Legislature(2015 - 2016)BELTZ 105 (TSBldg)
04/12/2016 09:00 AM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| SB130 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 130 | TELECONFERENCED | |
SB 130-TAX;CREDITS;INTEREST;REFUNDS;O & G
9:00:46 AM
CHAIR GIESSEL announced consideration of SB 130. She said the
purpose of the meeting today is to take public comment on CSSB
130(RES), [version 29-GS2609\W], that was introduced last night.
She thanked the administration, Department of Revenue (DOR), and
Tax Division Director Alper, for taking the data from all the
permutations of the tax credit rebate bills and putting them
into a single chart. This CS is a departure from an approach
that has been taken before.
9:02:24 AM
SENATOR STEDMAN joined the meeting.
9:02:33 AM
KARA MORIARTY, President and CEO, Alaska Oil and Gas
Conservation Association (AOGCC), Anchorage, Alaska, said she
would share four policy questions as they evaluate the sixth tax
change in 11 years in the new CS. She does have the unanimous
consent of her diverse group of members to offer these initial
thoughts, and from their view, none of the questions have a
positive answer.
Will this increase production? Frankly the answer is no, Ms.
Moriarty said. This is a significant threat to Cook Inlet
production. Dramatically and adversely changing the tax system
in the Cook Inlet as proposed in the CS will decrease production
of oil and gas in the Inlet. For the North Slope, there will
also be a negative impact, especially on smaller fields. Alaska
needs every company to be successful, because the state needs
increased production from every field and region. This CS will
not add more production.
Will this make Alaska more competitive? Many of the proposals
that were included in the Governor's bill remain in the
Committee Substitute and make it very difficult to attract new
investment and companies to Alaska, Ms. Moriarty stated.
9:04:47 AM
Will it provide predictability? The only thing that seems to be
predictable, even with this CS, is that the state will
constantly change tax policies regardless of oil price, and
regardless of the economic condition of the industry. Ms.
Moriarty stated that we hear that everyone has to pay something
to solve the state's fiscal crisis. We would ask, what other
industry is being asked to pay, or in our case, pay more when
the state has clearly demonstrated that industry is losing
money?
How will this CS affect Alaska families, businesses and jobs? If
you passed this CS in its current form, Ms. Moriarty said, there
would be less investment by companies, which will result in less
production and job loss. She added that they had heard the
passionate pleas from Alaskans who have already suffered from
the current economic situation on Saturday. Alaska families,
businesses and jobs will continue to be affected in a negative
way. How will this CS affect Alaska families, businesses and
jobs?
Lastly, will this CS provide stability? Ms. Moriarty said they
recognize that many of legislators are looking for ways to fill
the state's budget gap and see increasing taxes on the oil
industry as part of the solution to create a stable environment
for Alaska. But her job is to tell them how the industry will
react to those changing policies. Again, she needs more time to
evaluate the CS, but for now it is bad for Alaska. It is
destined to make the economic situation for the industry even
worse, and when the industry suffers, the state suffers too.
9:06:22 AM
SENATOR COSTELLO thanked her for providing her testimony and
asked if the plan is to do a full review of the CS and then
submit comments in writing.
MS. MORIARTY answered yes, and they will be listening to
testimony from the legislative consultant and department this
afternoon.
9:06:57 AM
SENATOR STEDMAN asked if they opposed a zero severance tax in
Cook Inlet going forward.
MS. MORIARTY answered that Cook Inlet doesn't pay a production
tax now, and they knew the state would be evaluating that in
2022, but they do receive tax credits to help with the high-cost
environment and to encourage investment. If the credits are
removed without paying a production tax, that in effect is a tax
increase. It changes the companies' economics whether there is a
no production tax or not.
SENATOR STEDMAN said he would clarify the question since the CS
is still being digested. Everyone wants a stable tax
environment. After the credits are phased out in 2019 he asked
if AOGA has a position on the zero severance tax structure.
MS. MORIARTY replied that this would take effect on January 1,
2018, so the companies have about 18 months before the dramatic
step down in the credits in 2017 and then they completely go
away. Especially in this price environment, that will not lead
to any increased investment, and drilling will be cut back.
Hopefully the legislature's consultant will look at a range of
prices, because that is really key in this discussion.
Incentivizing investment was the whole point of the credits,
because the Cook Inlet Basin has always been a challenging
economic environment.
MS. MORIARTY said she talked with both of her Cook Inlet
companies this morning and under this proposal even with no
production tax if prices stay the same there will be less
capital expenditures.
9:09:54 AM
SENATOR STEDMAN said no one knows what the price will be in FY18
or FY25, and maybe the policy set today will last only through
the next winter or the winter of 2030. It depends on how stable
the component parts are. If the bill is passed and enacted, in
2025 Cook Inlet wouldn't have a production tax. He didn't know
what the price would be, but it could be $80. He hoped this was
an opportunity to have that conversation with her members and
maybe get more feedback, because not having a severance tax is a
huge policy change for the state.
MS. MORIARTY responded that there has been little to no
production tax in Cook Inlet even during the ELF regime, and it
was designed that way because the Cook Inlet fields are much
smaller and the platforms don't produce as much, but it doesn't
mean the state wasn't benefiting. The state has actually been
collecting more money from Cook Inlet royalties even without a
production tax. So now, they are now focused on how to increase
production whether there is a production tax or not.
9:12:14 AM
REBECCA LOGAN, General Manager, Alaska Support Industry
Alliance, Anchorage, Alaska, said the Alliance started this
legislative session with two legislative priorities: increase
production and pass a sustainable budget. She was disappointed
to be here today recognizing that neither of those things will
happen. She opposed SB 130. She knew when the $4.6 billion
budget came out on March 15 they would get to a point where they
would have to come to the oil industry, because they didn't do
their job on the budget.
Their position on this bill has always been to oppose any
changes to the current tax structure. During the last weeks her
members have very passionately talked about the thousands of
people they have laid off. However, they didn't know how many
workers the state had laid off and thought it was maybe 75.
9:13:55 AM
SENATOR STEDMAN commented that it could be argued in any
legislative session that they hadn't done their job; it depends
on which side of the political aisle you are on or the argument
at the time, or if you are rural, or urban, or whatever. But the
legislature is made up of a cross section of 60 different people
from across the state with different backgrounds. His
impression is that very few members and staff members in the
building recognized that 4 percent floor was not a hard floor
and that credits would swing into it. However, all of the
professional folks in the industry understood that. Also, the
members were rather surprised at the impact of NOL loss stacking
and how it works in conjunction with the floor. And industry has
yet to come forward with a discussion on that. But it hasn't
been until the last couple of weeks that a lot of people in the
building even realized that such an issue existed. He guessed
that one of the pitfalls of rushing any tax legislation through
is a lack of understanding of different price environments the
state would be facing and it leads to substantial instability.
He personally thought that was the root of the issue they are
facing.
MS. LOGAN said legislators are elected to make policy calls, and
being given the information whether it was surprising or not,
they are now in a situation of low oil prices. Everyone in the
this building wants to increase production, so the policy call
they face with the current tax structure is what to do at low
oil prices to not damage the industry. The question is, "Are you
going to put more taxes on an industry that is hemorrhaging?"
SCOTT DAVIS, Alaska Support Industry Alliance, business owner,
Kenai, Alaska, said the Cook Inlet Recovery Act has positively
impacted his community over the last 10 years. They went from
brown outs and not enough gas and shutting down the fertilizer
and LNG plants to talking about reopening Agrium and exporting
LNG. In the last two years, they have watched just from the
price of oil the decrease in activity in their community that
has negatively impacted all businesses there, including his. He
warned against putting any further tax burden on the industry.
He said oil and gas production started on the Kenai Peninsula in
the 50s, so they are well used to these market ups and downs.
They also heard about the positive effect of a favorable tax
structure in listening to the Kenai/Soldotna Chamber of
Commerce. Enstar now has a contract to have enough gas to get
through the next few years, but it's still in the ground. It
still needs investment to be produced.
