Legislature(2015 - 2016)BUTROVICH 205
04/02/2016 02:00 PM Senate RESOURCES
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| SB163 | |
| Overview: Alaska's Oil and Gas Tax Credit System | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| += | SB 163 | TELECONFERENCED | |
^Overview: Alaska's Oil and Gas Tax Credit System
Overview: Alaska's Oil and Gas Tax Credit System
[Contains discussion of SB 130.]
2:11:51 PM
CHAIR GIESSEL announced the overview of Alaska's oil and gas tax
credit system and said that the referral of SB 130 is pending.
She invited Commissioner Hoffbeck and Mr. Alper to explain their
past experiences with Alaska's tax policy.
Department of Revenue Overview
RANDALL HOFFBECK, Commissioner, Department of Revenue (DOR),
Juneau, Alaska, said he has about 30 years of experience dealing
with Alaska tax policy, the majority of it dealing with property
tax issues, but he also served five years as the state petroleum
property assessor and was a contractor to the Department of
Revenue (DOR) for two years before that. Prior to that he was
the tax manager for the North Slope Borough dealing primarily
with oil and gas taxes. Most recently, he served as the CFO and
finance director for the North Slope Borough, the government
entity where the Prudhoe Bay oil fields reside, and now he is in
his current position. He authored the AS 43.56 oil and gas
regulations in 2001/2.
2:13:48 PM
KEN ALPER, Director, Tax Division, Department of Revenue (DOR),
Juneau, Alaska, said he had been engaged in the oil and gas tax
world for about 11 years. He spent 10 years working as a
legislative aide primarily focusing on oil and gas issues, and
in later years served exclusively as the oil and gas specialist
for the House Minority. He was very involved in all aspects of
the development of the last 10 or so years of oil and gas
legislation: PPT in 2006, ACES in 2007, AGIA and other gas
projects in 2007/8/9, and SB 21. He worked for Senator Bishop in
his last position at the legislature before Governor Walker
asked him to become Tax Division Director.
COMMISSIONER HOFFBECK explained that SB 130 is only one part of
the governor's total fiscal plan that has three parts: the
Permanent Fund Protection Act, which deals with how the earnings
of the Permanent Fund could be used for funding government
services; and second, expenditure reductions of which the oil
and gas tax credits is a significant component. He explained
that the governor proposed about $400 million in savings in oil
and gas tax credits, about $200 million of that being a
reduction in credits that would be issued and another $200
million in payment delays of some of the credits into future
years when there was more production to underlie the credits.
The third part of his fiscal plan is new revenues, and this bill
touches on the hardening of the floor for the oil and gas taxes
and an increase of the minimum tax from 4 to 5 percent. SB 130
hits two of the three components of the governor's fiscal plan.
2:17:11 PM
COMMISSIONER HOFFBECK said he would discuss why credit reform is
needed now and put their cost into perspective; he would also
discuss how the various fiscal components of SB 130 impact
industry and the state and the implementation plan. He would
also provide a list of presentations he had given to other
committees that this committee may be interested in hearing.
Putting the cost of the credits in perspective, Commissioner
Hoffbeck said the state has paid out about $8 billion in oil and
gas tax credits from 2007 to 2016. About $4.4 billion of those
credits were used against a tax liability; most of them were the
20 percent capital credits under Alaska's Clear and Equitable
Share (ACES) and the per taxable barrel credits in SB 21.
To be fair, he said, those credits really are an embedded
portion of the tax structure. Although they are referenced as
credits in the statutes, they really are more of the underlying
tax regime, itself, and need to be looked at in a separate light
from the reimbursable credits, which is what this bill focuses
on. It does not try to change SB 21 or some of the per-barrel
tax credits. This bill is primarily focused on the reimbursable
credits and some of the other credits that can be used against
tax liability. Most of the reform is to ACES components of the
tax law rather than SB 21 components.
2:19:02 PM
COMMISSIONER HOFFBECK said there had been $2.3 billion in
refunded credits on the North Slope, primarily paid to new
producers and explorers, and about $1.3 billion in credits that
were paid in Cook Inlet, about $100 million against liability
and about $1.2 billion in refunded credits.
He said that it's important to understand that there is no real
tax structure within Cook Inlet right now. Oil does not pay a
production tax in Cook Inlet until 2022 and gas pays a nominal
tax. Because there is no real underlying tax structure in Cook
Inlet an estimated $500-800 million in taxes has not been
collected because of the 2022 exemption.
2:20:09 PM
The amount of credits the state paid out through 2012/13 was
relatively modest, but since 2013, they have exploded. This is
where one starts to see how the size of the credits versus the
amount of revenue that the state is taking in is becoming much
larger than that what the state can afford. His graph
illustrated how the credits are continuing to grow in Cook Inlet
and Middle Earth. The North Slope has trailed off a little bit
in recent years, but is at a relatively consistent level. The
reason this is being talked about now is because sustained low
oil prices are tied to the high credit liability, and are at a
level that can't be ignored.
CHAIR GIESSEL asked what factors caused Cook Inlet credits to
increase so much.
MR. ALPER replied that the single greatest factor that led to
the explosion in Cook Inlet credits is the passage of credit
incentive legislation in 2010 HB 280, called the Cook Inlet
Recovery Act and another piece of complementary legislation, SB
309. Both provided much broader incentives for Cook Inlet. In
addition to the Cook Inlet gas storage facility, which was
designed to fix some of the seasonal problems with supply that
was being felt with the Agrium facility shutting down and
reduction in ConocoPhillips' export facility, those bills added
the 40 percent well lease expenditure credit and other small
incentives that really added up in terms of credits being
claimed in one year. The reinvestment requirement that used to
be attached to credits where the money had to be put into a new
project within 24 months was also eliminated along with ring
fencing (credits earned in Cook Inlet could be used to offset
North Slope taxes). This happened at the same time the new jack-
up rig credit was put in place. That whole suite of things
opened the door on Cook Inlet investment.
At the same time, the Regulatory Commission of Alaska (RCA)
loosened up some of its rules around pricing and allowing of
contracts. The gas price in Cook Inlet also crept up, which made
it easier to make investments there. So, with all of that
happening, there was an increase in spending and therefore, an
increase in credits. A big share of the credit can be given to
the Hilcorp Company that bought a lot of the mature Cook Inlet
assets and started spending a lot of money working them over.
There is no distinction in credit law between a new well or a
well work-over, he said; a capital expense is a capital expense.
CHAIR GIESSEL agreed, but when she first chaired this committee
in 2013, her first meeting was about the brown-out exercises
that were going on in Cook Inlet and Southcentral Alaska because
of the lack of gas, and said, "These credits have certainly
turned that around."
MR. ALPER agreed that they needed to make sure there wasn't a
supply problem, but maybe it is time to at least partially
declare victory in Cook Inlet.
2:25:00 PM
SENATOR STEDMAN commented that they had spent many meetings over
the years trying to re-energize oil extraction and help with gas
extraction in the Cook Inlet. It ended with the Cook Inlet
rewrite in 2010. Some felt the price issue was holding back
development of gas in Cook Inlet rather than the legislature
coming up with incentives, and in his opinion, they over-
incentivized Cook Inlet. Then the Regulatory Commission of
Alaska (RCA) changed the ceiling on price and now Cook Inlet is
a run-away area where the state has virtually no revenue and a
huge expenditure. It's quite "a substantial imbalance." Some
members of the legislature then never thought the risk of brown-
outs were real.
COMMISSIONER HOFFBECK commented that regardless of exactly how
the state got here, they have to deal what the issue in front of
them, learning from the past, but not necessarily focusing on
why. They want to keep that forward focus.
