Legislature(2015 - 2016)BUTROVICH 205
04/04/2016 03:30 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 | |
| SB130 | |
| Continuation of Enalytica Overview of Alaska's Oil and Gas Tax System | |
| Continuation of Dor Overview of Alaska Oil and Gas Tax Reform | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 247 | TELECONFERENCED | |
| *+ | SB 130 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
SB 130-TAX;CREDITS;INTEREST;REFUNDS;O & G
[Contains discussion of companion bill HB 247.]
3:31:29 PM
CHAIR GIESSEL announced consideration of SB 130 and the
continuation of enalytica's overview of Alaska's oil and gas tax
regime that started on Saturday.
^Continuation of enalytica overview of Alaska's oil and gas tax
system
3:32:30 PM
JANAK MAYER, Chairman & Chief Technologist, enalytica,
Washington, D.C., said he would recap the substantial
differences between the North Slope and Cook Inlet revenues and
credits. The credits for the North Slope are integral to the
overall tax system and only two credits are remaining: the
dollar-per-barrel credit and the net operating loss (NOL) credit
for which producers with less than 50,000 barrels a day can
receive cash payments. The dollar-per-barrel credit is a means
of shaping the overall tax rates and the NOL credit is a way of
deducting costs that are being incurred against revenues when
the costs exceed the revenues that exist at the moment. Two
things can happen with that: either the costs can be carried
forward and be deducted against future revenues or they can be
deducted today as a cash payment from the state.
3:34:28 PM
SENATOR WIELECHOWSKI joined the committee.
MR. MAYER said whether the credits are paid out today or in the
future has a fiscal impact on the state, particularly in times
of low prices. However, this credit is fundamental to the tax
system rather than being some incentive to try to achieve a
particular outcome.
3:35:26 PM
SENATOR STOLTZE joined the committee.
MR. MAYER said the Cook Inlet revenue/credit picture is very
different. It has no production tax on oil, a very low fixed
gross production tax on gas, and a very substantial credit
regime: 25 percent NOL credits, a 20 percent capital credit, and
a subclass of capital credit called the well lease expenditure
credit, which goes up to 40 percent for well-related intangible
drilling costs.
Slide 6 illustrated the overall picture. One can see that almost
all the revenue comes from the North Slope, but only a few
credits went to it, but it's exactly the opposite for Cook
Inlet. It's hard to see the Cook Inlet regime as sustainable.
3:37:59 PM
He said slide 14 focused on historical levels of activity in
Cook Inlet and showed several cycles of activity since the 1950s
and a substantial peak in exploration since 2010. The pace of
development drilling activity since the Cook Inlet Recovery Act
was passed has picked up substantially, but that success comes
at a significant cost, and that is what he would talk about
next.
3:39:41 PM
MR. MAYER said it's important to distinguish between oil and gas
production (on slide 15) in Cook Inlet. Oil production peaked at
about a quarter of a million barrels a day in 1970 with a very
sharp decline going through the 1980s, a shallow drop during the
90s down to very low production in the last decade until in
2009, only 7,500 barrels a day were produced. Since 2010, oil
production has substantial rebounded and Cook Inlet is now
producing about 18,000 barrels a day.
The gas side of the equation looks very different in terms of a
much longer, flatter plateau of gross production through the
mid-90s. Some of that gas was reinjected into the Swanson River
field and its production resulted in a plateau that went through
to the late years of the last decade. The reason for that is
even though gross production had started declining substantially
a full decade prior, but because no reinjection was happening
there, that added to the net amount of production through 2005.
Since then there has been a substantial decline, but where oil
production turned around, gas didn't. It has stabilized and
plateaued at about a quarter of billion cubic feet a day in the
last several years.
3:42:47 PM
MR. MAYER said slide 16 looked a little closer at the drivers
that enabled the remarkable turnaround in Cook Inlet. It comes
from two different sources: from new wells being drilled and
from work-overs on existing wells. The oldest wells are
producing more now than they were at the end of the last decade.
3:45:06 PM
SENATOR MICCICHE asked why the spike in gross oil production by
well vintage (1965 through 1978) (slide 15) compared to new
production (slide 16) is unusual in its steepness in both
directions.
MR. MAYER answered that a couple of big fields were brought on
line very quickly, but the decline while it is steep, in general
fits a sort of hyperbolic decline curve one would expect with
the legacy wells.
NIKOS TSAFOS, President & Chief Analyst, enalytica, Washington,
D.C., added that most of the increasing production in the early
70s came from five fields that went from 0 to 30,000 barrels a
day at the same time, but McArthur River went from zero to
112,000 barrels a day. And the decline rate isn't unusual with
such a steep increase, since no other fields came on line to
back-fill the production.
SENATOR MICCICHE asked if he saw any other issues that might be
more promising in the future.
3:49:11 PM
MR. MAYER said the two graphs on slide 17 show gas production by
well vintage and by field. The older vintages mostly decline and
almost all of the new production is from wells drilled after
2011. So, the plateau in gas production in the last couple of
years is from ongoing drilling in the existing fields rather
than extensive work-over work one sees on the oil side. The by-
field graph indicates that one substantial field has turned
around, the Kenai Loop. A few others - Beaver Creek and Swanson
River - have smaller amounts of increase, and there may be more
production from Furie's Kitchen Lights unit in the future.
3:51:11 PM
Slide 18 puts that picture in context and has the outlook going
forward. An amazing turn around happened on the oil side that
went from 7.5 thousand barrels day (mb/d) in 2009 to almost 18
mb/d today, and gas production stabilized in recent years after
several years of steady decline. He said the gas market has
undergone a major transition in supply, demand, prices,
seasonality, competition, and expectations. In particular, prior
to the time of this turn around a couple of major established
(harvesting mode) players - Marathon and Chevron - exited to a
new player, Hilcorp, who is focused on reinvestment and work-
over activity and new drilling, a very standard cycle to happen
in all hydrocarbon basins all around the world.
A couple of other things were going on at the same time. Cook
Inlet used to be a relatively low-priced gas market,
particularly compared to Henry Hub - that for a long time was
viewed in Alaska as a very premium price that couldn't be paid
here. Indeed at that time a Henry Hub pricing case was put to
the RCA based on that and it was turned down as being
potentially excessive. Now Cook Inlet gas has a much higher
price ($6/mcf going up to much higher levels for certain
contracts) both through the consent decree that happened when
Hilcorp came in and through subsequent RCA decisions. Now Henry
Hub looks low.