9:19:12 AM
KATI CAPOZZI, Communications and Project Manager, Resource
Development Council (RDC), Anchorage, Alaska, opposed CSSB
130(RES). She said RDC is a statewide trade association
comprised of individuals and companies from Alaska's oil, gas,
mining, forest productions, fisheries and tourism industries.
They believe the best approach to expand the economy and
generate new revenues for the state is to produce more oil,
attract more tourists, harvest more fish, and mine more
minerals.
She said regarding CSSB 130, raising taxes on companies that are
reporting record losses and are in a negative cash flow is not
sound fiscal policy. It will not increase production down the
TAPS, nor encourage development of new mines; it won't attract
more tourists, and it won't boost investment in the fishing
industry.
Higher taxes in this low price commodity environment will likely
deter investment that means lower state revenues and a weaker
private sector over the long run. Changing the tax structure now
will make a bad situation worse.
MS. CAPOZZI said there is good news: several news outlets
recently announced an increase in year-over-year oil production
during the past 12 months. This is the first increase in
throughput since 2002, which is more proof of the current tax
regime working. Next year's production needs to be even higher
than this year's. The current tax policy brought new
exploration, jobs and continued investment to the state and
stabilized North Slope production and somewhat shielded Alaska
from massive cutbacks that have occurred elsewhere.
She said this bill moves Alaska in the wrong direction. It is
the sixth major tax change in 11 years. RDC members are not
asking for a tax decrease during this time of low commodity
prices, but they do request that as the state considers changes
to tax policy, it does no harm to its largest industry.
9:22:08 AM
SENATOR STEDMAN said it might be beneficial to have DOR do the
analysis to see if there has been an increase in oil production
and if it helps deal with the "minimum tax trap" the state is
in. When he has done that analysis, he found it doesn't help at
all. It puts more production down the pipe, but it doesn't help
the broader issue that the state is facing financially.
9:23:37 AM
CHAIR GIESSEL said she would be happy to pose that question
although she was puzzled by it, since less production means more
engineering issues to solve.
SENATOR STEDMAN clarified that he is not suggesting that
declining production benefits the pipe, but from the state's
financial perspective what the financial implication is within
the tax system of moving barrels of production up. Clearly
having additional production is better than no marginal
increase, but they need to understand the sensitivity the tax
structure is built around. He wouldn't expect to see any benefit
from an increase in production from purely a tax position.
CHAIR GIESSEL rephrased the question: if we see increased
production of 50,000 barrels a day, what are the implications to
the state at different prices: at $60 and $80.
SENATOR STEDMAN said he was thinking more of this price range
and looking at the trigger on the minimum tax.
CHAIR GIESSEL said that her goal is a longer term vision.
DOUGLAS SMITH, CEO, Little Red Services, Houston, Texas, said
they had laid off 35 employees for almost $4 million in annual
payroll and they have idled a number of pieces of equipment.
This is the trend in the overall industry and the Anchorage
community hadn't seen the full impact of the economics yet. You
can't pull this much payroll out of the state and not see
significant trickle-down economic impacts. Taking additional
taxes by hardening the floor or other proposed changes to the
industry will cause an impact.
The longer term implications are that once equipment is idled
and employees are laid off, capacity is lost and as oil prices
recover, there will be a significant delay in response to the
changing market conditions. He urged them to be thoughtful and
to think long term. See what can be done to get through the next
12 - 24 months and see if prices do recover and get out of this
bind without making any significant changes to the current tax
policy. If the new producers who made investments based on the
20 percent reduction at the wellhead are now limited to five
years, those long term investment plans are no longer valid.
They can control tax and regulatory policies, but they can't
control the price of the commodity. Changing tax policy could be
seen as a negative to any kind of approach to a gas project.
9:32:08 AM
BOB HAJDUKOVICH, CEO, Ravn Alaska, Anchorage, Alaska, said they
had $1 million worth of fly-in work to support Caelus Energy
operations and were recently impacted when Caelus stopped work
on the North Slope. They really need that stable tax policy to
be able to move forward.
They also take a global view that businesses like theirs that
serve over 100 communities throughout the state with their 75
aircraft are benefited by the exploration and development phases
of industry while the state clearly benefits from volume flowing
through the pipe. Anything the state can do to keep the
exploration and development going is critical now.
CHAIR GIESSEL, finding no further comments, closed public
testimony on SB 130 and recessed the meeting until 3:30.
9:35:25 AM
Recessed from 9:35 a.m. to 3:30 p.m.
3:30:35 PM
CHAIR GIESSEL called the Senate Resources Committee meeting back
to order at 3:30 p.m. Senators Costello, Coghill, Stedman and
Chair Giessel were present. Senators Wielechowski, Micciche and
Stoltze arrived shortly after. The Chair invited Mr. Mayer to
provide an analysis of the Committee Substitute (CS) for SB 130.
JANAK MAYER, Chairman & Chief Technologist, enalytica,
Legislative Consultant, Washington, D.C., said he would conduct
an impact analysis for CSSB 130 dividing the "high-level"
summary into the North Slope versus Cook Inlet and other parts
of the state.
3:35:06 PM
He said for the North Slope, the CS continues the NOL credits'
ability to reduce taxes below the 4 percent floor (slide 2) and
changes the tax assessment to an annual basis (rather than the
approach taken by the original bill to move part of that to a
monthly basis).
For "new oil," the ability of NOL $5/bbl and small producer
credits to reduce taxes below the 4 percent gross floor and the
annual basis of tax assessment continue. However, key changes
are made: removal of the impact of the Gross Value Reduction
(GVR) in calculating the NOL to ensure 35 percent support for
North Slope spending. At the moment, interaction of these things
can create substantially more than 35 percent support for
spending on the North Slope in certain circumstances. It also
proposes an $85 million per company cap on refundable credits to
protect the state from the major liability that could come from
major new developments. It also proposes a five-year time limit
on the GVR, which enalytica has concerns about.
3:37:21 PM
The Cook Inlet provisions reduce all Cook Inlet credits starting
January 1, 2017 (slide 3): the well lease expenditure (WLE)
credit to 20 percent, qualified capital expenditure (QCE) credit
to 10 percent, and the net operating loss (NOL) credit to 15
percent. And then from January 1, 2018 onward, sunsets all
credits and exempts Cook Inlet from production tax.
The Middle Earth provisions grandfather existing .025 frontier
basin credits until 2022 and phases down the WLE, QCE and NOL
credits, but doesn't eliminate them.
General provisions that apply to both the North Slope and Cook
Inlet:
- 7 percent quarterly compounded interest on delinquent taxes,
but only for three years
- Tighter language for existing liabilities to state from oil
and gas production withheld from refundable tax credits
- Alaska hire is linked to credit refund priority, not amount
- Surety bond ($250K) to protect local creditors
3:38:23 PM
There is a big difference between Cook Inlet and the North Slope
credits (slide 4) Mr. Mayer explained. The majority of
refundable credits go to Cook Inlet producers. However, Cook
Inlet production generates limited direct revenue for the state.
The credits on the North Slope are more limited, but also are a
far smaller fraction of total value generated.
3:39:25 PM
The CS maintains the status quo in terms of not changing either
the minimum tax rate or to further harden the floor (the
original bill said the NOL could not be used to further reduce
tax liability below the 4 percent gross floor). The effective
tax rate under ACES could fall to zero, he explained, because
capital credits were applied after the gross floor. SB 21,
instead, had a similarly progressive tax rate, although slightly
lower, the difference being that just below 10 percent effective
tax rate legacy production would shift over from the net tax
system to the gross tax system, which is highly regressive.
3:42:02 PM
At ease for technical teleconference difficulties.
3:45:00 PM
CHAIR GIESSEL called the meeting back to order at 3:45 p.m.