CHAIR GIESSEL said she appreciated that and that the utilities
now are getting long term contracts, and they have to think
about how policy changes will impact the gas available to
utilities in the future.
SENATOR MICCICHE agreed that RCA improvements made Cook Inlet
more attractive, but Senator Stedman didn't mention the
increased delta between the shrinking Henry Hub price and the
increasing value of Cook Inlet gas. He asked how that factored
into the size of companies looking for gas in Cook Inlet.
MR. ALPER agreed that was an excellent point. Back when the RCA
was rejecting contracts, what was being sought at the time was
ironically to try to increase the price of gas in Cook Inlet
when consumers in Anchorage were more in the $3/4 range to mimic
Henry Hub, which was at $6/7. Suddenly, Cook Inlet gas became
some of the best price points available and that doubled with
the state's aggressive and generous credit system brought new
players to Cook Inlet. However, one of the concerns with the
system is that they didn't distinguish between oil and gas to
the extent that the credit system was made extra generous for
the purpose of gas supply certainty. The same credits were
available for oil, which while valuable, is not the life and
death necessary it is for the Southcentral consumer.
2:29:40 PM
MR. ALPER said he thought at the time the Agrium credit bill was
being discussed that the underlying economics of a new project
in Cook Inlet were fine. They could create their platforms,
drill their wells, and sell their gas without tax credits. But
state subsidies become necessary when there is a constrained
market, and maybe people need to look at how to build the market
for gas in Alaska.
COMMISSIONER HOFFBECK noted that slide 8 showed that state
tripping a point going into FY17 it hadn't seen before: the
state actually paying more in credits than it brought in through
all of the revenue streams combined. The credits entirely
overwhelm revenues at some point in FY17. However, $200 million
in credits is being carried-over from FY16, so the credits are
actually absorbing all of the revenues the state is getting from
oil and gas taxes right now.
In other committees this is where the discussion splits; it
became an issue of oil and gas tax policy or a discussion on
state finances. But to be fair, it has to be about both. There
must be a balance between what the state can afford and what is
necessary to have a healthy oil and gas industry.
COMMISSIONER HOFFBECK said purely as the DOR Commissioner
looking at the numbers, oil and gas revenues cannot support the
level of credit program the state has right now. Some form of
modification is needed on a pure numbers basis. Another concern
is that according to the spring revenue forecast oil prices have
become "range-bound" in the $30 to $60 price range. It's at the
lower end now and while it will eventually climb back up, there
is no money for anybody at $30. People pull back on development
and because of natural decline in the oil fields, supply will
eventually start to diminish. With a supply deficit, prices will
rise back up, and at $60, a lot of oil can be brought on line
relatively quickly because of changes in shale oil and things
like that. There may be volatility and perhaps a $20 price point
might be seen or a $70 or $80 spike, but they expect it to stay
in the $30 to $60 range, and those numbers simply don't work
without controlling the credit program.
2:34:00 PM
CHAIR GIESSEL remarked that Prudhoe Bay is shutting down three
of five rigs which equates to the loss of 300 jobs and Alaska's
government has a fiscal problem, but they don't want to make the
state's problem a citizens' economy problem. If it costs $52 to
pull a barrel of oil out of the ground and the price is
approximately $40, the companies are still losing money.
COMMISSIONER HOFFBECK said that begs the question: can the state
afford to make up the differential?
SENATOR STEDMAN said restricted and unrestricted revenues will
be a re-occurring theme in these presentations. It's imperative
that as policy makers, legislators see the total revenues
combined. For example, property tax and royalties are not
reflected in this chart.
COMMISSIONER HOFFBECK responded that those could be added in.
Today's message is money in versus money out of the treasury.
The state has no money coming in from oil and gas that can be
spent right now.
2:38:02 PM
SENATOR MICCICHE said the slide includes refinery credits, but
he wanted the timing for the $200 million in delayed credits to
be included, too, because it would make FY16 look very different
and improve FY17 somewhat.
COMMISSIONER HOFFBECK said he could do that. He explained that
the delayed credits aren't due until FY17, but in historical
context, some of those credits, if the money was available,
would have been paid this year even though they weren't required
to be paid until next year. Payment is being held this year into
FY17, because the money isn't in the budget to pay them. He
explained that in the past, credits that were earned in one year
but could be paid in two years, but now they are being more
precise about when they can be paid.
MR. ALPER said in the past they hadn't had to be that precise on
when 2011 begins for purposes of calculating credits, because
appropriations were open-ended. Enough money would be
transferred to meet the demand and then when more was needed,
they would transfer some more. Now that funds are more dear, a
greater degree of precision is necessary.
SENATOR MICCICHE said this is a specific production credit
problem, and that is why he wants the refinery credits
separated.
MR. ALPER explained that the refinery credit statute, which
passed in 2014, has an effective date of January 1, 2015, which
means the work would have been done last year, and by the nature
of the corporate income tax, the division won't actually see a
claim or application until October of this calendar year.
Inherently, the first credits for those, if any, will be seen in
FY17.
CHAIR GIESSEL asked him to clarify that no refinery credits have
been claimed to date.
MR. ALPER said that was correct.
SENATOR STEDMAN followed up that it's also important that to
keep things straight, they should look at the credits as if they
were totally paid in the year they were owed without any
appropriation restrictions, and clearly delineate what is
carried forward. He expects to see well in excess of $1 billion
in credits in FY18 with carry forwards.
COMMISSIONER HOFFBECK said that would be covered in about eight
or nine slides, but he would also be glad to provide more
granularity if that was requested.
2:43:18 PM
MR. ALPER said total credits add up to $3.5 billion through
FY16. He didn't have all the analysis FY16, do he left that out.
So, they are looking in greater detail at what happened at the
end of the prior year, FY15. Of that $3.5 billion from the state
treasury, about $1.45 billion went to six North Slope projects
that are now in production in one form or another. Another $650
million went to 13 projects with no production; some have been
abandoned, and some they expect future production from.
He said credits are also offered to seismic library companies
that will never have production but do independent seismic work
for sale or lease to other companies. It's an oddity in statute.
CHAIR GIESSEL asked how much credit goes to seismic companies.
MR. ALPER answered tens of millions of dollars, and it might be
getting larger, because the impending sunset of the exploration
credit is creating some unusual short-term phenomenon in the oil
patch.
CHAIR GIESSEL said she had heard that the seismic library
companies can sell their work, but they also can claim a credit
from the state. So, it's almost as if they can be paid twice.
MR. ALPER explained that the company that is paying for the work
gets to claim a lease expenditure, so they are paying less tax.
The credit is only being paid on the difference between what the
library paid and what it received for selling it. The
exploration credit is not quite so much and they simply get it.
It gets a little difficult for the Tax Division when a library
sells that data a couple of years later to a second customer. A
seismic library company is not necessarily an oil company, but
by statutory definition, once that credit is claimed, it becomes
an oil company taxpayer. Therefore, when they sell it the second
time, they should pay taxes on it. But the division doesn't have
the ability to diligently follow up on all those people, and he
thinks some revenue may be slipping through those cracks there.
He said that a small amount of credits are used on the non-North
Slope area called Middle Earth, most of which is claimed by
Doyon. That makes it easier for the division, because the
numbers are all confidential. Another $450 million went to
projects that now have production in the Cook Inlet area and
another $450 million went to eight projects that are in process.
That all adds up to the $3 billion.
