liability for that unit on that credit in
any given year. Any balance would carry forward until the credit
is exhausted, because it cannot reduce the tax liability below
zero.
MR. PAWLOWSKI said Senator Wagoner's core goal was to create a
stampede similar to the work he did last year on SB 309. The
"stampede provision" is really that the expenditures to qualify
for this credit have to be within seven years, before the year
2018 (page 2, line 1).
4:01:59 PM
SENATOR STEDMAN went to the slide with the $10 million capital
expenditures and asked if they would still get to fully expense
the $10 million CAPEX with their $2 million credit and the .026
credit ($8 million).
MR. PAWLOWSKI answered yes.
SENATOR STEDMAN asked if a model could be done on the rates of
return for this type of investment to compare how the return
profile changes when the credit is inserted to see if it would
be more advantageous than today's system.
SENATOR WAGONER replied that they could ask the Department of
Revenue to have that ready for them on Monday.
SENATOR STEDMAN said if the state has potential investments it
would be nice to have data so they could model how credits would
impact a project.
SENATOR WAGONER replied that he wasn't sure that could be done,
because a lot of these projects hadn't even started yet, but the
ones he was keen on were Great Bear, Armstrong and Brooks Range.
MR. PAWLOWSKI responded that his point was incredibly
appropriate, because this slide is really intended just to
demonstrate how the credit is calculated and the tax system has
a suite of other incentives that need to be evaluated. He said
that he had pulled the 2009 National Department of Energy's
Energy Technology Laboratory assessments on potential
developments within the North Slope and tried to put together a
suite of some of the identified undeveloped pools that DOR could
model.
SENATOR STEDMAN said he remembered presentations from both the
legislature's and the governor's consultants on different
aspects of credit enhancements and tax incentives and said he
thought some of that data should be available even though they
don't get company X's information.
SENATOR WIELECHOWSKI echoed Senator Stedman's comments and asked
if this was a credit towards the development of oil.
MR. PAWLOWSKI replied yes. He noted language on application of
the credit on page 2, lines 12-17, and that line 13 covered
development expenditures - that area incurred after completion
of the first well that discovers a pool. He noted that line 15
says "before the state of sustained production" and that the
Alaska Oil and Gas Conservation Commission (AOGA) working in
consultation with the DOR would define those goal posts in a
following hearing.
4:07:40 PM
SENATOR WIELECHOWSKI asked if everything after punching the well
in the ground is considered development and if that would
include delineation wells, gravel roads, ice roads or seismic
tests. And what kind of costs are they looking at?
MR. PAWLOWSKI answered that it includes "qualified capital
expenditures" and a detailed list of those gets a little
nuanced. They are continuing to work with the department and
AOGCC on the sign posts to make it clear to everyone when
exploration ends and development begins and then when
development ends and production begins; the suite of spending
will depend on each different field.
The analysis that Senator Stedman was referring to really needs
to happen - the goal is try to narrow when the credit can be
used as much as possible.
SENATOR FRENCH said two recent developments come to mind in
working with DOR on modeling - Nakiachuk and Oooguruk - and it
would be fascinating to see how this bill would impact those
fields.
SENATOR WIELECHOWSKI said the state is picking up 100 percent of
the development costs and asked what percent of exploration
costs it would continue to pick up under SB 85.
4:10:31 PM
MR. PAWLOWSKI answered that the goal is not to displace or make
the developers choose between any of the existing credits; this
is added to them and is the reason for the attempt to subtract
credits that are claimed on similar expenditures.
SENATOR STEDMAN remarked that first concept of this bill was
that the credit would be "either/or," but the new CS says that
the credit would be stacked.
MR. PAWLOWSKI responded that was correct.
SENATOR STEDMAN said one concern is that currently when you have
the immediate write off for CAPEX ($10 million in the example),
and that one would get an additional $8 million off the tax
bill.
MR. PAWLOWSKI replied that one would deduct the additional $8
million when whatever field the expenditure was made against
comes into production and only against the apportioned tax
value.
SENATOR STEDMAN asked for another model of how much the state
and federal governments are putting on the table and how close
they are to 100 percent.
MR. PAWLOWSKI explained that the risk of this credit to a
developer is that it may never be used. A perfect example is
where BP built up a fairly healthy expenditure to try to develop
the Badami unit, which didn't produce the way they thought it
would and got shut down. So it never generated a tax liability
to be offset by the credit.
4:15:13 PM
SENATOR WIELECHOWSKI asked if this credit would impact the
existing state/federal exploration credits of 65 percent for new
entrants and 76 percent for a current entrant.
MR. PAWLOWSKI replied that there was no intent to impact that,
but some cases might in terms of the .025 alternative
exploration credits that they are currently evaluating with the
help of the Department of Law.