3:46:14 PM
MR. MAYER said the biggest change for legacy (North Slope)
production was proposed in the original bill and is the question
of hardening of the floor and a gentle raising of it (slide 5).
One credit, the NOL, for legacy production can take one down
below the 4 percent gross floor. The CS maintains the status quo
in allowing the incumbent legacy producer's tax rate to go below
the 4 percent gross floor.
MR. MAYER proceeded to walk through the rationale in thinking
about the tradeoffs and why from a policy perspective this might
be a sensible call to make. He talked before about the effective
tax rates under previous fiscal regimes - under SB 21 and under
the proposed bill. The left chart showed a highly progressive
tax system under ACES where the tax rate could also come down
substantially below what was thought of as the base tax rate of
25 percent, and as prices come down the effective tax rate keeps
coming down to zero. The reason that happens is 20 percent
capital credits under ACES that act as a progressive component
in the system, thus reducing that tax rate down further.
Initially there was also a 4 percent gross floor under the ACES
system, but in reality that 20 percent capital credit could
bring one below that floor, because it was calculated after the
net minimum calculation was done. The impact was that while that
4 percent gross floor existed under statute, in reality it
wasn't binding. The choice made under SB 21 was to substantially
harden that by saying the dollar-per-barrel credit couldn't take
one down below that 4 percent gross floor. So, what one sees
from the chart is that production tax under SB 21 or CSSB 130
essentially maintains the status quo. But a sharp inflection
point happens where the tax switches over from the net to the
gross tax and then suddenly the tax rate rises very steadily.
That happens because gross tax is highly regressive and so as
prices continue to fall, the gross tax takes up steadily more
and more of the net value, until it takes up all of the net
value at around $50, because there is very little net value
remaining.
So, in order to think about what happens below those prices, one
needs a different way of looking at the data, Mr. Mayer
explained. That is on the chart on the right-hand side. Instead
of an effective production tax rate, it simply looks at the
actual amount of tax paid per taxable barrel produced. One sees
the red line of SB 21/CSSB 130 again falling sharply until the
point of just below $80/barrel where the switch from net to
gross tax happens with a sudden inflection at which point the
production tax per taxable barrel falls at a much shallower
rate. Then in the mid-$40s is where, because there is no longer
any profit and in fact companies are actually taking a loss, the
eligible flat NOL credit brings the tax paid per taxable barrel
down further and down to zero.
Obviously a key change that would have been made by the original
bill is both the raising of the floor but also the hardening of
it, meaning the NOL credit can't be taken to reduce against the
floor. In thinking about the tradeoffs here, Mr. Mayer said,
there are a few things that are important to think about. One is
that, by definition, in an environment where a major producer is
eligible for a NOL tax credit, it is a company that is already
making a cash loss. The question is a substantial one as to
whether it is desirable in those circumstances to continue to
levy an infinite tax rate against that producer versus allowing
the tax steadily to fall away, bearing in mind that companies
are still paying large amounts in royalty, and paying well over
100 percent government take on their overall production.
3:52:29 PM
Secondly, and a bigger point even beyond the raising of taxes in
the most difficult environment, it's not clear that the benefit
of that hardening is worth the cost in terms of impact to the
companies' potential future investments, when you consider that
really this is about needing state revenue from the future for
the present rather than actually increasing total revenue. That
is to say if a company is accruing a net operating loss credit,
simply saying that that credit cannot be taken against the
floor, means that credit is accrued and its value continues over
time. In other words that just means that the credit the company
needs to take as a deduction is against future revenue rather
than taking it at the moment against their current revenue. For
the state it means taking a little bit more in revenue at the
moment but correspondingly be taking less in revenue in the
future. Those are the real questions to ask about that dynamic.
This also means that as prices rise, those credits still need to
be paid out. That creates an environment where prices have risen
substantially, but state revenue hasn't accordingly, because it
is now effectively paying back that revenue it took from the
future to the present, because all the credits built up in the
system. The question is about whether the cost of that kind of
move is actually worth the benefits.
3:54:53 PM
SENATOR MICCICHE said that hardening the floor seems like the
best decision for the state at this time and it is not
intuitive, and asked if companies have the ability to apply
their tax liability right now or later.
MR. MAYER answered that ultimately those deductions can be
carried forward under Alaska's system. In that sense all the 4
percent gross floor does is to say you have these expenses and
you can no longer deduct them this year against your income,
because that would take you below the floor. By doing that, the
state is simply pushing those expenses into future years.
3:58:19 PM
He said one of the other changes proposed under the original
bill, though not adopted in the CS, is the question of annual
versus monthly tax calculations. Director Alper has talked about
this as "migrating credits," but enalytica thinks it is much
clearer to think about this as annual versus monthly
calculations and slide 6 shows how that works. Keeping annual
calculation avoids a tax hike. He explained how the gross
minimum tax may apply to some months, while the annual
calculation remains net profit-based. In his 2014 example,
enforcing a monthly gross minimum would have netted the state an
additional $100 million.
4:00:33 PM
MR. MAYER said some key things in the bill are substantial
changes and need addressing; other changes seem to be more
"salami slice" revenue-raising tactics that from an investor's
perspective, are actually quite chilling, because it's not clear
where the incremental raises stop and how there can be any
certainty that this really is a solid and unchanging tax system.
4:01:08 PM
CHAIR GIESSEL explained for clarity, that he articulated on
slide 5 that the CS does not harden the floor. It maintains SB
21. And he just said on slide 6 that the CS does not go to
monthly tax calculations and maintains the present annual
calculation.
MR. MAYER said that was correct.
4:01:47 PM
He said slide 7 looks at how the changes impact new North Slope
development. To do that they looked at a reasonably accurate
model of sample North Slope investment (not any particular
investment): cumulative CAPEX and DRILEX of $1.3 billion and
average annual OPEX of $15 billion to produce a total of around
20 million barrels of oil at a peak production rate of 20,000
barrels a day drilled over eight years. This process builds up a
realistic cash flow of recent investments.
MR. MAYER explained the first thing was timing of cash flows
that include: CAPEX, drilling costs, OPEX, and government take.
For the first couple of years in the project the impact of the
credits is negative. One sees three years of initial up front
capital spending of close to $100 million on drilling pads and
pipelines facilities before drilling actually begins and several
years of ongoing drilling long after production has actually
started. This means because there is substantial ongoing
spending through those years you can see the government take
gets substantially bigger after seven or eight years of
production once drilling finally stops. That is where the bulk
of government take, but through the net profit tax, actually
occurs. Taxes up until that point where sustained drilling is no
longer happening are relatively a much smaller piece of the
picture. That timing of cash flows is crucial in understanding
one of the changes in the CS, which is the question of limiting
the timing application of the GVR. Leading to slide 8.
4:04:53 PM
He explained that the CS places a five-year time limit on the
GVR (slide 8), and that can have a major impact on the value of
a project such as this one or any North Slope projects that are
the status quo of this model (20 percent GVR). The X axis looks
at different possible lengths in years of a limit on the
currently non-time limited GVR. The Y axis looks at percent of
the current value of the project measured in terms of net
present value (NPV) over time of all the cash flows and what
percent would be taken away by placing some sort of limit in
years on the GVR. One sees quite intuitively that as the length
of that limit increases, the amount of value that is taken away
by having that limit decreases. So, in all these cases, for
instance, by the time a 15-year limit on the GVR is reached, it
has very little impact on overall project economics. One could
do that very easily and not be saying to current producers who
have made sanctioned decisions based on GVR economics that a
major substantive change is being made.
