Legislature(2017 - 2018)HOUSE FINANCE 519
03/22/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB111 | |
| Industry Testimony | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 111 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 111
"An Act relating to the oil and gas production tax,
tax payments, and credits; relating to interest
applicable to delinquent oil and gas production tax;
and providing for an effective date."
1:36:35 PM
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
continued addressing a PowerPoint presentation titled "New
Sustainable Alaska Plan, Pulling Together to Build our
Future; CSHB 111(RES)\N by the House Resources Committee,
Oil and Gas Production Tax and Credits: Background and Bill
Analysis" dated March 21, 2017 (copy on file). [Note:
presentation also heard on March 21, 2017 and the morning
of March 22, 2017.] He addressed Section 26 of the
legislation on slide 62. The section involved several
components of the legislation including the uplift and
Department of Natural Resources (DNR) preapproval area. He
addressed the uplift portion. He discussed a scenario where
the state would not buy credits and instead the lease
expenditures would roll forward in some way into a future
year against future taxes. The question was how to
compensate the taxpayer for only the fact that only a
fractional portion of the costs would be allowed to move
forward and how to compensate the company if they were not
going to get value for several years (i.e. time value of
money). The uplift section had been added by the previous
committee to provide interest.
Mr. Alper highlighted a scenario on slide 62 where a
taxpayer had a loss of $100 million and carried forward $50
million in lease expenditures, the amount would earn
interest, which was tied in statute to 7 percent plus the
federal discount rate (currently 8.25 percent and scheduled
to increase to 8.5 percent due to recent action taken by
the Federal Reserve Board). The 8.25 percent interest would
be added to the $50 million for up to seven years for a
total of $87 million (roughly the equivalent to a 30
percent net operating loss (NOL)). The scenario
reintroduced three variables that could be built into
future debate, amendments, or other: 1) the carry forward
percentage; 2) the uplift interest rate; and 3) the number
of years the benefit could accrue. He explained that the
numbers would change dramatically with any change to the
variables. He detailed that with a full carry forward at a
higher interest rate for a longer time period, the state
could eventually be giving double or triple the original
value. He relayed that the 7 percent plus the federal
discount rate was the same as the interest rate in Section
2 (the interest rate on delinquent taxes) that the bill
currently amended to limit to three years. He recommended
linking the concepts together directly by tying the uplift
rate to the interest rate statute. He suggested language
reading "the amount in 43.05.225." Consequently, if one
figure changed the other would automatically change.
1:40:09 PM
Mr. Alper continued to address slide 62. The department
needed clarification on whether the seven-year period
accrued to the taxpayer for their first lease expenditure
carry forward only. Alternatively, he questioned if a
taxpayer have the ability to carry forward a loss from the
second year for a seven-year period as well. The department
assumed it was the latter, but the bill language was not
completely clear. He turned to slide 63 and explained that
the remainder of Section 26 related to preapproval of lease
expenditures that would be carried forward.
Vice-Chair Gara referred to slide 62 and acknowledged that
under the current bill version the credit was less than it
used to be. However, in most tax systems companies were not
paid interest if they had to extend deductions over a
number of years or had to roll their losses forward under
federal tax for many years. He surmised an 8.5 percent
interest payment to a company that was already getting a
credit seemed like a profit on top of a credit. He wondered
why the option had been chosen versus using the common
option of enabling a company to roll forward credits until
it was able to deduct them.
Mr. Alper believed the question would be best answered by
legislative consultant Rich Ruggiero who had created the
concept and proposed it to the prior committee. His
understanding was that the language more or less modeled
some of the language in production sharing agreements with
countries with a slightly different tax system. He detailed
the idea was a capital recapture where there was no tax
until a company made its initial investment back. There was
also the government take share of the amount beyond that
amount. He explained it was not unusual in those
circumstances for there to be a built in profit or
multiplier on top of the expenses before the sovereign
began to receive its share. He qualified that his response
was a bit of a guess, but it was his understanding based on
testimony by Mr. Ruggiero.
1:42:51 PM
Vice-Chair Gara stated that in prior tax discussions the
legislature had always been told that production sharing
jurisdictions around the world tended to have a higher tax
rate. He continued that Alaska had a lower tax rate and the
state was also giving companies interest on top of tax
credits. He would need convincing the state was not getting
the worst of all worlds. He recognized that the proposed
credit was smaller than the one under current law.
Representative Pruitt remarked that many times the state
compared itself to other countries. However, Alaska was not
a sovereign - there was still a federal aspect to the
issue. He believed failing to include the federal component
and comparing Alaska to a sovereign could be detrimental to
the conversation.
Mr. Alper answered in the affirmative - the federal tax was
the last link in the chain. Whatever the companies end up
paying to the State of Alaska ended up being a deduction
against what they paid to the federal government. There
were pros and cons to the method. He explained that as the
state increased taxes, the federal government ended up
receiving less; therefore, the net effect on the company
was a bit less than simply the extra dollar paid to the
state.
Representative Guttenberg asked Mr. Alper to expand on the
issue related to the state impact.
Mr. Alper responded with a scenario where the state raised
the tax burden on a large corporation by $1 million. He
detailed that the company's profit would be reduced by $1
million as a result. He continued that most large oil
companies paid a 35 percent federal income tax - the
state's tax would mean the company would pay the federal
government $350,000 less and would only be out of pocket
$650,000.
Representative Guttenberg asked if there were other
considerations when undertaking the exercise. Mr. Alper
answered that within the state income tax there was the
apportionment formula and the interaction of Alaska's state
tax with other states' taxes. For federal income tax, the
primary difference was depreciation. For tax purposes the
federal government treated capital expenditures differently
- they were taken over a number of years and amortized or
depreciated. Whereas, Alaska's tax system had 100 percent
spending recapture in year one.
1:46:05 PM
ED KING, SPECIAL ASSISTANT TO THE COMMISSIONER, DEPARTMENT
OF NATURAL RESOURCES, addressed slide 63 related to lease
expenditures. He noted that two provisions added to the
bill in the prior committee impacted DNR. The first was the
preapproval process for lease expenditures. Based on
testimony provided, DNR better understood the intent. One
of the department's largest concerns was the broadness of
the language, which could be interpreted in a variety of
ways. If the language was maintained, the department
requested clarity about what the legislature wanted the
department to accomplish. Under the current language it was
possible that every line item of each lease expenditure ($6
billion annually) would have to be preapproved by DNR,
which would be an arduous and expensive task. He furthered
that the department's regulations would probably not be
written in that way - DNR would probably automatically
preapprove operating expenditures and similar items. The
department's review process would likely be reserved for
larger projects. He recalled prior testimony in reference
to poor management or a project the state would not want to
participate in. He suggested if there was a classification
of lease expenditures the state was not interested in
participating in, it was possible to enumerate the
classification within existing statute rather than having
the department go through a preapproval process. The
department appreciated the deference and latitude; however,
because the process involved tax law, it provided very
difficult challenges for DNR to overcome if it were to deny
an expenditure. Either DNR or the Department of Revenue
(DOR) would have to defend in court that the decision had
not been arbitrary, which was DNR's largest concern.
1:48:37 PM
Co-Chair Seaton appreciated the testimony. He did not want
the broadness of language to result in the significant in-
depth analysis Mr. King referred to. He communicated that
the committee would make sure to take the concerns into
account.
1:49:09 PM
AT EASE
1:49:25 PM
RECONVENED
Mr. Alper noted the presentation contained another four or
five slides related to the fiscal note that he could
address at a later date.
^INDUSTRY TESTIMONY
1:49:59 PM
KARA MORIARTY, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
ALASKA OIL AND GAS ASSOCIATION (AOGA), introduced herself
and provided a PowerPoint presentation titled "House
Finance Committee CS for HB 111" dated March 22, 2017 (copy
on file). She detailed that AOGA was the private
professional trade association for the oil and gas industry
in Alaska; it represented the majority of oil and gas
companies (represented on slide 2). She read from a
prepared statement:
Collectively, governments in Alaska, local and state
governments combined, this last fiscal year FY 16,
received just over $2.1 billion in revenue from the
oil and gas industry. This presentation and my
testimony does have unanimous consent of our diverse
membership.
As with any piece of tax legislation that we've looked
at over the last decade or so, we often use different
guiding principles to weigh the proposal against. This
bill is no different.
Ms. Moriarty pointed to the guiding principles AOGA used to
measure progress including production, investment,
competitiveness, revenue, and "fair share" on slide 3. The
principles had been used by AOGA when analyzing the
original version of HB 111 and the current committee
substitute (CS). She stated that the first four principles
were very objective, it was clear and easy to weigh whether
the bill would provide increased production, investment,
competitiveness, and revenue; however, fair share was very
subjective.
As we examined the latest committee substitute for
House Bill 111, it became clear that because of the
vast number of changes, the bill definitely raises
taxes and increases cost on the industry. The CS for
House Bill 111 will not add more oil to the pipeline,
it will not attract investment to Alaska, and it will
put Alaska toward the bottom of the competitive scale.
Throughout my testimony today I plan to briefly
highlight the policy sections of concern. You will
notice I will point out where the bill does not make
any changes or has nothing to do with what many say
need to be reformed or continued to be reformed and
that's tax credits. There are several sections of this
bill that have absolutely nothing to do with tax
credits. There are several sections that were just
changed last year.
Ms. Moriarty turned to slide 5 and addressed the section on
increasing the interest rate [Section 2 of the
legislation]:
Increasing the interest to six years of compound
interest will simply increase our costs of doing
business and this is a prime example of a section that
has nothing to do with tax credits.
1:53:49 PM
Ms. Moriarty addressed slide 6 on Sections 3 through 5 and
20 through 22 of the bill related to confidentiality and
transparency:
This is another section that was just changed last
year. There were additional transparency requirements
that were part of House Bill 247. There have been some
claims that industry, even AOGA in particular, has
supported the language in this current version of the
CS. That is not accurate. To be clear, AOGA did submit
some potential confidential language to House
Resources last March. We have gone through and
compared what we submitted to the House Resources
Committee last year with Amendment 45 that I think was
referenced on Monday, as well as the language that's
currently in the bill and they are not the same. There
is some very clear differences. The current version
paraphrases some of the language that we submitted to
House Resources and that paraphrased language as well
as language that's omitted from the version in front
of you are very important and substantive.
Additionally, this version includes language regarding
very broad authority for the Department of Revenue and
it gives the department unfretted and unsupervised
power in a variety of ways to request and disclose
virtually any information it desires in either
executive session or via the proposed new annual
report. For a variety of reasons the industry does not
support what's currently in the bill.
Ms. Moriarty advanced to Section 6 regarding raising the
minimum tax (slide 7):
Section 6 or a version of Section 6 was in the
governor's original oil tax bill last session in House
Bill 247. Even though House Bill 247 was touted as a
tax credit reform bill as House Bill 111 is, it had
many provisions such as this one that has nothing to
do with tax credits. Raising the minimum tax is not
just a 1 percent increase. For some companies it
represents a 25 percent increase and for other
companies it's an infinite increase. Your consultant
asked industry to be very specific about how they
would change their investment behavior and my guess is
you're going to hear that directly from some of the
companies today. Last session, when we had a similar
provision that would raise the minimum tax, there was
testimony that this 1 percent increase could result in
the reduction of a drilling rig for up to six months
on the North Slope. That is significant.
House Bill 111 will impact investment decisions.
Companies won't keep investing money the same way they
are today if these provisions are adopted.
1:56:48 PM
Ms. Moriarty turned to Sections 7, 10, 12, 13, and 16
related to hardening the tax floor on slide 8:
Not allowing credits to be applied to the minimum tax
floor is a tax increase. While this one is directly
related to credits, this proposal changes a key
provision of the purpose of credits. For some
companies using credits against the minimum tax is the
only way they continue to invest money, especially in
a low price environment. Another key section of
Section 7 is this issue of migrating credits. If
you're looking at making the tax system less complex,
you should eliminate this part of the bill because
this proposal actually makes the tax system more
complex. It moves the tax to more of a monthly tax and
this section would require companies to accurately
submit estimates each month versus doing a true up at
the end of the year. So, you have to ask yourself if
you were a business owner, would you like to file your
taxes on an accurate estimate every month versus
having an annual true up so you can utilize the very
incentives that attracted you to invest in the first
place. For us, this is a tax increase and changes the
key provision of the current tax system.
Ms. Moriarty addressed Sections 11 and 18 related to net
operating loss (NOL) credits (slide 10):
One part of the NOL credit, and we'll get into NOLs
later as well, if you no longer allow an NOL for a
cash payment it's almost a double whammy for some
companies because the NOL has been said time and time
again to be a playing field leveler, especially for
small companies on the slope. These two sections
really can impact small and newer companies to Alaska.
1:58:58 PM
Ms. Moriarty turned to slide 11 related to the changes in
the per-barrel credit.
Before I go into the changes on the per-barrel credit,
I just want to go back and talk about how these so
called credits, the per barrel credit, came about.
When Senate Bill 21 was originally drafted the tax
rate was 25 percent. After it was introduced and
during some of the modeling, the Department of Revenue
and the legislature recognized that it was going to be
a very regressive tax and the effective tax rate would
be dramatically lower at lower prices - and they did
not want that to happen. So, the department and the
legislature worked together to create nothing more
than a math formula, which kept the tax rate at about
the same percentage across a wide range of prices.
That actually added an element of progressivity back
into the tax, versus what was originally proposed,
which was really a regressive tax. By its very design,
it was never the intent to have an effective tax rate
of 35 percent. The tax rate was 35 percent with this
math formula to incentivize production and that's
exactly what it did - it incentivized investment.
You're going to hear about projects and production
that came online after Senate Bill 21.