SENATOR WIELECHOWSKI recapped that the state would be picking up
100 percent of the development costs above the 67 and 76 percent
exploration credits.
MR. PAWLOWSKI corrected that the state would pick up 100 percent
of the development costs in a success case.
SENATOR STEDMAN said he didn't want the state to be in the
position of crediting over 100 percent and was concerned that
the CS stacks the credits as opposed to the original bill that
made the producers chose between credit options.
MR. PAWLOWSKI explained that the capital expenditures to qualify
for these credits have to be made before 2018. That number came
from a presentation by the AOGCC to the House Finance Committee
on March 16, 2011. It is intended to get through the development
phase into sustained production.
SENATOR WIELECHOWSKI why asked why there is such a big
difference between the Kuparuk River melt water 1.5 years and
some of the other fields. Was it just the dynamics of the field?
Is there are another way to speed up the development of these
fields?
4:18:55 PM
MR. PAWLOWSKI said he was ill equipped to answer that question,
but a future section of the bill would help in that type of
question.
He explained that the other addition in section 4 establishes an
Oil and Gas Competitiveness Review Board in statute rather than
as a legislative commission (Senator McGuire's original
concept). It is a nine-member board with members of the
legislature (one House and one Senate), the commissioners of the
Department of Natural Resources and the Department of Revenue,
and five public members four of which have specific
qualifications - geologist, petroleum engineer, economist - and
a member of an environmental or conservation group.
The duties of the board are to review historical, current and
potential levels of investment, identify those factors that
might affect investment, review the competitive position of the
state, and make written findings before December 1 of each year
regarding changes to the state's regulatory environment, fiscal
regime and alternative means for increasing the state's ability
to attract and maintain investment (which gets back to Senator
Wielechowski's question).
MR. PAWLOWSKI commented on another slide (from the AOGCC's
presentation to House Finance) of a production profile of the UK
North Sea that has a double peak and then a rapid decline and
what the theoretical future of Alaska could look like (taken
from the Energy Technology Laboratory). He commented that it
includes offshore, ANWR, the kitchen sink and the geologists'
best wishes, but in looking at new oil it's important to put on
the table what could theoretically be possible.
4:21:30 PM
SENATOR WIELECHOWSKI asked if this slide is what the U.S. DOE is
currently projecting for Alaska North Slope.
MR. PAWLOWSKI replied that he wasn't sure. ANWR isn't in their
current projection but it is in this slide.
SENATOR STEVENS said he is always hesitant to give away
authority and responsibility of the legislature and he asked why
this board is needed and what the legislature is giving up.
MR. PAWLOWSKI replied that the board has only an advisory
capacity to the state in general. Senator McGuire felt that
since oil is so important to the state that it would be helpful
to have a public board that can review all of the issues related
to the legislature on an ongoing basis and make recommendations
to the legislature. She thought that was an important part of
doing business as the state.
SENATOR STEDMAN said he had equal concerns when he first read
through this and having a board do the review might encourage
the legislature to get lazy about getting into the subject
matter.
CO-CHAIR WAGONER said this doesn't give away their control of
the state's hydro carbons, but it is part of developing a
process for the legislature to get information on a regular
basis.
MR. PAWLOWSKI concurred, but he said it is a fair policy debate.
SENATOR STEDMAN acquiesced that it's not a total abrogation of
their duties, but it would give an easy way out for the
legislature to not look at the details of how the system works
and just take the board's recommendations. PPT and ACES are some
examples of the complexities.
SENATOR STEVENS said he is concerned that the board might not
see the enormous importance of decoupling oil and gas as some of
his colleagues do.
4:26:25 PM
MS. JACKSON reminded them that a number of issues were raised
when this bill was first before them and summarized that the CS
now has a seven-year provision and it also excludes Cook Inlet.
The AOGCC now certifies the production, not the DNR, and
"production in paying quantities" is defined as "sustained
production" that is a term already in statute. The AOGCC
identifying the pool as it applies to shale is an ongoing
conversation that will happen in committee on Monday.
4:28:18 PM
She began the analysis saying the first change is to the title
that was necessary to include the new section 4, which is the
Oil and Gas Competitiveness Review Board. Section 1 has no
change. Section 2 was deleted from the old bill and in the new
CS makes 2018 the new date that production has to occur by. It
has an exclusion for the credit in the Cook Inlet Basin and the
Pt. Thomson Unit. She said if the body is willing, it could add
any future credits for the development of heavy oil in this
section.
SENATOR WIELECHOWSKI said page 2, lines 5, 7 and 10, have
several references to December 31, 2010 and asked if it would be
better to use some other wording like "the effective date of
this bill".