As the limit in time periods in years get shorter, that impact
on the net present value of a project gets much greater and is
greatest at low prices, because a project like this is
essentially marginal at $50/barrel oil. So, if one were to
eliminate the GVR that is the same as saying there is a zero
year limit on the GVR, that actually wipes out all the value of
the project at that price. Assuming the $50 level applies for
the entire lifespan of this project, a five-year limit wipes out
more than half of the total value of that project. At higher
prices, the impact is less, but it is still substantial. For
instance, at $100/barrel they are still talking about 20 percent
of the net present value taken off a project by a five-year
limit. Whereas a 10-year or greater limit has much reduced
impact on the project. The key reason why it's so great at those
short time limits versus the later ones is because the project
has substantial drilling costs in the first five years (and
isn't paying production tax), and that 5 to 10-year window is
actually where a lot of the production tax liability occurs, and
therefore, where a lot of the value to the company in a GVR
exists. So, Mr. Mayer cautioned against a short limit, because
it would have "quite disruptive impacts" in terms of the value
of these projects to investors that have already made these
decisions.
4:08:39 PM
SENATOR WIELECHOWSKI asked if he had the NPV for a project at
these various prices.
MR. MAYER answered that he could go back to some of his
calculations and get those for him. At $60/barrel for this
project under the status quo they are talking about $50 million
net present value (NPV) going up to over $1 billion north of
$135/barrel.
SENATOR WIELECHOWSKI asked if he used an NPV of $10.
MR. MAYER answered yes.
SENATOR WIELECHOWSKI asked if he had those numbers broken down
at $60, $70, $80, $90, and $100/barrel and if the NPV was before
the GVR or for the total project value.
MR. MAYER answered this has been a status quo project assuming a
20 percent GVR. So, just over $55 at $60/barrel, $184 at
$70/barrel, $310 at $80/barrel, $556 at $100/barrel, and just
under $800 at $120/barrel.
4:11:05 PM
Slide 9 graphed hardening the floor for new oil subject to the
GVR. Mr. Mayer wanted to show total government take over a
project life-cycle, both for status quo and under the CS versus
under the original bill. The different components are royalty,
oil tax, production tax, and state and federal corporate income
tax. In almost all cases except when one gets to very low
prices, those add up to the black dashed line, which is
government take, and that is below the sum of the bars at low
oil prices. The production tax is effectively negative at those
prices. If one assumes that oil prices for the entire life cycle
of this project were $40, $50, or $60/barrel, that means a
certain amount is being paid upfront either though the tax
system or through reimbursed NOL credits and at the tail-end of
this project, revenues occur through profit-based production
tax. At the lowest prices, the value of the credits is greater
than the value of the taxes. Once one reaches above $60 or
$70/barrel world, the value of the subsequent taxes is
substantially greater than the value of the credits and gets
greater as prices rise.
But even though production taxes are effectively negative to the
state below $50/barrel, Mr. Mayer said, one has to remember that
the impact of the other components of this fiscal regime, in
particular the substantial and regressive royalty, is such that
one can see the design of the status quo system is to give
overall government take for new projects between 60 and 55
percent neutral over a very broad price range. But at the lowest
prices that government take still starts to rise and gets up to
just under 100 percent at $40/barrel and gets even higher at
lower prices. That simply is the effect of the royalty.
So, hardening the floor in terms of what can be deducted against
those credits reduces (in the world of the original bill) the
stakes to a negative production tax position. In those cases it
also means you are simply getting to that regressive portion of
the curve driven by the royalty sooner and harder; it's no
longer quite as flat and neutral across the broader range of
prices as might otherwise be the case. So, at $40/barrel
government takes goes to 130-140 percent.
For new production the aim was to have an overall neutral
regime, taking into account the effect both of the production
tax and the royalty, and all these components across a wide
range of prices. Understand that in terms of not making that
change, one is simply saying this is still a regressive system
and government take still gets up to 100 percent at current
prices, and "we just don't want to take that even further."
4:14:55 PM
SENATOR WIELECHOWSKI asked if any other states have an even more
regressive tax structure at current prices.
MR. MAYER answered there are many; the vast majority of states
in the U.S. are a gross tax system. In that sense, places like
North Dakota do not look like they were investment environments
at current prices in many regards. There is also a balancing
act to be performed. Alaska is unique in the U.S., in this
context, in having a net profits system. It's a system that
could potentially be neutral or progressive and take
substantially more of the value at higher prices. One can be
better protected on the down side through the royalty, through
parts of the gross minimum tax, than one might be with a pure
net profits tax. And one can take more through a net profit tax
than one would through a regressive system of royalties and
gross severance taxes, but you can't try to do both: be Norway
and North Dakota.
4:16:25 PM
Slide 10 deals with what, for the administration, is a genuine
issue that the CS addresses, as the original bill did, the
question of the ability of an NOL credit to actually be worth
more than 35 percent of an actual loss, because of its
interaction with the GVR. The table on slide 10 shows how the
calculations work. The core thing to realize is that under SB
21, the status quo, what would otherwise be $6 dollars in
production tax value is assessed as negative $6/barrel, and at
$40/barrel it is a loss of twice as big as that. Mr. Mayer
explained that the reason it is twice as big is "the fiction of
reduced revenue that is created to allow a lower tax rate
without ring-fencing costs."
MR. MAYER explained that because the statute has the NOL
calculated on that inflated loss instead of the 35 percent net
credit against an actual NOL, his example has 70 percent support
for government spending. The difference comes when the NOL
credit is calculated including the effect of the GVR or not and
this comes particularly prominent at low oil prices. The
difference can be up to $10 million for his example project, in
particular, between the years 8 and 10 when the project is
actually making a profit. The difference between those two
things is credits are being paid out - the project is actually
in positive cash flow status - but once the GVR is assessed, it
appears as though it's making a loss. So, the effect of the CS
is to say this doesn't seem like what was intended under SB 21
and addresses that.
CHAIR GIESSEL said she thought she saw a typographical error.
Looking at the chart of numbers on the left hand side he has SB
21 GVR and the next column says HB 247.
MR. MAYER apologized for the error and said those should be the
original SB 130 as well as CSSB 130.
He continued that slide 11 concerned the refund limits. The key
thing to understand is that any sort of binding refund-ability
limit tighter than the amounts actually being claimed by
companies has an impact in terms of the amount of capital those
companies need to build a project and on rates of return they
receive. The chart on the left looks at cumulative cash flow
over time for a $1.3 billion project, but it probably only takes
$300-$400 million to build. This is due to a combination of
things: one being that many of drilling costs are incurred after
the start of production. So, all that the project needs is to
get to a point where the cumulative cash flow is at its lowest
level and from that point forward, this project is self-
sustaining. So, the difference between the two lines in the
graph was the question of how much of the NOL tax credit can be
refunded. To the extent that it is paid out by the treasury
means that substantially less capital is required by these
companies to build a project.
So, if a company goes into a project like this looking at the
letter of law as it stands now thinking it can be built for $350
million, the original bill has a $25 million limit, assuming
this project is being built by a company with no other projects
claiming an NOL credit, that probably increases the amount of
capital required to somewhere over $400 million.
4:22:01 PM
Several companies one can think of now have other projects in
their portfolios that are also in NOL territory still. For a
company like that the impact could be in many cases actually
close to $500-550 million of total capital required to build
this project. So, the key here is the impact on projects that
have already been sanctioned and are currently under way, where
if one were to place a strict limit particularly as the original
bill did, in the middle of this year, they are essentially
saying to these companies you thought you needed $350 million
and you now need 50 percent more than that, and also by the way
your internal rate of return (IRR) has gone substantially down
(chart on the right of slide 11). They have to tell that to
their financiers, and that will not be an easy conversation.
On the other hand, Mr. Mayer explained, protecting the state
against potential credit outlays is a valid action. And the
question remains what a near Kuparuk-sized new development could
look like and that could mean more than $2 billion in credits
over the three or four years of development before the start of
production. It still is a hard argument to ask for more money.
4:24:29 PM
MR. MAYER said the question is if $85 million could work for
companies that have already started their projects or whether
that starts to seriously challenge their current capital plans.
If it does, the question becomes is the difference between $85
million and of $100 million worth the impact of that investment
or not. It makes a lot of sense as a limit in terms of trying to
protect the state against the environment where there are
multiple hundreds of millions of dollars a year to a single
company for a major new development on the scale that hasn't
been seen recently.