3:54:04 PM
MR. MAYER said the credits have had an extraordinary effect in
Cook Inlet on both the oil side and the gas side, but part of
the reason is also about broader structural changes that have
occurred. The DNR published estimates say about 1.2 tcf is
remaining in proven or probable reserves. If one adds in
Cosmopolitan and Kitchen Lights (that has seen substantial
development on the gas side and is starting to produce at
relatively low levels so far) they estimate an additional 400
bcf, therefore 1.6 tcf in total, although there is substantial
uncertainty as to the size of the resource.
He explained that instate demand is about 80 bcf/year and the
total Cook Inlet gas production is over 100 bcf right now. One
might think that is 10 years of gas supply, but the problem with
that is that hydrocarbons aren't produced at the same flat rate
indefinitely. Fields all go into decline at some point, but with
substantial additional drilling and investment one might see the
gas plateau extended out another six years. But at some point,
there will be a decline again. When that happens the question is
what the new resources look like, how well-developed they are,
and how well-equipped the companies are to contribute an
incremental portion to meet the ongoing gas demand in the
region.
3:56:38 PM
To answer the question of fundamental challenges for keeping the
Southcentral gas market well supplied into the future, Mr. Mayer
said he did some modeling looking at three different
hypothetical fields and assumptions. The first project he
modeled was on slide 19, a market-constrained development with
large upfront investment. One sees the economics of developing
something that would optimally be a much larger development - a
large gas resource that could in principle produce 100 bcf/day
of gas for several years at a plateau rate. The problem is there
isn't a market at the moment in Southcentral Alaska for that
much gas, short of substantial exports or other alternatives.
One can look at the market and see an increase in demand over
the next four or five years. So, if one drills wells that
produce 15-18,000 million cubic feet a day of gas at a peak rate
and then it declines, one could see how a single platform and
well could be developed at a time over the course of a decade.
3:59:55 PM
The problem with having a substantial resource that one is
trying to work into a larger-scale gas development is money
spent on big facilities. He noted that one producer, in
particular, has talked about spending several hundred million
dollars on a platform, pipelines, and all the rest - and just
looking at the cash flow chart one can tell this is a very
challenged development.
4:00:43 PM
MR. MAYER said slide 20 looks at exactly the same development,
but if it weren't subject to the very difficult constraints that
the Cook Inlet market is subject to. It would require a change
in supply/demand dynamics, which most likely would come from a
substantial export customer. If that could be done, one could
produce at 100 or close to 140 million cubic feet a day of gas.
One could drill three wells a year for the first three years, or
drill nine wells in the first three years and then drill another
well every year for the next decade to maintain production. This
would look like a very different development. The cash flows
look more similar to the sorts of cash flows one expects to see
on any number of gas developments around the planet. As a
result, it is a much healthier development that can exist
probably with or without credits.
He modeled a third project using the same assumptions around
well productivity, the cost of drilling a well, and the same-
type curves, but, if not making that substantial initial
investment in upfront facilities, pipelines and all the rest.
Here under the current Alaska fiscal regime without the 25 NOL
credit (because an existing mature field has enough revenues to
not be in an NOL position), but with a 20 percent capital credit
and 40 percent credit applying to well-related work, the very
minimal initial upfront costs to do that drilling results in a
very quick return and correspondingly very high and attractive
economics.
4:03:25 PM
MR. MAYER said slide 22 graphed the three different projects one
could imagine either in the real world or in a hypothetical
unconstrained world in the Cook Inlet. One can see that even
with benefits of essentially no or little tax, 20 percent
capital credits, and 40 percent credits for drilling costs, that
in the first two cases of a new development by a new company
with a 25 percent NOL credit, the economics remain really very
strained and difficult to make work (because of the enormous
amount of capital required and the small amount of production
revenue that comes from it). Internal rates of return (IRR) of
5-15 percent at the very highest gas prices is not particularly
desirable economics when one considers the benefits of all those
credits. And when one looks at the spilt of value to the
company, the federal government and the state, it is nothing but
a pure subsidy situation from the state government perspective,
even in the highest price gas scenarios.
So, the company with the economics that look great at prevailing
Cook Inlet prices of $6 mcf, with maybe just a little bit of net
present value, in an unconstrained environment, looks suddenly
very different. The economics are transformed solely by being
able to actually develop this field in an optimal manner. The
IRR goes from 20 to 40 percent at the same price levels and all
of the different players are in positive net present value
territory. Companies are doing best here and the state,
relatively speaking, is taking the least value of the overall
equation, because of the mixture of the 12.5 royalty and a very
small gross production tax on the gas.
Looking at the scenario of additional drilling in the mature
fields that is even more the case, particularly with the 40
percent well drilling credit, and IRR from 50 to north of 100
percent. The idea here isn't to say that this is a definitive
picture of any actual company's economics; it's simply to say
that drilling in mature fields is not substantial economic work,
especially because with no credits at all, they are looking at
25 to 85 percent ROR. It does seem that drilling in the mature
fields is likely to be a substantially economic activity across
a wide range of assumptions.
4:08:34 PM
MR. MAYER said the question then comes back to the big picture
of what the aim of the Cook Inlet credit regime is. One possible
answer is that it exists as a gas supply to Southcentral Alaska.
If that's the case, based on the resource base, it looks like
the current plateau can be maintained for another four or five
years at current rates. At some point, though, that will start
declining again and new resources will have to be found. Despite
very challenged economics, Furie has developed a gas phase at
Kitchen Lights with some initial production, and the coming
years will reveal a market and the dynamics of a new entrant.
In thinking about the role for state support, Mr. Mayer said,
the one thing that is highly challenged to make work is
development of substantial new facilities, infrastructure, and
entirely new projects given the constraints of the domestic
market. There is a role for ongoing targeted support simply to
ensure that as mature fields begin to decline there isn't a
difficult transition. One could just say leave that to the free
market and that might work, but the decline could set in and
only at a point the deflected transition would result in the
rolling brown-outs of a few years ago. Then one gets to a point,
again, where there is enough unmet demand that substantial
development of a new project actually looks desirable in terms
of economics.
