Legislature(2015 - 2016)SENATE FINANCE 532
04/13/2016 01:30 PM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB130 |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 130 | TELECONFERENCED | |
| + | HB 247 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 130
"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."
1:48:48 PM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
explained that the governor's total fiscal plan had three
components: the use of earning's reserve; reduction in
expenditures; and increased revenues. He stated that the
bill would address two of the three components. He
explained that the bill reduced the size of the credit
outlay on an annual basis, and it also had a provision for
additional revenues related to the "hardening of the floor"
and the change from the 4 percent to the 5 percent minimum
tax. He stated that the administration recognized that
Department of Revenue (DOR) could not offer stability to
the industry without necessary funds to sustain the credit
program. He shared that there were over thirty meetings
with various members of industry, and with those within the
financial community in order to understand the impacts of
the legislation and the veto from the year prior.
Senator Dunleavy wondered if the proposed legislation was a
change to previously oil and gas tax reform legislation [SB
21]. Commissioner Hoffbeck replied that the "hardening of
the floor", and the rate change from 4 percent to 5 percent
were related to SB 21. He explained that that all of the
Cook Inlet credits were related to Alaska's Clear and
Equitable Share (ACES), not SB 21. He stated that the
governor did not want to revisit SB 21, but there was a
consideration to raise the minimum tax rate.
Senator Dunleavy queried whether the calculations showed
that the state would be better served under ACES.
Commissioner Hoffbeck replied that the state was in a
unique situation, because the net operating losses had
allowed tax rates to move to zero, so there was not much
difference between SB 21 and ACES-unless there was a
comparison related the number of credits.
Senator Dunleavy asked if the state would better under
ACES.
1:55:54 PM
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
replied that the answer would have been affirmative the
year prior. He explained that the minimum tax in SB 21 was
far stronger than ACES, and the state was receiving $3
million to $4 million more than ACES.
Senator Dunleavy surmised that the state was not "better
off" under ACES. He wondered if the state would be better
under ACES or SB 21, if the price of oil resumed to $60 or
$70 per barrel. Commissioner Hoffbeck replied that as the
prices increases, the state was still in the minimum tax
regime. Therefore, the state was "better off" under SB 21.
Senator Dunleavy asked if some tax credits started prior to
ACES. Commissioner Hoffbeck replied in the affirmative.
Senator Dunleavy stressed that the SB 21 was not
detrimental to the state.
Co-Chair MacKinnon outlined the schedule for the meeting.
Mr. Alper discussed the presentation, "Oil and Gas Tax
Credit Reform - CS SB 130(RES)," (copy on file). He wanted
to highlight the basic features of the current and original
version of the bill.
Mr. Alper addressed slide 2, "History of Oil and Gas
Production Tax Credits":
FY 2007 thru 2015, $7.4 Billion in Credits
North Slope
· $4.3 billion credits against tax liability
o Major producers; mostly 20 percent capital
credit in ACES and per-taxable-barrel credit
in SB21
· $2.1 billion refunded credits
o New producers and explorers developing new
fields
Non-North Slope (Cook Inlet and Middle Earth)
· $100 million credits against tax liability
o Another $500 to $800 million Cook Inlet tax
reductions (through 2013) due to the tax cap
still tied to ELF
· $900 million refunded credits (most since 2013)
2:01:09 PM
Mr. Alper discussed slide 3, "History of Oil and Gas
Production Tax Credits," which showed a regional breakdown
of the refunded credits. He explained that it was a North
Slope-centered regime, until the Cook Inlet Recovery Act.
Over the most recent two years, the regime became mostly
non-North Slope operators. He stressed that it was mostly
Cook Inlet, and there were a limited number of Middle Earth
credits and were not available to report because of
confidentiality.
Mr. Alper turned to slide 4, "Forecast of O & G Revenue and
Tax Credits."
Mr. Alper showed slide 5, "Work Done Since Last Session":
· Governor's line-item veto capped FY16 spending at
$500 million
o Temporary liquidity crisis; many meetings
with industry and others to help reassure
lenders
· Multiple presentations with history, current
practice, and possible changes
o Joint Resources in Kenai, June 17
o Three "regional" presentations to Senate
Working Group September through November
o All presentations on BASIS; we're prepared
to go through similar information for the
committee
· Development of reform legislation including plan
for transition from current system
Co-Chair MacKinnon wondered if the referenced documents
were available on the DOR website. Mr. Alper replied that
the documents were available on BASIS.
Mr. Alper spoke to slide 6, "Major Bill Themes":
1. Reduce the state's annual cash outlay
2. Protect Net Operating Loss credits as a playing
field leveler between legacy producers and
newcomers
3. Limit repurchases
4. Strengthen the minimum tax
5. Be more open and transparent
6. Honor and pay credits earned to date and through
any transition period
2:07:44 PM
Mr. Alper discussed slide 7, "Major Bill Concepts in
Governor's Proposal":
1. Exploration Credits- sunset and transition
2. Cook Inlet Drilling Credits- phase out while
retaining operating loss credits
3. Repurchase Limits- limit cash outlay
4. Remove Exceptions / Loopholes
5. Strengthen Minimum Tax- prevent certain credits
from going below the floor, plus increase to 5 percent
6. Other Provisions- technical cleanup, transparency,
interest rate reform
Mr. Alper showed slide 8, "Changes made in Senate
Resources":
· Kept and improved many of the technical fixes,
including inadvertent "double dip" credit for new
oil on the North Slope
· GVR "new oil" reverts to legacy after 5 years
· Phased out all Cook Inlet credits in 2018, while
also establishing a zero tax on Cook Inlet oil
and gas
· Increased repurchase "cap" to $85 million /
company / year without large company exclusion
· Removed changes to minimum tax "floor,"
transparency provisions, and migrating credits
· 7 percent+Fed / compounding interest only for 3
years
· Surety bond for local creditors / bankruptcy
protect
· Alaska Hire precedence for credit repurchase
Mr. Alper recounted that the Senate Resources Committee had
passed out the bill the previous day.