4:25:02 PM
Slide 12 considered Cook Inlet changes and their impacts. There
are currently three credits in Cook Inlet: the 25 percent NOL
credit for carried-forward annual loss, stackable with either,
the 20 percent QCE credit for all qualified capital lease
expenditures, or the 40 percent WLE credit for well-related
capital lease expenditures.
MR. MAYER said the 25 percent NOL credits for Cook Inlet are
very different than the operating loss credits on the North
Slope, because there is no corresponding production tax on oil
and only a very small production tax on gas in Cook Inlet. In
addition, that can be stacked with either a 20 percent qualified
capital spending credit or suspending well-related, intangible,
drilling costs up to 40 percent credit, and if one is eligible
for the NOL credit with minimal to no taxes.
Under the CS those numbers would be roughly halved down to 15,
10, and 20 percent respectively in 2017 and sunset from 2018
onwards and there would be no production tax in Cook Inlet from
2018 onwards. There would be a shift to a low government-take,
free market approach that says we're not going to look to this
as a source of tax revenue and it is not the place for the very
substantial subsidies that have occurred so far.
4:27:00 PM
MR. MAYER said the high level impacts of those things,
particularly for ongoing drilling in mature fields and new
projects where very substantial additional demand over and above
what exists in Cook Inlet at the moment, could still work in the
Cook Inlet with no credits at all. The one crucial question
where no taxes can be seen as an attractive regime is if it is
generally seen by players in the market as durable. So far, one
of the key rolls of the credits, particularly in recent years,
is to say people don't really know what the future of this
regime looks like from 2017, and from 2018 onwards things start
to look blurry, but at least there are credits. So the payback
times are very short. For a regime with no credits but also no
taxes that can be a very good regime, but it needs to be seen as
lasting for the next decade and well beyond. If that isn't the
case, the conclusions around attractiveness start to look very
different.
4:27:48 PM
SENATOR STEDMAN said the "free market approach" was "kind of a
twist," because a free market lacks a lot of government
intervention and he didn't see how a zero tax definition could
be a free market approach.
MR. MAYER responded, "All of these things are relative." The
current approach in Cook Inlet is one of very strong state
intervention through a high level of subsidy of investment.
In terms of achieving the state's aims there, there are a number
of tools it can use. One is the fiscal lever which the state
leans most heavily on at the moment; another is the question of
prices which are high and fairly regulated at the moment, and
the third is the question of effective market regulation to try
to create a more competitive market (probably the most
neglected).
The approach of the CS says from 2018 onwards the consent decree
goes away, no major spending, no major subsidy, but also this
isn't going to be a major source of tax revenue. In that sense,
it's a fiscal system that looks not unlike large parts of the
federal offshore, which also has a low fixed royalty which doles
revenues to the state that are seen as highly attractive fiscal
regimes, because they have a low level of overall government
take.
4:30:25 PM
SENATOR WIELECHOWSKI said Cook Inlet had low taxes for years at
very low prices of $1 to $3 and very little subsidies, and a
huge amount of gas, but in the late 90s the situation changed.
Then the state started doing more subsidies in the form of tax
credits while the tax remained at zero. He asked if Mr. Mayer
had every done an analysis to figure out what really impacted
Cook Inlet: the prices, which are among the highest in the
country, or the subsidies?
MR. MAYER answered enalytica had looked at the available
historical data last week and presented more detailed versions
of that to other committees, but broadly speaking, they
concluded a lot of things were happening at the same time in
Cook Inlet over the last 5 to 10 years. On one hand, there was
the natural evolution of the basis; one or two established
players focused on the area back in the day and now after many
years of steady decline, no longer a material basin for them and
for whom an exit at some point was going to be natural. Relative
to the Lower 48 there were some of the lowest gas prices in the
country at the time when the Henry Hub was at an all-time high,
very different than at the moment. He thought the natural cycle
of both bringing in new companies that were interested in
rejuvenating the basin combined with a move to higher pricing
was always going to have some substantial effect. And a lot of
the effect they have seen has to do with those two things.
Now clearly at the time there was a great deal of concern about
where the situation was headed and throwing credits into the mix
substantially accelerated that transition. It made it much
easier to bring in the companies that eventually came to achieve
a lot of that turnaround. It is very difficult to pick apart how
much of that was due to the credits and how much was due to the
fundamental changes going on in the basin. One has to conclude
it's about all these things in combination, and when one looks
purely at the economics for things like ongoing drilling in the
mature fields, it's hard to see that, particularly at these
prices in Cook Inlet, that it is not a desirable activity to
continue even without credits.
4:34:26 PM
MR. MAYER said slide 13 presented three models of hypothetical
projects based on assumptions around real things they have seen
in the last couple of years in the Cook Inlet. The first
scenario was a market constrained one: a completely new
development - though not additional drilling in mature fields -
but for the sorts of things seen recently like new resources
trying to be brought to market with old gas projects. The reason
they are looking particularly at gas projects is that they want
to understand what is involved in achieving security of gas
supply in Cook Inlet on an ongoing basis if the idea is to have
that degree of support
He said the big challenge for a project like this is to say this
is really a project that is sized to produce much more gas -
over 100 mmcf/day - and so one is spending hundreds of millions
of dollars on facilities, pipeline, platforms, and all the rest
(and one has seen these sorts of amounts of cash to produce in a
facility with that sort of capacity in at least one place in the
Cook Inlet). But in facing a fundamentally constrained market,
that means there is only a very small wedge of incremental
demand that can be supplied, and the economics of a project like
that look enormously challenged. And they look enormously
challenged even with the very generous 45 to 65 percent support
credits that have existed in the Cook Inlet so far. The project
in this model drills only a handful of wells over the course of
a decade starting off producing about 18 mmcf/day of gas,
getting up to maybe 40 mmcf/day well into the next decade.
Having made that big upfront investment makes the economics very
strained.
4:36:40 PM
MR. MAYER explained that the status quo for a project like this
in Cook Inlet on slide 14 means that because of the big amount
of cash the state is providing, if they look at net present
values across a wide range of prices from $5 to $10/mcf, the
state is net negative in all of those environments. The company
is maybe just positive sort of above $7/mcf and there are rates
of return (ROR) that might be just bearable, but don't look very
attractive, and one sees the lowest of government takes of
anywhere in the world in around the 40 percent range.
Under SB 130 in its original form that change is substantially
where there is only the 25 percent NOL credit and none of the
qualified capital or well lease expenditure credits. There is
substantially higher government take, a situation where the
state may be net negative, but at least at higher prices is
possibly net positive. So, the overall risk equation between the
company and the state seems a little better balanced, though of
course, the project is that much further challenged in terms of
ROR and whether it is actually a favorable project to produce at
these prices.
MR. MAYER explained that the cost assumptions he is using are
based on projects they have seen recently in the area, though
undertaken at a time when worldwide competition for resources
meant the costs were very high, and those costs are coming down
to a point that it might be feasible to start to think about
undertaking a project like this in a way that these figures
don't accurately capture. What they see at the moment is that
under the cost structure that has existed until now, projects
like this are very challenged even with the credits. What the
credits meant was that the state was in a strongly negative
position and they made something like this maybe just bearable
to do.
4:38:51 PM
Slide 15 showed the results if instead there were an
unconstrained demand environment, a very different situation
from what exists in Cook Inlet today, but one that has a
substantial export customer, for instance, or another major
source of demand that doesn't exist at the moment. The economics
of a project like this would look very different, and
fundamentally it's this rather than anything else that
determines whether a project like this can really work. This
project has exactly the same initial facilities capital
investment, but an optimal drilling program that instead of
drilling just four wells over the course of a decade, drills
around three wells a year for the first three years and then a
lower level of drilling every year after to maintain the
plateau. In the case of around 140 mmcf/day of gas the cash
flows look much more like what one might expect from this sort
of gas project and much healthier economics as a result.