So, he said, to enable a smoother transition, some degree of
support might be warranted, but it could look very different and
be much more targeted than the credit regime, which covers a
wide range of activities. A lot of data is protected by
confidentiality, but it seems safe to conclude that a lot of
work-over work and new drilling is on-going on the oil side
rather than on the gas side, but that won't necessarily put new
gas behind pipe any time soon, and it is a small subset of the
total piece of work.
4:13:07 PM
SENATOR STEDMAN said he hoped the committee didn't get enamored
with hypothetical projects and doesn't stop to take a look at
the state's checkbook, which could very easily be empty in
January. It would also be nice to have some cash flow work done
on Cook Inlet, so they have a concise view over the next couple
of days. He knew that the DOR had created some analytical models
of Cook Inlet over the last several years that the committee
might see.
CHAIR GIESSEL thanked Mr. Mayer for his presentation and
transitioned to the DOR presentation.
4:14:25 PM
SENATOR COSTELLO joined the committee.
4:15:21 PM
At ease
^Continuation of DOR overview of Alaska oil and gas tax reform
4:16:05 PM
CHAIR GIESSEL called the meeting back to order and welcomed
Department of Revenue Commissioner Hoffbeck to continue his
overview of Alaska's oil and gas tax credit system. She noted he
would start on slide 20, which was the beginning of a section
called "Work Over the Last Interim."
RANDALL HOFFBECK, Commissioner, Department of Revenue (DOR),
Juneau, Alaska, said since last session, the Governor vetoed
$200 million in tax credits that created a temporary liquidity
crisis within the oil and gas industry that led to him and
Director Alper to spending the next month talking to various
companies and lending institutions to assure them that all the
credits would be paid and that their concern that these credits
were not valuable collateral for loans was unfounded. They had
over 30 meetings with industry and financial institutions
getting a much broader understanding of how credits are used to
leverage additional assets versus just being direct
reimbursements for work.
He said that multiple hearings were heard over the summer by
Senator Giessel's Senate Oil and Gas Tax Credit Working Group
that added depth to their knowledge of the issues the state is
facing, and creating a basis for today's legislation. The Senate
Working Group provided a good anchor for the discussion.
4:19:17 PM
COMMISSIONER HOFFBECK said the Working Group and the state saw
most of the issues in a similar fashion, but maybe some of the
solutions not quite exactly the same. The Working Group felt
gradual change was the right way to change the oil and gas tax
credits and the administration felt more urgency driven
primarily by looking at the state checkbook. However, gradual
implementation, if it's available, is a better way to make these
type of changes, if one has the luxury to do so. The
administration felt constrained by how much the credits cost and
how much revenue the state had, so they wanted to be more
aggressive with implementing changes.
He said the Working Group's report considered timelines and
sector impacts very strongly, and while the administration
looked at those, they had a different interpretation of where
the impacts would be. Because there was a strong statement to
protect local vendors in the case of bankruptcy that was not in
the original legislation, the bonding component was added in
House Resources, and the administration felt it was a good
addition. They both saw the need to protect some form of the
minimum tax floor within the analysis and to protect the
Frontier Basin tax breaks, because it is still a very immature
basin. Finally, they looked at enhanced reporting requirements
to have enough transparency to have an open dialogue on some of
the issues so that when they are making these tough decisions,
everyone can see the data and know what issues need to be
addressed.
4:21:03 PM
COMMISSIONER HOFFBECK said the state put together its thought
process on how to deal with the various credit issues cognizant
of what they felt were the resources available for offering
those credits. It became very clear that they couldn't offer
stability to the oil and gas industry if the state couldn't
afford its credit program. He added that for the next four years
the state will have a substantial draw down on its savings and
its ability to fund government services, and a credit program
that is costing $700 million a year is a substantial draw down.
They asked themselves how to balance this so that they didn't
completely crater the oil and gas industry when they are
struggling with low oil prices, as well.
4:23:13 PM
He said they saw the credits in three different categories.
First, the credits that really just didn't work the way they
were supposed to. A series of credits weren't even applied for,
and it didn't make much sense to leave those on the books, so
their legislation proposes repealing those. Another credit was
put in place because of energy security issues within
Southcentral and focused on developing gas in Cook Inlet, but
they were equally applied to oil production, which is where the
profits really are long term. And it was the focus of what the
Cook Inlet Recovery Act was supposed to do. So, they looked for
a way to structure the credits to focus more on the development
of gas resources.
COMMISSIONER HOFFBECK said the second category was the credits
that did work but had maybe served their purpose. One of the
things one sees all across the board within government, and he
assumed the same in business as well, is that a program is
started and funded; the program gets up and running and it's
successful. But then it's hard to determine when it's time to
stop. That is may be what is being seen in the credit program:
energy security was needed in Southcentral; they put in a very
robust credit program in order to obtain that energy security;
and now that has been accomplished. When the credit program was
put in place, there was a market looking for gas; and now gas is
looking for a market, and the question now is if the Cook Inlet
had been incentivized sufficiently to have achieved the goals
they had set out to achieve.
COMMISSIONER HOFFBECK said the reality is that the market can be
over-incentivized. Enalytica has said in their prior
presentations that the price point for gas in Cook Inlet is
sufficient to look for and develop gas anywhere in the world. If
the market continues to be incentivized and additional gas
floods the market, the price will get pushed down more. Then
they must incentivize again. He said a second way to over-
incentivize is if energy security is their big goal - and it is
- is to incentivize projects that can only find a market by
exporting. But those are policy questions.
4:25:53 PM
SENATOR STOLTZE pointed out that Commissioner Hoffbeck referred
opaquely to different kinds of useful credits, as well as
credits past their useful life. He asked if the department could
put out a credit rating score card to help legislators make good
decisions.
COMMISSIONER HOFFBECK said DOR doesn't have a report card
format, but their presentation talks about those things and he
would be happy to provide more context.
SENATOR STOLTZE commented that the public would be better served
by an assessment of various credit's usefulness, their ranking
in terms of how each credit best serves the state's financial
interest.
SENATOR WIELECHOWSKI said the information they are looking for
is the rate of return (ROR) and return on investment (ROI) from
the credits for the state.
COMMISSIONER HOFFBECK said confidentiality makes looking at
specific projects difficult, therefore the department created
life cycle models, based on general data not specific to a
particular company, that he could provide.