This math formula kept the tax rate at about 25
percent over a range of prices and that's what's
referred to as the per barrel "credit" because
changing the per barrel credit now changes the
structure of the tax. It would be an immediate tax
increase on core fields that provide a little more
than 90 percent of our current production. It's not
just us as industry who have described it that way.
You've had legislative consultants at the time, you
had DOR officials at the time, DOR officials today,
who recognize that the per barrel credit is not really
a credit in the true sense of what you think of it as
a credit. Enalytica, the consultant at the time,
described the per barrel credit as a misnomer. The
current Tax Division Director, Mr. Alper, previously
confirmed that very notion. Even though he was not
part of the creation of the math formula, he is on
record as saying this about per barrel tax credits.
This is from a joint House and Senate Resources
hearing down on the Kenai Peninsula in June of 2015:
"Some of them (credits) are integral parts of the
tax regime; the 20 percent capital credit in
ACES, the per-barrel credit in SB 21, those are
very much offsets to what would otherwise be a
very high tax rate."
So Director Alper recognizes that a 35 percent
effective tax rate is a very high tax rate. He goes on
to say:
"With SB 21 the credit is an offset to the tax
and is designed to create a progressive element,
a little bit lower tax rate at lower prices, a
higher tax rate at higher prices, so it's hard to
really consider them a credit in the context of
an inducement to doing work. It's really what we
are calling an integral part of the system."
So, just know that if you change this per barrel
credit, you are making a fundamental change to a very
integral part of the tax system and we would argue
that this "credit reform" is not really targeted at
the credits that I think most are referring to when
they talk about credit reform.
2:02:54 PM
Ms. Moriarty addressed the proposed new dry hole credit on
slide 13.
So now we have a new credit in this CS and that's the
dry hole credit. For us the policy objectives around
the dry hole credit are a bit unclear. The credit
would be limited to companies that do not produce oil
or gas in the calendar year in which the credit is
earned, which frankly would severely limit the
eligibility. So, a company could have production
elsewhere in the state but if they produced oil they
would not be eligible and it disregards production
thresholds already in place for the purchase of
credits.
The other interesting thing to us is that the credit
can only be taken if the company gives up the lease,
which feels a little awkward to us to us because the
explorer that drilled the dry hole would have the
information gained from that drilling, they would be
the most likely to drill another well on that lease,
and would likely stand a better chance of success than
a different company. My guess is you'll hear more
about that from some of the explorers today.
We also think that the surrender of a lease to the
state would signal a lack of value and decrease
interest in the lease to third parties, while
depriving the state of lease rentals prior to a
successful lease sale. For us, this seems a bit
counterintuitive and again, the policy objectives are
a bit unclear for us around this new proposed credit.
2:04:32 PM
Ms. Moriarty addressed Section 19 on slide 14.
Even though it may seem moot now that the NOL - if it
goes back to the original version, is reduced, or is
converted to a deduction - this section brings a lot
of uncertainty around how it would apply, the language
is not very clear to us, and so it leaves more
questions than answers for us.
Ms. Moriarty advanced to slide 15 and addressed Section 23
related to the gross value at the point of production
(GVPP):
The gross value at the point of production, we
testified to this last year during House Bill 247 and
the testimony is the same. We believe by changing the
structure of the tax, by preventing the gross value at
the point of production from going below zero, creates
uncertainty. This is another section that doesn't have
anything to do with tax credits.
Ms. Moriarty moved to slide 16 and discussed the NOL
credit:
I think that in some sense both inside the legislature
and outside, there's a lot of misinformation about
what an NOL is and what it's not. Generally,
throughout this whole NOL conversation, the NOL has
generally matched the tax rate throughout Alaska's net
tax system. This provision that's currently being
proposed would penalize companies for investing in
Alaska, while they're losing money. Reducing or
changing the NOL from a credit to a deduction was
never part of Governor Walker's original piece of
legislation. In fact, early on when Governor Walker's
administration testified to House Bill 247, they
recognized that the NOL was an incredible part of
leveling the playing field for companies and so they
didn't believe the NOL should be changed back then.
The proposal before you converts the NOL from a credit
to a deduction. As I said, I've probably received more
questions about what is an NOL, what is it, how does
it work? I went and looked in a business dictionary
and this is how they define the NOL:
"A net operating loss is the amount by which net
expenses exceed revenue in an accounting period."
All that means is an NOL is when expenses exceed
revenue. Something as business owners, or even frankly
as my own personal finances, you don't want your
expenses to exceed your revenue. When Senate Bill 21
was written they made the NOL a credit. That was the
decision that was made at the time. This bill would
change that and it would make the NOL a deduction. If
a company has expenses that exceed revenue, they would
then deduct that expense when they have revenue -
pretty standard.
Ms. Moriarty referred to an example related to NOL on slide
17:
We put this example together and I think it's a visual
illustration that shows the difference between a
company who has gross revenue of $1,000. Let's just
say for simple math everybody has gross revenue of
$1,000 and everybody has the same tax rate of 25
percent. But Company A doesn't have any deductions and
so they can't deduct anything. You have your taxable
income of $1,000, your tax rate's 25 percent - simple
math $250 is the tax bill. But Company B, same income,
you have $200 worth of deductions, and you have
taxable income of $800. Then you apply the 25 percent
tax rate, it gives you a final tax bill of $200. It
changes your tax bill by $50. It's why we all want to
claim our mortgage interest as homeowners. Then
Company C, let's say they don't have any deductions,
so their taxable income is $1,000, then the tax is
applied at $250, but they have a $200 credit. Now all
of a sudden they can deduct the credit after the tax
is applied so they only have to pay a $50 tax.
So the main difference between going from a deduction
to a credit or vice versa is that the deduction is
taken before the tax is calculated and a credit is
taken after the tax is calculated. That's the
difference that you're now considering.
2:09:27 PM
Ms. Moriarty addressed slide 18 and referred to testimony
from Mr. Rich Ruggiero (legislative consultant):
Mr. Ruggiero from Castle Gap Advisers is your
legislative consultant now and when he was here a
couple of weeks ago he advised that the state should
change your NOL from a credit to a deduction. But the
bill's current language does not reflect his complete
recommendation, because companies would not be allowed
to deduct the full value of their loss and of these
expenses generated. And the uplift provision is not
the way he recommended. So, the current way the uplift
language reads would negatively impact economics for
all companies in Alaska.
Ms. Moriarty moved to slide 19 and provided quotes by Mr.
Ruggiero from a March 1 Senate Resources Committee meeting
related to changing the NOL from a credit to a deduction
and including an uplift:
"Every regime, everywhere you go, allows, especially
with a development like Smith Bay, everyone who
develops gets to deduct the cost of what it took them
to get that production from future revenues from that
project. Every regime."
"To deny that would really move Alaska to the bottom
of the competitive scale."
Ms. Moriarty elaborated that denying the full value of the
loss or the expense would put Alaska at the bottom of the
competitive scale. She read an additional quote by Mr.
Ruggiero:
"Various Countries have different ways of dealing with
this. Where there's a long lead time, between when the
money is spent and when actual production comes on,
they'll offer forms of uplift which is another way of
saying interest as it's carried forward so that way
time value loss does not become a big kicker to their
economics."
Ms. Moriarty explained that under the current language it
was a big kicker to the economics and did not reflect Mr.
Ruggiero's recommendations to the legislature.
2:11:30 PM
Ms. Moriarty discussed Section 26 related to a new
regulatory process created by the bill (slide 20):
We obviously have a lot of concerns about this. When I
talk about Alaska when I'm asked to speak at a variety
of conferences or give a perspective on what's good
and what's bad in Alaska for the oil and gas industry
and our regulatory challenges have always been on the
federal side - I've always been able to say the state
regulatory system does a great job in providing some
of the most stringent regulations on the industry but
they regulate us in a way where we know the rules and
then we're allowed to do the work and we move forward.
But this section would change all of that, because
this preapproval process as has been described would
require preapproval of any expenditure before it could
qualify for a potential net operating loss deduction.
And if you change NOLs to a deduction that's a very
important part. We don't know for the most part at the
time of the expenditure if you're going to be in a net
operating loss situation, so that's why we do believe
that unless this language is tightened up or more
clearly defined, the way it's currently written, you
would have to have almost every single expenditure
preapproved. And then there's a lot of unanswered
questions because what would happen if DNR says "Okay,
you can build that ice road to do your exploration
work, to get that drilling rig out to any pad in the
winter time...yep that's preapproved, that would
qualify for a deduction." But six to seven years later
on audit, the Department of Revenue says "nope, that
doesn't qualify." So who is going to win in that
scenario? We can tell you that the regulatory process
does not always make statutes easier to understand. If
you look at our current statutes around deductible
lease expenditures, it's described in about three or
four different places in statute, there is a very
lengthy regulation process, and even DOR right now has
different definitions of what qualifies and what
doesn't. This would just add another layer and causes
us great concern.
2:14:04 PM
Ms. Moriarty addressed Section 27 on slide 21 that would
repeal the statute that allowed tax credit certificates and
proceeds to be assigned to third parties:
This is very important for some companies and their
project economics because this ability to sign tax
credit certificates and proceeds provides really
valuable liquidity in early stage projects and it does
improve project economics. It allows the credits to be
used as collateral and as a source of repayment of
project costs through financing arrangements or in
joint ventures. Frankly, there's no negative fiscal
impact to the state when those tax credit certificates
or proceeds are assigned to a third party. But the way
this repeal would work and the way its currently
written would actually have a retroactive impact. Why
do I say that? It's because there are some parties who
have already agreed to assign credits generated by
expenditures happening right now in 2017, but they
won't be able to apply for that credit application
until after January 1, 2018. This change would
significantly impact some current commercial
arrangements.
2:15:32 PM
Ms. Moriarty addressed slide 22 titled "Would you invest in
Alaska if tax policy changed 7 times in 12 years?":
It's been stated that the oil and gas industry is
constantly evolving so why do we care about oil taxes
changing. Part of that is true, the industry is
constantly evolving. I'm glad, because technologies
improve and techniques improve to tap additional
resources. We are able to develop better monitoring
systems to take care of the environment, but global
markets and prices - you can't control that and can't
predict them and certainly there's always geopolitical
changes that impact the industry. But the one area
that can remain a constant if the government chooses
to is the fiscal system. We just think there is a lot
of misinformation right now about how these are being
characterized. This would be the seventh change in
twelve years and there have been some who've said the
industry has asked for over half of these changes.
That is not true. Of these seven, the six that have
taken place and the seventh one before you, the
industry has supported two. We only asked for Senate
Bill 21. We didn't ask for the Cook Inlet Recovery Act
in 2010. If those statements are made, it's not
accurate.
Alaska has a lot of potential, the Department of
Revenue will say it, everyone will say it. We have
great rocks and we have great geology. But this bill
has the potential to lose out on long-term revenues
over time through lost royalties, production tax,
corporate income tax, property tax, if projects never
come online. Or if production decline goes back to 4
to 6 to 8 percent decline, you could lose out more
over time on lost royalties alone than you would make
up in the increases that the bill would put in place.
So last but not least, the two principles around
revenue and fair share. Fair share is truly in the
eyes of the beholder. I'm not going to tell you what
the state's fair share should be. Not for me to
determine. What this slide shows you [slide 24] from
the Department of Revenue - is government share today
net of credits. You can see in the orange, which is
the top bar, that's the state's share. The state takes
the largest portion of the share at every single
price. And when the company is underwater, which is
the blue section - you can see when we're underwater
under $45 - the state is still collecting revenue.
2:18:27 PM
Ms. Moriarty advanced to slide 25 comparing Alaska with
other locations:
It's also been stated that we don't really need to
compare ourselves to other fiscal regimes; however, if
you look at this chart, the blue line is oil price
from January of 2001 to January of last year. You can
see as oil prices go up, governments do take more -
that's the orange box. But as prices go down,
generally, and if you look at January of 2016, of all
the major oil and gas regions (not every country),
every single one of them in January of 2016 was
creating fiscal incentives as the price was
decreasing.
Ms. Moriarty summarized on slide 26 that gaining a larger
portion by the state would not close the fiscal gap. She
sympathized with the desire for a fiscal plan. However, the
bill raised taxes at every oil price and at significant
rates when oil prices were low. For example, at oil prices
of $20 per barrel, the bill raised over $400 million more
for the state when the industry was losing money in a big
way. She underscored that the bill would not put more oil
in the pipeline. She emphasized that the state could not
expect companies to take on the increased cost and continue
to invest money in Alaska. She reasoned the same would
apply for any business the state was trying to attract
(e.g. hospitals, Native corporations, auto part stores,
fishing fleets, restaurants, or hotels). She detailed that
the state could not expect businesses to come to Alaska and
then raise their taxes regardless of how much money they're
making and expect them to continue to invest at the same
level. She hoped the committee would reconsider some of the
most concerning portions of the bill.
Co-Chair Foster thanked Ms. Moriarty for her presentation.
He provided information about the afternoon agenda. He
asked the committee to hold its questions until the end of
each presentation.
2:21:43 PM
Vice-Chair Gara believed Ms. Moriarty thought the current
tax rate was fair. From his perspective a fiscal plan
needed to be fair not only to the wealthy but to lower
income Alaskans as well. He stated that for new oil the
production tax on profits was zero and at $70 per barrel of
new oil in an average field on the North Slope the tax was
0.3 percent. He asked if Ms. Moriarty believed it fair to
the people of Alaska.
Ms. Moriarty answered it would be up to the legislature to
decide what was fair. From AOGA's perspective, the new oil
provisions had been put in place for a reason. She detailed
that Alaska had a very high cost environment. She had not
spoken about the cost per barrel, but many of the new
fields were expensive to bring online and represented less
than 10 percent of current production. Going forward the
majority of the production would continue to come from
legacy fields. The provisions had been created to
incentivize companies to come to Alaska to explore,
develop, and produce in very high cost, high risk areas.