The graph on slide 16 represented a status quo company, an SB
130 NOL only company and a CSSB 130 no credits company. In the
first company, the federal government and the state are all in
positive territory, although the state is by far the worse off
of the three, because of the very low level of government take
(50 percent) and quite attractive ROR. The relative position of
the state under SB 130 or the CS improves substantially and the
position of the company deteriorates substantially, but in terms
of internal ROR even in an environment with no credits it seems
possible, particularly if one could reduce some of the costs,
that projects like this could go ahead if they just had access
to the end gas market that they need. Constrained demand is
overwhelmingly the problem for a project like this and not the
credits, particularly if some of the producers that might be
capable of additional projects like this at the moment can get
their existing investments to a point of self-sustainability on
a cash flow front.
4:41:06 PM
MR. MAYER said slide 17 looks at the question of ongoing
drilling in mature fields assuming similar drilling costs to the
first constrained example and similarly drilling for the four
wells over the period of a decade. There is less well
productivity, because they are drilling in mature fields, but
looking at what the cash flow economics look like. The big
difference here is that no big facilities need to be built to
enable the work to occur.
4:41:37 PM
Slide 18 has two columns, because the original SB 130 and the CS
fundamentally look the same: under the original bill the only
credit was the NOL credit and companies that have mature
existing fields producing are by and large not eligible for that
and so the impact looks the same on them as the governor's
original bill did. One sees very high internal ROR for
investments in mature fields under the status quo with a high
level of state support. If one thought this was a stable regime
that would continue well into the future, with no production tax
and no credits, it still looks very attractive in terms of
undertaking this work on an ongoing basis provided one genuinely
believes that it is a stable regime that isn't going to change
in the future.
MR. MAYER said that concluded his analysis.
4:42:49 PM
SENATOR WIELECHOWSKI asked him to put together a chart that has
the investment metrics: government take and internal investor
ROR, for the GVR.
MR. MAYER replied that he would.
4:43:29 PM
CORRI FEIGE, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), Anchorage, Alaska, said she would make
some general observations about impacts to activity levels she
could perceive through the CS as well as look at data capture to
the NDR. She said the CS takes a step forward in trying to find
a reasonable balance between the state outlay against trying to
maintain a healthy investment climate, which will support
continued exploration and development activities in the state.
MS. FEIGE said that DNR deals with this type of legislation in
two ways: first and most directly is through the data that is
captured by DNR through the existing credit program and
exploration incentive credits, and secondly would be simply
through activity level and the pace at which oil and gas
exploration and development work is taking place in the state.
To look first at credit data with the roll back and the phase
out of all of the - especially in Cook Inlet - credits (NOL,
QCE, WLE) and the coinciding sunset of the exploration incentive
credits, would roll up into a net impact to DNR of just simply
not having as much data available that would go public.
She said she had spoken at length previously about the seismic
data and some of the expanded downhole data sets that become
available for public distribution through some of the incentive
credit programs. All of that being said, the division would
still be able to capture all the data it needs to continue doing
its job. Well data would be able to be made public in a
continuing fashion as it is done now through the Alaska Oil and
Gas Conservation Commission (AOGCC).
4:47:01 PM
On the topic of activity levels around the state, she said Cook
Inlet with the phase out of the credits and reduction of the
other credits to zero and the removal of all production taxes is
an interesting thing to contemplate. She agreed with enalytica
that in the long term a significant downturn would not be seen,
but in the near term, especially with those projects that are
currently in active drilling and development phases - most
notably BlueCrest at the Cosmo development and Furie at the
Kitchen Lights Unit - they would see a time period over the next
couple of years where those companies work very diligently to do
as much as they can while the other Cook Inlet credits still
exist. Then there would be a retooling period with their
financing. Those kinds of changes clearly would be material to
their financing moving forward. Both of those companies are
working now at securing their finance for the next two to three
of their activities. She would expect to hear from them about
amendments to the pace of that activity through their plans of
operation and development for those specific units.
Over the long haul, Ms. Feige said, that zero production tax
really does try to balance Cook Inlet against the North Slope in
terms of state outlay and recognizes that Cook Inlet is a
different market. It is the source of energy for the majority of
the population in Alaska.
Looking at other areas of the state - Middle Earth, for example
- with the reduction in support level that the CS provides, she
would expect to see a slowdown in activity levels. Although
exploration success in the activities they will see in the next
year could be a game changer. With that comes the ability to
find capital and find additional partners. She didn't think the
slowdown would be catastrophic.
4:50:12 PM
She said she was glad enalytica took the time to walk through
the phase out of the GVR over five years, because DNR would
"absolutely concur" that the five years even out to 10 years
would be too short. Fifteen would have nearly no impact to the
value of the project, and that is important especially in terms
of keeping ongoing very large developments coming down the pipe
on the North Slope moving ahead.
4:50:59 PM
MS. FEIGE said DNR has concerns with the type of bonding in
section 44 of the new CS being placed in a bill like this. DNR
bonds regularly for impacts from activities that are associated
with the oil and gas exploration and development work, but for
the state to step in and tie up capital in what may or may not
be an accurate number at the $250,000, raises some questions.
They wonder about the mechanics of how that program might work.
In some discussions around the table and with bankruptcy
attorneys the take away was there were probably better vehicles
through workman liens and other means that small party
contractors could protect themselves more effectively. The state
could build stronger protections through expanding statutory
liens rather than through a bond program associated with tax
credit refunds.
SENATOR WIELECHOWSKI asked if DNR supports removal of hardening
the floor.
MS. FEIGE replied they didn't discuss that specifically; they
paid more attention to what DNR's interaction with this type of
legislation is. They very much applaud the balance the CS
attempts to take.
SENATOR WIELECHOWSKI asked if she speaks for the Walker
administration and if DNR supports the CS as it stands.
MS. FEIGE answered that she can only speak for herself,
personally, and not Commissioner Rutherford and she felt the CS
is taking a step in the right direction.
4:54:20 PM
SENATOR MICCICHE asked if the change is from people who are
borrowing on a guarantee of state credit to folks that require a
lot more access to capital or other sources of security and how
the removal of credits wouldn't result in a downturn during that
vulnerable stage of exploration and development.
MS. FEIGE replied that she anticipates a retooling period and
that as the credits phase themselves to zero, they will probably
see a flurry of activities while they still exist. In that two-
year period they would see a lot of activity on the financing
front, knowing that as they move forward there will be a zero
tax regime on the backside. She sees a slowdown in activity
while the retooling takes place, and that would impact the
smaller companies more and those that have less depth of
capital, but she also thought that smaller companies would join
forces to pool capital on good looking prospects.
4:57:21 PM
SENATOR WIELECHOWSKI asked if she expected the amount the state
has to pay out in credits in the next few years to increase in
Cook Inlet.
MS. FEIGE answered if companies are actively drilling, it stands
to reason that they will do as much in the two remaining years
as they possibly could. However, with the levels at which the
credits are stepping down, essentially being halved over the
next couple of years, the net outcome given what is drill-ready
today, in Cook Inlet would be about a draw, if not a little less
in their projection.
4:58:23 PM
SENATOR WIELECHOWSKI asked if she supported removal of the
confidentiality provisions.
MS. FEIGE replied that DNR does not deal with those
confidentiality provisions and she has no position on that.
4:58:59 PM
RANDALL HOFFBECK, Commissioner, Department of Revenue (DOR),
Anchorage, Alaska, said he had to get to another meeting and
that Mr. Alper would provide a comparison of the tax credit
bills.
KEN ALPER, Director, Tax Division* Department of Revenue (DOR),
Anchorage, Alaska, said he had a side-by-side comparison and a
granular fiscal note table with different line item components.