4:30:14 PM
The last category of credit is the one of credits that should be
maintained, primarily the NOL credit that is a playing field
leveler, but it's also the hardest one to control. Director
Alper would explain the provisions on how to cap some of those.
4:31:17 PM
KEN ALPER, Director, Tax Division, Department of Revenue (DOR),
Juneau, Alaska, said their initial presentation walks through
the various components of the bill and how they affect different
sectors of the industry, what kind of changes the department was
trying to make and the fiscal impacts. The second presentation
has the date of April 4 and drills much deeper into the modeling
of some specific sections of the bill and deals with some fairly
complicated statutory language that he wants the committee to
understand. In some ways it answers questions that came up in
the first committee of referral in the House. That presentation
goes into the life cycle modeling that Commissioner Hoffbeck
talked about - how it is now and how it would perform given the
changes proposed in SB 130. The third part of the second
presentation answers a couple of specific questions that came up
in the earlier Senate Resources hearing on Saturday.
4:32:54 PM
MR. ALPER said slide 23 is the big picture of what the
commissioner just said: the process was driven by the
understanding that the state no longer has the cash flow to
support the credit program as it currently stands. That spend
needs to be reduced one way or another. The idea gelled upon the
NOL credit as "the mother credit," the one that is the playing
field leveler, especially on the North Slope, between the new
comer and the incumbent producers that pay a net profits tax and
receive value for every dollar they reinvest or spend in Alaska
by reducing their taxable net income. Reducing it by a dollar
reduces their taxable net income by 35 cents. The NOL credit is
how the developer of a new field gets that 35 cent value from
the same dollar spent.
The third major theme of the bill is to limit repurchases of
credits. That is not quite the same as reducing the cash outlay.
Many of the credits were initially designed with the idea of
them being intended to be used against taxes or carried forward,
to be used against taxes, and only later did they become more of
an open-ended repurchase. So they are looking at deferring
payments in some cases by rolling them into a future year when
the state might have better a fiscal situation to be absorbing
them as offsets against taxes.
A fourth component of the bill is strengthening the minimum tax
ensuring the state does, in fact, get the value of the statutory
floor that was put in place in the PPT regime and has not ever
worked to its full intent.
Number five is be more open and transparent to be able to talk
about what the state is doing and how state resources are being
shared in different development projects. And of course, as
changes are made to honor and pay all the credits that are
earned to date and through the transition period.
MR. ALPER said the bill also has a fairly large fiscal note of
$900 million to endow a fund to put additional money into the
Tax Credit Fund so that should the system face dramatic changes;
anything earned before the effective date would be paid and not
subject to question.
SENATOR WIELECHOWSKI said the operating budget appropriates $73
million for tax credits in FY17 and asked if he is advising
producers of that.
COMMISSIONER HOFFBECK answered that they are encouraging
producers to track the legislation. But if only $73 million is
appropriated, that is all they can spend. However, there is
still a ways to go.
4:36:26 PM
MR. ALPER said the major bill components more thematically deal
with exploration credits, the Cook Inlet drilling credits, the
repurchase limits and implementation of them, removing certain
exceptions and loopholes in existing statute, strengthening the
minimum tax, and other provisions on technical language.
4:37:24 PM
Starting with the exploration credits, he said the
administration's policy is to let the exploration credits sunset
on their own accord. Specifically, the alternative credit for
exploration is scheduled to end on July 1, 2016 in both the
North Slope and the Cook Inlet areas. That has been previously
extended in the Middle Earth until 2022 in prior legislation and
the intension is for that to still happen. They want to get
these credits off the table, because they, among other things,
have led to some historically very high support. On the North
Slope the NOL credit increased to 45 percent from 25 percent for
the last two years after the passage of SB 21. Those can now be
stacked with an exploration credit of up to 40 percent and there
are circumstances, especially for seismic shoots on the North
Slope, where the state is actually paying 85 percent of
companies' costs in 2014 and 2015.
SENATOR WIELECHOWSKI asked what the success rate is of using
credits for jack-up rigs and the Frontier Basins. Did the state
get an appropriate return on that investment? Should they expire
or will it cause a further crisis in the gas situation?
MR. ALPER answered those two credits, referred to as the super
credits, have actually rarely been used. The jack-up rig credit
hasn't been claimed and only one or two smaller claims have been
made in the Frontier Basin. Producers found that the other
credits, especially in Cook Inlet, that were already on the
books were more valuable. The 65 percent money was in some ways
more valuable than the 100 percent jack-up rig credit that had
depth and additional data sharing requirements as well as a
paying back of half the credit once they came into production.
Producers decided to never apply for it, so there is no downside
in letting it sunset. The frontier credit is 80 percent for
development drilling costs and 75 percent for seismic, and a 65
percent credit remains in place for normal circumstances in the
Middle Earth area. So, there really isn't that much difference
between the normal credits and the super credits.
4:40:08 PM
SENATOR WIELECHOWSKI said a jack-up rig did come to Cook Inlet
and asked if that was just a coincidence or did it come up with
the intent of being used and then they determined they could get
more credits through other means? Are there plans for anyone to
apply for a jack-up rig credit?
MR. ALPER answered that he heard that one company may seek that
credit, but the work has to be done by July 1, 2016. As for why
they came, the jack-up rig credit was part of SB 309 in 2010
that had several credit stimulants in the Cook Inlet area. It
happened in some ways as a companion bill to HB 280, known as
the Cook Inlet Recovery Act that also passed in the 2010
session. That bill contained the 40 percent well lease
expenditure credit.
4:41:19 PM
SENATOR STEDMAN remarked that when PPT credits escalated beyond
25 percent, consultants were very concerned about getting into
goldplating and distorting economic behavior, and asked when the
state will face erratic behavior driven by credits versus sound
economics.
COMMISSIONER HOFFBECK answered that he wasn't sure he could
answer that question without specifics, but they felt there were
some largely undercapitalized companies that took advantage of
the high credit regime and came to Alaska and if they found
something, they did well; if they didn't, he knew that at least
two went bankrupt. The credits probably have incentivized some
activity that maybe would not have been otherwise undertaken,
but he couldn't say what the goldplating threshold was.
4:43:21 PM
MR. ALPER continued that an unexpected spike in exploration
credit claims came in for last year that might have been for
some work that was done in advance of when it otherwise would
have been done, but the companies wanted to do it to take
advantage of the 85 percent credit that was about to sunset.