2:47:36 PM
The next couple of slides indicated that six North Slope
projects had lease expenditures of $1.4 billion and 38.5 million
barrels of production with refundable credits of $37.30 per
barrel. That number will come down, because these projects are
for the most part paid for, but there will be continuing
production every year that will reduce the average (dollars in
credit per barrel produced over time), plus the money that went
to the fields that are not in production, which would increase
that number. The lease expenditures on those projects at the end
of FY15 is $4.94 billion. This means the state has reimbursed 29
percent of companies' lease expenditures on these projects.
Slide 12 takes the same analysis and looks at Cook that had $450
million in lease expenditures on six producing projects equating
to 55.9 barrels of oil equivalent (BOE). He explained that a
producer receiving credit for one new project is getting credit
applied to all of their gas production. Their fields are not
parsed out from each other. If a company has four fields and
only one of them is new and they are earning credits on it, they
are getting that credit for all of their gas.
Setting that aside, that 55.9 million BOE of total production
would lead to $7.80/BOE credits or about $1.30/mcf, a number
that will decrease over time due to additional production from
these fields. Lease expenditures for these projects through FY15
were $1.09 billion, which is lease expenditure credit support of
40 percent.
2:50:00 PM
The estimated value to industry of the Cook Inlet tax caps is
$550-$850 million from 2007-2013 (slide 13). The total
production for that timeframe in Cook Inlet was 250 million
cubic per day (equaling 640 BCF/or 106 million BOE). Adding
10,000 barrels/day, one gets to the equivalent of 132 million
barrels BOE. He used a midpoint $700 million estimate, the value
of the caps equals $5.30/barrel or $0.88/mcf. Adding that to the
calculation from prior slide 12, the sum of credits and tax caps
is $2.18/mcf.
SENATOR MICCICHE said that spans of 2007-2013 were narrowed to
after the Cook Inlet Recovery Act passed, the investment per BOE
for the state would increase dramatically.
MR. ALPER agreed.
SENATOR STEDMAN asked what the revenue side to the State of
Alaska was for Cook Inlet over the same timeframe (FY7-FY15).
MR. ALPER answered he thought the production tax revenue was in
the neighborhood of $25 to $27 billion and total oil and gas
revenue was $40 billion or so. Senator Stedman brought up an
important point, that the tax credit system was put in place
with the expectation that fairly robust oil and gas revenues
were going to be coming in (in the billions of dollars per
year). This system was envisioned as something of a reinvestment
of some fraction of the state's revenues to get tomorrow's oil
drilled and built. According to Commissioner Hoffbeck, state
revenues have shrunk to where it is not even supporting
government any more, and the credits are relatively unchanged,
if not larger. So the system is very different now from how it
was original constructed.
SENATOR STEDMAN said Cook Inlet didn't have billions of revenue
that he knew of and asked ballpark numbers for what Cook Inlet
contributed to the treasury. The $25 to $27 billion referenced
came from the North Slope.
MR. ALPER answered the production tax will be very close to
zero. The 17 cent/mcf works out to about $15 or 20 million per
year in a typical year, but most of that would be lost through
the small producer credit. The royalties and other revenues from
Cook Inlet would be in the ballpark of tens of millions of
dollars per year.
SENATOR STEDMAN said he was trying to make the point that Cook
Inlet is a closed basin and the state energy subsidy goes to the
Anchorage Bowl. It doesn't produce any revenue to the treasury
to speak of that would benefit the entire state. He was
concerned that the presentations hadn't dealt with how they got
in this position in the first place.
2:55:45 PM
COMMISSIONER HOFFBECK said in fairness to the presentation, they
had a history section and pulled it out in order to focus more
directly on the specifics of the fiscal issue. However, they
could add it back in.
CHAIR GIESSEL said they had presented that history numerous
times before a number of committees and it's all on line, and
the Senate is able to do that kind of research. So, committee
members could look it up. She added that the Cook Inlet supplies
gas for the Kenai Peninsula, the MatSu Borough, and it is
trucked to Fairbanks; so 50 percent of the state's residents
benefit.
SENATOR MICCICHE said the number referenced to communities
impacted by Cook Inlet gas is higher than 50 percent of the
state's population. He asked Mr. Alper to correct that the
production for Cook Inlet in 2007 was essentially zero, since
the Cook Inlet Recovery Act didn't come into effect until FY11.
MR. ALPER responded that the statutory tax caps were part of the
PPT bill that passed during the 2006 special sessions. So, the
17 cent/zero rate has been in place since that point. The rates
were designed as a "hold harmless" to mimic what the taxes were
in the year before the effective date of PPT (2005).
2:58:17 PM
SENATOR STEDMAN said this is the bill's first hearing in this
committee and he was trying to put things into context -
depending on if they want the public to be able to follow the
information and hopefully support the legislature's conclusions.
At some point they must talk about what the credit is, why the
state has it, and when it would be used. "If you put the cart
before the horse, these conversations get real interesting."
There is a reason why he and a lot of colleagues swim around in
the tax codes. Many policymakers understand the basics of the
tax and credit system. They need to get a firm basis down and
try to get some stability in the tax code.
MR. ALPER said it's true that the tax code is very complicated
and every time it changes it tends not to get simpler.
3:00:12 PM
Slide 14 showed the status of the credit fund and how demand is
moving around for FY16-17. The FY16 appropriation was capped at
$500 million through a line item veto. Of that, $473 million
money has been paid out to date even though it is near the end
of the fiscal year: about $200 million went to North Slope
producers and $273 to non-North Slope producers. That leaves $27
million in the fund; about $4 million in claims are in some form
of the payment process.
Meanwhile, his division has an applicant que worth $675
million:, $10 million in older net operating loss (NOL) credits
from prior years (where the department requested additional
information), $22 million in older exploration credits that also
need more information, and $552 million in 2005 credits (NOL
credits, the non-North Slope qualified capital expenditure (QCE)
and well lease expenditure (WLE) credits).
He explained that other well credits are only applied for at the
end of the year, because a loss has to be proved, and the tax
filing deadline was March 31. The capital and well credits are
sometimes applied for quarterly or even more frequently, but
they will be processed together this summer and will largely go
out the door in July and August.
3:02:50 PM
Meanwhile, thus far, they have $60 million in 2015 exploration
claims and another $31 million on top of the $552 million in
preliminary applications that for some reason aren't really done
yet and awaiting amended returns. That means the "minimum
demand" for FY17 "stuff in hand" is $652 million. That is an
extremely current figure, based on filings that came in on
Thursday from major and minor taxpayers throughout the state.
They expect additional credit applications during the coming
CY16, which could also be paid in FY17, and about another $40
million for QCE and WLE from Cook Inlet.
MR. ALPER said the exploration credits for both the North Slope
and Cook Inlet are extremely aggressive, an additional 30 or 40
percent on top of some other credits, and they are sunseting on
July 1, 2016. They are now realizing that companies are going
for those credits before the sunset date through "frontloading"
projects to try to max out companies' abilities to get those
exploration credits, a one-time cost, but still very much as a
cost in FY17. They are expecting about $20 million between the
refinery credit and the credit for the Interior gas utilities
gas storage project. Should that go forward and the tank gets
built, a credit claim could come in some time this year for
reimbursement. So, foreshadowing the spring FY16 forecast, they
will most likely revise the number from $825 million that they
presented about two weeks ago down to about $775 million.
CHAIR GIESSEL thanked him for the very current information asked
if he could group the exploration credits together to let them
know where they are being claimed in each basin.
MR. ALPER answered yes and added that Table 8-4, on pages 77-78,
in the Fall Revenue Sources Book has the same information
although in a different format. But the simple answer back when
it was $825 million it was almost exactly 50/50: $410 million in
one basin and $415 million in the other.