2:14:14 PM
Mr. Alper presented slide 9, "Current Status of CSHB247
(FIN) amended":
· Also kept and improved many of the technical
fixes
· GVR "new oil" reverts to legacy after 7 years
· Reduced Cook Inlet credits to NOL only on faster
timeline; Cook Inlet tax working group
· Increased repurchase "cap" to $100 million /
company / year without large company exclusion
· Partially hardened minimum tax: credits can
reduce to 2 percent, retains 4 percent hard floor
for per-barrel credits
· Removes transparency provisions and several
smaller provisions
· 5 percent+Fed / compounding interest only for 4
years
· Surety bond for local creditors / bankruptcy
protect
· Alaska Hire precedence for credit repurchase
2:16:02 PM
Mr. Alper moved to slide 10, "Summary of Fiscal Impact"
which was a comparison of fiscal notes between the
governor's original bill, the House version, and the
current committee substitute. He remarked that the actual
fiscal note was more detailed, and contained 15 or 20 line
items that addressed individual provisions of the bill.
There was a yellow line on the bottom that showed the total
of the revenue increases and the spending decreases. The
fiscal note would be forthcoming with a narrative later in
the day. The House version of the fiscal note was amended,
so the current fiscal note was slightly different. He
remarked that the bill was somewhat smaller in FY 17,
primarily because of the effective date. The governor's
bill attempted to do more on July 1 of the current year,
but the committee versions had adjusted most changes to at
least January of 2017. He stated that the committee
substitute contained approximately $55 million from the
elimination of the Cook Inlet tax credits. The $15 million
of North Slope credits elimination was due to the interplay
of the gross value reduction, which could be used to
increase the size of a net operating loss to create some
artificially high NOL credits. The House version had
similar numbers on those provision, and a floor-hardening
revenue items that added another $95 million in additional
revenue in FY 18 and FY 19. The governor's bill was much
larger in comparison, because of the fully hardened 4
percent floor; and the $25 million per company cap, which
would have material impact in delaying certain credit
payments.
2:18:17 PM
Mr. Alper discussed slide 11, "Content of Future
Presentations":
We have provided nine different presentations to three
prior committees; all are on BASIS
· History and development of our credit system
· History and application of the minimum tax
· Various credits and how they have been used,
which ones haven't been, and what is sunsetting
· Current application status, impact of Spring
Revenue Forecast, and NOL Carry-forward issue
· Details and modeling of specific bill provisions
· Explanation of changes made in prior committees
· Life cycle modeling of typical new projects, with
impact of legislation
2:20:32 PM
Vice-Chair Micciche referred to slide 2, and expressed
appreciation for the outline of the slide. He queried the
approximate GF revenue from FY 07 to FY 15. Mr. Alper
responded that the production tax revenue was approximately
$27 billion. The total oil and gas revenue was higher than
that, and agreed to provide that information.
Vice-Chair Micciche queried the non-North Slope revenue.
Mr. Alper stated that the production tax would be close to
zero. He agreed to provide specific information about
royalties, but surmised that it would be approximately $10
million to $20 million a year.
Vice-Chair Micciche wanted to know the production tax for
2007 through 2015, and the royalties for 2007 for 2015 for
the two segments.
Vice-Chair Micciche referred to slide 4, and stated he
would like to see the graph calculated to include the years
2007 through 2015. He stressed the SB 21 had nothing to do
with the $4.1 billion budget gap, and asserted that the
state was in better shape than it would have been. He felt
that eliminating royalty caused speculation about whether
the administration believed that there were fields in the
state that would be so expensive to produce where it may be
appropriate to settle for royalty rather than no production
at all. He queried further explanation of that philosophy.
Mr. Alper replied that the information on slide 4 included
70 percent of the royalty, which was the royalty that was
subject to appropriation for use in the annual budgets. The
other 30 percent was deposited into the corpus of the
Permanent Fund and was effectively "untouchable." He agreed
that the state received value from the royalty. He shared
that, before 2008 when the prices spiked in net profits
tax, the state made more from royalty than it had in
production tax. He shared that there was a previous
document that addressed where the state received royalty in
different ownership statuses. He shared that the state did
not necessarily receive royalty if it was not from state
land. He shared that the National Petroleum Reserve of
Alaska (NPRA) allowed for a restricted one-half royalty to
the state, but was restricted to certain community use. He
explained that private land allowed for a gross tax of 5
percent of the royalty. He stated that the possibly
development of the Arctic National Wildlife Reserve (ANWR)
would allow for 90 percent of the federal royalty, which
was unrestricted and the best overall scenario. He stressed
that it was important to recognize that the state did not
always receive the royalty, but the credit obligation fell
to the state, anywhere in the state where the expenditures
occur.
Vice-Chair Micciche would like to provide a comprehensive
view. He remarked that there was a reduction of the cost of
oil transportation in locations where there may be a lower
proportion of royalty. He announced that he had many
questions, but would wait to ask them.
Co-Chair MacKinnon urged Vice-Chair Micciche to put his
questions into the record.
Vice-Chair Micciche stated that he would email his
questions.
2:25:41 PM
Senator Bishop commented that the whole problem was not an
issue of the mechanics of SB 21, but rather the issue
related to the price of oil. Mr. Alper concurred, and
thought if there were flaws in the tax system it was
related to not contemplating what would occur at very low
prices in the tax system.
Senator Hoffman wondered if the administration planned to
address the problem of "stackable credits" in the future.