He said the exploration sections of SB 130 attempted to clean up
a couple of older credits (one that can be taken against
royalty) that hadn't been used in decades. The thought was to
preemptively repeal them so they don't get resurrected in some
way and go against the broader intent of the administration.
MR. ALPER said that within the exploration statutes there is a
requirement for data sharing - primarily well bore data - with
DNR as a condition of receiving the credits. The state gets
great use out of that data to better understand and market the
state's resources. They were hoping to reattach that language to
the remaining NOL credit by referencing that old language.
4:44:52 PM
Slide 26 talks about the Cook Inlet drilling credits. SB 130
repeals AS 43.55.023(a), the qualified capital expenditure or 20
percent QCE credit, and .023(l), the 40 percent well lease
expenditure or WLE credit. The idea here is during the passage
of SB 21, there seemed to be a direction against rewarding
spending without production. The spending based credits were
repealed on the North Slope and a comparable system was being
extended to Cook Inlet and other areas of the state. They also
want to make sure especially given the tax caps in Cook Inlet
that the producer who is not in a loss situation (simply
drilling wells and selling oil and gas and hopefully earning a
profit) and not paying tax, is not receiving cash credits for
it, which they are under the current system through the 20 and
40 percent credits. They don't feel that is an appropriate use
of state funds, especially at this time.
MR. ALPER added that all of this is in some ways temporary, and
they understand that the Cook Inlet needs a more comprehensive
tax reform between now and 2022. If the tax caps that exist in
statute were to sunset tomorrow there is no stable tax regime
underpinning them. They have bits and pieces of different taxes:
a 35 percent net tax from SB 21, but not per barrel credit nor
GVR benefit, a 25 percent NOL "a little bit of a hodge podge."
The House Resource CS has a working group towards that end; it's
not in the legislation that is before them now.
In general, Mr. Alper said, their broad goal is to reduce the
general level of state support for Cook Inlet from the roughly
50-60 percent that it is now to the 25 percent level through the
remaining NOL credit.
4:46:56 PM
SENATOR STEDMAN said the 25 percent NOL in Cook Inlet has been
around for a while and asked if it used to be 25 percent north
of 68 and now it's 35 percent.
MR. ALPER said, yes, that's correct.
He said the idea behind the repurchase limits on slide 27 is not
what credits are earned but the method by which the state repays
those credits. Currently, any company who presents the credit
for repurchase is eligible with the exception of those who
produce more than 50,000 barrels a day. That has historically
meant the three major producers, although now Hilcorp has added
themselves to the 50,000 barrel club. The bill adds a couple of
restrictions to getting cash for credits. First, if you are a
large company (global revenue in excess of $10 billion) then
maybe you can afford to keep those credits on your own books,
save them until such time as you have tax liability (when you
are producing) and then use those credits to offset your own
taxes. For those companies that don't meet that threshold - the
great bulk of them - they would institute a cap of $25 million
per company per year, the limit that used to be in place during
the 2006 PPT bill that was eliminated with the ACES bill in
2007.
SENATOR MICCICHE asked if he thought about adjusting the $25
million cap that went away in '07 for inflation or did he think
the same cap was an appropriate number.
MR. ALPER answered that they put in the historic number as a
starting point expecting that to be part of a robust discussion.
SENATOR STEDMAN asked if any of the non-refundable credits and
the NOL credits accumulate any carrying costs to the state.
4:50:37 PM
MR. ALPER answered that there are no provisions in statute for
earning interest or gaining value on credit that are carried
forward.
SENATOR STEDMAN said that is a point that hadn't been touched on
much and he expected billions of dollars in carry forward costs.
SENATOR COSTELLO asked if other oil-producing regimes have
something like the requirement that it applies to any company
with a global annual revenue greater than $10 billion a year.
Would it affect investment decisions across projects which
normally are reserved for that specific location in investment?
MR. ALPER answered that he didn't know if he could adequately
answer that question, but there are very few regimes that offer
cash reimbursements the way Alaska does. The idea of putting a
cap on large companies was in some ways germinated over a year
ago in doing some modeling for the House Resources Committee on
a potential ANWR development. They found that no matter how
robust it looked to the state, once it was up and going, the
first 10 years were potentially catastrophic with $2 billion a
year in credit liability. Realizing that it would be large
companies coming in, they had to find a way to protect the
state's interest while still allowing projects to go forward. He
didn't know if there was anything comparable in other regimes,
but they thought internally that there was a difference between
the type of smaller independents they were trying to bring to
Alaska and the large international companies who already have
business in Alaska.
4:53:05 PM
SENATOR STOLTZE said he wanted a better idea of the team that
put this legislation together. Were other departments, such as
the Department of Natural Resources involved?
COMMISSIONER HOFFBECK answered that it varied at different times
within the process. The initial research on credits was
primarily driven by the DOR. They held the meetings and talked
to the various players. Then they took the information about the
credit liability that the state was facing to the governor as
well as some ideas about ways to mitigate it. Involved in that
was the governor, the chief of staff, the DNR, and the DOR; a
team actually helped formed the entire fiscal plan. It came back
to the DOR for refining and then was taken to the Department of
Law (DOL) for the language. It was finally brought back to the
governor in a room that had almost half the cabinet plus the
governor where the governor said. "That one, that one, that
one..."
4:55:16 PM
CHAIR GIESSEL pointed out that she met with Commissioner
Hoffbeck early in December to talk about ideas he was
considering and recalled that DNR was in that meeting, and DNR
said it was the first they had seen of any ideas.
SENATOR STOLTZE said a lot of things that happen on the third
floor aren't very public and asked Commissioner Hoffbeck to
describe the role of the chief of staff on this. Is he a passive
observer or one of the drivers?
COMMISSIONER HOFFBECK replied that he is just one of the voices
in the room. The governor wants to hear from all sides of every
issue before he makes a decision. He pointed out that DNR
Commissioner Myers was in some of those prior meetings.
SENATOR WIELECHOWSKI asked if there were meetings outside of the
cabinet - industry or outside organizations - in the crafting of
this legislation.
COMMISSIONER HOFFBECK replied not in the crafting of the bill,
but they met with all of the players and got their input on what
was critical and what areas they thought needed modification.