CHAIR GIESSEL said she wanted to see the value of each specific
credit.
MR. ALPER explained that AS 43.55.890 says data can be
aggregated for confidentiality purposes if there are three or
more companies so that numbers cannot be reverse engineered. He
explained that if he told them all of the North Slope credits,
then he'd be telling them there is only one in the Cook Inlet
slide 15. However, he would do everything he could to parse
these numbers as fine as possible under the law.
SENATOR COSTELLO asked how companies responded to the governor's
decision to cap credits.
COMMISSIONER HOFFBECK answered there was angst amongst the
companies, because a lot of these credits are used as collateral
for loans, and when the vetoes were put in place the capital
markets pulled back saying if they can't be certain the credits
are going to be paid, then they aren't any good as collateral
against the loans. So, he spent the better part of a month
talking to various lending institutions and assuring them that
the credits would be paid. However, the veto introduced
uncertainty into some of the companies' decisions as to moving
forward. For the most part, the state saw the type of work that
would have happened without the veto, but it took some work to
put that back together again.
3:08:55 PM
SENATOR COSTELLO asked if that is something that can affect the
state's credit rating.
COMMISSIONER HOFFBECK answered no, because there is no statutory
requirement that these credits have to be cashed out by the
state. The credits are earned, but they could be held until
there is production or they could be sold to somebody who has a
tax liability who could then use the credit. The credit rating
saw it as a responsible action in light of the state's financial
situation.
SENATOR COSTELLO asked if all the credits are transferable.
MR. ALPER answered that all of the cashable credits are
transferrable. There are caps on transferability meaning the
company who is buying them can only reduce their own tax
liability to 80 percent of what it would otherwise be. And
considering how little production tax liability is in the next
couple of years, there is, to be fair, a relatively soft market
for transferable credits. The small producer credit and the per-
barrel credit on production are both not cashable and not
transferable. Those are use it or lose it credits.
SENATOR COSTELLO asked how often credits have been transferred.
MR. ALPER answered that it happened in the beginning of the era
of transferable credits (PPT time period), but the anecdotal
information they received was that the market price for credits
was 70 cents on the dollar and the major producer was the one
getting the full value of it because they were using it to
against their tax bill. In 2007, with passage of ACES, the
legislature decided to get rid of credit repurchase caps and
reverted back to a take away per company per year limit that
used to be in statute. Since then, there has been almost no
transferring of credits in the oil and gas world.
CHAIR GIESSEL asked if the net operating loss (NOL) credits are
cashable or transferable.
MR. ALPER answered yes.
3:12:25 PM
SENATOR STEDMAN said it would be nice to model - using the first
in first out system for payment by the state to the companies -
how the accumulated credits versus the appropriations will
impact the state. With a $70 million appropriation for the
credits he expected it would take a while to get to the FY17
credits, and he has been told by at least one company whose
credit is $65 million that their interest rate for their loans
on the project is 20 percent.
He also wanted the numbers for how much will be carried forward
to FY17 in accumulated credits north of 68 latitude and south of
68 and the expectation for FY17 credits.
MR. ALPER responded that that information is on slide 14.
SENATOR STEDMAN clarified that he didn't want the $500 million
broken down; he just wanted the aggregate amount of credits that
were accumulated and the appropriation.
MR. ALPER answered that he would do everything possible to get
that information for him. In the next couple of slides he would
get into the new world of NOLs earned by major producers that
are very explicitly not cashable, and those are all going to be
carried forward. They will be coming from the major producers,
not from this pool.
CHAIR GIESSEL said he could get that information to her and she
would distribute it to the committee.
3:15:21 PM
MR. ALPER recapped slide 15 saying that when the spring forecast
comes out, the total claims will probably be around $775
million. Slide 16 talks a little bit about how the state got
from $825 million to $775 million. It went up a little because
the NOL claims were higher by $100 million than expected for
calendar year 2015.
He explained that "calendar year (CY) 2015 equals FY17" is not
an intuitive way to look at the numbers and that a loss finishes
in on December and taxes are filed on March 31. The NOL credit
statute, AS 43.44.023, says the certificates shall be issued in
120 days, and 120 days later means the last week of July. That's
when the Tax Division scrambles "to get all the credits
processed and out the door." Then many companies will turn
around and request repurchase the next day and the money should
be available in the Tax Credit Fund. So, in essence, the bulk of
CY15 credits will be paid in July and August of 2016, which is
in the early months of FY17, and what appears to be a two-year
lag is really just a four-month lag.
He said because all of the CY15 NOLs are going to be FY17
credits, the decision was made to take all the future NOLs from
CY16 off the FY17 pool and move them into FY18, because
realistically that is when they will be paid. Making that
calculation correction reduces the total by about $150 million.
The net effect is the FY17 projection goes down by $50 million,
but FY17 and FY18 will have larger credit estimates by at least
$50 million.
3:17:59 PM
SENATOR STEDMAN asked that this data be brought forward in table
format so the public can follow along.
MR. ALPER said it is his preference to provide math data in
table format, because it reads better that way, but in the
context of a presentation it's sometimes easier to turn it into
bullets. But he would do that interpretation for him.
MR. ALPER said the growing carry forward NOLs are a new and
growing problem. The beginning of a net profits tax where there
was such a thing as a net operating loss credit was basically in
2007. All of the companies except for the three majors have been
able to get cash for their credits whether there was a cap or
not (in the later years there wasn't). Cashable credits were
part of the way the state did things with the singular exception
of companies producing more than 50,000 barrels a day, of which
there were three, the larger producers. Now with Hilcorp
crossing the 50,000 barrel threshold, there are four. This means
they won't be able to get cash for credits going forward. The
division knows that at least one of the majors has an NOL for
the prior CY15. That NOL credit can be used to offset their
monthly tax payments beginning in January of CY16, and can
reduce them as far as zero for as long as it takes to work
through their NOL credit. Eventually, in the later months of the
year there will be tax payments. This will partially offset what
the minimum tax payments would have been in CY16 (half FY16 and
half FY17), but not take it all the way to zero. So, the state
will have positive production tax income. However the revised
forecast that the governor released last week - and they believe
the price of oil isn't going to change - indicates that all
three majors have operating losses in CY16 and in some cases,
relatively robust ones, and possibly for years beyond.
This is a new world, he said, and that means that by January
2017, the state's monthly production tax payments will be
effectively zero. Once this calendar year ends, if the forecast
holds, everyone will be completely offsetting their production
tax.
MR. ALPER explained that the smaller numbers - $10 million and
$15 million - are from some sidebar pieces of production tax,
the main one being the 5 percent gross tax on private royalties.
Some private companies receive royalties; the main one now is
the Arctic Slope Regional Corporation that owns a chunk of the
land under CD5, ConocoPhillips's new development on the North
Slope. They will be receiving a certain amount of royalties and
that is taxable income and shows up under the production tax
umbrella, although it's very different from the traditional
production tax.
MR. ALPER said if the majors have larger loss credits than it
takes to zero out their minimum tax, the credits can get carried
forward and get added to any losses that might get accumulated
in the following year. The bottom half of slide 18 is a table
that tries to show how that happens based on the actual numbers
in forecast documents and the ANS oil price (starting at $40 and
creeping up to $65.90 10 years from now). The production tax
revenue drops to a number very close to zero; zero plus the
outlier issues increasing in the later years. The column on the
right is new information - the carryforward credits form this
concept.