He also would provide the current version of the companion bill
that is in the other body. Mr. Alper said he saw this bill last
night and today he embarked upon a modeling exercise to come up
with fiscal note numbers. Frankly, he expected the totals to be
larger than what was in the bottom line number. The FY18 impact
is about $55 million and perhaps $80 million in FY19.
MR. ALPER said it was an effort to keep the four bill versions
straight and in many ways the most straight forward comparison
is the House Resources CS that had two major changes to current
law: the ramp down to a lesser extent of the Cook Inlet tax
credits as well as resolving the GVR net operating loss (NOL)
interaction that Mr. Mayer talked about on the North Slope.
Going forward from that point the Senate Resources CS has a more
aggressive Cook Inlet credit reduction with the taxes and
credits all going to zero in 2018. Then "the graduation" of the
new oil to become old oil after five years of production. The
fiscal note (line 6) has it showing up as incremental revenue
beginning in FY21 when the first of the fields that are
currently enjoying the GVR on the North Slope will start to pay
taxes effectively at the full rate. Compared to the Resources
version that has the stepped down Cook Inlet credits, the full
removal of Cook Inlet credits doesn't actually show up in the
fiscal note until FY20. It seems counterintuitive, but there is
a natural time lag between company spending and the state
spending.
He explained that the repeal of all these credits that are based
effectively on companies spending money or showing an operating
loss in calendar year 2018 doesn't really get applied for to the
state until that company files its 2018 taxes for which the true
up payment is due in late March of 2019. By the time his staff
reviews those applications - it is about 120 day turnaround -
and issues credit certificates it would be July 2019. They get
refunded within several weeks of that point. Once they are in
July 2019, it's really an FY20 expenditure for the great bulk of
the credits that might be earned by spending money in calendar
year 2018.
Unfortunately, Mr. Alper said, the side-by-side document on the
screen was provided based on an earlier version of the bill. He
used the metric on the bottom for the fiscal impact in FY19 and
FY18 whereas the CS really kicks in in FY20. So there is a
dramatically larger impact in the FY 20/21 columns compared to
the House Resources version.
5:04:29 PM
Starting from there the main changes from the House Finance
version is the hardened floor. They did the 2 percent hardening
of the floor against many credits including the NOL. That change
alone is worth about $100 million in incremental revenue that is
to a certain extent just a delay. When you increase the minimum
tax payments without allowing the NOLs to be used against them
means you are increasing the NOL carry forward, which aren't
being reduced by offsetting a tax. Instead they carry forward to
a future year where they will be offsetting a tax.
MR. ALPER explained that the idea of a carried forward NOL for
nonrefundable NOLs from major producers is a relatively new
phenomenon. It was not part of their prior analysis and it was
not seen in material amounts until they had already produced the
spring revenue forecast in the later part of March, about three
weeks ago. It is a new thing and they are endeavoring to keep it
as a tracked number on all the comparison analysis with this
bill, because every one of them in addition to affecting the
state's revenue is also affecting the state's future liability
for the carry forward credits. It is an important metric.
MR. ALPER also adjusted a statement by Mr. Mayer when he said
that the hardening of the floor moves all of that liability to
the future; he would say it moves most of it to the future. Some
of the incremental revenue from hardening the minimum tax was
related to the new oil that currently gets the GVR, and that
$5/barrel credit can be used to reduce taxes below the minimum
tax to zero. Bringing that oil under the minimum tax is true
revenue and not deferred revenue through future NOLs. These are
the great bulk of the dollar containing provisions of the CS
before them.
5:06:48 PM
Some of the secondary provisions that are important are the 7
percent interest rate for three years and then no interest
beyond that. He has watched that language evolve as the bill has
been in various committees and he appreciates the concern about
audit delays which the department is working on correcting. By
next year it should be better. He also understood the desire to
ramp down interest in some way, and that makes sense after a
fixed period of time. The House Finance version reverts to
simple interest after a number of years and this version reverts
to no interest.
He wanted to clarify that there might be a concern because of
the way the effective dates work. Right now there are very low
interest rates. There is a 3 percent rate in current statute and
as this bill kicks in, there is some concern that that 3 percent
interest will drop down to zero on the three-year old audits
immediately and there won't be any period of the higher
interest. However, that could be fixed through transition
language.
5:08:20 PM
He raised another question regarding inconsistencies in the
presentation and what he saw in the actual bill and the draft
version of the side-by-side the chair put on the table last
night. The extension of the Middle Earth exploration credits
references the year 2022 and that is the year in which the
Middle Earth traditional exploration credit has already been
extended to through prior legislative action. Whereas those
credits are sunsetting in the rest of the state: Cook Inlet and
the North Slope this July. What is in the physical language of
the bill is an extension of the frontier basin super credit, the
80 percent credit, and that is not a long term extension. It is
a very limited extension of a well that is in progress that has
been spudded by July 1 of this year. The way the bill is
written, section 25 says the rest of that well can be completed
and still enjoy the full 80 percent credit, but there is no
language extending the frontier basin-specific credits to 2022
right now and he wanted to make sure that was the intent.
CHAIR GIESSEL responded that the intent was there would be no
new entrants into that tax credit.
MR. ALPER said it is a major policy decision to go to zero tax
long term in Cook Inlet, and the degree to which industry will
treat that as a durable tax has an impact on the degree to which
it's going to be valuable in encouraging and incentivizing
behavior.
He said they should be aware that the state has revenue from
Cook Inlet built into its forecast. It's not large, but it is an
increasing number. If the oil tax, which is tied to the economic
limit factor (ELF) is zero, but the gas tax is $.17 for around
100 bcf/year with the utility demand in Anchorage being in the
80-90 bcf range and some small amount still exported, that tax
represents about $17 million in revenue. However, the state
doesn't get that much, because most of that production is
currently eligible to receive the small producer credit.
MR. ALPER said they should be aware that, because of the slow
sunset of the small producer credit beginning in a year or so,
Cook Inlet gas revenue will be seen under current law, at a
number ramping up towards about $17 million, as the small
producer credit falls away and then finally, in 2022, he
estimates $100-125 million in oil and gas production tax revenue
from Cook Inlet. That number is probably unrealistically high,
because it refers to the underlying tax regime (the 35 percent
net tax without any per barrel or per mcf credits). Were there
to be a tax system that worked its way through a future
legislature, it would probably come in somewhere between zero
and $125 million, but in analyzing this bill long term, he had
to take that $125 million off the board in the distant out-years
because of the zero tax.
5:11:58 PM
Another possible unforeseen circumstance tied to the Cook Inlet
gas cap is the language in AS 43.55.011(o), the so-called gas
used in state (GUIS) tax cap, which is at the same rate. That is
being repealed along with the Cook Inlet caps. That will impact
certain gas that is sold commercially on the North Slope (gas
sold to TAPS for pump stations and operations and gas that is
used within the utility systems in Barrow, which has utility
gas). The gas that is actually used in field is tax free and
that is a specific exemption in statute, not a problem, but the
gas that is sold will likely have some sort of tax impact that
he was not able to model in the time allowed. That is in the
fiscal note indeterminate line.
MR. ALPER said the North Slope gas tax system is not fully
developed. SB 21 was written around oil and the 35 percent rate
is the rate on everything that goes to a 13 percent gross tax on
gas in 2022, a provision in SB 138 (the AKLNG bill), but they
might need to contemplate what the treatment of that gas used in
state might be between now and 2022.
5:13:28 PM
SENATOR WIELECHOWSKI asked if the Governor supports this
version.
MR. ALPER said he wouldn't guess; Governor Walker's official
position is that he supports the original version of the bill as
he introduced it.
CHAIR GIESSEL stated that at 5:30 yesterday she and other Senate
leadership met with the Governor and presented the bill to him.
5:14:49 PM
SENATOR WIELECHOWSKI asked if it's fair to observe that by
removing the hardening of the floor and the fact that there are
no significant credits being taken by the "big three," that the
major producers on the North Slope are "left virtually
unscathed" by this version of the legislation.