She reiterated it was a decision the legislature had to
make, but the provisions had attracted new companies to
Alaska and had resulted in increased production for some in
the last several years.
Vice-Chair Gara discussed that the production tax rate was
4 percent for the larger fields until about $73 per barrel,
which he considered a problem. He referenced slide 18 where
Ms. Moriarty had expressed a concern that a credit was only
for half of the cost. He explained that the credit was half
the cost because the industry was receiving a deduction
that was more than double the actual tax rate paid by
companies. He agreed with Ms. Moriarty's statement that
there was really no 35 percent tax rate. He stated that the
real tax rate paid by companies were in the low double
digits and as low as 7 percent. Currently companies were
allowed to deduct 35 percent of their costs. He remarked
that in other jurisdictions the deduction rate is the same
as the tax rate; however, in Alaska the deduction rate was
two to three times the actual tax rate, which was the
impetus for the 50 percent number. He asked if it sounded
fair. Alternatively, he wondered if the state should match
the deduction rate with the actual tax rate.
Ms. Moriarty answered that talking only about what the
industry paid in production tax did not take the full
picture into account. She explained that only looking at
production tax could give the false impression that it was
all the industry paid. She detailed that at every oil price
the industry paid royalties, income tax, and property tax.
She underscored it was necessary to look at the overall
government take. She stressed that the state was taking the
largest share at every oil price. She pointed out that the
legislature's consultant [Rich Ruggiero] had communicated
that if a credit was converted to a deduction and the state
did not allow a company to deduct all of its expenses prior
to the start of revenue generation, it would be a
disincentive to investment. She suggested asking the
consultant about the reason for his recommendation.
2:26:26 PM
Vice-Chair Gara stated "we just have a disagreement." He
noted he did not need to follow up [with the consultant].
He believed allowing triple the deduction rate a company
paid in taxes was very generous.
Representative Ortiz referred to Ms. Moriarty's statement
that the changes in HB 111 would put the state at the
bottom of the competitive scale. He asked where Alaska fell
on the competitive scale at present.
Ms. Moriarty responded that her statement that Alaska would
be at the bottom of the competitive scale had come from Mr.
Ruggiero's testimony about what would occur if the state
did not allow 100 percent deduction of the costs. She noted
that the bill did not reflect that. She stated that Mr.
Ruggiero may have a better sense of where Alaska stacked up
competitively. Based on her study of various oil and gas
journals, blogs, and other, there were very few regions -
even in the $40 to $50 range - currently considering
increasing government take. She believed Alaska had been
competitive because companies had continued to invest money
at low oil prices, production had increased, and money
continued to be invested in Alaska even as some companies
were contracting [investment] elsewhere. She concluded that
if cost was added, it would change the competitive nature.
Representative Ortiz asked for verification Ms. Moriarty
believed the state was pretty competitive under current
law. He asked if that was what she meant to imply with her
previous answer.
Ms. Moriarty replied that the state's current tax system
had been attracting investment and production to Alaska;
therefore, in that sense AOGA did believe the system was
competitive. She believed there was significant pressure to
be competitive. She referred to substantial talk about
where the state's effective tax rate was in the single
digits. She explained that was also when companies had been
"bleeding cash" and were underwater. The industry was still
paying revenue to the state even though it was not making
any money at low prices. There was a balance - if prices
were to increase, the industry would retain some of the
value on the upside. The industry would prefer to see the
current balance maintained.
Representative Ortiz referred to the 35 percent tax rate.
He noted Ms. Moriarty had pointed out the industry also
paid other taxes including on royalties. He asked if there
were other locations worldwide with the other taxes as
well. He surmised that Alaska did not set itself apart by
having a royalty tax. He asked there were any taxes Alaska
had that other jurisdictions did not, which resulted in
Alaska being less competitive.
Ms. Moriarty answered that it was very common for tax
regimes to have a royalty paid to the landowner, a
production tax, an income tax, and a property tax. She
stated that a couple of factors made Alaska that were
unique. The state was a long distance from the market,
which made transportation costs much higher. Additionally,
the operating and capital costs were higher. She expounded
that because of those factors, Alaska needed to have large
fields. She furthered that there were numerous shale plays
on the North Slope that had become necessary in the current
price environment. She detailed that the cost of producing
shale had decreased. She explained that when discussing
competition, it was necessary to look at the entire
picture. She specified that only looking at production tax
failed to recognize all of the other things the industry
had to contribute. She relayed that increased costs would
only increase the cost of doing business. Based on her
understanding, there were very few regimes currently
looking at increasing costs through production taxes or
changing net profit share leases. Different regimes had
different levers to pull and Alaska was one of the few
looking at changing taxes.
2:32:19 PM
Representative Ortiz asked if Alaska was the only location
paying out cash credits. Ms. Moriarty did not know if any
other location in North America paid out cash credits. She
recommended asking the legislature's consultant during a
meeting the following day.
Co-Chair Foster provided the list of the upcoming
testifiers.
Representative Pruitt spoke to Section 7 related to
migrating credits - he referred to Ms. Moriarty's testimony
"accurately submit estimates." He surmised that the word
estimate did not mean 100 percent accuracy. He asked if the
monthly accurate estimate was done elsewhere in other
regimes.
2:34:30 PM
Ms. Moriarty recommended asking Mr. Ruggiero the question
the following day. She could follow up after speaking with
AOGA member companies.
Representative Pruitt spoke to the new dry hole credit. He
noted he had asked about its genesis the previous day, but
he did not fully understand where it had come from and who
supported it. He referred to Ms. Moriarty's testimony that
the new credit did not seem to provide value to the
industry or the state. He added that Ms. Moriarty had
specified that the opinion was approved by all AOGA
members. He asked for verification that Ms. Moriarty was
speaking for all AOGA members by indicating that the new
dry hole credit did not seem to provide value to the
industry or the state.
Ms. Moriarty replied in the affirmative; none of the 12
companies AOGA represented believed the credit would
provide value to the industry or state.
Representative Wilson remarked that "we" have continuously
heard that oil companies would have increased oil
production without SB 21 [oil and gas tax legislation
passed in 2013]. She asked if Ms. Moriarty agreed. She
wondered how a hard floor of 4 or 5 percent impact the
volume of oil coming down the pipeline.
Ms. Moriarty responded that Alaska's Clear and Equitable
Share (ACES) had penalized investment and investment had
been stagnant at that time. She believed it would be very
difficult to imagine that an increase in production would
have occurred without SB 21. The forecast had not predicted
and increase and at present that forecast had been beaten.
Representative Wilson reiterated her second question. She
explained that the previous year there had been significant
talk about the 4 and 5 percent hard floor not actually
representing a hard floor. She stated that the bill
contained both: a 4 percent floor and a 5 percent floor
depending on the price of oil. She asked how it would
impact oil coming down the pipeline.
Ms. Moriarty answered that the two sections - hardening the
floor and increasing the minimum tax - would impact
industry investment. She explained that there would be less
investment and less production if prices did not change.
2:38:02 PM
Vice-Chair Gara listed fields where investment had occurred
prior to SB 21 including Point Thomson in 2015, CD5 before
2012, and Moose's Tooth and Bear Tooth. Additionally,
Repsol had announced investment of $750 million prior,
expansion had been going on in Kuparuk to stem the decline
for many years. He asked for an example of a field where
investment had not started prior to the implementation of
SB 21. He pointed to Smith Bay as a possibility, but he was
not certain when the lease had first been purchased.
Ms. Moriarty did not recall the slide used by
ConocoPhillips in a House Resources Committee meeting, but
the slide had summarized investment decisions made and
projects brought online after SB 21 had passed. She
referred to Caelus's Nuna field as an example of investment
after SB 21. She referred to Hilcorp's Liberty field, which
was moving forward and providing 70,000 barrels per day.
Some of Armstrong's additional investment had occurred
after SB 21 and had led to the company's announcement two
weeks earlier. She could absolutely point to the fields and
was happy to provide a report.
2:39:47 PM
Vice-Chair Gara stated the investment on virtually all of
the fields mentioned had started prior to SB 21 as did the
lease purchase. He was certain that companies would say
they would have stopped investment if SB 21 had not passed.
Ms. Moriarty offered to compile a report summarizing
investment decisions, fields, and projects that came online
after the passage of SB 21.
Vice-Chair Gara stated "or the investment started before SB
21."
Ms. Moriarty replied "absolutely." She stressed that
investment had occurred after SB 21 had passed that had not
previously been occurring. She stated that companies were
happy to compile a report if desired.
Representative Thompson remarked that increased production
had been seen since the passage of SB 21. He reasoned that
there had also been substantial investment where the state
had not yet seen the results from SB 21. He believed making
changes [to the tax structure] at present would be
premature before the results were realized.
Ms. Moriarty responded that on some discoveries companies
still needed to fully delineate what was there.
Additionally, some projects were still in a permitting
phase. She agreed time and additional exploration and
delineation work were still needed to determine what was
there and when it could come online.
2:41:27 PM
Representative Grenn spoke to Sections 3 through 5 related
to making taxpayer information public. He asked how the
sections impacted each company.
Ms. Moriarty answered that a concern about the current bill
language included the broad authority DOR could have. For
example, based on the current language, it was feasible to
see where DOR could ask a company what it paid all of its
contractors. There was concern about disclosing what a
company paid contractor A for transportation, contractor B
for hot oil, and contractor C for an ice road. The
businesses were all competitive and AOGA did not support
the information being publicly disclosed.
Representative Pruitt asked if there were any SEC
[Securities Exchange Commission] or IRS [Internal Revenue
Service] issues with some of the proposed language in the
particular sections [Sections 3 and 5].
Ms. Moriarty replied in the affirmative. The current
language would allow disclosure of some information that
was already protected through other federal regulations.
There was a concern from a variety of aspects.
Co-Chair Foster indicated that Mr. Seckers would be
testifying next.
2:44:05 PM
DAN SECKERS, TAX COUNSEL, EXXONMOBIL, thanked members for
the opportunity to testify regarding ExxonMobil's concerns
about the legislation. He read from prepared remarks:
While I am pleased to be here to discuss our views on
this CS, I have to say that I am disheartened by the
fact that once again I'm here to testify on the state
trying to raise taxes on the industry again even
though we're struggling with the current economic
downturn. An effort not only to raise taxes, but also
to change the state's policy for the seventh time in
less than 13 years.
As you've heard testimony already, such reexaminations
and frequent changes serve to undermine the investor
confidence in Alaska, Alaska's tax policy, and to
weaken Alaska's overall investment climate for
attracting continued and future investments. For any
tax policy to succeed and to meet the state's long-
term objectives for revenue and investment that policy
must be competitive, stable, predictable, and provide
confidence to taxpayers and investors that the
underlining rules of the game won't be changed,
otherwise they will adversely affect the economics of
decisions.
It's been stated by others that part of this effort
with this committee substitute is to provide some sort
of durability. That if you pass the committee
substitute, magically this will provide durability to
the Alaska oil and gas system. Durability and
certainty were terms that had been thrown around every
time there's been efforts to change taxes in Alaska.
While durability and certainty are important aspects
to any sovereign's tax regime, such durability and
certainty lose its value if it comes at too high a
cost. Make no mistake, as you've heard testimony even
by your director of tax, committee substitute 111 is a
tax increase and it changes substantially the tax law.
Senate Bill 21 or MAPA the More Alaska Production Act
is working as intended. It has led to more industry
investment and more importantly an increase to oil
production for the first time since 2002. This
increased investment and production has led to more
jobs, more revenues to the state, and has been good
for the Alaskan economy especially during these times
of economic downturn.
Alaska needs to remain globally competitive for
critical capital investments and raising taxes on the
oil and gas industry at a time when we are all
suffering, as your Department of Revenue has shown
you, that will not help Alaskans or the industry
weather this economic downturn, it's just going to
make matters worse.
With those opening comments let me delve into the
committee substitute. First, let me say for the record
that we do support testimony you just heard from
Alaska Oil and Gas Association that this is a
troubling, troubling bill. Many of the provisions, as
you've heard director of tax Mr. Alper testify, are
carryovers from House Bill 247. Unfortunately all of
them are bad. We are reminded of the testimony by
legislative consultants last year, and I invite you to
please go look at it, where they said that these
provisions that are in the committee substitute will
not improve Alaska's overall investment climate.
Again, I ask you to ask your consultant that. It will
not lead to more production, it will not lead to more
jobs, it will not help maintain or grow production,
and it will not help the Alaskan economy. It's just
going to make matters worse.
The raise in the minimum tax. As you've heard
testimony, this is nothing but a tax increase. That's
all this is. It's nothing to do with credits. Raising
taxes when companies are hurting is not wise tax
policy. It's a regressive tax increase and it can't
help but hurt the industry and it's not going to be
good for jobs.
Hardening of the minimum tax floor. The committee
substitute would also raise taxes under Section 7, as
you heard Ms. Moriarty testify to, by preventing
companies from realizing the true economics in their
investments, by preventing them from taking critical
tax credits to offset the minimum tax as is allowed
under current law. This would represent and immediate
and significant tax increase and would penalize
companies who've made prior year investments and who
are making current year investments even though they
may be losing money, and would deny them the economic
recovery that they need at the time they need it the
most because we're losing money. In order for Alaska
to maximize investment it's critical to provide
investors the opportunity to capture the economic
benefit of those investments, especially given the
inherent downside risks of long-term capital intensive
investments that you have in the state. You heard Ms.
Moriarty testify to that and your consultant will tell
you that - Alaska is one of the most expensive places
to do business. That's not your fault, it's not our
fault, it's just a fact. You're a long ways from
market and you are in a very harsh environment and
very environmentally sensitive environment. That all
adds to costs; it's costly to bring oil out of the
ground here in Alaska and get it to market. But this
provision would significantly and negatively impact
Alaska's investment climate, make no mistake about
that. If you don't believe me, ask your consultant.