They were open and frank about what they thought was necessary.
Structuring of the bill was internal within the state.
COMMISSIONER HOFFBECK apologized and said he had to leave for
another meeting.
4:57:47 PM
SENATOR MICCICHE asked if the administration went through the
exercise of evaluating what kind of production has been the most
beneficial to the people of Alaska and what kind will be most
beneficial in the future, because the state has invested a lot
of money in credits in companies that are no longer in Alaska,
and that is where most of the credit liability lies. Why do they
look at big company-good versus little company-bad and try to
reward accordingly as opposed to what has the most potential
benefit for the general fund (GF).
MR. ALPER said that is a good question. He answered there was no
intent to say small companies-good and big companies-bad. This
provision is the only place where they made a distinction
between the sizes of companies; their modeling showed fairly
little difference in the net effect between the zero limit and
the $25 million limit for the larger fields. They didn't really
contemplate the larger companies involving themselves in the
smaller fields anyway. Companies have left the state, but in the
scope of all of it they are not most of the liability; they are
a relatively small fraction. He was more concerned about the
companies that stayed and left, because they didn't find
anything worth developing. If there is a discovery that is not
being developed from some reason, maybe it gets developed in a
future era. He hoped there would be some increased interest in
Alaska no matter what they do here when the price recovers. It's
just hard to develop our "challenged basin" in low prices.
What projects get developed isn't so much a function of the
credit system as of the resource, Mr. Alper said. The big fields
have been found; they are hoping people will develop the smaller
fields that might be a little more challenging. Some needed a
little more exploration; some needed to be found. They were not
trying to play favorites either in the credit system or in what
they are trying to modify it to; they are simply trying to
shrink the footprint a little bit.
CHAIR GIESSEL invited Deputy Commissioner Burnett to come to the
table and fill in for the commissioner who had to go to another
meeting.
5:00:50 PM
SENATOR MICCICHE repeated his question of whether the
administration evaluated what type of production has been the
most valuable to the GF in the past, separate from what size
company provided that benefit. This was in reference to the
graph on slide 27, and how the credits and risk exposure seem to
be disproportionately going to smaller, under-capitalized
companies.
JERRY BURNETT, Deputy Commissioner, Department of Revenue (DOR),
Juneau, Alaska, answered the issue here of limiting credits for
companies with a larger amount is to make sure they deal with
companies that are not capital constrained differently than
companies that were more likely to be capital constrained and he
would have to go back and look at that question separately.
Historically, smaller companies have provided significantly less
money to the GF over time.
5:02:54 PM
MR. ALPER said there are two additional restrictions: one is
tied to the percentage of Alaska resident hire. Conceptually, if
a company has a $10 million certificate that they are looking
for repurchase of and in the previous year they had 80 percent
Alaska hire, the state could cash out only $8 million. The other
$2 million would remain a company asset that they would role
forward and use in a future year or against their taxes.
Finally, just to protect the state's interest in the long term,
those would expire after 10 years.
CHAIR GIESSEL asked if he had conferred with the DOL as to the
constitutionality of the provisions in the bill regarding Alaska
resident hire.
MR. ALPER answered yes. The DOL was unsure, but believed it is
possible, and the main reason is because the state is not taking
the credit itself away from them. Everyone will get the full
value of their credit. It was just a matter of the policy
choices as to whether the state would offer a full amount or a
partial amount of cash for it. This is an idea that the governor
introduced into the mix, but it will inevitably get a legal
challenge if this survives and becomes law.
SENATOR COSTELLO asked industry's response to the local hire
part of the bill.
5:05:19 PM
MR. ALPER answered that industry was dubious as several on the
committee are, and it is largely outside of their control,
because the way the bill is written, it also extends to their
subcontractors, which they have less influence over. All the
companies testify that they seek to maximize their state hire,
and he takes them at their word. Another issue they had was
uncertainty. If they don't know how much of their credit they
are going to get paid until a year later, it's harder, for
example, to borrow money against that expected payment.
CHAIR GIESSEL asked if the carry forward loss credits apply to
cash only or to all the NOL credits.
MR. ALPER replied that the NOL credit is the only one that can
be carried forward; all the other cashable credits are either
being repealed or are sunsetting.
He said slide 28 was about some of the unusual phenomenon they
discovered in statute that led to larger credits than should
have been going out the door that they want to correct or
clarify.
The idea behind the gross value reduction (GVR) for new oil was
that the company would earn a production tax value, a profit,
and it would be reduced by a percentage of the gross value at
the point of production to reduce the taxable profit in a
synthetic calculation. Effectively, the same 35 percent tax
would be collected but charged to a smaller number. That works
fine until the company in question has an operating loss. If the
company in question instead of paying taxes is losing money,
which could happen in a low price scenario, it could also lose
money in a high price scenario, for example, in the early years
of operation for a new field if a company is still drilling new
wells and building out its infrastructure.
Well, Mr. Alper said, the statute never contemplated how that
might play out, and what has happened is one could take a GVR
and subtract it from the operating loss and that on paper
appears as a larger operating loss, and it earns a 35 percent
credit NOL. This has led to credits well in excess of 35 percent
and, in a couple of cases, over 100 percent of the amount of the
loss. It's completely legal, but DOR feels that was not the
intent. So, they are looking to clarify that the GVR, although
it can be subtracted from a company's profit, it can't be used
to increase the size of its loss.
SENATOR STEDMAN said it would be nice to see what the 35 percent
tax would be if there were no GVR to see how it interacts with
the minimum tax.
5:09:32 PM
MR. ALPER said in a little while he would talk about the minimum
tax provisions that would touch upon the new eligible oil. In
today's price environment it doesn't matter much; the state is
not getting a lot of production tax revenue anyway. Should
prices recover, 9 percent of production from the North Slope is
currently eligible for the gross value reduction (GVR).
SENATOR STEDMAN said the whole mechanism has some peculiarities
that weren't recognized at the time. He asked for a quantifiable
analysis about what a "medium price range" is for the assessment
of the GVR.