He understood that those credits would be approaching
almost $2 billion. He queried the administration's plan to
address those credits. He remarked that the increase in oil
price would be used to fund government, and not to pay
credits. Commissioner Hoffbeck agreed to provide that
information. He shared that looking beyond a couple of
years adjusted the forecast on credits, because the
industry plans were unknown. He agreed to provide a
forecast based on the Revenue Sources Book. He shared that
the appropriation level determined the availability of
funds to pay the credit.
Senator Hoffman wondered whether the administration was
concerned about the unpaid credits reaching $2 billion. He
specifically asked if the level of unpaid credits was a
concern, and how those credits would be paid. Commissioner
Hoffbeck stated that the backlog of credits was a big
concern of the state. He remarked that there were also
discussions regarding the credit payment limits per year,
which result in greater numbers of unpaid credits.
Co-Chair MacKinnon stressed that the legislature had
approved more credits to be paid, but the administration
vetoed those approval. She disagreed with the assertion
that the legislature did not fund the credits, because the
state owed $400 million more that would have been paid and
off the books.
Senator Dunleavy thanked Mr. Alper for comments regarding
the unknown oil price decrease. He stressed that the
conversations around SB 21 often focused on the assumption
that the oil price would continue to climb to $140 per
barrel. He wondered if oil production was predicted to
increase in the coming year. Commissioner Hoffbeck
responded in the affirmative. He stated that the following
two years showed slight "uptick" in production, and then it
was predicted to fall after that.
2:30:24 PM
Co-Chair MacKinnon had heard a request from Vice-Chair
Micciche and Senator Hoffman to show consistent date ranges
portrayed in the slides. She looked at slide 2, and
wondered if there would be a representation of 2007 to 2015
credit pay out. She looked at slide 3, and noted a request
to match the same dates to update it to 2007 to 2015. She
also asked for the same details for slide 4 as related to
the stackable credits. She wondered if that was a correct
request from Senator Hoffman. Senator Hoffman replied in
the affirmative.
Co-Chair MacKinnon queried a list of the current
applications for credit. She also wondered how many were
based on the vetoes, and reiterated that the legislature
had approved payment of the credits. She looked at slide 8,
and noted the indication that both bodies had a $250,000 a
surety bond that was based on paying Alaskans as a result
of a company's behavior. She recalled that the
administration rationale for the veto by ensuring that
Alaskan's debt was paid first. She queried language that
was not available as inclusion in the bill. Mr. Alper
stated that currently the state could withhold a credit, if
a company owed taxes. He furthered that the bill expanded
that law by stating that the state could withhold the
credit, if the company owed a royalty or other non-tax
obligation. He felt that it was a technical provision that
had survived in a modified form through the various
versions of the bill.
Co-Chair MacKinnon felt that the provision should not be
considered "technical", because companies went bankrupt
from that impact.
Co-Chair Kelly recalled a presentation that stated that
losing 8 to 10 percent of production would result in a loss
of more royalties that the state could ever recover by
scaling back the tax credits. He queried an analysis on
that issue. Commissioner Hoffbeck replied in the negative.
Co-Chair Kelly felt that the state may lose royalty, if the
state was not careful in adjusting the tax credits. He
stressed that the tax credits were created to enhance
production. He queried an estimate of the gains and losses
in revenue as related to the tax credits. Commissioner
Hoffbeck replied that there was a difficulty in the
analysis, because there could be a delay as related to a
price increase and eventual oil production.
Co-Chair Kelly stated that the state had adjusted its tax
policy frequently, so the state could adjust to price hikes
and reductions based on his observation.
Co-Chair MacKinnon asked for an analysis to examine the
interplay of the tax credits.
Co-Chair MacKinnon thanked the finance committee staff.
2:36:00 PM
AT EASE
2:36:46 PM
RECONVENED
Co-Chair Kelly asserted that Prudhoe Bay was reducing three
rigs.
Senator Bishop offered to share the rig counts.
Co-Chair Kelly wondered if the rig reductions were factored
into the future tax credits and revenue. Mr. Alper stated
that the BP announcement had been factored in to the spring
revenue forecast, and the others were not included in the
forecast.
Co-Chair Kelly queried any other rig reductions. He thought
ConocoPhillips had plans to reduce rigs.
Vice-Chair Micciche remarked that the committee took its
time in evaluating SB 21. He wanted to ensure that the
administration kept resources available. He stressed that
the discussion related to many different types of revenue.
He wanted to understand the impacts of the changes to the
oil and gas tax policy across the entire state. He did not
want to make any hasty decisions, and result in a net
negative to the state in the long run.
Co-Chair Kelly did not think ConocoPhillips was "laying
down a rig" rather they stated that they were spending $400
million less year to year.
2:39:34 PM
AT EASE
2:44:05 PM
RECONVENED
2:45:03 PM
KARA MORIARTY, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
ALASKA OIL AND GAS ASSOCIATION, stated that AOGA was the
professional trade association for the oil and gas
industry. She stressed that her testimony represented the
thoughts and sentiments of each member of AOGA; and the
testimony was approved by unanimous consent. She understood
that the legislature faced a tremendous challenge in the
economic times. She stressed that the oil and gas industry
was facing similar challenges such as loss of revenue;
budget cuts; and employee layoffs. She noted that the
legislature was asked for the sixth time in eleven years to
examine and change oil tax policy. She remarked that no
other industry had faced so many changes to its fiscal
structure in Alaska. She added that there was no other
jurisdiction in the world that had considered changing oil
tax policy more than Alaska. She felt that the only reason
that the tax policy change was under consideration was
because of oil prices. The administration had shared with
AOGA that the bill would not have been introduced, if the
state did not need more money to operate the government.