Ask anybody if you had a tax increase "what do you
think that's going to do?" It's amazing how people see
that oil companies would act differently than anybody
else. You have a small business, maybe you own a
restaurant, your costs are increased - are you going
to hire more people? Are you going to expand? Are you
going to do the opposite? This provision will announce
to the world that Alaska is willing to effect the
economics of past and essential current investments
solely for short-term needs.
Section 7 also has this migrating credit provision and
you've heard conversations about that. This is nothing
but a tax increase. That's all this is. And why is
that? Let's examine this in a little more detail. The
tax you have in front of you is an annual tax, it's
not a monthly tax. We file estimates every month.
Estimates. Look it up in the dictionary what an
estimate is. It's a guess. That's all it is. We're
guessing what our tax will be for the year, on a
monthly basis. We are bound by certain restrictions on
what we can claim as deductions in any given month and
those are based on estimates. What this provision
would say is you must file now, basically perfect
estimates or you risk losing valuable tax credits.
These tax credits that are going to be affected are
sliding scale credits and the small producer credits -
you can't carry those forward. You use them or you
lose them. So what happens, you make your estimate at
the end of the year when you file your annual tax
return - again this is an annual tax - if you missed
your estimate it's going to cost you money, it's going
to raise your taxes. This is a significant change in
the law. You're migrating to a monthly tax when right
now it's an annual tax. But more importantly, how
could we file our returns accurate? How can we know
each month what our credits are going to be for the
year? Because you're supposed to tax the economic
activities of a taxpayer on its entire year activity.
Not its month, it's yearly activity. These are
estimates, no different than a corporation files its
monthly or its quarterly estimates for its federal tax
return. There's nothing in that law that says - well
if you miss that estimate, that's a shame, you're
going to get tax increase. I've not seen this
provision elsewhere - and again you can ask your
consultant that - and I've never heard the concept of
filing perfect estimates or you lose. And this only
goes one way, the state does not refund money, we
would have to pay higher taxes. That would be the
policy of the state.
A very troubling provision is in a number of the
sections as to reducing the ability to recover net
operating losses. There's a lot of misinformation I
think on this, or misunderstanding. I think Ms.
Moriarty did an excellent job of trying to explain.
The net operating loss is nothing more than when your
expenses exceed your revenues. This isn't anything any
company is proud of. People say - oh you're getting a
subsidy because the state's allowing you to recover a
loss. I'm sorry, from a tax perspective, that I don't
understand. Nobody wants to be in a loss. Nobody. Your
tax for the most part is a net tax. It's a hybrid, but
it is based more on net income than it is a gross tax.
What this provision would then do is to say - well if
you invest and you go to a loss, thank you for
investing in the state, we wanted you to do that, but
you suffered. And you say - well how can that be? It's
easy to explain this as Mr. Alper did, from a revenue
side. You want to raise taxes like he does? Well,
that's great. It's an easy provision to describe. Take
away half your deductions. There's a big difference
between a statutory tax rate and an effective tax
rate. There's a lot of talk on that - oh your
effective tax rate is much lower? Well, it has to be.
This is a net system. Effective tax rate is determined
after your deduction of costs, after your subtraction
of credits. It has to be lower. You have a high tax
rate of 35 percent, as Mr. Alper has testified to you.
It's a high tax rate. There's not another state in the
country that's even close to 35 percent. Louisiana is
12.25 [percent]. You guys are almost three times as
high. Theirs is a gross tax that's true. And yours is
not.
2:54:10 PM
Mr. Seckers questioned what would happen. He asked members
to step back and look at it from a practical perspective.
He stated that many of the committee members were business
owners. He asked them to consider how it would work. He
emphasized that every December or January he would get a
call from our senior executives telling him they were
thinking about doing an investment in Alaska and wondering
if it would put the company in a loss. He would have to
respond that he did not know. The executives would then say
they would lose half their investment if so. He agreed. He
questioned whether committee members would make an
investment with that type of uncertainty. He asked what
would happen if an investment arose near the end of the
year. He reasoned that if the investment put the company at
a loss it would lose half of its deduction. He asked how it
work in partner situations. He provided a scenario where
Partner A wanted to spend on a particular project, Partners
B and C wanted to spend as well, but unfortunately one or
more of those partners would be driven to a loss. He
questioned whether the investment would move forward. He
thought it was an interesting dynamic. He underscored that
the state would suffer under the scenario. He stated that
the investment may not go forward and it would no longer be
a timing difference, but a permanent difference. He asked
if it was the policy the legislature wanted to have for the
state. He asked if the state's policy would now be that
deductions would be allowed for companies that spend less,
but companies spending more would be penalized. He stated
that an investment would lead to royalty, property tax, and
income tax and companies would be penalized. He believed
the policy appeared to be inconsistent with the policies
the legislature had been trying to enact for the past
decade or so by encouraging investment by spending more in
the state. He underscored that the proposal would send a
signal to do the exact opposite. He stressed that every
investment would be under greater scrutiny because a
company would lose if they experienced a loss.
Mr. Seckers referred to the 7 or 8 percent uplift for a
period of seven years. He stated the uplift may be
sufficient for some small companies (e.g. explorers), but
he did not know. He asked the committee to consider
companies that would not go seven years. He stated that for
a producer that went negative for a few months and became
profitable again would see an immediate tax increase. He
was unaware of any other regime that employed that method.
He believed the legislature's consultant had advised
allowing a loss to go forward and that allowing for an
uplift was a policy call. He emphasized that the expenses
were important and it would create dysfunctional actions on
the slope based on the policy provision. He reiterated that
the legislature had to ask itself if it was the policy it
wanted to instill in the state. He restated that the policy
would penalize companies for spending more and would allow
deductions for companies spending less.
Mr. Seckers provided a scenario where Company A spent
$1,000 in a year and was able to write off the cost at its
tax rate of 35 percent. Whereas, Company B spent $1,000,
had no revenue in the first year and turned profitable in
the second year. Under the provision Company B would not
receive the ability to write off the $1,000; it could write
off $500, which constituted a tax increase. Every tax
regime he knew applied the tax at the statutory rate; it
was the tax rate applied to net profits. The effective tax
rate may be different - it had to be under a net system.
Other regimes applied tax at a statutory rate to avoid
"this kind of" inconsistency.
2:57:56 PM
Mr. Seckers addressed the sliding scale tax credits:
This again is a very troubling provision because it
went to the core of the tax structure. This doesn't
have anything to do with credit reform. I know people
like to call it that, but it doesn't. And as Director
Alper has testified to, you take these away, you alter
them, and the 35 percent is a very high tax rate. I
think those were his exact words, and he's right. It
is. This is a tax increase on the legacy fields,
that's all this is.
Another provision is Section 23 of the bill, which
talks about the gross revenue at the point of
production. This does not get a lot of airplay for
some reason. It's a disguised tax increase that's why.
Again, it changes the substance of the law. Ask
yourself what this would do. Under Alaska's current
structure we pay tax not by field, by segment. We pay
a tax for the entire North Slope, Cook Inlet oil, Cook
Inlet gas, and everything in between - Middle Earth.
We file consolidated returns for the entire North
Slope. So what does that mean? A company's got income
from one field, income from another field, loss from a
field - they consolidate to represent the entire
economic activities of that entire segment. What this
section would do is to say:
No, no, we're sorry, it's a shame, we wanted you
to invest in the state, but you chose a field
that is so far removed from infrastructure that
your transportation costs (which are approved by
FERC) are so great that it may drive your gross
value at the point of production. And guess what?
We wanted you to make that investment, it's good
for property tax, good for income tax, good for
royalties, but we're going to punish you for
production tax.
Is that the policy of the state? That you're going to
encourage investment only near existing facilities.
That you want to sit there and say we want you to
invest in the state but don't go beyond this region
because if you do you're going to get a tax increase.
That is a tax increase to companies and could drive
investments in a very distinct way. This picks winners
and losers; it looks like you're trying to punish a
given field or two. You have to ask yourself is that
really the policy the state is trying to come up with.
Disclosure of taxpayer information, you've heard a lot
on this already. I can tell you these are very
troubling provisions. This would in effect allow
disclosure of some very confidential and taxpayer
sensitive information. As Ms. Moriarty's already
indicated there could be contracts going to other
companies they would be concerned about. As much as we
welcome BP and Conoco and others as partners, we're
competitors. Bottom line, we're all competitors. We
are bound by federal law what we can or cannot reveal.
There also may be taxpayer proprietary information
that is a benefit over years and years of work that is
beneficial to that company. Could be trade secrets, it
could be ways of doing things that are cheaper that we
have to protect. This language as written would in
effect allow almost anything to be published. This
would chill investment and cause all kinds of concerns
with the industry as well as how it relates to federal
law.
3:01:24 PM
Mr. Seckers addressed the preapproval requirement:
It's hard to address something that is really a
statement in statute that says - oh we want this
preapproval process. It's hard to address that, it
raises a lot of questions. Really, this is a very
troubling provision. The only way to really address
this is by highlighting the fact that it just raises
all kinds of questions. As Ms. Moriarty testified to -
does that mean the Department of Natural Resources has
to do an audit of our costs line by line before? How
long will that take? When will I have to submit it by?
Can somebody else look at it? Can a third party
intervene? What happens if the Department of Natural
Resources says yes Exxon or taxpayer this is a valid
expense, if you go to a loss you can claim this. Six
years later the Department of Revenue says yeah but we
are reinterpreting our reg [regulation] to say no its
not. Who wins? I made that investment based on that
representation by your agency. I've got another agency
saying that they're wrong. Who wins? What's the appeal
process? What happens if the Department of Natural
Resources denies something? Says you can't spend that.
What's my appeal rights? If you look at the fiscal
note that was advanced by the Department of Natural
Resources in House Resources they said that they would
not have their regulations up and running until 2019.
This provision takes effect January of next year. What
happens for 2018? How can I invest, I don't have a
preapproval. The regs don't come out until 2019. Are
they going to be retroactive to January 1, 2018? How
would I know? What happens if I've made an investment
that the Department of Natural Resources in 2019 says
for 2018 sorry you shouldn't have done that one. How's
that going to work? Where's the investor confidence?
What's going to happen to the projects that are in
limbo? There are so many questions this raises. I
implore you to examine this very closely. I know in
theory it sounds fine. You've got the resource owner
providing this preapproval, we don't want to waste
money. Ask yourself, is this going to be worth the
cost to the state, worth the cost to the industry, and
worth the risk on investment and jobs. I don't know.
This is a very troubling, troubling provision.
ExxonMobil believes that this committee substitute as
currently proposed will reduce Alaska's global
economic competitiveness. It's going to raise taxes on
an activity in the state to which the companies are
currently struggling. It's going to force companies -
all of us - to reexamine long-term, near-term, and
future investment decisions and we believe it's
inconsistent to what your policy has been and hopes to
be to encourage investment in the state. When you
enacted the PPT and ACES you did so to raise taxes
when prices were rising. As Ms. Moriarty's chart
showed you'd be one of the only regimes that's
actually trying to raise taxes when prices are going
the other way. So the signal to the world would be:
come to Alaska, they'll raise your taxes when you're
making money and by the way, if you're losing money or
struggling, don't worry they'll raise your taxes then
too. Is that really the policy you're trying to come
up to?
As I've mentioned many times, Alaska remains a
critical component of ExxonMobil's worldwide
investment portfolio and we look to be here a long
time. We really want to work to try to make this
policy, all these policies work. And while we will
continue to pursue investment opportunities, if bills
like this are passed and our taxes go up that just
reduces what we can spend in the state and all the
investment opportunities now get a different look and
are diminished.
So Mr. Chairman and members of the committee, let me
conclude by reiterating something I've also said
before. That Alaska needs to maintain a competitive
and stable fiscal regime that attracts and encourages
critical ongoing future investments, especially in
today's lower prices and that's one of the most
important things you face. I get it, we all get it, I
don't envy your task, you're trying to balance the
budget and go forward, and I understand that. But
raising taxes on the industry when they're all hurting
sends a very chilling signal to the investment world.
We believe the evidence is clear that MAPA is working
and if left alone, will continue to work, increase
investment, and provide more oil in the pipe. So as
policy makers you need to decide whether increasing
taxes on companies that are struggling today - will
that be a wise, long-term fiscal policy that's going
to lead to more jobs? Will it lead to more investment?
Will it lead to more production? Will it be good for
the Alaskan economy? I believe deep down we all know
the answer to those and the answer is no. I thank you
for the opportunity to be here today and I'm happy to
address any questions that you may have.
3:06:28 PM
Representative Thompson asked for a copy of Mr. Seckers'
remarks. Mr. Seckers replied in the affirmative.
Vice-Chair Gara spoke to Mr. Seckers' comment that the
state would be raising taxes solely for short-term needs.
He countered that he and others wanted to make sure the
state was receiving a fair share in order to fund basic
services and have a fair share for all parties. He referred
to Mr. Seckers' point that the legislature would be
increasing taxes when [oil] prices were low. He believed
Mr. Seckers was aware that in the coming fiscal year the
state would be paying more in tax credits to companies than
it would gain back in production taxes. The goal was to
change a tax system that in recent years and in the
following year would be paying out more than it brought in
with production taxes. It was a different system than a
country with high taxes that would try and raise taxes,
which would not make sense. He asked for comment.
Mr. Seckers answered that the questions were valid. He
could not address cashable credits; it was a policy call
made by the legislature. Exxon had never received cashable
credits and hoped to never receive them. He spoke to fair
share and believed the department and Ms. Moriarty's slides
indicated the state took in more than the industry at every
price range. He believed it was concerning to only focus on
the production tax. Exxon paid royalties, income tax, and
property tax. It was true that in low price environments
perhaps the production tax did not pay as much as the state
wanted it to, but it also meant the companies were not
earning as much as they may like to. He underscored that
the companies still paying the other taxes. He stated it
had led to jobs, investment, and to royalties. He believed
the legislature needed to decide whether it wanted the
investments to move forward. He believed the share the
state was receiving was pretty fair notwithstanding the
lower production tax the companies paid in the lower price
environment.