MR. ALPER responded that the primary difference today in the
revenue received for that 9 percent of the oil on the North
Slope versus the other 91 percent is that the legacy fields are
paying at the minimum tax level of 4 percent. And the $8 per-
barrel, sliding-scale credit gets cut off once they butt up
against the minimum tax - unless it's happening for a second
year in a row and there is an operating loss credit (part of the
floor hardening provisions is will review later). Meanwhile the
$5 a-barrel credit can drive the new GVR oil fields down to
zero. In 2015 the state got taxes from old oil but none from new
oil. In 2016, it's not getting much from either.
CHAIR GIESSEL said that isn't a factor of the tax policy as much
as the low price.
MR. ALPER agreed, but added that in 2016 it's a factor of the
fact that one or more of the producers in 2015 had an operating
loss and that credit could be used to go below the floor
beginning in the early months of 2016.
CHAIR GIESSEL said that raises the policy question of if people
are losing money, should the state be taxing them.
SENATOR STEDMAN said when they look at the GVR in 2017 that 9.27
percent of the oil at 35 percent credit is more like $3.9
million. It takes that tax to zero and leaves another $26
million of the GVR that goes beyond the tax amount. He pointed
out by contrast, that in the minimum tax environment, the per-
barrel credit listed earlier was a pure mathematical exercise.
MR. ALPER said he wasn't sure what document Senator Stedman was
looking at, but he wanted the opportunity to go through it with
him to understand what he was saying.
He said the second loophole-type provision SB 130 straightens up
is when a municipality owns its own gas field and burns most of
it in its own utility, that itself is not a taxable transaction;
but there are circumstances where that municipal entity might
sell some fraction of its gas to a third party, because they
have surplus production. That sale is taxable income, but the
question is what the offset is; is it a lease expenditure? Using
a literal interpretation of the law are circumstances where
companies can subtract all of their expenditures against 2 or 3
percent of their revenue and thus create some fairly synthetic
operation losses that qualify for credits. That is not terribly
controversial, but it is something that is getting cleaned up in
SB 130.
5:15:19 PM
SENATOR STOLTZE asked what "loophole" means.
MR. BURNETT answered that slide 28 says exemptions/loopholes and
some people consider it a "peculiarity." It is a term where no
one is suggesting that there is bad behavior on the part of
Municipal Light and Power (ML&P), for example, when they get a
cash credit for something that the law allows.
SENATOR WIELECHOWSKI asked how much money has been lost through
this loophole.
MR. ALPER replied that he didn't have a number, because very few
plausible entities could benefit and the data is confidential.
It's not a gigantic portion of the overall pie. Based upon his
reading of the legal track record, it appears to be truly an
unforeseen circumstance of statute and there is some consensus
that it wasn't intended to be written that way.
SENATOR WIELECHOWSKI said it's not a secret that it will impact
ML&P, which happens to be in many legislative districts in
Anchorage. That will result in an increase in rates, because
they would be getting less money back. ML&P has expressed
concern to him about this provision and he will be looking at
this one carefully to make certain that his rate payers aren't
impacted severely.
CHAIR GIESSEL asked where this provision is in SB 130.
MR. ALPER answered that he thought it was in section 27, towards
the back of the bill.
SENATOR STEDMAN said the resources are owned by the public and
the state is not structured for one particular group to have an
advantage over or a first call versus another group, and when
they get into the intricacies of this particular
exemption/credit, it will be hard for utilities to justify the
credits they put in to try to drive more oil production where
the state has no ability to recoup. The credits are put in place
to move cash flow in time to make marginal projects viable. It's
just gotten totally out of hand. He wanted some discussion about
the folks in the gas belt versus the folks that are sitting in
the oil furnace belt where his constituents heat their homes.
He wants to be fair around the state.
CHAIR GIESSEL said she was under the impression that his folks
had hydro dams that the state had built for them.
SENATOR STEDMAN responded that about 80 percent of people in his
district heat with oil, because electricity too expensive at 12-
13 cents a kilowatt.
5:20:17 PM
MR. ALPER said it was up to the chair how far he would go and
the last two portions of the bill are strengthening the minimum
tax, which is in several different provisions in SB 130. The
main and most important one, the biggest dollar value, is that
you can't use an operating loss credit specifically to reduce
payments below the 4 percent floor. So, that is the one where
the major producers who might have lost money in one year would
still have to continue to pay the gross tax the next year, which
is comparable to the gross tax paid in other states that have
purely a gross tax. Also the exploration credit would not be
able to be used to go below the floor for the small producer.
The other provision extends the 4 percent floor to new oil,
meaning the cutoff for the GVR ($5 barrel credit) would also be
limited by the 4 percent rather than the zero. They have asked
that those two changes and the section that describes them to be
retroactive to January 1, 2016, a controversial decision. The
idea being because they know of a specific circumstance where an
entity with an operating loss is offsetting its taxes this year,
but if they truly want to harden the floor, they should begin
doing it with the beginning of the present year they are working
on. In addition to all the changes to how the floor is treated,
they are looking to raise the level of the floor to a flat 5
percent at all price points.
5:22:24 PM
SENATOR STEDMAN asked what the NOL loss and credit amounts are
for north of latitude 68 for major producers in this current
fiscal year.
MR. ALPER answered that the tax is a calendar year tax, so part
of it would have to be estimated. He wouldn't be comfortable
talking about 2015 numbers because it's one, possibly two,
companies, whereas in 2016 he expects all three to have a loss.
The DOR forecast talks about $1 to $1.5 billion of loss: and NOL
credits in the neighborhood of $.5 billion: a couple hundred
million of that being used to offset minimum tax liability and
the other $300 million being incremented to the previously
carried forward NOLs.
SENATOR STEDMAN said he thought those losses were $1.9 billion.
Isn't the credit 40 percent because of the tail from the
transition amount laid out in SB 21, and the NOL calculation
straddles two different calendar years with two different rates?
It's a significant amount of money.
MR. ALPER said he wasn't certain where the $1.9 billion figure
came from, but he didn't doubt it. He was trying to describe
FY2016, which is half in CY15 and half in CY16.
SENATOR STEDMAN said if he is interpreting the Revenue Sources
Book correctly it's $1.9 billion in loss carry forwards and 40
percent credits of $770 million. It's a significant amount this
year. He also wanted a guesstimate of CY16/17 numbers.
CHAIR GIESSEL said they certainly do recognize the magnitude of
the numbers as well as the fact that three rigs out of five are
being laid down on the North Slope, because they can no longer
be supported in this price environment.