She stressed that SB 130 did more than reform credits. She
asserted that the bill increased taxes on the industry to
generate more money for state services; and it redefined
oil and gas taxes.
Ms. Moriarty discussed the presentation "Senate Finance
Committee," (copy on file). She displayed slide 2, "Policy
Questions for SB 130":
· What effect will the policy have on overall oil
and gas production in the state?
· Will the policy make Alaska more or less
competitive on a global scale?
· Will the policy provide stability to the industry
and the State of Alaska?
· Will the policy provide predictability to
companies looking to make huge investment
decisions?
Ms. Moriarty moved to slide 3, "Alaska has MORE production
- FIRST time since 2002," which showed a graph of
historical and forecasted TAPS throughput. She stated that,
in August 2014, voters decided that the state's current
fiscal policy was good for Alaska, and AOGA agreed. She
stated that the oil and gas industry had announced more
than $5 billion of additional spending across Alaska since
April 2013. The increased spending could not have occurred
at a better time, because no one knew that prices were
going to crash. She stressed that those investments had
helped the industry sustain itself. She asserted that
Alaskans and the state as a whole were better because of
those investments, as everyone was attempting the low price
environment. She understood that stability and
predictability in any business setting, but more oil and
gas production was the ultimate objective for Alaskans and
its oil and gas industry. She announced that for the first
time since 2002, there was a production increase. She
stated that from March 2015 to March 2016 there was an
increase of just over 4000 barrels a day, which was just
under a 1 percent increase. She also looked at the outlying
years. She stated that the slide showed a chart which was
the fall forecast from 2013, and the current spring
forecast of 2016. She noted that the industry was on track
to have production at around 520,000 barrels per day by the
end of the fiscal year, which was an increase of almost
33,000 barrels over the projection from 2.5 years prior.
She noted the 2013 fall forecast showed the 2023 projection
was around 400,000 barrels per day. She remarked that, even
in the current low price environment, there was a higher
production forecasted by almost more than 50,000 barrels
per day in five years. She was puzzled as to why she had to
explain why increased production was positive for Alaska.
She shared that some people had suggested that the state
was not receiving value for its oil, so it did not matter
that there was increased production. She wanted to explain
how the current tax structure was generating more revenue
for the state, even in the low price environment.
2:50:27 PM
Ms. Moriarty turned to slide 4, "Hilcorp's Monopod
example":
January 2012
• Price: $95/barrel
• Production: 600 bpd
• Royalty to State: $90,000/month
Today, April 2016
• Price: $35/barrel
• Production: 3,000 bpd
• Royalty to State: $500,000/month
• Added 20+ years production life & 8 million barrels
of future production
Since Hilcorp's entrance in 2012:
• Oil production doubled
• Oil royalty increased $70 million
Ms. Moriarty discussed slide 5, "Importing foreign crude
for Alaska refineries." She remarked that the Cook Inlet
Recovery Act only focused on gas, and the benefit was not
supposed to be for oil fields. She remarked that there was
a value added benefit to increased production in the Cook
Inlet. She shared that the slide was from a presentation by
Tesoro in 2009 for an AOGA legislative education seminar.
She stated that, in 2009, Cook Inlet production was at
"rock bottom." The slide illustrated where Tesoro was
importing oil in 2009. At that time, Cook Inlet production
was so low, and North Slope Crude was not always available.
She shared that Tesoro had operated the refinery on the
peninsula since the 1960s. She stressed that, without the
increase in oil production, Tesoro would need to once again
look outside Alaska for oil to refine to meet the needs of
Alaska's transportation and construction needs. She
stressed that the imported oil would invariably cost more,
because of transportation costs, which would cause Alaskans
to pay more for the Tesoro products.
Ms. Moriarty showed slide 6, "Low oil prices taking their
toll on jobs." She understood the significance of the 85 to
90 percent of the state revenue from oil, she stressed that
the oil and gas industry received 100 percent of its
revenue based on the market price of what it produces. She
asserted that the industry was a "price taker" not a "price
taker." She stated that the low prices had caused the
industry to be cash-flow negative.
Ms. Moriarty moved to slide 7, "At current prices, industry
has negative cash flow before tax":
Estimate Average March 2016 ANS Price $38.11
Transportation Costs ($10.50)
Total Operating Expenditures ($19.47)
Total Capital Expenditures ($19.97)
Total Average Cost Per Barrel Before Tax ($49.94)
2:56:20 PM
Ms. Moriarty showed slide 8, "CS Avoids Making Regressive
System Even More So":
State of Alaska making negative production tax in
today's prices; but overall government take is still
high
Floor hardening of original bill shifts up government
take in lower oil prices
In times of high investment/low prices (as in 2016),
effective government take exceeds 100 percent.
2:56:44 PM
Ms. Moriarty discussed slide 9, "Specific Concerns with CS
for SB 130":
Nuclear Bomb for Cook Inlet
GVR Limits/Elimination = Lost value for projects
Changing Value of GVR/NOL
Set limits on credits-discouraging investments by
smaller company
Interest rates increase significantly
Retroactivity provisions
Alaska Hire provisions
Ms. Moriarty moved to slide 10, "Concerning provisions not
in CS":
Raising the minimum tax by at least 25 percent for
companies
"Hardening" the floor
Confidentiality protections jeopardized
Disguised tax increase through the change of the
application of Gross Value at the Point of Production
Ms. Moriarty showed slide 11, "Policy Changes = Economic
Impacts":
AOGA is not asking for assistance from the state of
Alaska in this downturn, but does ask for careful
consideration of any policy changes.
In this price environment, any change will have a
negative impact on industry and will result in
Alaskans losing jobs, less production, and less long-
term revenues for the state.
3:00:35 PM
Co-Chair Kelly referred to slide 3, but noticed that he was
referencing the incorrect slide.