3:09:23 PM
Vice-Chair Gara remarked that there were other
jurisdictions currently with much higher tax rates than
those in Alaska. He observed that Mr. Seckers had claimed
that the state had the highest tax rate in the world at 35
percent. He surmised that Mr. Seckers realized that
companies did not pay it; that it represented a price
sensitive tax rate and 35 percent was the tax rate at $159
per barrel, which the world had never seen. At the $60 per
barrel range for new fields the average production tax rate
on the North Slope was zero percent and 4 percent for
companies paying the minimum tax. He asked for verification
that Exxon never paid 35 percent of its profits at prices
below $150 per barrel.
Mr. Seckers responded that it was necessary to understand
the difference between a statutory tax rate and an
effective tax rate. He agreed that the statutory tax rate
was 35 percent just like it was for federal income tax.
Corporations did not pay a 35 percent tax because it was on
net; it had to be below the 35 percent. He continued that
if the desire was a statutory rate that equaled the
effective rate it was necessary to have a gross tax. By
design a net tax could not yield what "you're trying to
imply." He reiterated that the effective tax would
absolutely be lower; however, companies paid the tax. The
calculation was based on 35 percent.
Mr. Seckers detailed that if a company had $100 of profit,
the tax would be $35; it may get reduced by credits, but it
was calculated at 35 percent. He was not certain there was
a net regime that would pay the statutory rate because of
all of the reductions. Part of the reason the system had
been put in place was due to Alaska's high 35 percent tax
rate. He clarified that he had never testified the rate was
the highest in the world. He corrected that he had been
speaking solely about the United States. He underscored
that the rate was the highest in the U.S. by far. He
explained there were other regimes in the world with higher
tax rates but their structures were entirely different. For
one, those regimes allowed cost recovery, not cost
deductions. Some of the jurisdictions specified that if a
company spent $100 it was allowed to recover the full $100
before a tax was leveled. Sometimes a system may even
provide an uplift on that to provide for the costs incurred
to get the oil out of the ground and then the system taxed
at a higher rate. It was not the system in Alaska. He
cautioned it was important to be careful when comparing the
different systems. He agreed the statutory tax rate was 35
percent, which was the rate companies paid tax on. However,
the effective tax rate was entirely different.
3:12:15 PM
Vice-Chair Gara countered that if the federal tax rate was
35 percent a company obviously received a deduction on that
rate. He stated "this is much different." He underscored
that the lower the price, the lower the actual tax rate. He
continued that for new fields at prices of $80 per barrel
it was 7.9 percent on average. He detailed that at $70 per
barrel it was 0.3 percent on average and at $60 per barrel
it was zero percent on average for new fields. He stressed
that there was no 35 percent tax rate; it was price
sensitive. He stated that the federal 35 percent tax rate
that was really a 35 percent tax rate at all prices and
companies deducted from that. He stressed the big
difference between the two kinds of tax systems.
Mr. Seckers disagreed. He stated that the statutory base
tax rate in Alaska was 35 percent. He agreed the effective
tax rate after the application of deductions and credits
was much lower. He also agreed that the effective tax rate
was a function of the sliding scale credits impacting the
rate; however, the statutory rate was 35 percent. He
detailed that if he had $1,000 profit, his tax would be
$350. Credits came beyond that yielding an effective tax
rate. He believed Vice-Chair Gara was misspeaking. He
continued it was the same with the federal tax return. His
tax rate was 35 percent, which was used for federal
worldwide taxable income. Yet the effective rate was
different after applying deductions and credits. He
reiterated that the statutory rate in Alaska was 35
percent. He agreed it was adjusted by credits; however, the
rate taxed on net income or production tax value was 35
percent.
Co-Chair Foster stated they would have to agree to
disagree.
Vice-Chair Gara remarked that the credit Mr. Seckers was
speaking about was price related and had nothing to do with
investment.
Mr. Seckers relayed that the company did not get the credit
"just because prices are whatever." It was necessary to
produce a barrel of oil in order to get the credit. A
company would get zero if it did not produce a barrel of
oil. He stressed that a company did not merely receive the
credit based on price. He explained the credit was based on
gross value at the point of production, but it was
necessary to produce the oil in order to receive the
credit. There were costs the company had to incur in order
to get the credit or reduction to its taxes. The whole
purpose of the credit was the more a company produced the
better off it became, which was good for the state
(increased production, income, property, and royalty
taxes).
3:15:12 PM
Representative Pruitt discussed that Exxon was the largest
publicly traded company but there were other larger oil and
gas companies. He asked what percentage of oil and gas
development worldwide Exxon was responsible for.
Mr. Seckers recalled that ExxonMobil produced less than 4
percent of the worldwide oil - it was in that range.
Representative Pruitt asked how many different regimes
ExxonMobil invested in.
Mr. Seckers replied that the company invested in pretty
much every country and state. He elaborated that there may
be some locations without oil and gas, but Exxon may have
retail, a refinery, gas stations, or other in those
locations. He detailed that when the company looked at
investments, they looked worldwide. He spoke to questions
related to decisions to invest in Alaska - he mentioned
increased taxes when prices went up or down. Alaska
competed in Exxon's world worldwide.
Representative Pruitt believed Alaskans were
"Alaskacentric." He believed Alaskans lived in the world
that existed when the pipeline had been turned on and
failed to recognize it was now in a global market. He asked
what percentage of the company's assets were deployed in
Alaska.
3:18:21 PM
Mr. Seckers did not know. He knew the company's investment
in Alaska was "big," but the company was also big. The
company spent billions annually in Alaska. He noted it was
possible to ask the operators about Exxon's share of the
total spend in Prudhoe Bay. He thought the Department of
Revenue may have the information from the company's
corporate tax returns. He explained that one of the
corporate tax return items was property in the state versus
property worldwide.
Representative Ortiz believed that under SB 21 the goal had
been to establish a hard [tax] floor. He asked if that was
true.
Mr. Seckers answered that he did not recall the goal had
been that specific, but he did not know for sure. He
elaborated that the bill had eliminated sliding scale tax
credits. He stated that hardening the floor and raising
taxes was a policy call [for the legislature]. He relayed
that going for the NOL tax credit to a deduction served
that purpose because deductions could not go against the
minimum tax - only credits could. He furthered that the NOL
would no longer be a credit. Most of the other credits were
disappearing anyway; the only one left on the North Slope
would be the per barrel credit. He did not know whether it
would pierce the floor, but he did not believe so. He
explained that some of it was already occurring because
credits were expiring; the floor was being hardened "as we
speak." He reiterated that going to an NOL deduction would
take away the largest credit that remained.
Representative Ortiz asked if the industry rejected the
idea there should be a minimum tax paid by industry for the
extraction of the state's resources and a minimum share the
state should have access to.
Mr. Seckers answered that it was difficult to answer. He
noted that a gross tax is a regressive tax; it was paid
whether a company made a profit or not. He provided a
scenario of a business losing money but having to pay tax
regardless. He stated it was a hard concept, especially
with the current system. He noted it was a policy call. For
most taxpayers it was difficult to pierce the floor - the
credits were necessary. He emphasized that production tax
was merely one item paid by companies. He underscored that
the state was not giving the resource away; the state may
not be getting as much as it liked, but that was a function
of price, which oil companies did not control. Companies
paid a royalty (a regressive number), income tax on
worldwide operations, and property tax. He reiterated that
hardening the floor was a policy call. He believed it was
necessary to ask what it would do to current taxpayers with
zero minimum tax due to small production that had to go to
a rate of 4 or 5 percent. He advised it was prudent to
think about how the industry would react to the change. He
stated the oil industry would not react differently than
any other business.
3:23:56 PM
Representative Kawasaki referred to the Point Thomson
lawsuit settlement in 2010 or 2011. He noted that Point
Thomson development began pre-SB 21. He asked if Exxon had
new fields in Alaska since the passage of SB 21.
Mr. Seckers answered in the negative. The company was
looking at all opportunities, but it was currently focusing
on its existing assets. The company was always looking at
other options.
Representative Kawasaki asked for clarification on options.
He asked for verification there were no new Exxon
investments in pre-development.
Mr. Seckers believed Representative Kawasaki was correct,
but he would have to double check. He knew the company was
actively looking at all kinds of options and opportunities.
He could not say what stage they were in - some of the
information was proprietary. Alaska was an important piece
of the company's portfolio.
Representative Wilson asked if Exxon would have to
reexamine projects that may be close to a decision if the
bill passed as currently written.
Mr. Seckers replied that anytime taxes increased in any
jurisdiction it became a factor. He countered the notion
that Exxon printed money; the company had a finite amount
of capital like any other company. He detailed that the
company's capital was apportioned based on economic
viability, performance, and so forth. Any time taxes went
up it reduced the amount of capital and future investments
were reconsidered. Tax increases could also lead to lost
jobs, lost production, and other.
3:27:01 PM
Representative Pruitt believed the question about new
fields was the wrong question to ask because only 3.5 years
had gone by since the passage of SB 21. He thought the
prudent question was about whether there were investments
Exxon had made even in current fields that had come about
because of SB 21.
Mr. Seckers responded that Exxon was always looking at
efficiencies and investments in current activities. He
stated it was a valid question to ask operators of BP and
Kuparuk because they directed it and much of the
investments went there. The company was always looking to
do more and with the passage of SB 21 many things such as
redesign, workovers, and so forth, became more economic.
The company believed SB 21 was working and was good for
Alaska's economy. He stated that SB 21 had led to more
production, investment, and royalty. He believed the
committee substitute was a bad idea and would hurt
contractors and others associated with the industry.
3:28:48 PM
AT EASE
3:51:47 PM
RECONVENED
Co-Chair Foster recognized Representative Lora Reinbold in
the audience.
DAMIEN BILBAO, VICE PRESIDENT OF COMMERCIAL VENTURES, BP,
provided a PowerPoint presentation titled "BP Testimony:
March 22, 2017, HB 111(N), House Finance Committee" (copy
on file). He expressed intent to focus his testimony on
policy and how Alaska competed for investment. He explained
that when the company made internal decisions about where
to invest, there was a limited amount of global investment
and every project and location competed against each other.
Some things could be controlled by the company (e.g. how
efficiently a project could be executed and the use of
technology in progressing a project) and many things could
not be (e.g. a fiscal system and oil price). It was
important for the company to holistically think about how
the projects and locations stacked up against one another.
Mr. Bilbao continued that as BP had engaged in the
discussion in support of a fiscal conversation, it had
understood that the focus was related to a specific problem
having to do with tax credits; however, it was clear the
bill was broader than tax credits. The company encouraged a
much more targeted solution, which he intended to address
throughout his testimony.
Mr. Bilbao addressed slide 2 that showed two charts related
to investment trends by region (left chart) and production
trends by region (right chart). He detailed that the
numbers on the slide were indexed (they began at a common
starting point and moved relative to each other), not
absolute. He explained that when comparing global spend
versus U.S. Lower 48 versus Alaska, on an absolute basis
the total number of dollars would not even be seen on the
same graph. However, if the numbers were indexed to a
common starting point, it was possible to see how different
locations moved relative to each other under common
circumstances on oil price, fiscal systems, and other. He
pointed to the left chart and noted the top line was
capital investment in U.S. Lower 48 development, the middle
light blue line represented global development, and the
bottom [gray] line represented Alaska. The chart indicated
that in the early 2000s Lower 48 investment had begun to
outpace Alaska and global growth investment. He stated it
had been pretty remarkable and had begun to signal a
renaissance not only in U.S. oil and gas exploration, but
in terms of global oil and gas geopolitics. He continued
that around 2008/2009 Lower 48 investments spiked relative
to global investment and Alaska.
Mr. Bilbao focused on more recent years. He pointed out
that since 2013 (circled in red on both charts), while oil
prices were beginning to move down and Lower 48 investment
and global investment had begun to decrease, investment had
increased in Alaska. The charts demonstrated how Alaska
investment compared to other locations. He directed
attention to the right graph, which showed production
trends by region. He noted that with investment went
production: as Lower 48 investment spiked, production also
spiked. The top dark blue line represented Lower 48
production, which was twice its original starting point on
an index basis. Global production was shown to be slowly
creeping up and [production in] Alaska continued to decline
until about 2014 and had flattened out over the last couple
of years (circled in red on the chart). He stated that BP
credited the passage of SB 21 to the dramatic increase in
investment relative to the rest of the world and the Lower
48. He reiterated that while investment in the rest of the
world and the Lower 48, it was increasing in Alaska. There
was one distinguishing feature, which was the shift in oil
policy attracting investment to Alaska.
3:57:35 PM
Mr. Bilbao turned to slide 3 titled "Alaska - How do we
Stack up?" The slide pertained to a conversation around
production in Alaska relative to the rest of the U.S. In
the current year Prudhoe Bay and the Trans-Alaska Pipeline
System (TAPS) would celebrate its 40th anniversary of
production. He observed that the events were pretty
remarkable given the timing was well beyond original
expectations. He discussed the original discovery of
Prudhoe Bay, which initially projected the production of 9
billion barrels; however, over 12 billion barrels had been
produced and BP still believed there were billions more to
produce, which it was actively working to do.
Mr. Bilbao pointed to the graphs on slide 3 that showed
production on a relative basis between Alaska and other
Lower 48 sources (i.e. onshore, offshore, shale, tight oil,
and other). The left graph provided a reference case for
the U.S. Energy Information Administration and the right
graph showed an aggressive growth case. Under either
scenario tight oil production in the Lower 48 had grown
from approximately 5 million to somewhere between 10
million and 17 million barrels of oil. The amount of tight
oil that could come out of the Lower 48 was humongous. He
noted that the resource opportunity in Alaska was world
class, but it was necessary to keep in mind that the
resource opportunity in the Lower 48 was incredibly robust.