SENATOR WIELECHOWSKI said every time he had been involved in oil
taxes, they had comparatives with other states and other
jurisdictions around world. He hoped to see an overall
comparison of how Alaska's tax and royalty structure at current
dollars compares with North Dakota, Texas, and Louisiana and
other comparable jurisdictions around the world.
MR. ALPER responded that he would provide to the committee the
latest Competitiveness Review Board comparison document that
compares Alaska with others. It is reasonable to say that in the
current price environment Alaska is a very low regime - and it
offers credits. It is a system that is designed to collect more
money at higher prices with the counterpart to that being
getting less at low prices. Now that people are looking at
several years in a row of lower prices, that logic is being
rethought. One advantage North Dakota and Texas have for their
own revenue is a fixed gross tax. They get a certain percent
whether the price of oil is high or low; the downside of that is
when the price goes to $100, they aren't capturing all that they
could. Part of the balance that has always been before this body
is how much can the state can take at the high end in exchange
for what it gives back at the low end, and that consensus hasn't
been truly reached. Alaska has a kind of hybrid.
CHAIR GIESSEL asked him to highlight the difference in the
revenue collection under ACES and SB 21 in this low price
environment.
5:28:18 PM
MR. ALPER responded that the number in June using the best
available information was that SB 21 would have been bringing in
$300 to $400 million a year more, the difference being the
minimum tax, itself, based on $50-odd oil. About $400 million
would come in the minimum tax whereas under ACES the minimum tax
calculation would be offset, effectively zeroed out, by the 20
percent capital credit - based on known amounts of ongoing
spending. As the price goes further down, the delta will shrink.
In 2015, he would think the difference would be more like $150
million, because that is about how much production tax revenue
the state got. It would be close to the same in 2016 and 2017.
5:29:22 PM
SENATOR WIELECHOWSKI asked for numbers more or less on what the
state would have made if SB 21 was in place during ACES.
MR. ALPER answered that a previous analysis is in memo form and
he could forward it to the committee, but over the six years
that ACES was in place between FY08 through January 1, 2014, it
brought in $27 billion in net production tax and SB 21 would
have brought in about $18 or $19 billion. The revenue spikes
came from those years of very high prices when ACES had very
high progressivity.
CHAIR GIESSEL remarked that Alaskans have been incredibly
fortunate: it raised taxes tremendously before the largest oil
price spike in history, then instituted a higher base tax with
more protection on the downside before one of the most
precipitous drops of oil prices in history. "We did well not
because of our brains, but because of our good luck."
SENATOR COSTELLO asked in this low commodity price environment
is Alaska the only state that is revising its tax credits.
MR. ALPER replied that he didn't know off-hand, and when there
was an answer, it wasn't the group Alaska wants to necessarily
be associated with. Nigeria and Venezuela are thinking about it
now probably. Alaska does have the reputation of doing it more
often than other states. However, this bill is not being
characterized as a change to the oil taxes; it is considered a
reform to some of the excesses of the tax credit regime around
the edges of the core tax system that they are trying hard not
to get into.
5:31:52 PM
Slide 30 is a little bit of a catch-all, he said. It includes
interest rate reform. A technical error in SB 21 eliminated
compound interest and put all assessments on delinquent taxes
not just for oil and gas, but for all of Alaska's taxes on a
simple interest footing. They are hoping to restore that as well
as increase the interest rate to something more akin to what the
state earns on its savings on the Permanent Fund to reflect the
opportunity cost involved. If taxes aren't paid one year, but
get paid two years later, and the state draws from savings to
make up that difference, the state wants to get paid back at the
rate that the savings themselves might have earned in the
interim.
Next is a confidentiality waiver, a relatively narrow increase
but it is important. DOR doesn't want to talk about company
profits and how much taxes they pay; they simply want to list
the names of companies who receive tax credits and how much they
get. Another is that a small and subtle provision that has to do
with the gross value at point of production not going below zero
has a couple of technical issues as well as some more
substantial policy issues.
Finally, Mr. Alper explained, right now if someone owes taxes to
the state, at the moment they file to get their tax credit
certificate the tax gets paid. The department could effectively
hold back credit to pay taxes, but it has found circumstances
where a company might not owe taxes but owe to other state
departments - a royalty, a lease payment, fines to an agency or
something like that - and is trying to broaden in statute their
ability to use credit money to satisfy other obligations to the
state, not just taxes, before the credit is paid.
CHAIR GIESSEL said currently, transportation costs can't reduce
gross value below zero, so as production declines tariffs
(transportation costs) will go up and asked if he is saying they
can't deduct that any further.
MR. ALPER replied a model of transportation costs across the
North Slope indicates they are in the neighborhood of $10 barrel
and that number will go up. But the number varies wildly from
field to field depending on how far they are from the center.
Her question becomes if one particular field has a well head
value of less than zero, can that negative number be used to
offset positive numbers coming from other fields for tax
purposes, and that is a totally legitimate policy debate that
one might disagree with. Although this won't lead to a negative
royalty because that is a separate calculation, it doesn't
impinge upon the new gross tax on private royalties that are on
the books (if someone pays a 5 percent tax based on gross value
at the point of production, at the very least the state needs to
ensure that can't become a negative number.
CHAIR GIESSEL said she looked forward to discussing that.
Finding no further questions for the department, she said the
presentation would continue tomorrow beginning on slide 31.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 130 Presentation +DOR Presentation to SRES-4-2-2016.pdf |
SRES 4/4/2016 3:30:00 PM |
SB 130 |
| SB130 ver A.pdf |
SRES 4/4/2016 3:30:00 PM |
SB 130 |
| SB130 Sponsor Statement - Governor's Transmittal Letter.pdf |
SRES 4/4/2016 3:30:00 PM |
SB 130 |
| SB130 Fiscal Note-0609-DOR-TAX-01-13-16.pdf |
SRES 4/4/2016 3:30:00 PM |
SB 130 |
| SB130 Fiscal Note-0609-DNR-DOG-01-11-16.pdf |
SRES 4/4/2016 3:30:00 PM |
SB 130 |
| SB130-DOR Presentation to SRES 4-4-16.pdf |
SRES 4/4/2016 3:30:00 PM |
SB 130 |
| enalytica presentation to SRES-4-2-2016.pdf |
SRES 4/4/2016 3:30:00 PM |
SB 130 |