3:22:04 PM
At end of 2017, there will be $632 million worth of NOL credits
that are in hand and not cashable, because they are with the
major producers who have already zeroed out their taxes. So that
increases the NOL credits to $747 million in 2019 credits. Then
it goes down as the price of oil increases.
MR. ALPER said that the price of oil is forecast to go from $43
to $60 between 2018 and 2021, but the production tax is only
projected to be $32 million in FY20/21, the reason being the
drawdown of the accumulated NOL credits. However, that number
zeroes out in 2025.
SENATOR STEDMAN asked for a synopsis of any credits that can
apply to activities on private land and if the state has a
mechanism to recoup any of that credit investment.
MR. ALPER said there are two different answers to that. The work
done on private land is fully eligible for all of the credits -
the credits are silent as to what part of the state they are in
whether state, federal, or private land. The difference is if
it's on state land the state gets the royalty. If it's not on
state land, the state gets 5 percent (or the equivalent of .06
percent) of the gross of the owner's royalty. That is "a must be
paid number."
3:25:05 PM
SENATOR STEDMAN asked what the assumption for the appropriation
on the carry forward credits is.
MR. ALPER answered the assumption is that the appropriation will
be whatever the demand for re-purchasable credits is.
SENATOR STEDMAN suggested footnoting the tables on how the
appropriation impacts credits, because clearly there is a $500
million limit this year, and people need to be able to
understand both sets of data.
CHAIR GIESSEL said it would also be helpful to have the
calculations of how much is required to be in the Tax Credit
Fund, complying with the formula in AS 43.55.028.
MR. ALPER thanked her for the question, because he had been
internally wrestling with how to come up with a number the
legislature might appropriate if it was something other than the
claimed number. The most obvious alternate scenario to model
would be the 15 percent formula that is in statute.
SENATOR COSTELLO asked him to provide the oil price assumptions
that were used in projecting that price.
COMMISSIONER HOFFBECK replied the department can do that.
Briefly, he explained that the department uses a probabilistic
model with a range of prices, and for budgeting purposes they
select a specific price point within it, typically the mid-
point. But the price is now below the mid-point of last fall's
probabilistic modeling, and they selected the price point that
reflects the current price of oil, because it will be in the $39
range for the year. Then they slowly brought it back up over a
four-year period until they got to the 50 percent confidence
level.
CHAIR GIESSEL said it would be informative to hear about the
process the department goes through.
COMMISSIONER HOFFBECK explained that they convene a group of
typically 20 to 40 people with various oil price forecasting
expertise (academic and on-the-ground experience) in the fall
and try to come to some consensus over what they feel the price
is going forward. Then they do statistical testing on long term
historic averages for prices adjusted for inflation as well as
looking at supply and demand coefficients. They actually look at
what other forecasting agencies put out. The group then does a
Monte Carlo analysis on the probabilistic modeling of what oil
prices would be starting with where it is now. So, they really
have three ways of looking at it: one is this group, one is the
Monte Carlo process, and one is the supply and demand
coefficients.
SENATOR COSTELLO asked for the assumptions used on slide 18 of
the production tax revenue projections.
COMMISSIONER HOFFBECK said absolutely.
3:31:03 PM
MR. ALPER added that those are the numbers that are in the
spring forecast they published last week.
CHAIR GIESSEL stopped at slide 18 saying the committee would
next hear from enalytica.
SENATOR STEDMAN went back to Senator Costello's earlier question
about the price range and said it would be helpful to talk about
the minimum tax range the state is in and the expectation of
when it will get out of it. Most people can realize that the
state will be at a minimum tax range for the entire environment
and that cuts through a lot of the chase when they look at
revenues.
MR. ALPER said he was formulating a graphic showing where the
minimum tax overlays the gross and net and credits that it would
be ready soon.
Presentation by enalytica
3:32:57 PM
CHAIR GIESSEL thanked Mr. Alper and said the next speaker would
be oil and gas legislative consultant, Janak Mayer.
JANAK MAYER, Chairman and Chief Technologist, enalytica, said he
had worked over the last decade in the consulting environment
for the oil and gas sector primarily dealing with financial
modeling, evaluation, and economic analysis of upstream oil and
gas projects. For the last four or five years he has done a lot
of work for the Alaska Legislature through the Legislative
Budget and Audit Committee, two or three of those years with PFC
Energy, and the last couple of years with his own firm and that
of his colleague, Nikos Tsafos. Most recently, they had done
work around natural gas commercialization of the AKLNG Project,
and have been engaged through the Legislative Budget and Audit
Committee as consultants for the legislature as a whole to
provide independent and dispassionate advice and analysis on its
questions.
3:35:20 PM
NIKOS TSAFOS, President and Chief Analyst, enalytica, related
that this is his third or fourth year engaged with the Alaska
Legislature, and like Mr. Mayer, he used to work for PFC Energy.
His background is in consulting on the oil and gas industry with
a focus on gas commercialization and gas market analysis. He has
spent the last two years working on a range of issues Alaska has
been dealing with on both oil and gas and especially on the
AKLNG Project.
3:36:20 PM
MR. MAYER said their presentation today, Alaska Oil and Gas
Credits, focuses on the background for some of the core
questions around oil and gas credits in Alaska, both on the
North Slope and in Cook Inlet: trying to put numbers into some
perspective as well as the broader context of the history, the
purpose of the credits, how well the purpose has been achieved,
and how much they are needed going forward.
Slide 2 was a high level visualization of some of the total
numbers one sees in the Revenue Sources Book. Looking back at
2015, there was a total of $1.3 billion in credits. He divided
them up between North Slope and non-North Slope (Cook Inlet and
a small portion outside of Cook Inlet) credits: $879 million on
the North Slope and $413 million outside of the North Slope.
He divided the credits further into what was refunded and what
was taken against liability. On the North Slope, $224 million
was refunded versus $655 million taken against liability. In
Cook Inlet, that situation is reversed: $404 million was
refunded versus $9 million taken against liability.
3:38:24 PM
Another aspect of the credits is their purpose. The North Slope
dollar-per-barrel credit is $595 million; it is an integral part
of the tax system. Thinking about it as a credit is almost a
misnomer, even though it is written in statute that way. It
really exists as a way of introducing a progressive element into
the tax system of curving the tax rate down at lower oil prices
(SB 21) in exactly the same way as progressivity combined with
capital credits did under Alaska's Clear and Equitable Share
(ACES). About $203 million is net operating loss (NOL) credits
on the North Slope. By and large these two credits substantially
remain on the North Slope when other credits (capital credits,
exploration tax credit, and the small producer tax credit, which
ends in May 2016) have ended. The yellow category of "other"
includes those things that are at various stages of sunsetting.
The core of what is happening on the North Slope is the per-
barrel credit and the NOLs credits. The tax system will
recognize NOL credits eventually, but the question is if they
are paid now or later.
MR. MAYER explained that unlike the previous capital credits and
credits in the Cook Inlet, which are very much about the state
providing incentives to do something, these credits recognize
the value of the tax system of expenses incurred. Whether that
happens now or later is a timing question not an absolute
question of amounts of money.
3:41:31 PM
The Cook Inlet revenue is a fraction of the North Slope's and
there are very substantial credits being paid out there, the
vast majority being refunded versus being taken against
liability. He assumed that was mostly small producer tax credits
going against the minimal tax liability that is incurred from
gas and other things in the Cook Inlet. Lumping the two together
as state support for activity in the Cook Inlet, he would talk
about the rationale behind that state support, what it was years
ago and what it is now, and then discuss if there are ways of
reducing it.