The graph provided a sense of how the Department of
Energy's EIA characterized the opportunity in the Lower 48
versus Alaska.
Mr. Bilbao continued to address slide 3. He communicated
that in the mid-1980s Alaska had been producing about 25
percent of total U.S. production. Whereas, at present
Alaska produced less than 5 percent of the U.S. production,
which was projected to continue to decline. When comparing
Alaska with locations in the Lower 48, there were numerous
opportunities Alaska was competing against. He explained
that a conversation around oil fiscal policy was a
discussion around how competitive the state would be for
the next dollar of investment.
4:00:31 PM
Mr. Bilbao moved to slide 4 titled "Distribution one barrel
in Alaska." He had used the 2016 Revenue Sources Book
published by the Department of Revenue and had looked at
total spend on an aggregate level. The slide reflected the
"all in" number, which provided a good indication of a
couple of key points. The book showed an average sales
price of $43 per barrel in 2016. Under the scenario, Alaska
received revenue of about $7 per barrel between royalty and
state taxes. The scenario showed that the industry had
spent $48 between operating, capital, and transportation
costs. If industry was spending $48 to produce a barrel and
was paying government take of $7, on average the industry
was losing around $12 per barrel during 2016. He
underscored it was a high cost environment for doing
business and the industry did not fare well in 2016. He
elucidated that BP had lost about $1 million per day in
2016.
Mr. Bilbao turned to slide 5 titled "Suggested Principles
for Alaska Policy" related to HB 111. He shared that BP had
testified to the House Resources Committee that any oil
fiscal policy should be measured against a set of common
principles. The first principle BP looked at to measure any
oil fiscal policy in Alaska is whether it would lead to
more oil down TAPS. For the first time in over 15 years,
oil flow down the pipeline was higher in 2016 than in 2015.
In January and February of 2017, oil flow down TAPS was
higher than the same time the preceding year. The increase
was primarily from the legacy fields.
Mr. Bilbao addressed the second principle on slide 5, which
related to extending the life of legacy fields. He stated
that the legacy fields were the string on which the pearls
were strung. The longer the string of Prudhoe Bay and
Kuparuk, the more other fields would be added to the pearl
necklace. He noted that 90 percent of TAPS production came
from legacy fields. Third, BP believed it was important to
encourage more independence to look for oil and gas in
Alaska. He detailed it was good for the state and the
industry's midstream infrastructure. Additionally, it was
beneficial for TAPS to see increased oil flow (whether from
legacy fields or not) and BP believed any fiscal policy
should encourage increased North Slope exploration and more
independence. Lastly, it was important to avoid picking
winners and losers. He expressed intent to provide examples
of where HB 111 fell short. The company believed the bill
failed on all four principles.
Mr. Bilbao stated that as a broad tax increase at all oil
prices, BP did not believe the bill would encourage more
oil down TAPS. He furthered that because the bill included
a tax increase and would raise costs, BP believed it would
shorten the life of legacy fields. Additionally, the
company did not believe the bill would lead to increased
independence exploring for oil and gas on the North Slope
or looking to actively enter fields on the slope. He
explained that either because of a production hurdle the
bill would implement or how things were meant to be
submitted to DNR, the bill may have a bias towards certain
players versus others. He stressed it was very important
for any tax policy to be agnostic to who the player may be.
He continued that the tax policy should set a foundation
for the state ending up in a good place and the industry
being in a positive place to continue investment.
4:05:56 PM
Mr. Bilbao emphasized that the bill was an overextended
response to what had initially been a focused concern about
cashable tax credits. The company believed there should be
a way to address the problem while keeping companies whole
on cashable tax credits and continuing to encourage
exploration on the North Slope. He stated that HB 111 went
well beyond that scope and stepped into areas that had not
been problems identified early on with regards to a base
(SB 21) system. He elaborated that the current system had
led to investment and production that was good for the
state and that had been targeted when SB 21 had passed.
Mr. Bilbao advanced to slide 6 and provided examples of BP
concerns with HB 111, version N. First he addressed Section
14 related to the per barrel credit, which the slide termed
as the "new drillsite killer." He explained that the
statutory tax rate implemented with SB 21 and the sliding
scale per barrel credit were integrated into a joint system
and were not independent from one another. He recalled the
conversation in the House Finance Committee during debate
on SB 21 related to sliding scale. He explained that as the
base rate moved up, the sliding credits were put in place
to offset the cost and to provide an incentive for
production. He emphasized it had been a critical policy
shift between ACES and SB 21. He explained that ACES had
incentivized spend, while SB 21 incentivized production.
The state had wanted more production down TAPS, which had
occurred. He underscored that it only worked when the base
rate and per barrel credit worked together to provide an
appropriate incentive for investment and to provide a
competitive policy to attract the next dollar of investment
verses other locations. He stated that BP saw Section 14 as
hugely detrimental in running economics on large
investments in particular. A tax hit or reduction on the
per barrel credit would severely dampen the economics and
competitiveness of large investments with big spend and big
production opportunity.
4:08:36 PM
Mr. Bilbao continued to address slide 6 and spoke to
Section 26 of the legislation related to the new DNR
process, which the slide termed the "investment
decelerator." He stated that it was necessary to know how a
project would be treated financially if BP was running
economics, otherwise it was not possible to run the
economics. He elaborated that before he sanctioned a
project he needed to know whether items were deductible,
which meant he would need to submit up to 100 percent of
the investment for review by DNR. He questioned whether
companies would be kept whole if regulatory process
resulted in project delays and would impact value to
companies. The administrative review could be onerous and
more fundamentally, challenging around the ability to make
an investment decision. He thanked the committee for its
time. He encouraged a conversation around a targeted
problem statement such as cashable tax credits. He
reiterated his belief that companies should be kept whole
and continued exploration should be encouraged. He asked
the committee to understand that a broader policy change
would be viewed by the industry as a fundamental policy
shift making Alaska less competitive than other locations
around the world.
4:10:23 PM
Representative Wilson referred to slide 4. She asked if the
on the slide state taxes included local municipality
property taxes.
Mr. Bilbao answered that the slide was based on data from
the [2016] DOR Revenue Sources Book for state taxes. He
detailed that when determining economics, BP included
everything it was paying regardless of whether it fell in a
production tax bucket, state corporate income tax bucket,
or other. The information on the slide reflected an "all
in" revenue going to the state. He believed the slide came
from page 29 of the book.
Representative Wilson asked for verification the slide did
not include municipalities. She did not believe
municipalities were included in the DOR Revenue Sources
Book.
Mr. Bilbao did not believe so, but he would follow up.
Representative Wilson asked for an estimate of federal
taxes on the same barrel in order to understand the true
loss.
Mr. Bilbao believed there was a broad difference in the
current year for different industry members. He did not
imagine there was a large federal income tax payment if the
industry was suffering a loss. He would follow up.
4:12:38 PM
SCOTT JEPSEN, VP EXTERNAL AFFAIRS AND TRANSPORTATION,
CONOCOPHILLIPS, provided a PowerPoint presentation titled
"House Finance Committee CSHB111" dated March 22, 2017
(copy on file). He outlined his intent to speak about
benefits SB 21 had brought to Alaska, what it was intended
to do, and whether it had met its intent. He also intended
to speak about the current competitive environment in the
U.S. The testimony would also address specific elements of
HB 111.
Mr. Jepsen turned to slide 3 titled "FY 2017 Producer Share
vs ANS WC - Fall 2016 RSB Assumptions." The chart was
derived from the 2016 Fall Revenue Sources Book compiled by
DOR; it showed net cash flow split between the state, the
federal government, and producers, as a function of oil
price for FY 17. The Y axis represented net cash flow in
millions of dollars. The state's share consisted of
royalty, severance tax, state income tax, and property tax.
Also included in the calculation were the per barrel
credits, but the cashable or other tax credits had not been
included because they were discretionary expenditures the
legislature had decided to make to encourage new entrants
to the North Slope for further tax purposes. The chart
represented strictly the revenue side of the equation. He
pointed to the red portion of the bars on the chart, which
indicated the state had the largest share at all price
points. He referred to 2013 when $80 per barrel had been
considered a low oil price. The share to the state was in
the higher $40s and the investor share had been around mid-
$30s. At around $60 per barrel, the ratio between the state
and investors remained close to the same. At lower prices
where profits were thin, particularly below $45 per barrel
where industry was in the negative, the state's share
continued to increase. The chart did not include
percentages on the state's share below $45 per barrel was
because the share was infinite; any net profit was consumed
by the state through existing gross taxes - primarily the
minimum severance tax, royalty, and property tax.
Mr. Jepsen continued to address the chart on slide 3. He
referred to discussion on whether there should be a set
amount of money received by the state (a floor). He
explained that there was. He detailed it was the gross
taxes the state already received. In the case of property
tax, it was not price dependent, but value dependent. He
communicated that the state already took the lion's share
of the revenue - it took far more than the investor. He
noted that if the federal and state share were combined,
the total was in the mid-$60s, which was a pretty high
government take. He referred to earlier discussion by Vice-
Chair Gara related to effective versus statutory tax rates.
He explained that the chart represented what the government
took after operating costs and capital investments. He
could not define fair share for the legislature, but it
appeared the state was already in a pretty good position,
particularly at low oil prices. An increase in taxes would
further widen the gap between investor and state share and
would make costs increase in Alaska.
Mr. Jepsen noted he would address what the competitive
environment looked like. He continued that anything
increasing the industry's costs in a high-cost environment,
would not going to incentivize investment. The per barrel
credit had been included because it was an integral
component of the tax rate calculation. He explained that
the specific credit had been implemented in the House
Resources Committee as a way of taking the extreme
regressivity out of the tax rate when looking at lower oil
prices. He clarified that it was not a credit per se, but
it was an integral part of the tax rate calculation.
4:17:41 PM
Vice-Chair Gara asked if the slide counted or did not count
the tax rate reduction. Mr. Jepsen answered that it was
counted.
Mr. Jepsen advanced to slide 4 titled "Activities since Tax
Reform (SB21) Passed." The slide addressed the number of
projects sanctioned since the passage of SB 21 and whether
they had occurred due to the passage of SB 21. The slide
showed all of the various investments ConocoPhillips and
its partners had authorized since the passage of SB 21 in
2013. Shortly after the passage of the bill the company had
added two new rigs to the Kuparuk rig fleet, it had
sanctioned and taken delivery of two new-build rigs, and in
2016 the company had four to five rigs running between
Kuparuk and Alpine. At present the rig count was down to
three for a couple of reasons. First, Conoco had worked off
much of the backlog in terms of fixing wells needing to be
worked over. Additionally, due to the current price
environment, the company had high-graded the portfolio in
terms of wells that made since to drill at current prices.
However, the investment and drilling opportunities the
company had identified three years earlier were still
there. He stated that hopefully the company would have the
ability to revisit the opportunities assuming an investment
climate that incentivized investment as well as some uplift
in oil price.
Mr. Jepsen continued to address slide 4. In 2016 Conoco had
sanctioned another new-build rig (an extended reach
drilling rig). The rig would significantly change how much
the company could develop from a single drill site.
Currently the maximum it could reach from a single drill
site was approximately 55 square miles; the new rig would
extend that to about 120 square miles. The change could
represent a paradigm shift as it could reduce the number of
drill sites it took to develop a discovery or a new field
and would let the company get further out to the edge of
the reservoir in places that may be marginal if it were not
for the fact that the work could be done without putting in
more infrastructure like gravel. Conoco had also authorized
additional investment in its viscous oil resource in
Kuparuk - the North East West Sak (NEWS) at drill site 1H.
He elaborated that when prices had dropped, the project had
been paused for about one year and the company had looked
hard at what it could do to reduce costs and was currently
back to work on the project.
Mr. Jepsen continued to speak to slide 4. The company had
brought the first new drill site 2S on stream, which was a
project of about $450 million and brought in about 8,000
barrels per day. Conoco had sanctioned 18 additional wells
at CD5. The CD5 decision had been independent of SB 21, but
the company had decided in the past year it would drill an
additional 18 wells in the region. The company had
sanctioned Greater Moose's Tooth 1 in 2015. He expounded
that exploration had been underway in the late 1990s/early
2000s in the specific area of the National Petroleum
Reserve - Alaska (NPRA). The company had made discoveries
in the area and had completed an EIS in 2004 with the goal
to do CD5 and then CD6 and CD7 (Greater Moose's Tooth 1 and
2). However, the process had not gone according to plan -
there had been some issues with the regulatory process and
CD5 had not come online until several years back. The
decision to make the other investments such as Moose's
Tooth 1 were independent decisions. He underscored there
was nothing in the past that would dictate that Conoco
would have to make the decision. When looking at investment
decisions the company considered price, the quality of the
reservoir, the rate it would earn, the cost to invest
capital, and the tax framework. The projects had made sense
to Conoco since the passage of SB 21; he believed SB 21 had
been a key factor in the decision to move forward - it was
not the only factor - but it helped position the
investments better in the company's portfolio.
Mr. Jepsen explained that at present the company was trying
to permit Greater Moose's Tooth 2 (located about eight
miles west of Greater Moose's Tooth 1), which would be
another $1 billion-plus project and was anticipated to
bring in about 25,000 to 30,000 barrels per day at peak
production with about 700 positions during construction.
The project was estimated to come online about 2021. The
company had recently announced another major discovery in
NPRA - about eight miles west of Greater Moose's Tooth 2 -
called Willow. Willow was a much larger discovery - the
company was estimated 300 million-plus barrels of
recoverable oil. It was potentially a multibillion dollar
investment with production of up to 100,000 barrels per day
depending on the development scenario pursued. The company
continued to be bullish in Alaska investment. He furthered
that in December [2016] the company had picked up about
737,000 acres in federal and state lease sales in NPRA and
just east of NPRA on state acreage. The company believed
there continued to be exploration potential, which it was
pursuing.