MS. JACKSON said they just "grabbed a date" for drafting
purposes, but they could use that language. She would have to
check with the drafter.
4:29:55 PM
SENATOR PASKVAN asked her to explain why this does not apply to
heavy oil.
MS. JACKSON answered that this bill does not apply to heavy oil
because it has already been produced. It could be added as
another section if that is what they want.
SENATOR PASKVAN said he wanted to see some financial models of
shale oil potential in Alaska because it is highly capital
intensive. It's important to distinguish between the capital
expenditures of Brooks Range and Armstrong, which are
potentially conventional new oil and shale oil, which is new
also.
MS. JACKSON added that shale is a real problem because the first
question is if the AOGCC has the statutory authority to
promulgate regulations for shale. Question two is if the AOGCC
can come up with a definition of a "pool" for shale and is
looking at how it is being defined in other areas.
SENATOR PASKVAN said his understanding of the shale oil
development is that once the process is put in place, it is kind
of an industrial output in the sense that it is moving the
"cookie cutter" forward and he was trying to understand how the
capital expenditures would be differentiated in that type of
system.
MR. PAWLOWSKI replied that it falls back to the definition of
"pool" that is an accumulation and it's all about communication.
The questions is can he put a well "here" and pull oil from
"there" and is it related to each other. Shale doesn't
communicate between different sections; so the AOGCC itself is
struggling with the definition of a pool. It is a policy call
for the committee if they want to extend the credit to those
things given its substantive nature.
CO-CHAIR WAGONER said his office tried to research some of this
and talked to an engineer with Whiting, probably the second
biggest company in North Dakota, who said theirs is an acreage
allowance. If your fracing system goes out so far, then you have
to go back that far from where that acreage's lines goes down in
the ground so you don't take oil from the adjacent property
owner. Great Bear's holdings are adjacent to one another, so
that shouldn't be a problem if they are talking about associated
pools.
4:35:14 PM
SENATOR WIELECHOWSKI asked if this bill wouldn't apply to heavy
oil at all.
MR. PAWLOWSKI replied that is correct at this point; only to new
oil.
SENATOR WIELECHOWSKI asked even if the heavy oil were located in
a new unit?
MR. PAWLOWSKI responded that could be correct in theory, at
least, but he has been told most of the heavy oil is within
existing units.
SENATOR WIELECHOWSKI asked how the bill would apply to Great
Bear.
MS. JACKSON said he didn't see how it could because they don't
have a definition of a "pool" for shale. If members want to
include heavy oil, they need to broaden the horizons to get
better definitions for both heavy and shale oils. The AOGCC
doesn't want to just pull something out of its hat. They had a
definition of sorts from Commissioner Seamount who defined it as
a township and then the next problem came from Mr. Bullock who
said they did not want to put an AOGCC definition into a credit
bill under taxes. Then the question is if they have the
authority to promulgate regulations to do the definition of a
pool for shale.
CO-CHAIR PASKVAN said shale oil for purposes of application is
an extremely aggressive credit, because they get to deduct 100
percent as well as getting a 100 percent credit. So if the
region is defined in a small sense, then a producer is
perpetually getting 100 percent credit and if it's large, it all
comes down to where you want to draw the boundaries of where
shale oil is different from conventional.
MR. PAWLOWSKI added that the dilemma with shale is not only the
boundaries but what kind of production it will be applied
against.
CO-CHAIR PASKVAN asked if Bakken or Eagle Ford have credits that
apply to shale.
4:39:55 PM
MR. PAWLOWSKI said he would get back to them with that
information.
CO-CHAIR WAGONER said he found no credits for shale or any other
thing in North Dakota; they have a different system of 10.5
percent of the gross.
MS. JACKSON said that section 2(b) is the "goal post" target
that Mr. Pawlowski alluded to where the AOGCC certifies the
production. New terms were used; "sustained production" was
necessary because the previous ones were DNR terms and they are
now not in the bill. Because AOGCC was put in DNR's place, some
terms had to be changed to conform with AOGCC. They are working
with the Department of Revenue to get there.
Subsection 2(c) talks about how the credits balance against a
company's production tax liability. "If they have $40 million in
CAPEX and only $30 million in liability, they are only going to
get a $30 million credit."
SENATOR WIELECHOWSKI asked how operating expenditures are dealt
with.
MR. PAWLOWSKI replied that operating costs won't be counted, but
they will be included in the net operating loss credit (being
subtracted from the .026 credit) and actually lessen the value
of the credit.
4:43:40 PM
SENATOR WIELECHOWSKI asked if he had any sense of of operating
costs versus CAPEX in the development stage. He has heard that
CAPEX is a huge amount if not all.
MR. PAWLOWSKI said there are some references in the DOE report
that he would go over with him.