Vice-Chair Micciche queried further detail on slide 7. Ms.
Moriarty agreed to provide further information.
Co-Chair Kelly referred to slide 3, and surmised that the
fall forecast was before a change. Ms. Moriarty explained
that the fall forecast in 2013 was created in December,
which was after the legislature had adopted SB 21.
Co-Chair Kelly stated that the bill in question was not SB
21, but pointed out that there was legislation which
changed how the production estimates were viewed. He stated
that the legislation reverted to a more conservative
production estimate. He pointed out that without
normalizing, there may be an "apples to oranges"
comparison. Ms. Moriarty stated that AOGA needed to utilize
the public data provided by DOR. Therefore, if there was a
change to the methodology, AOGA would have no way to change
the estimates.
Co-Chair Kelly asserted that the estimates on the slide may
have been normalized.
Co-Chair MacKinnon pointed out that Mr. Alper was nodding
in the affirmative. She asked for further explanation.
Co-Chair Kelly wondered if the estimates were normalized.
Mr. Alper stated that the department had transistioned to a
different method of forecasting, in which they applied a
risk factor and probabilities.
Senator Bishop asked if Mr. Alper agreed with the change in
methodology for accounting barrels of oil.
Mr. Alper agreed that the risk factors made sense, but
there were some "hitches" in the formula that DOR was
looking to adjust going forward.
Senator Bishop noted that there were some who had disagreed
with the methodology changes.
Co-Chair Kelly remarked the numbers were normalized and the
2013 numbers were more conservative compared with the
current numbers.
Co-Chair MacKinnon shared that Co-Chair Kelly's comments
were directed at slide 3 of the presentation.
3:05:18 PM
AT EASE
3:06:48 PM
RECONVENED
DAN SECKERS, TAX COUNSEL, EXXONMOBIL CORPORATION, expressed
concern about the bill. He stated that Alaska was an
important part of ExxonMobil's worldwide portfolio. He
announced that ExxonMobil understood the difficulty in
attempting to address the current budget concerns while
maintaining Alaska as a competitive place to conduct
business. He felt that tax decisions fundamentally impacted
the economic health of the state, and the companies that
conduct business in the state. He stressed that the tax
policy decisions would either move Alaska toward or away
from its vision of long-term oil and gas development. He
stated that maintaining a stable fiscally attractive
environment was possibly the most important issue to the
legislature. He questioned whether increasing taxes on the
oil and gas industry at a time when DOR had proven that the
companies were losing money and recording significant
losses was consistent with the state's vision and belief
that there would be more investment, jobs, production, and
long-term state revenues.
Mr. Seckers thought the CS was improved from what was
originally introduced by the governor. He stated that AOGA
endorsed Ms. Moriarty's testimony. Although the CS was an
improvement from the original version, but was still
extremely troubling. He echoed Ms. Moriarty's assertion
that the CS represented another significant examination of
the tax policy, which added uncertainty to the companies.
He felt that continued changes led to instability and
investment concerns. He stated that the tax changes also
increased the interest rate. He remarked that the concept
in the CS of increasing the interest to 7 percent plus
prime, and then stopping the increase after three years was
an interesting concept. He argued that the concept only
addressed the symptom, but not the problem. He asserted
that the problem was long length of time of the DOR audits.
He shared that ExxonMobil received its 2009 assessment on
March 31, 2016, which was six years after the filing of the
return. He did not believe that the bill would move Alaska
into increasing its overall investment climate or
increasing jobs. He announced that ExxonMobil opposed the
committee substitute. He explained that the CS was only an
improvement from the original version, because it removed
some punitive sections: 1. Hardening of the minimum tax
floor. He felt that it was a critical piece of the bill
that was removed. He explained that preventing companies
from realizing the true economics of their investments, by
preventing critical tax credits from being used to offset
the minimum tax would have represented an immediate and
significant tax increase; and would have penalized
companies who made prior year investments and who were
considering current year investments from making those
investments, because the economics would be damaged. He
stressed that the large or small companies, who may have
new oil tax credits, small producer credits, or tax loss
credits would not be able to use those credits in the low
price environment.
3:11:17 PM
Mr. Seckers felt that the CS was also improved by the
removal of the increase of the overall 25 percent, which
was a significant tax on gross revenues. He highlighted the
change of the substantive law in determining how the gross
value at the point of production would be determined. Hs
remarked that, under the original bill, the gross value at
the point of production would have been changed to reflect
that it could not fall below zero. He explained that the
production tax was not a unit-by-unit tax, rather it was a
segment-by-segment tax: Cook Inlet, Middle Earth, and the
North Slope. He shared that the gross value only falls
below zero because of the decrease in price; and the marine
transportation and pipeline costs. He shared that
disallowing the recovery of those costs was a substantive
change in the law and an immediate tax increase for those
fields affected. He stressed that it would change the
economics of the small fields. He addressed the problem of
"sliding" credits month to month. He disagreed with the
assertion that it would only impact the monthly sliding
scale tax for legacy fields. He explained that the proposal
would have affected every tax credit. He stressed that the
tax was an annual tax, which was a collection of the twelve
estimates. He felt that, disallowing credits to be used
against another month required perfect estimates. He
remarked that the law required the use of annualized costs,
so there were no actuals at the time of the monthly
estimate.
3:14:42 PM
Mr. Seckers addressed the issue of confidentiality. He
remarked that ExxonMobil was partners with BP,
ConocoPhillips, and other companies on the North Slope; but
ExxonMobil also remained competitors with those companies.