Mr. Jepsen discussed that since 2013 there had been
significant industry investment by other players. North
Slope production had grown for the first time in about 14
years by 2 percent in 2016. In 2015 the decline had been
slight at about zero percent. He recalled that during the
debate on SB 21 people had asked what would happen if the
bill passed. People had asked if decline would be offset or
production would increase.
4:23:32 PM
Mr. Jepsen continued to address slide 4. He explained that
at the time no one had been able to answer the questions.
He had not known whether the projects would be sanctioned
at the time because the bill had been under debate. Since
the passage of SB 21, significant work had taken place on
the North Slope - substantially more so than what had been
taking place before the passage of the bill. Not only had
decline been offset, but production growth had begun. He
pointed to a chart in the bottom right corner of the slide
showing Conoco's capital budget back to 2012. The blue bars
represented the percentage of the company's overall capital
budget for each year (from 2012 to 2017). He continued that
2012 had been the last full year of ACES; during the ACES
regime from 2007 to 2012, the company had spent between
$700 million and $800 million per year in Alaska. Since
then the company's budget had been higher. Even in the
current environment of low oil prices the company was
planning on spending about $1 billion in Alaska. He had
showed the percentage as a function of the company's
overall corporate capital expenditure to show that its
budget had varied based on the projects it was pursuing,
but it had remained pretty consistent and had grown as a
percentage of Conoco's overall corporate budget.
Mr. Jepsen relayed that in 2017 the company's corporate
budget was about $5 billion and Alaska would receive
approximately 20 percent of the total allocation. Part of
the reason was related to current projects the company
would continue with; the projects had been authorized due
to the positive investment climate in Alaska amongst other
things. He hoped the trend would continue, but it would
depend in part upon whether a significant tax increase was
implemented in Alaska.
4:25:21 PM
Mr. Jepsen moved to slide 5 and addressed how the bill
would impact on competition. A map on the slide showed the
unconventional fields in the Lower 48, which were basically
the shale fields (oil fields were represented in green and
gas fields were represented in red). He pointed to large
investments made indicated next to the Bakken, Permian
Basin, and Eagle Ford fields on the slide. He elaborated
that much of the investment activity had focused on the
areas over the last few years. At the present time there
had been a decrease in price, less capital available for
investment, and companies were allocating capital based on
the cost of supply. He detailed that Alaska had to compete
against projects that were typically cheaper to develop and
operate and with fewer regulatory hurdles. He referred to
work in NPRA, which was a very difficult place to work from
a regulatory point of view - due to the federal government,
not the state. He discussed that Alaska was a high-cost
location to invest. The state was opportunity rich, but it
was necessary to be able to compete if the company were to
continue investing in Alaska.
4:26:59 PM
Mr. Jepsen addressed slide 6 titled "Unconventional: Top-
Tier Resource Base and Growing." He detailed that
information on the slide had been taken from Conoco's
November 10, 2016 analyst meeting. The slide addressed the
company's resource base within its portfolio as a function
of cost of supply. The cost of supply (dollars per barrel)
was represented on the Y axis and the resource was shown on
the X axis. At $50 per barrel, Conoco had about 15 billion
barrels of resource it could develop. He noted the
information was pretty representative of what investment
opportunities looked like for the industry as a whole. In
Alaska, Conoco's cost of supply was at the top end at the
$40 to $50 per barrel range. Over the past year Conoco had
focused much of its attention on how to decrease its cost
of supply on all of its investment opportunities. The cost
of supply on CD5 had dropped from $62 to $40. He was
concerned that if the base tax rate structure was
increased, it would drive costs of supply up and would make
companies less competitive, which could result in less
investment in Alaska. He explained it would have a negative
long-term effect if the company invested less money,
resulting in fewer jobs, less production, less royalty,
less severance tax, and less revenue to the state.
4:29:01 PM
Mr. Jepsen turned to slide 7 and relayed the minimum tax
rate increase (from 4 percent to 5 percent) in HB 111 would
be a 25 percent tax increase at low oil prices. The company
viewed the change to the per barrel credit as a fundamental
change to the SB 21 tax structure. He stressed that the
state already received the lion's share of the net revenue
- the bill would increase the share even higher. He stated
the interest change was punitive, primarily because the
state largely controlled the time it took to finish some of
the audits. He referenced intention to comment on the
migrating tax credit change, the tax information disclosure
provisions, and the NOL provisions.
Mr. Jepsen advanced to slide 8 titled "CSHB111 Represents a
Significant Increase in Tax Rate." The chart attempted to
show the percentage increase as a function of oil price
between CSHB 111 and SB 21. The Y axis represented the
percentage increase in tax rate as a function of oil price.
The chart was complicated as it tried to take into account
changing the minimum tax rate, changes in the timing of the
sliding scale, and a different effective use of per barrel
credits. The company viewed the CS as a tax increase - at
lower prices the bill represented a 25 percent tax increase
and when looking at per barrel credits it still represented
a fairly significant tax increase at medium prices. The
company would be making money, but the consideration was
where the changes would put the company at total cost. He
stressed that total cost mattered. He spoke about lower
total costs in other locations around the world. He
returned to slide 5 and explained that the cost of supply
for places like Eagle Ford, Bakken, and Permian Basin took
into account whatever the royalty rates may be. They took
into account the royalty rates and higher severance tax in
North Dakota.
Mr. Jepsen summarized that total cost mattered. He stressed
that it was not whether the state had the highest or lowest
severance tax, but about what it cost to produce a barrel
in Alaska and how it competed with other places in the
world. He underscored that there was not infinite
investment money - it was necessary to place investments in
the best place a company could achieve the best return.
Conoco was hoping Alaska would continue to remain
competitive. He posed a question about why the company was
doing business in Alaska if it was such a high cost place
to conduct business. First, the production characteristics
in Alaska were different than the unconventionals, which
were typically high rate and steep decline. In Alaska the
characterization could be offset with more conventional
reservoirs with a lower rate of decline. Conoco still saw
the ability to grow production in Alaska; it would invest
in locations that fit in their portfolio that made sense in
the current price environment, and where it could make a
reasonable rate of return under the tax regime. The company
still saw places in Alaska where it could explore and
potentially grow its base and potentially generate positive
net income and cash flow. He cautioned that if the cost of
supply curve increased too much those things could change.
4:33:24 PM
PAUL RUSCH, VICE PRESIDENT, FINANCE, CONOCOPHILLIPS,
addressed slide 9 related to migrating per barrel tax
credits. He referenced previous presentations from DOR that
showed where taxpayers had migrated the per barrel tax
credits from one month to another during the year in 2014.
Conoco disagreed with the view. He detailed that the
production tax was an annual tax, but monthly estimated
installment payments were made to help ensure the state
received tax payments throughout the year. At the end of
the year (March of the following year) companies made a
final tax payment. He specified that in 2014 taxpayers had
utilized their full allotment of the annual per barrel tax
credits; they had not migrated them from month-to-month,
but had used what was allowed by law for the tax year. The
change proposed in HB 111 had been identified as a simple
change to a perceived problem in the existing tax law;
however, it was fundamentally moving the annual tax to a
monthly tax. He referred to testimony on some of the
difficulties the change would create related to trying to
calculate the monthly tax to the precise dollar. The change
would increase the complexity and would potentially open
the door to other changes in the same direction. He
underscored there was no such thing as migrating credits.
He stressed the change was really nothing more than a tax
increase.
4:36:07 PM
Mr. Rusch moved to slide 10 titled "Basis for Interest
Change Unsupported." Conoco viewed the interest rate
increase was really a punitive interest rate when
considering how long the audit process took and how little
control the taxpayer had over the entire process. The slide
included a chart titled "Production Tax Audit Timeline,"
which showed the company's audit status from 2006 to 2011.
He relayed that 2006 was the only tax year that had fully
completed the audit process, which represented the
magnitude of time it took to complete the process. He used
2007 as an example and explained the gray portion of the
bar represented the tax year. The final tax return for 2007
had been filed in March 2008. The red portion of the bar
included the following six years and represented the period
of time DOR took to complete the audit. He noted that the
department had taken three years to complete the audit for
2006 (three years had been the statute of limitation in
2006, but it was six years beginning in 2007). There was
nothing the taxpayer could do to impact the schedule.
Following the red portion of the bar there was a small
orange section, which represented a 60-day period in which
the taxpayer could appeal the results of the audit if
desired. The bar included an additional two-year period in
yellow, which represented the informal decision process
(the first appeal process) - most of which was controlled
by the department. A small blue segment of the bar
represented a 30-day period for the taxpayer to appeal.
Finally, the green portion represented the Office of
Administrative Hearings. He summarized that the process had
taken nine years for 2007. Interest had been incurred over
the entire period unless a limitation was implemented,
which is what had been in place previously.
Mr. Rusch elaborated that under HB 247 [oil tax credit
legislation passed in 2016] the interest rate had
effectively doubled from 4 percent to 8 percent.
Additionally, the three-year limitation had been
implemented at the same time, which Conoco had perceived as
an effort to create some incentive to shorten the audit
timeframe. He furthered that HB 111 was contemplating
maintaining the high interest rate, but doing away with any
incentive for DOR to shorten the audit time. He reiterated
there was very little the taxpayer could do to impact the
slow timeline. The company saw applying a high interest
rate in that environment as punitive.
4:40:03 PM
Mr. Rusch addressed other concerns on slide 11:
· Tax policy should be focused on the aggregate, not
individual tax payer information
o Disclosure of individual tax return information
may violate SEC, anti-trust, or other regulations
o Puts recipients at risk of violating federal law
o Confidentiality agreements are difficult to
enforce -provision provides for broad
distribution
· Pre-approval of lease expenditures (NOLs) could
effectively require advance approval of production,
prices, and all expenses
o Could create significant bureaucracy
o Results in uncertainty / instability regarding
tax treatment
o No legislative guidance regarding implementation
Mr. Rusch elaborated on slide 11. He clarified that in no
way was Conoco saying it did not want to provide the data
to the state. He detailed that the company provided a
significant amount of data to the state already. The
question for Conoco, was about who needed to see the data.
He furthered that DOR could provide the data on an
aggregate basis to the legislature. He addressed the second
portion of slide 11 related to the preapproval of lease
expenditures. He pointed to a lack in clarity in the
drafting of the bill; the pending regulations left a great
amount of uncertainty. He explained the bill required a
company to know in advance whether it would have an NOL,
which the company would not know. One option was that a
company would bring all expenses in for approval. Companies
would also have to try to make a determination based on
assumptions around production and price. He stated it was
problematic and would create significant bureaucracy and
uncertainty. He referred to references in earlier testimony
about mismanagement. He reasoned that it alone would scare
companies because it would become very subjective. For
example, he questioned who would decide if a delay was
mismanagement or due to regulatory issues. He reiterated
that the discussion would scare people off if they were
making significant investments.
4:44:50 PM
Mr. Rusch continued to address slide 11 and NOL changes. He
explained that Conoco had not yet incurred any NOLs to date
and barring a significant reduction in prices, it did not
anticipate being there. He stated that the NOL change was
very complicated and added another layer of complexity to
the tax, which he questioned the necessity of. He discussed
that in most developments there were partners in
investments in Alaska, which would create some issues. He
provided a summary on slide 12:
· CSHB111 represents a significant increase in the base
tax structure in an already high cost environment -
moves Alaska in the wrong direction
· CSHB111 provisions regarding NOLs and individual tax
disclosure requirements will create additional
barriers to doing business in Alaska
· SB21 is working -it has stimulated investment
resulting in jobs, production, and increased State
revenue -let it continue to work
Mr. Jepsen elaborated that oil flowing in TAPS had
increased in 2016 for the first time in a long time. He
detailed that significant discoveries had been announced by
Conoco and several other companies. Additionally, Conoco
had sanctioned and completed a number of developments on
the North Slope over the last few years. He stressed that
increasing taxes would increase the cost of doing business
in Alaska, which could result in less investment, fewer
jobs, lower production, and ultimately reduce revenue to
the state.
4:47:54 PM
Co-Chair Seaton stated that one of the things the
legislature had tried to do the previous year in HB 247 was
limit the state's exposure on credits given. He believed
the concept had been melded into the preapproval provision
in HB 111. He explained that the previous year the
legislature had been looking at allowing credits to accrue
if a company was working on a development plan and getting
closer to production tax credit. He asked if the method
would work better for industry if the state was attempting
to limit its exposure for the cost of developing credits.
Mr. Jepsen responded that the scenario mentioned by Co-
Chair Seaton would not require any divestiture or
disclosure of any cost data, price assumptions, or anything
else - which would not be as invasive as the provision in
HB 111 or as chilling to investment. He continued it was up
for the legislature to decide whether it discouraged a
company from coming to Alaska to explore, buy leases, or
other. He noted that at that point in time the company
would not be in a development plan at that time. He
questioned whether the company would be in the same
competitive position as someone else who might be. A
potential downside to the scenario presented by Co-Chair
Seaton was - the state wanted new investors, but it was
implementing another barrier relative to someone who may
already be in Alaska.
Co-Chair Seaton asked if the production tax credits were
exploration tax credits or were they building up a seismic
log that could be sold to someone else never intending to
have something go into production. He explained the
legislature had been trying to determine a balance in terms
of what it was trying to incentivize. He requested written
feedback around the issue. He understood concerns about the
intrusiveness of an approval process, but the legislature
was trying to address what it could afford and what it
wanted to incentivize at present. He spoke about credits
leading to production versus merely activity.