MR. MAYER said roughly speaking there are three categories of
tax credits; the per-barrel credit, the NOL on the North Slope,
both fundamental to the tax system, and the third category of
support or subsidy to incentivize particular behaviors, which is
really about what is going on in Cook Inlet.
3:42:58 PM
SENATOR STEDMAN said the state is in a minimum tax environment
and will be there for quite a while. The issue that sticks out
is the $595 million per-barrel credit, but it is just a
calculation to get down to the 4 percent of the wellhead value
minimum tax. It's not a credit the state pays out; it's just a
credit to exercise if one is in a minimum tax environment. It
makes the amount of credit numbers change significantly.
3:45:16 PM
MR. MAYER agreed that the per-barrel credit is a math exercise.
The North Slope credits are broken down in detail on slide 3.
The elevated level of 45 percent were the result of transition
arrangements under SB 21, because it substantially reduced the
level of overall government support from 45 to 35 percent, and
this is a way of holding that level at 45 percent for an
additional two years to allow companies that had made investment
decisions under the assumption of that high level of support
(under ACES) to continue and from this point forward know it is
down to 35 percent. The basic purpose behind that incentive is
to equalize the impact of the tax system to make it the same
between a new developer without a tax liability and an income
producer with one. He explained that the inequality is not about
the big guys on the North Slope that dominate everything and the
state needs to help the little guys; it's really about pure hard
math and simply saying a series of deductions are allowable when
one has a liability, and the NOL credit is providing exactly the
same thing to companies that don't have that liability. He will
talk about how that math works in the coming slides.
He mentioned that the dollar-per-barrel credit is for so-called
"old" legacy production from the big producing fields and ranges
from zero to $8/barrel or $5 per-barrel of "new" oil under SB
21.
3:47:31 PM
SENATOR STEDMAN asked him to clarify the difference between the
per-barrel credit and the $5 gross value reduction (GVR) credit
where one can be taken against the floor and one cannot.
MR. MAYER answered that could be better answered with some
slides in a short while. He added that for old oil there is a
sliding dollar per-barrel credit that ranges from $0 to $8
depending on where the price is; it's highest when prices are
low and it exists to curve the effective rate of tax down. It
can't be used to go below a 4 percent gross minimum floor. The
only credit that can do that is an NOL credit, which he would go
through shortly.
By contrast, the calculation of the gross minimum floor for new
oil is effectively done first, and then the question of the $5
fixed per-barrel credit is done after that. That means that the
hard gross minimum floor doesn't apply in the same way.
Essentially these are both integral components of the tax system
that is used to figure out what the actual effective tax rate
should be in a range of different price environments and to
reduce that tax rate in lower price environments to create an
overall progressive system, which balances out regressive
elements of the overall fiscal system, which is the royalty. He
would cover how those pieces fall together a little later.
3:49:53 PM
The elements that are at various stages of phase out are: the
exploration credit that expires on July 1, 2016, and the small
producer credit which expires on May 1, 2016, but phasing out
with a nine year tail from the time an eligible company received
first production.
Non-North Slope (Cook Inlet) credits are a form of state
supported subsidy that offers to incentivize particular types of
activity. There is a loss of credits tied to capital spending
and the NOL credit is the same in statute as the one on the
North Slope, but it functions very differently, because the
North Slope has a profit-based production tax and the NOL credit
is simply a way of recognizing expenses that would otherwise be
deducted against liability. Cook Inlet doesn't have a profit-
based production tax, and so the NOL credit in lots of ways is
similar to either the capital credits under ACES or the capital
credits that exist in Cook Inlet, except that it's something
that can only be taken by a producer that effectively doesn't
have production.
The 20 percent for qualified capital expenditures is the same
credit that used to exist under ACES on the North Slope; it
continues to exist in Cook Inlet. The additional heightened
credit of 40 percent for capital expenditures are also
intangible drilling costs for well-related spending. These two
credits can be taken and stacked together if one is eligible for
a NOL credit (if one is a new developer) to receive a total of
45-65 percent total state support.
SENATOR STEDMAN remarked that the committee is being told that
there is no way for the treasury to recoup the 45-65 percent in
credits being issued in the non-North Slope region, Cook Inlet
specifically.
MR. MAYER said that is correct; the one exception is Cook Inlet
royalty.
MR. MAYER said the exploration credits in both Cook Inlet and
the North Slope expire on July 1; the one exception to that is
outside of those two basins (Middle Earth) where the proposal is
to extend those. The small producer tax credit is used to reduce
a liability to zero if less than 50,000 BOED is produced
declining in a straight line up to 100,000 BOED. In Cook Inlet
the tax liability is primarily from gas. For companies working
in Frontier basins (Middle Earth) there is an up to $6 million-
a-year credit), structured similarly to the small producer tax
credit that has the same phase-out timeframe as the small
producer tax credit. That was the end of his description of
various North Slope and non-North Slope credits in statute.
3:54:05 PM
He said the key part of the conversation is about the refunded
component that are cash payments from the treasury. Those have
grown very substantially over time, and looking from FY11
onwards, the North Slope part of that component is pretty
stable. The most striking growth has been in Cook Inlet; the
majority of FY15 is actually Cook Inlet and FY16 is essentially
capped at $500 million total. The numbers are correspondingly
large in FY17 and he assumed that was because the rest of the
FY16 cap is being paid out in FY17.
3:55:18 PM
MR. MAYER said slide 6 illustrates for FY15 the sheer difference
between Cook Inlet and the North Slope, credits versus revenues.
There is about $2.3 billion in restricted and unrestricted
petroleum revenues, about $1.6 billion of that being
unrestricted. There are about $600 million in credit payouts,
and those are substantially greater than the revenue from
production tax, although by no means greater than the whole
stack of revenues. To get the full picture, he said, one needs
to distinguish between what is happening on the North Slope and
what is happening in Cook Inlet: there the disparity is quite
striking. The amount of revenue that comes from the Cook Inlet
is relatively small versus the majority of the refunded credits
that are paid out. It's hard to look at that in the current
fiscal environment and think that that is a sustainable position
the state can maintain.
CHAIR GIESSEL commented that the other striking thing about this
slide, besides what Mr. Mayer already pointed out, is what a
massive piece the royalty is.
MR. MAYER said royalty is a gross tax and those are inherently
regressive; that is to say they represent a much greater share
of the pie when prices are low than when prices are high. And
that is in contrast to the progressive element of the system,
the production tax, which is specifically designed to shrink
away as prices go down. The royalty alone takes a vast portion
of the overall value of a barrel of oil and in many cases, more
than 100 percent. In that sense, royalty, more than anything,
provides the lion's share of the value to the state at low
prices, because the other components of the system, particularly
the profit-based production tax only exist when there is
actually profit to tax. Whereas the royalty provides revenue to
the state even when there is no profit.
SENATOR STEDMAN asked Mr. Mayer to graph FY16 even though part
of it is still hypothetical, because it ends at the end of June.
The contrast will be the price difference between roughly $70
and $30 a barrel for oil. He thought that would make the bars on
the graph look a little different.
4:00:52 PM
MR. MAYER said he would be happy to do that. He said slide 7
uses a 10 percent gross tax and a 25 percent net tax to
illustrate the math involved. He explained that an effective tax
rate is a net concept (how much of the profit is being taken
through the tax system), and a 25 percent flat net taxes the
gross value of the sale, not anything connected to the actual
profit or economic value being created. Because it is a fixed
amount, a flat rate represents an ever greater share of a
shrinking barrel as prices go down and results in a very
regressive curve that quickly gets very high when prices are
low.