He stressed that ExxonMobil was bound by federal law not to
discuss or disclose certain information; and it was bound
by its shareholders not to disclose or discuss sensitive
proprietary information. He stressed that making certain
information public was damaging to companies, took away
competitive advantages, and was unlawful. He appreciated
that the confidentiality provision was removed in the
current CS. He restated that the committee substitute was
an improvement from the original bill, but was still a
concerning piece for industry in the Cook Inlet. He
stressed that reintroducing any of his highlighted
provisions would dramatically reduce Alaska's overall
global competitiveness by raising taxes on companies. He
asserted that the legislation was not an income tax or
property tax bill. He stressed that the legislation was a
production tax bill. He announced that, currently,
producing a barrel of oil on the North Slope caused
ExxonMobil to lose money. He wondered if taxing companies
on an activity that was currently losing money was in the
long-term best interest of the state.
Chair Kelly queried the impact of hardening of the floor,
and how the net operating loss (NOL) related to the floor
hardening. Mr. Seckers replied that no one wanted an NOL,
because no company wanted to invest money to lose money. He
stressed that the NOL was only a loss. He stated that the
production tax was akin to an income tax. He explained that
the concept was to equate or balance revenues and expenses.
He stated that, under the law, instead of carrying the loss
forward, it automatically converted to equal credit and was
carried forward. The companies use it to fund current
operations.
3:20:14 PM
Co-Chair Kelly requested an analysis regarding substantive
law. Mr. Seckers mentioned substantive changes in law,
including the migration of credits back and forth. He
explained that a carried forward credit would be denied,
because a company may not be able to appropriate number of
credits. He stated that another substantive change was the
gross value at the point of production. He explained that,
under current law, the company filed a segment consolidated
return. He did not feel that the change encouraged the
small field development.
Co-Chair MacKinnon remarked that the presenters had taken
more than their allotted time.
Senator Bishop thought a low-priced environment tested the
quality of a partnership.
Co-Chair MacKinnon stressed that the remaining speakers
would be given 10 minutes each.
3:23:34 PM
J. PATRICK FOLEY, SENIOR VICE PRESIDENT, ALASKA OPERATIONS,
CAELUS, discussed the presentation "Senate Finance SB 130
Testimony," (copy on file).
Mr. Foley discussed slide 2, "Caelus Energy Alaska: Key
Facts and Information":
Privately-held E&P company focused exclusively on
Alaska's NS
$2Bn capital investment in Alaska since 2002
Less $300MM 2016 capital budget
Total Alaska workforce is equivalent to over 600 full-
time positions
Less 70 full-time Alaska employees
Nearly 400 contractors on the North Slope today
Operational Highlights & Accomplishments:
23MMBO gross cumulative production since 2008
4MMBO gross annual production 2015
2015 best safety record, 0.65 OSHA recordable
injury rate
Longest Oooguruk well length to date: 23,209'MD
(ODS N-7i)
Direct Financial Benefits to the State:
$67 MM paid in royalties to the State of Alaska
$60 MM paid to the State of Alaska / NSB in
property taxes
Proven and Potential Reserves:
less than 85 MMBO remaining at ODS
less than100 MMBO remaining at Nuna
350,000 undeveloped State of Alaska leases on the
North Slope
Mr. Foley moved to slide 3, "North Slope Exploration and
Development Program," which showed a map depicting Caelus
projects on the North Slope. He stated that Caelus had
drilled two exploration wells in Smith Bay. Caelus had
spent over $100 million on the wells in Smith Bay, and was
encouraged by the results caused by those wells, and hoped
to be back the following year with more delineation. He
stated that the program earned both NOL credits and
exploration incentive credits. He stressed that, without
the credits, the wells would not have been drilled. He
furthered that the Oooguruk Unit was the cornerstone of his
business, which produced nearly 20,000 barrels per day. He
stated that Caelus had recently been forced to put the rig
on standby. He stated that Nuna was currently on hold until
prices recover. He stated that Caelus also had a block of
exploration leases in the eastern North Slope, which was
approximately 350,000 acres. He stressed that Caelus was
struggling to survive in the current price environment. He
remarked that Caelus had been operating in the state in
2002, and had yet to make a profit.
3:28:17 PM
Mr. Foley turned to slide 4, "Alaska: An Attractive
Investment Opportunity?":
World Class Resources? Yes
Access to Substantial Leasehold of Interest? Yes
Access to G&G Data and Information - Yes
Expert Contractor Community? Yes
Hospitable Regulatory Environment? Yes
Access to Existing Infrastructure? Yes
Favorable Logistics? No - remote, harsh conditions,
seasonal limitations
Favorable Fiscal Regime? Yes, under SB21. No, under
proposed system changes
Stable Fiscal Regime? No, 5 significant changes in a
decade
Lender and Equity Provider's Confidence?
Historically low participation and experience
Confidence in stability is low
Apollo has backed Caelus
Other equity providers are "watching"
Bank of America committed but spooked by change
ING backed out when changes began
Wells Fargo disengaged when changes began
Mr. Foley spoke to slide 5, "Alaska Oil Tax Policy -
Integrated Tax System." He stated that the slide was
borrowed from enalytica. He looked at the dashed line,
which represented the government take. He explained that
the government take was the percentage of profits that the
government received, and one-minus government take was what
the company was entitled. He noted that, on the far left
side at $40 per barrel, there was 100 percent government
take. He announced that the slide represented "the beauty"
of SB 21, and showed an absolute flat 65 percent government
take over a very broad range of prices. He believed that
the past tax policies were created without the assumption
that prices would be so low.