CO-CHAIR PASKVAN asked if Bakken and Eagle Ford and other shale
developments don't have a credit system with capital
expenditures, do they even differentiate between CAPEX and OPEX
for any substantive reason.
MR. PAWLOWSKI replied that the goal of getting back to the
definition of a "qualified development expenditure" by linking
it back to the AS 43.55.023 definition of a capital expenditure
was to bring it into the universe of what the DOR is already
issuing credits for. These are expenditures that companies are
already making and filing for in .023 credits.
4:45:40 PM
CO-CHAIR PASKVAN said he appreciated that, but right now
conventional oil development has a correlation between OPEX and
CAPEX that it is skewed to 90 percent CAPEX/10 OPEX, and the
credit is 100 percent of CAPEX. The impact on the treasury's
bottom line could be "incredible" and they want to know that the
new oil is not going to bankrupt the state.
4:46:31 PM
SENATOR STEDMAN said it is hard for the companies to manipulate
expenses, because the IRS classifies them has "decades of IRS
rulings." He also commented when they get into other basins most
of those are regressive systems.
CO-CHAIR WAGONER reminded them that the amount of the credit is
already capped by the amount of production; producers don't have
a free run just throwing millions of dollars out there and then
writing it off.
MS. JACKSON continued with the sectional analysis as follows:
(d) Page 2, line 26, restricts the use of the new credit so
there aren't multiple credits.
(e) Establishes that the credit or a portion of the credit is
not transferable and may not reduce the tax liability below
zero.
(f) Allows the Department of Revenue to adopt regulations needed
to administer the credit.
(g) Establishes procedures so that when the credit is utilized
it is applied only to the production tax due for the lease or
the property that qualified for the credit.
(h) Definition section that references existing statute for a
"pool" with regards to "qualified development expenditures" as
per the DOR's review; and "sustained production" is now used
rather than "production in paying quantities."
She explained that "sustained production" was developed last
year in SB 309 and pertained to the jack up rig.
Section 4 establishes the Oil and Gas Competitive Review Board.
4:49:39 PM
SENATOR WIELECHOWSKI asked how this would work from a timeframe
perspective. If someone goes out and spends five years incurring
capital costs to develop a well and then they start producing in
year six. Do they only get to collect their costs up to year
seven? How does that work?
MR. PAWLOWSKI answered it's only within the timeframe of after
discovery up to sustained production. So, if you are in
production in the third month of year six, it's only from the
third month of year six back to post discovery. Once you pass
it, you go back into the regular 20 percent credit in .023.
SENATOR WIELECHOWSKI asked at what period the .026 percent
credit lapses.
MR. PAWLOWSKI replied that it doesn't lapse until it is
exhausted. The policy call here is that the tax credit is
applicable only to new oil and it can't go below zero.
SENATOR WIELECHOWSKI, as an example, said someone spends $100
million and takes the full seven years; year seven they go into
sustained production. They put out $20 million for the next five
years. For year one they would get a credit on their production
tax, so $20 million at $100 barrel oil would give an effective
tax rate of 27.5 percent. Do they get a 100 percent deduction
off that 27.5 percent?
MR. PAWLOWSKI replied they would have accumulated a credit
through their development expenditures during the development
stage ($100 million in Senator Wielechowski's example). They
have production tax liability of $20 million in year one, two,
three and four. They would be able to take $20 million a year
and roll $80 million to the next year; take $20 million in the
next year, roll $80 million to the next year; take $20 million
in the next year and roll $80 million for the third year and
never being able to go below zero.
MS. JACKSON added that the "true up" comes when the production
tax liability comes into play. Going back to the sectional
analysis, she said a minor error in references in section 4 was
corrected and section 6 is the immediate effective date.
4:54:58 PM
CO-CHAIR WAGONER removed his objection and finding no further
objections CSSB 85( ), version E, was adopted. Finding no
further business to come before the committee, he adjourned the
meeting at 4:54 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SJR 2 Sponsor Statement.pdf |
SRES 3/25/2011 3:30:00 PM |
SJR 2 |
| CS SJR 2.1.PDF |
SRES 3/25/2011 3:30:00 PM |
|
| CS for Senate Bill 85 Presentation to SRES.pptx |
SRES 3/25/2011 3:30:00 PM |
SB 85 |
| Draft CS SB 85 Version E 3-24-11.pdf |
SRES 3/25/2011 3:30:00 PM |
SB 85 |
| Compare SB 85 to CS for SB 85 Version E.pdf |
SRES 3/25/2011 3:30:00 PM |
SB 85 |
| SA 3-25-11 draft CS SB 85 version E.pdf |
SRES 3/25/2011 3:30:00 PM |
SB 85 |