A 10 percent gross tax might represent barely 12 or 15 percent
of the profits at the highest prices, but quickly becomes 100
percent of the profits at a $50-or-so barrel, and from that
point very quickly goes reaches infinity, because at some point
one gets to where there is no more profit and any fixed share of
nothing is nothing.
4:02:39 PM
The basic idea is that there are key advantages to both gross
and net taxes, and Alaska has a hybrid of both, and there are
certain tensions that come with having that, Mr. Mayer said.
He explained that gross taxes are much less volatile, precisely
because they are regressive in the same way that most of
Alaska's revenue is coming from the royalty. Because they take
much more of the pie when times are hardest, they provide a lot
of relative revenue stability to the state, and they are very
simple and easy to administer. Unlike the world of profit-based
taxes where one sees years of audit backlog trying to figure out
all the costs that went in and assessing exactly how much profit
was made, the state only needs to know two data points to
administer a gross tax system: how much was produced and how
much it sold for. The disadvantages are: because it is high
government take at low prices and low government take at high
prices that means over the course of the economic cycle, when
times are good, the state is probably not taking near as much as
it could, but it also distorts and dis-incentivizes marginal
investments. That could be because in the same way it is
regressive with the relative price, it is regressive with regard
to costs. The most difficult fields to produce have the highest
government take, and in many cases, that means that fields that
are expensive and difficult to produce - but that might be
economic other than for the incidence of this tax - become no
longer economic, because the take on them is so high.
MR. MAYER said companies are not drilling in North Dakota at the
moment, and the reason is that North Dakota has a very
regressive system that takes a huge amount at these sorts of
prices and much less at higher prices. It's very hard to want to
be reinvesting in those sorts of places when prices are what
they are now, because there is simply no profit to be made.
SENATOR STEDMAN noted that Texas and Oklahoma have private land
ownership and Alaska has a state-owned resource. He would be
very surprised if a farmer would want to produce his 20 percent
royalty at $39 a barrel. That would have an impact on
production, also.
MR. MAYER said certainly the royalty in the majority of cases in
those jurisdictions are privately held, but from a company's
perspective in terms of assessing an investment decision, it
doesn't matter whether the royalty is privately or publically
held in so far as it's all cash that goes to someone that is not
you.
SENATOR STEDMAN clarified that his point was that a private
royalty owner would be a lot less excited about pumping oil at
$39 a barrel than at $79 a barrel and would probably be more
reluctant to reduce royalties rather just leave the oil in the
ground and wait. The actions from the landowners are different
from the State of Alaska as a sovereign, because its structure
is different.
MR. MAYER said that net taxes are much more volatile and harder
to administer, because auditors are needed to, but the great
advantages are a much more efficient system. If structured well,
it is much less distorting for marginal investments on expensive
fields allowing investment to keep going when times are harder
and it enables investment across the commodity cycle.
4:07:18 PM
In particular, he explained, net profit taxes (slide 8) are
frequently structured, as the State of Alaska's is, not as taxes
on income but as taxes on cash flow. The key thing to understand
is that for the first three years of a new development one might
see three years of capital investment before any production
actually occurs. After the start of production, revenues occur
and operating costs are deducted against those, but the bulk of
that capital spending is happening up front before any actual
revenues occur. In a pure cash-flow world that means three years
of negative cash flow, and then subsequent years of positive
cash flow. In a world of income accounting, all the upfront
capital expenditure would be capitalized at the start of
production and only recognized through the tax system in the
form of depreciation (allowing a portion of that to be taken as
an expense steadily over time).
Whereas the idea behind a cash flow tax is to say over time the
same expenses are recognized but capital spending is seen as a
cash cost when it occurs rather than being depreciated over
time. The idea behind that is to maximize the efficiency of the
tax system in terms of minimizing the distorting impact on
investment, and the way to be least distorting on investment is
for the tax to look as much as possible like an equity
participation in a project. Equity participation means putting
up some of the initial capital and then taking some out from the
resulting cash flow. The basic idea behind any cash flow net
profit tax is to look exactly like that. The simplest example
would be like the one on slide 8 where 25 percent of the upfront
capital is in the form of negative tax credit (NOL, for
instance), and then 25 percent of the cash flow is taken through
the tax system later on. It's important to understand that
distinction when people bring up different companies and the
profits or losses that they report are all about income. Almost
all companies that are reinvesting in Alaska at the moment,
spending actual capital, are cash negative in this environment.
4:10:31 PM
MR. MAYER said it is useful to come back to the core idea behind
Alaska's tax system, which has steadily gotten more complicated.
It's easiest to understand the components by going back to where
it all began: in 2006 with a paper by Dr. Pedro van Muers that
proposed a net profit based production tax of a flat 25 percent
that would have two credits: the 20 percent capital credit and a
25 percent net operating loss credit (NOL) - the NOL to be the
same as the 25 percent tax rate, the idea being to allow the tax
to go negative those years of negative cash flow. In other
words, the state contributes 25 percent of the costs of
investment and then takes 25 percent of the cash that is
generated.
The 20 percent capital credit was an additional way of creating
- instead of the flat neutral 25 percent tax rate - a
progressive structure. The impact of that 20 percent capital
credit comes close to a 25 percent tax rate at the highest
prices, but steadily as prices go down, the tax rate would bend
along with it and eventually become zero. He said if one plots
the effective tax rate of 12.5 percent royalty it creates a sort
of symmetry that ends up with a fairly flat tax rate across a
wide range of prices.
4:12:39 PM
MR. MAYER said Dr. van Muers' paper proposed credits that would
be tradeable but not reimbursable from the treasury, the idea
being a producer with no liability could sell the credit to
someone with a liability. This means, effectively, there would
be a statewide floor of zero, because the credits could only be
taken against a liability, there would not be a possibility for
the credits to take the liabilities below zero.
SENATOR STEDMAN remarked that Alaska has an imbalance of a 35
percent NOL credit and no corresponding 35 percent tax. It is a
statutory 35 percent tax, but mathematically, due to the per-
barrel credit, there is no effective means of achieving that 35
percent numeric.
4:14:51 PM
MR. MAYER said the mechanism for that balancing is the sliding
per-barrel credit under SB 21. Referring to slide 10, he said
the basic idea of the NOL credit is to equalize the impact of
the tax system between producers that have a liability versus
new developers that don't yet have one. Instead of allowing them
to carry expenses forward and deduct them against future
revenues, the credit just pays them now. They would not deduct
them in the future and therefore pay more taxes then.
4:18:04 PM
MR. MAYER said that slide 11 showed how ACES added an additional
progressive component to the basic tax structure in the form of
a tax rate that could steadily increase as the price goes up.
So, the total tax rate could approach 40 to 50 percent or higher
instead of 25 percent. The progressivity structure meant very
high marginal tax rates, and that is because the actual tax rate
itself was based on the so-called production tax value per
barrel. This meant that instead of the previous system where
government take was essentially a flat 45 percent in all cases,
a new developer with no liability would receive 45 percent
support through the combination of the NOL credit and the 20
percent capital credit, but a developer with substantial tax
liability might have 80 to 100 percent effective support,
because of facing a marginal tax rate up in the 80s combined
with 20 percent capital credit. The amount of support was very
unpredictable for everyone. It meant the state brought in huge
amounts of revenue to the treasury when prices were high and
spending was low, but it also meant that in periods of low
prices and high spending there was major risk that the state
would have to pay out a large percentage of cash both in terms
of foregone revenues in the tax system and then in terms of
credits.