Mr. Foley discussed slide 6, "CS SB 130 (RES) AM / CS HB
247 (FIN)am":
Current Bill Provision(s)
CS SB 130 (RES) AM
LIMITS GVR to 5 years
CAPS earned credits to $85 MM per company
Min Tax: No change from current law
CS HB 247 (FIN) AM
LIMITS GVR to 7 years
CAPS earned credits to $100 MM
NEW Alaska hire provision of 80 percent
HARD 2 percent floor
Mr. Foley moved to slide 7, "CS SB 130 (RES) AM / CS HB 247
(FIN) AM":
5-year GVR limit has major impact on project value
Project is marginal at $60/bbl; elimination of
GVR can wipe out all value at that price
Because most tax liability occurs after end of
major spending, short GVR limit provides little
benefit
5-year GVR limit destroys over 60 percent of
project value at $60/bbl, relative to status quo
Impact of 10 year limit much lower; 15 year limit
preserves almost all of status quo value
3:33:15 PM
Mr. Foley showed slide 8, "Nuna: A Project on the Bubble":
First oil Late 2018 IF Prices recover and confidence
in favorable / stable fiscal terms exist
Caelus holds 100% interest
100+ MMBO 2P reserves
20,000 to 25,000 BOPD peak production in 2021
Economically Benefits Alaska
300 FTE contractor construction jobs for two
years
300 FTE contractor drilling jobs for 4 to 5 years
$1.75 Bn in future payments to the State of
Alaska
$900MM in future royalty payments*
$500 MM in future NPSL payments*
$250 MM in future production tax
payments*
$100 MM in future Ad Valorem taxes
$250MM in future NOL cash payments from the State
of Alaska
*Values are undiscounted based upon a Flat $70/bbl
Brent Price Assumption
Mr. Foley spoke to slide 9, "Closing thoughts":
Alaska has Great Resource Potential
Alaska needs more exploration & production
companies to fully develop its petroleum
resources
Caelus continues to be very optimistic on Alaska
SB 21 is a balanced system that is working for
Alaska
Recommendations
GVR
10 - 15 years
Credit caps
Greater than $100 mm
Minimum Tax Floors
Allow small producers to use credits against
Thoughtful policy considerations:
Will policy increase production?
Short- and Long-Term Vision
3:35:16 PM
Senator Bishop addressed slide 8, and noted the concerns of
the confidentiality provisions in the bill. He queried the
number of credits for the project. Mr. Foley relayed that
the work was done at a $70 per barrel price. He stressed
that it was not the current price, but it was the
environment required to move the type of project forward.
He remarked that the upfront assistance provided by the
state was $250 million. He furthered that the revenue to
the state was $1.75 billion when the project moved forward
Senator Bishop felt that the general public did not
understand oil and gas tax credits; and personally found it
difficult to understand the analytical portions. He
understood the desire to get a portion of over $1.5
billion. Mr. Foley replied that the state's return was
nearly a six times multiple.
Senator Bishop remarked that the state should be able to
see the basic principles.
Mr. Foley was fearful that he was portrayed as part of the
problem, but he believed that he was part of the solution.
He argued that the state's short term cost investment, but
would help to set up a future of jobs, royalty, and
production taxes that would be six times more than the
value of the credits.
Co-Chair MacKinnon wondered if Caelus has reduced costs.
Mr. Foley replied that the company had eliminated some
staff, which had eliminated the general administrative
costs by approximately 25 percent. He furthered that Caelus
had also reduced capital. The capital that was intended for
spending in 2016 had been reduced by nearly one-third.
3:39:36 PM
JOE REESE, ALASKA TAX MANAGER, BP (via teleconference),
supported the testimony provided by AOGA earlier in the
meeting. The success of Alaska's oil and gas tax policy was
critical to BP, the AKLNG project, and to the many Alaskans
who benefit directly and indirectly from the successful
exploration, development, and production of Alaska's oil
and gas. He remarked that a durable, predictable, and
administrable oil and gas tax policy must be in place to
unlock the benefits. He shared BP saw a durable policy as a
tax policy that was the same tomorrow and today. He stated
that BP saw predictable as the ability to model with
reasonable certainty the outcome of the tax policy. He
shared that BP saw administrable as the ability to file the
taxes and tax returns in an accurate and timely manner. He
stressed that BP was committed to maintaining a safe,
compliant, and sustainable business in Alaska. He noted
that in two years, there was a 70 percent drop in oil
price. He shared that, in 2015, BP paid approximately $263
million in royalties and taxes, which resulted in a
financial loss of $194 million. He announced that under the
current market conditions, BP's Alaskan business was
spending more cash than it was bringing in. As a result, BP
had undertaken a 17 percent reduction of workforce; and the
Prudhoe Bay working centers had reduced activity levels. He
remarked that Prudhoe Bay economics were at a point where
tax increases in the cost structure would result in lower
activity levels and would be detrimental to its Alaskan
business. He shared that a 1 percent increase in the
minimum taxes was equal to approximately 6 months of rig
work on Prudhoe Bay. He stressed that operating under a
predictable, durable, and administrable oil and gas tax
policy was essential to maintaining the activity level at
Prudhoe Bay and long-term viability of the AKLNG project.
He stressed that BP was committed to complying with tax
laws in a reasonable manner, and to have an open and
constructive relationship with tax policy makers.
3:42:46 PM
Mr. Reese stressed that one of the major costs to BP's
business in Alaska was oil production tax. He shared that
while BP was currently taxed for negative, it still paid
oil production tax, because some investments were not
deductible for oil production tax purposes. At current
prices, Prudhoe Bay did not attract oil production tax
credits. He remarked that, while Prudhoe Bay did not
currently receive the oil production tax credits, BP did
not support limiting the production tax credits provided in
SB 21, because it would negatively impact the oil and gas
industry as a whole. He understood that the state was
facing severe budget shortfalls at the same time as the
industry was struggling to make any profit. He did not feel
that it was not the time to make changes that would
increase taxes and further inhibit the industry's ability
to maintain its activity level at Prudhoe Bay. The near-
term changes to the state's oil and gas tax policies would
have long-term consequences for everyone.