MR. ALPER responded that he tried to break out the impact of the
bill at various segments in previous presentations. The major
producers for the most part are out of Cook Inlet now. So,
obviously the Cook Inlet changes are relatively insignificant to
them. The North Slope changes are tied primarily to new oil
(the GVR and the NOL issue) and now the sunset of the GVR. So,
it is fair to say that the legacy producers and the currently
producing major fields are not substantially impacted by any of
the changes in the bill as it stands in this CS.
5:15:51 PM
SENATOR STOLTZE asked what Mr. Alper would advise the governor:
this bill, HB 247 or no bill.
MR. ALPER replied that he hadn't thought that question through.
He knows the Governor wants a bill and sees the need for credit
reform. Either of the bills is an improvement over the status
quo, both in the fact that it helps the state's fiscal picture,
although to a far smaller degree than he originally proposed, as
well as several of the technical issues and concerns with how SB
21 was performing due to the unforeseen circumstance of low
prices. Those have been surviving in all the various versions of
the bill and it would be unfortunate if those were lost
outright, which would happen if there was no bill.
He said the biggest "X factor" that has entered the conversation
since the bill was introduced is the idea of rolling forward of
the major producers' NOLs. The department is still digesting the
meaning of it and is not comfortable knowing about the $677
million in future liability when effectively the state will not
be receiving taxes, even after the price of oil goes up. They
just don't know how to handle that at this point.
5:18:14 PM
SENATOR COSTELLO said the fiscal note says it does not include
the revenue impacts from potential changes in investment, and
she was curious if that means that the opportunity costs have
not been considered in his presentation.
MR. ALPER answered to a certain extent that is disclaimer
language, but she is correct. He is saying whatever he thought
was going to happen - this company was going to spend this many
dollars on this project - and that being built into their
various forecasts, this is how the bill impacts their treatment
of money related to those projects. If someone decides to do
something that they were otherwise not going to do or the
reverse, that is not captured in the analysis before them.
SENATOR COSTELLO asked if he anticipates being able to capture
that.
MR. ALPER replied that that economic analysis is beyond their
skills; companies might choose to do different things. Once the
bill reaches its final stage, every company has to go through
its own internal analysis. Sometimes those analyses are driven
by straight up and down economics and sometimes there are other
factors that he couldn't forecast.
5:20:10 PM
SENATOR WIELECHOWSKI asked if the tax and credit numbers for
FY17/18 will change substantially with passage of this bill.
MR. ALPER answered because the bill doesn't touch upon the
minimum tax issues, up until FY22 there is not a material amount
on the revenue side. The small amounts of revenue that are tied
to the minimum tax that is reduced by operating losses nearly to
zero remains the story going forward. Should the price of oil be
what is in the spring forecast, the state would not get more
than $15-20 million in production tax a year for several years.
The credit spend is going to go down primarily because of the
Cook Inlet reductions. While it's unfortunate that $404 million
happened in FY15, the state is seeing both the ramping down of
company behavior and a couple of companies leaving the inlet.
He explained that the FY15 spend was really tied to money spent
in 2013. To a certain extent they are closing the barn door
after the horse has left. Should companies do the investments
they have said they may do - the BlueCrest and Furies in Cook
Inlet are the most obvious ones - the status quo analysis would
see a much larger credit number. If someone spends an extra half
billion dollars that's going to result in a 50 percent state
credit support, that's $250 million in credits. Until that
sanction it doesn't show up in their forecast. The further they
get into the future the status quo looks smaller even though
they know it is really going to get bigger as it gets closer to
the present. So, there is a tendency to "low-ball" the fiscal
impact of a bill like this.
5:23:07 PM
SENATOR WIELECHOWSKI said most of the effective dates are set at
July 1, 2016, and the testimony the commissioner gave several
meetings ago was that there was a concern that if you kept the
credits going until next January companies would act rationally
and go out and try to spend as much as they can to take
advantage of the credits. He asked if that effective date
applies to Cook Inlet in the original bill, because the bill now
is pushing out the credits until 2017, and he said they will
impact the state through 2020. He didn't completely understand
that, but he also wanted to know if he worries about a flurry of
activity in Cook Inlet, although Director Feige said she didn't
expect much impact on the tax credits. He didn't see how that is
possible. He asked Mr. Alper his take on that situation.
MR. ALPER replied that the fiscal note for the earlier version
had a very large savings in FY17, in part due to the July 1
effective date. When they looked a little deeper into that they
realized to a certain extent because those large numbers were
tied to the $25 million repurchase cap that is in the so-called
.028 fund, it's not about earning credits. There was a little
bit of internal confusion, because a lot of the very large
credits that have already been earned in calendar year 15 were
falling off the table by not being paid in FY17. It was never
their intent to not pay those. The Governor's original bill had
a $900 million fund capitalization fiscal note attached to it.
It might still be attached to this bill. The idea was to make
sure there is adequate money to spend before obligation of what
is on the table now. So, the intent of the original bill was to
say we're not going to earn credits and pay them based on having
been earned after the effective date. That is a big difference
when it comes down to 2015, which was a very large spending year
and is behind us now.
He believed what Director Feige was saying is that dramatically
reducing the credits beginning in January 2017 won't drive that
much activity compared to the 50 percent that is being provided
now. It's almost impossible for people to add more work between
now and the end of this calendar year, because their work plans
are already pinned down. There might be a little bit of an
increase next year, but the fiscal impact of that at the reduced
25 percent level of total support would be less on the state
than current law, which if we got twice as much work at half the
credit level would be a net zero. No real impact is felt until
the 2018 spend, and based on earlier testimony that doesn't
actually affect the budget until 2020.
5:26:46 PM
CHAIR GIESSEL thanked Mr. Alper for his testimony and noted her
office had received no amendments.
SENATOR COSTELLO moved to report CSSB 130 (RES), version 29-
GS2609\W, from committee with individual recommendations and
attached fiscal note. There were no objections and it was so
ordered.
CHAIR GIESSEL said oil and gas has changed the State of Alaska.
Five of the committee members out of the seven were actually
born in Alaska and know the positive impact the oil and gas
industry has had on the state. These tax credits are an example
of partnership; they are also a way of incentivizing activity
just like going to a store and having a coupon for a product.
Often using those coupons establishes faithful loyal customers
who keep coming back and buying the product: the same idea with
the state's tax credits. Their goal was to establish loyal
customers that would continue to work here, and the state has
reaped tens of billions of dollars in revenue that has built
roads, schools and all kinds of infrastructure. But this
precipitous drop in oil prices is devastating, not just to
companies but to the state, too. Probably the most hurtful thing
is that jobs are being lost. She said it is hard for her to
offer a bill like this knowing what it will do to this resource
development. Still she is was hopeful and encouraged everyone
that there is a future here. The state has "massive resources"
that have not yet been developed. This will turn around and it's
important to have discipline, patience, and a long-term vision.
5:31:33 PM
SENATOR MICCICHE said he appreciated the work the chair and the
committee had done on this legislation and he would see it in
the Finance Committee. If members had concerns he invited them
to feel free to discuss them with him.
[CSSB 130(RES) was reported from committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| CSSB130-Testimony-AOGA-4-12-2016.pdf |
SRES 4/12/2016 9:00:00 AM |
SB 130 |
| CSSB130-enalytica Analysis to SRES-4-12-2016.pdf |
SRES 4/12/2016 9:00:00 AM |
SB 130 |
| CSHB247FIN-Fiscal Analysis-DOR-4-12-2016.pdf |
SRES 4/12/2016 9:00:00 AM |
HB 247 |
| CSSB130RES -Fiscal Analysis-DOR- 4-12-16.pdf |
SRES 4/12/2016 9:00:00 AM |
SB 130 |
| CSSB130-Updated Comparison Chart-DOR Tax Div-4-12-2016.pdf |
SRES 4/12/2016 9:00:00 AM |
SB 130 |