4:20:21 PM
SENATOR STEDMAN recalled under both regimes the concept was to
try to make reinvestment in Alaska more attractive than sending
the cash back to the home office and trying to get the industry
out of "harvest mode."
4:21:13 PM
MR. MAYER said the way the 4 percent gross floor works is to
first decide if the net profit tax one is paying is greater or
less than 4 percent of the gross (the regressive element that
gets steadily bigger as prices get lower). It seemed that when
that calculation was done it really had no impact. That is
because capital credits were applied after. So, as long as one
had any baseline level of capital spending, that flow was never
binding. Therefore, the effective tax rate still comes down to 0
percent at the $60 or so price range. So, there was really no
hard binding gross floor under ACES.
4:22:15 PM
The core changes in SB 21 (comparison on slide 12) were no more
20 percent capital credit, a higher nominal rate of 35 percent
tax, and a sliding $0-8 per-barrel credit for oil production
that acts similarly to progressivity (under ACES) to create an
overall progressive curve.
SB 21 has a slightly lower tax rate at last year's prices, but
there are two key differences. SB 21 has a much lower rate when
prices are highest and it also has a harder binding gross floor,
because it essentially said if there is no more capital credit
and you can do the calculation of this sliding per-barrel credit
that can reduce your taxes steadily more as prices go down, but
comparing it to a gross system is done after the $1 per-barrel
credit is applied. So, the $1 per-barrel credit can never take
you down below the 4 percent gross floor. Then the tax rate
comes down to just under 10 percent of the net at around $75 a
barrel of oil, but then very quickly starts to go up again,
because at that point, one is no longer being taxed on a net
basis. One is being taxed on a gross basis at 4 percent of gross
revenues, and that very quickly takes up ever more until again
once the price goes down to about $50 a barrel the tax rate
quickly becomes 100 percent in net terms.
4:24:15 PM
SENATOR STEDMAN said the Senate never reviewed a $0 to $8
sliding scale. The Senate bill used $5 per barrel when it was
sent over to the House and at some point, a sliding scale is
needed for DOR to hold a taxpayer in the minimum tax range. And
a "hardened floor" just doesn't exist; it is a mathematical
equation to take credits against. He thinks of it as a gross tax
calculation of 4 percent and then take whatever you can against
it.
MR. MAYER added that the only thing you can take against it -
unlike previous times when the entire capital credits could be
counted and it really had no effect - is NOL credit, which only
applies literally when one has no profit at all. The reason this
curve goes up dramatically is you can only plot the lines in
terms of effective tax rates as long as there is actually profit
to tax. Below the point of $46 barrel there is no longer any
profit to tax, the point at which you have on one hand an
infinite tax rate and also the point at which the NOL credit
kicks in for the first time and starts to take you from that 4
percent of gross down to zero.
SENATOR STEDMAN pointed out that the GVR $5 per-barrel credit,
the small producer credit, and starting in FY15 with a large
enough Net Operating Loss (NOL) credit, can all be taken against
the floor.
4:26:17 PM
MR. MAYER said slide 12 looks at the world of "new oil" that is
eligible for gross value reduction, which at the moment makes up
"a very, very, small sliver of the total pie," and "old oil"
under SB 21, and the only thing that can be taken as a credit
against the hard floor is the NOL credit. The floor for old oil
is a very hard floor right up until the point that there is no
profit whatsoever. At that point it starts coming down because
of the operation of the NOL credit. It's important to keep in
mind through the entire history of tax regimes in Alaska there
has been an understanding of this problem of gross taxes being
highly regressive. Under the economic limit factor (ELF) the
idea was understanding those problems and needing a formula that
would steadily reduce the tax burden when there is no more
profit to tax, and it worked for a little while, and then it
stopped working. Under ACES the gross floor was put in and
clearly it never actually applied. But the idea - based on cost
assumptions that existed back then that are very different than
today's cost assumptions - there would be a 4 percent floor in a
certain range of prices below $25 per barrel. Then it went to a
2 percent floor and then no floor at all at lower prices.
MR. MAYER thought it was a very intentional move to have the NOL
credit, to say once one was eligible for a NOL credit, by
definition one has no profit. In circumstances, the state is not
sure it wants the full 4 percent gross floor to apply.
Reasonable people can differ as to whether that is the right
policy call or not, but that is the right context for thinking
about that debate.
SENATOR STEDMAN said he should have parsed it more clearly,
because he was looking at oil in the aggregate and Mr. Mayer was
talking about old oil. He thought there had been a lot of
confusion in the building in the last several years about the
floor. A lot of people were shocked that it could be pierced so
easily.
CHAIR GIESSEL said the point that Mr. Mayer made was if one
takes net operating losses, one has no profit. Consequently,
it's rather difficult to say one owes a tax in a system based on
net profits.
4:29:55 PM
MR. MAYER said slide 13 is about new oil. It is eligible for the
GVR, the idea being to create a lower effective tax rate for new
fields. People in Alaska tried to do that in the past, but it
was very hard to see how that would work, precisely because the
entire system is set up is to have no "ring fencing." It's a net
tax system where one thinks about costs and revenues and
subtracts one from the other and doesn't try to get down to the
level of saying these costs are associated with a particular
field. This system treats the North Slope as a whole and the
idea behind the gross value reduction was to say if we want to
have a lower effective tax rate on some production and not
others, the only way to do that is by concentrating on the
revenue side of the equation. So, because they wanted to reduce
the tax rate but can't change it from 35 percent for everybody,
they created "this fiction" that says you had X in revenues and
we're going to pretend you had X minus 20 percent. Having that
fiction allows the tax rate to be reduced, which turned out to
be a substantial reduction in the overall effective tax rate on
new oil.
The other difference, as Senator Stedman pointed out, is that to
be eligible for GVR (a very small portion of the total
production), the gross floor is calculated first and then the $1
per-barrel credit is applied afterwards. So, it's a fixed $5
per-barrel credit rather than the sliding one, and it doesn't
get as big. The idea was to not put the burden of the regressive
gross floor on activities they are trying to incentivize. The
idea was to create an overall tax system that was effectively
neutral at between 60 and 65 percent across a really wide range
of prices.
CHAIR GIESSEL asked if he would be available to continue on
Monday. Mr. Mayer said he could make that work.
| Document Name | Date/Time | Subjects |
|---|---|---|
| enalytica presentation to SRES-4-2-2016.pdf |
SRES 4/2/2016 2:00:00 PM |
Oil and Gas Tax Credits |
| DOR Presentation to SRES-4-2-2016.pdf |
SRES 4/2/2016 2:00:00 PM |
Oil and Gas Tax Credits |
| SB 163-Supporting Document-40 CFR 122.2.pdf |
SRES 4/2/2016 2:00:00 PM |
SB 163 |
| SB 163-Supporting Document-40 CFR 230.3.pdf |
SRES 4/2/2016 2:00:00 PM |
SB 163 |
| SB 163-Comments-Bristol Bay Native Association.pdf |
SRES 4/2/2016 2:00:00 PM |
SB 163 |
| SB 163-Comments-Curyung Tribal Council.pdf |
SRES 4/2/2016 2:00:00 PM |
SB 163 |
| SB 163CS(RES)-Fiscal Note-DEC-WQ-03-31-16.pdf |
SRES 4/2/2016 2:00:00 PM |
SB 163 |
| SB 163CS(RES)-Fiscal Note-DNR-MLW-4-1-16.pdf |
SRES 4/2/2016 2:00:00 PM |
SB 163 |
| SB 163CS(RES)-Fiscal Note-DFG-HAB-4-2-16.pdf |
SRES 4/2/2016 2:00:00 PM |
SB 163 |