Mr. Reese remarked that four of six of his concerns with
the legislation were removed in the committee substitute
from the Senate Resources Committee. He would acknowledge
those issues. He remarked that the administration had
proposed an increase to the minimum tax, and BP felt that
it was a 25 percent tax increase and would have a
"chilling" effect on additional investment. He remarked
that the provision had been removed in the current CS. He
shared that the administration had imposed an artificial
limitation on the use of credits within a year, and Mr.
Seckers had addressed some examples with the issue. He
acknowledged the provision's removal in the CS. He stressed
that SB 130 was a tax increase, which meant less money
available for investment.
3:47:12 PM
DAVE WILKINS, SENIOR VICE PRESIDENT, HILCORP ENERGY,
ANCHORAGE (via teleconference), agreed with the testimony
by AOGA president, Kara Moriarty. He shared that Hilcorp
operated in both Cook Inlet and the North Slope. He
announced that Hilcorp had over 500 full-time employees,
and over 90 percent of those employees were Alaskan
residents. He stated that Hilcorp operated approximately
53,000 gross barrels of oil per day, and produced and sold
150 million cubic feet of gross gas sales per day from
approximately 500 producing wells. The total net production
to Hilcorp of approximately 57,000 barrels of oil
equivalent per day. Hilcorp's overall success came
primarily from acquiring and operating older fields with
extensive production histories; and steady and predictable
performance that carry opportunity for retrieving more oil
and gas out of the ground safely and responsibly, while
extending the production life through efficiency and
thousands of smaller scale projects. He felt that the state
needed to attract more companies like Hilcorp as the fields
and infrastructure in Alaska continue to age. He asserted
that Hilcorp's production in Alaska represented
approximately 40 percent of what was produced company-wide,
so the success in Alaska was critical to Hilcorp's overall
success.
3:58:56 PM
ED KERR, DIRECTOR, ARMSTRONG OIL AND GAS, DENVER (via
teleconference), felt that the discussion should be
conducted in a conversational manner. He shared that
Armstrong Oil and Gas was operational in Alaska since 2001,
both in the North Slope and Cook Inlet. He shared that
there were various developed fields that were currently
producing in Alaska.
Mr. Kerr felt that SB 21 was working. The development by
Armstrong provided for 120,000 barrel per day facility. In
other words, Armstrong anticipated producing 120,000
barrels of oil per day. The result of that production would
be jobs, significant revenue to the state, and significant
revenue for the North Slope Borough. He stressed that there
was a partnership with the state to develop the reserves.
He stressed that any tax policy change would have a
profound and long lasting impact beyond what anyone can
contemplate. He stressed that keeping the tax law in its
current state was the best option. He remarked that
investment drives production, and production drives revenue
for the entire industry. He understood that everyone was
affected by the low oil prices. He felt that leaving the
tax policy unchanged would have a greater effect on the
state's revenue interest than changing the tax policy. He
stressed that the main focus should be on investment.
4:05:13 PM
Mr. Kerr expressed his desire to work with the legislature
to fix the problem. He noted that currently there was no
focus on the small producer credit and exploration credit.
He remarked that the current leases had a higher royalty
than the legacy leases, so that was already an increased
revenue stream for the state, but was an impediment on his
company. He shared that there were limits on the NOL
credits that could be purchased. He noted the interplay
between the GVR and NOLs, and the sunset of the GVR. He
stressed that should that state keep a consistent tax
policy in the form of SB 21, everyone would benefit.
4:12:33 PM
PETE STOKES, PRESIDENT, ALASKA SUPPORT INDUSTRY ALLIANCE,
ANCHORAGE (via teleconference), shared that the alliance
had 600 member companies that employed over 30,000
Alaskans, but had recently declined due to the layoffs as a
result of the low price of oil. He opposed both SB 130 and
HB 247, because it would result in decreased investment and
decreased future production from the industry. He stressed
that there were many questions to industry about what could
be weathered in a tax increase. He felt that the type of
question reflected a goal to raise revenue, rather than
maintain a tax policy that incentivized investment to lead
to increases in production and provided a steady revenue
stream to the state for a long period of time.
Co-Chair MacKinnon appreciated the responsiveness of the
testifiers. She discussed the following meeting's agenda.
SB 130 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 247 CSSB130-Updated Comparison Chart-DOR Tax Div-4-12-2016.pdf |
SFIN 4/13/2016 1:30:00 PM |
HB 247 SB 130 |
| HB 247FIN-Fiscal Analysis-DOR-4-12-2016.pdf |
SFIN 4/13/2016 1:30:00 PM |
HB 247 |
| SB 130 AOGA Presentation SFIN 04 13 16 FINAL.pdf |
SFIN 4/13/2016 1:30:00 PM |
SB 130 |
| SB 130 BlueCrest Senate Finance Testimony Slides 04-13-2016.pdf |
SFIN 4/13/2016 1:30:00 PM |
SB 130 |
| SB 130 comment - Oil Production Tax Credits - Hanson.pdf |
SFIN 4/13/2016 1:30:00 PM |
SB 130 |
| SB 130 CSSB130-Updated Comparison Chart-DOR Tax Div-4-12-2016.pdf |
SFIN 4/13/2016 1:30:00 PM |
SB 130 |
| SB 130RES -Fiscal Analysis-DOR- 4-12-16.pdf |
SFIN 4/13/2016 1:30:00 PM |
SB 130 |
| SB130 DOR Overview for SFIN 4-13-16.pdf |
SFIN 4/13/2016 1:30:00 PM |
SB 130 |
| SB 130 CAELUS Presentation Sen Finance Apr 13.pdf |
SFIN 4/13/2016 1:30:00 PM |
SB 130 |