Mr. Jepsen answered that by in large the activities
described by Co-Chair Seaton probably did not impact Conoco
significantly. He understood that the cashable tax credits
were a significant issue for the state at present. He also
understood the desire by the legislature to ensure the
state received the most bang for its buck. He would follow
up at a later time if he had additional thoughts. He
thought some later testifiers would have a better idea of
what it would mean for their business because they were
actually doing that kind of business.
Representative Guttenberg spoke to the disclosure of tax
returns and concern by the industry. He was always
concerned that DOR could not answer a question due to
confidentiality. He detailed that numbers were aggregated
and the department could not separate them out. The
legislature was trying to determine tax policy apart from
information from consultants and industry, the information
from the department was what the legislature had to go by.
He stated that much of the information was public and
available in other jurisdictions around the world. He asked
if Conoco would be willing to make information the company
disclosed in other locations public in Alaska.
4:53:57 PM
Mr. Jepsen replied that he was not aware of any location in
the world where Conoco's federal tax return was public
information. He believed tax policy should be based upon
results it provided. He stated it could be changed if the
results were not desirable. However, he believed trying to
craft tax policy around individual tax returns was bad
policy. He stated that it would not be possible to ever get
exactly the desired outcome. He thought successful tax
policy achieved the average of the goal - some players
would do better and others would do worse. He relayed that
Conoco provided substantial information to DOR. He
continued that the department had tight control of the
information. He did not believe he could follow the
company's tax return and make decisions based upon the
return. He did not believe the information would be
beneficial for Conoco or the committee. He opined that DOR
was doing a pretty good job conveying to the legislature
and the public what the tax policy was doing for the state.
If the desired results were not being achieved it was the
legislature's purview to change the tax law.
Representative Guttenberg believed the confidentiality
posed a problem as the previous day Mr. Alper [Director,
Tax Division, Department of Revenue] had not been able to
respond to two of his questions. He did not know what
Conoco's board of directors would do if it had to consider
investment policies in places where they did not have
information. He knew that when looking at one set of
numbers or one audit it would not be possible to understand
due to complexity. He did not understand the industry's
opposition to providing the legislature with access to
information. He noted the information may not be relevant
and may not be decipherable. However, he opined that to
understand how something was working in some scenarios but
not others was a disservice to everyone.
Vice-Chair Gara appreciated the company's presence in
Alaska and its commitment to projects. He referred to slide
5 titled "Significant Investment Competition." He asked
which states the Bakken shale play was located in.
Mr. Jepsen answered North Dakota and Montana.
Vice-Chair Gara asked if the company was still investing in
those locations. Mr. Jepsen answered in the affirmative.
Vice-Chair Gara clarified his interest was "not to tax
companies into submission so that you're bleeding red." He
continued that some individuals wanted a 10 to 15 percent
gross tax at all prices, but it would put oil companies
under water at $40 to $50 per barrel. He stated that North
Dakota had a 10 percent gross tax at all prices - it
increased to 11 percent around $80 per barrel. He asked if
his representation of the North Dakota tax was fair.
Mr. Jepsen believed the existing price point [in North
Dakota] moved from 10 to 10.5 percent.
Vice-Chair Gara surmised the tax was much higher than
Alaska's 4 percent gross minimum tax.
Mr. Jepsen answered by returning to slide 6. He stated it
was not about what a particular tax was, but what the total
government take looked like. In Alaska, a significant share
of the net revenue went to the state at any given price
point. He explained it was not about whether North Dakota
was getting more than in Alaska; it was about the total
cost. He understood the dilemma facing the legislature
related to what the tax rate should be - whether it was
reasonable and met the state's tax and revenue needs. He
explained that the cost of supply was already very high and
companies were struggling to compete. If the legislature
did anything to increase the cost, the company would fall
out of the game. He underscored that total cost mattered.
Vice-Chair Gara noted that in North Dakota the royalties
paid by companies were largely to private landowners -
instead of bidding on a lease like in Alaska, companies
paid an acreage cost there. He relayed it had been
explained to the committee that Alaska was cost-challenged.
He noted that one thing that Conoco did that other
companies did not do - because of SEC rules, Conoco
reported its Alaska and regional profits. He expounded that
in Conoco's fourth quarter of 2015 it had made $110 million
in adjusted earnings in Alaska, lost $101 million in
Canada, lost $219 million in the Lower 48, made less money
in all of Europe and North Africa combined, and had lost
money in all other international areas. The only areas the
company had made more money than in Alaska was in the Asia
Pacific and Middle East regions combined. He asked if he
should infer from those numbers that Alaska was really a
terrible place to do business.
5:01:17 PM
Mr. Jepsen answered that unfortunately SEC-type accounting
did not necessarily give an adequate picture of where a
company was in terms of generating cash flow. There were
numerous things that went into SEC accounting that were not
representative of "what we would all look at in our
checkbook." Ultimately, the company actually had more
positive cash flow in the Lower 48 pre-tax than in Alaska.
He deferred to his colleague to provide an additional slide
in response to Vice-Chair Gara's question.
Mr. Rusch informed the committee that the company's annual
report was currently available. The slide would address
full-year data. He pointed out that due to the company's
size it reported its Alaska results separately. The annual
report showed specific cost data for Alaska relative to
other parts of the world. He stressed that the cost
structure in Alaska was significantly higher than elsewhere
in the world. He referred to its remote locations and noted
that everything was more expensive everywhere in Alaska.
For example, an all-in cost for Alaska was about $43 [per
barrel] including transportation, tax, development cost,
and production cost. Whereas, the total cost was around $20
in the Lower 48.
Mr. Rusch addressed a supplemental slide 1 titled
"ConocoPhillips Earnings and Estimated Cash Flow ($
Million)." The slide included a table titled "2016 Cash
Flow Estimate." The slide used an SEC-type net income based
on U.S. GAP [General Accounting Principles] guidelines. For
the year Alaska had generated positive adjusted earnings of
$233 million and the Lower 48 had a loss of almost $1.9
billion. He underscored the importance of cash flow. The
table adjusted for two items including income taxes and
depletion and depreciation. The table added income taxes
back in to demonstrate that the company was corporately in
a loss position. The company was not receiving a refund for
the tax benefit. He stated that the data made Lower 48 look
even worse because of the receipt of a significant federal
tax benefit. After the inclusion of income taxes Alaska
pre-tax earnings were $216 million and the Lower 48 showed
a loss of almost $3 billion. The large adjustment was
depletion and depreciation, which was a way to amortize
previous capital and fixed assets over the period of
production. He detailed that a units of production was
calculated and a depletion and depreciation rate was
assigned to each barrel produced. The number for the Lower
48 was significantly higher than the rate for Alaska. There
were a number of factors driving the different rates,
including the significant capital investment made in the
Lower 48 over the preceding four to five years. Much of the
investment had been to set up infrastructure (i.e.
pipelines and other fixed assets) for future production.
Mr. Rusch continued to address the supplemental slide 1. He
relayed that the reserve base in the Lower 48 was much
smaller relative to the capital size. Units of production
were calculated based on the booked proved reserves. He
furthered that the Lower 48 developments were fairly new
and they were only able to book a small percentage of the
production expected out of the wells - additional reserve-
adds would be seen over time. When the non-cash item was
added back the estimated cash flow before investing was
about $1.1 billion for Alaska versus $1.3 billion for the
Lower 48. Once the capital expenditures (cap-ex) were
factored in the estimated pre-tax cash flow for Alaska was
$200 million and $9 million for the Lower 48. He explained
that the results were not stellar. He specified that the
company had $12 billion to $13 billion invested in Alaska.
When looking at the companies Lower 48 business only about
40 percent of its production was oil - the remainder was
natural gas liquids and gas. He noted that the gas price in
the Lower 48 had been approximately $13. He referred to the
future investments Conoco was making in the Lower 48 and
explained that it was investing in oil, not gas. He shared
that the company had recently announced it was disposing or
marketing a significant portion of its gas assets in the
Lower 48. The slide represented a combination of oil and
gas; however, future investments were veering towards oil,
which would be much more profitable.
5:10:25 PM
Co-Chair Seaton wondered if there was an effect of being
able to write off 100 percent of cap-ex in the year it
accrued versus having to do a depreciation schedule. He
asked if it showed up in the slide.
Mr. Rusch responded that the information presented in the
table [supplemental slide 1] was purely on a financial
basis. There was no accelerated depreciation or anything
else. He clarified that all of the fixed assets were
amortized on units of production; it was very different
than what was witnessed in tax depreciation or other
depreciation purposes.
Co-Chair Foster recognized Senator Peter Micciche in the
audience.
5:11:49 PM
Vice-Chair Gara emphasized that the gross tax rate in
Montana of 10 percent was 250 percent higher than the tax
in Alaska. He reiterated his earlier statement about losses
Conoco had experienced outside of Alaska in 2015. He stated
that in almost every year going back to 2010 Alaska was
either the most profitable or the location where the
company had lost the least or close to the least amount of
money. He was glad to know the company was profitable and
was doing better in Alaska than in most other places.
However, he believed it indicated Alaska was a decent place
to invest. He added that even under ACES Alaska ranked
first of second for Conoco; the Middle East and Europe were
the places where it tended to do better.
Mr. Jepsen reiterated that the items shown on the slide
were not cash results, reflections of where the company was
investing its money, or of the lower cost of supply
opportunities the company could invest in. The company had
about 7 billion barrels of resource to invest in below $35
per barrel cost of supply, which was where Conoco was
currently putting its money. The company had historical
investments that were putting it in the negative net income
category due to the drop in oil price. He underscored that
the data did not represent cash flow numbers. He explained
that Wall Street liked to evaluate companies on net income
because it tended to smooth out investments over time
rather than presenting a "saw tooth" profile. Many
investors believed the net income method should be done
away with and only cash flow should be used because it was
what determined what a company was actually earning. The
company was not putting its money in gas fields or in
places that would continue to drive its earnings negative;
it would put the investment in different places. He
continued that Conoco had invested quite a bit in some of
the unconventional basins and it would not begin to drill
more wells. He concluded that it was not possible to take
from the numbers presented on the slide that Alaska had a
big advantage over the places Conoco was looking at
investing at present.
5:15:07 PM
Representative Kawasaki asked about the key metrics
included in the calculation of production cost per barrel.
Mr. Rusch responded that the number was all inclusive and
represented production tax, taxes on net income,
transportation, and the development cost where Conoco had
taken its capital on a per barrel basis. The goal on the
slide was to show all spend in the current year divided by
barrels.
Representative Kawasaki asked for verification that the
calculation included capital expenses for the year, which
had been high in 2016.
Mr. Rusch responded that when he had referenced a $43 [per
barrel cost for Alaska] it reflected an all-in number. He
referenced the $16.12 cost per barrel for Alaska versus the
$11.06 cost per barrel in the Lower 48 [at the bottom of
the supplemental slide 1] and explained that it was purely
a production cost number (primarily lifting costs and other
related expenses).
Representative Kawasaki asked for clarification that the
number did or did not include capital and transportation
costs. Mr. Rusch responded that it did not include those
items.
5:17:09 PM
Representative Kawasaki referred to slide 6 of the
presentation. He asked about the definition of the cost in
supply. He wondered if the cost of supply included capital
expenses paid in the year, transportation costs, and
lifting costs.
MR. Jepsen answered that the cost of supply was the
breakeven price required to get a 10 percent rate of return
on an after tax basis. It included all elements - severance
tax, royalty, and transportation; it was an all-in metric.
Representative Kawasaki asked if capital was also included.
Mr. Jepsen responded that capital was included.
Representative Pruitt returned to the discussion about
required information the legislature was asking companies
to provide. He quoted from slide 11 of the presentation
that disclosure of individual "tax return information may
violate SEC, anti-trust, or other regulations." He provided
a scenario where state law potentially conflicted with
federal law and asked which Conoco would chose.
Mr. Jepsen replied that he hoped there would not be a
situation where the scenario would occur - presumably the
legislature would ensure its regulations aligned with
federal law. He relayed that generally federal law
superseded state law.
Representative Pruitt asked whether the state would open
itself up to litigation from Conoco's investors if it tried
to force the company to provide certain information that
could violate federal law.
Mr. Jepsen replied that he was not an attorney and could
not definitively answer the question. The company was not
planning on being in an NOL situation; therefore, it would
not be planning on coming to the state with the
information. From a generic standpoint he believed it was
very problematic and the issue raised by Representative
Pruitt was legitimate.
5:20:21 PM
Co-Chair Seaton asked to return to the previous slide
[supplemental slide 1]. He referred to a realized oil price
in Alaska of $41.93 and production cost in Alaska of
$16.12. He stated it turned out to be $26.00. The realized
oil price in the Lower 48 was $37.49 with a production cost
of $11.06, which equaled $26.50. He asked for verification
that the Company's margin in Alaska compared to the Lower
48 was essentially equal.
Mr. Rusch clarified that the $41.93 and $16.12 figures did
not include transportation. It was necessary to also factor
in transportation costs of approximately $10 per barrel for
Alaska; transportation cost for the Lower 48 barrel was
minimal.
Co-Chair Seaton asked if the presenters had any other
slides that showed Alaska costs or production volumes that
would give a more definitive picture of what Alaska looked
like from Conoco's perspective.
Mr. Jepsen responded that they did not have any additional
information on hand. He noted that the annual report had
been published and was the source for the information shown
on the slides.
Co-Chair Seaton asked for verification that the price and
cost information were from the annual report. Mr. Jepsen
answered in the affirmative. He added that the figures did
not include capital or transportation on production costs.
Given that much of the company's production in the Lower 48
represented low margin investments (i.e. natural gas), the
company wanted to invest in other locations where margins
were higher.
Co-Chair Seaton remarked that his calculations still showed
about the same margins [between Alaska and the Lower 48].
He stated that a look had been taken at the fields with
gross value reduction (GVR), which had an entirely
different margin, cost expenditure, and yield to the state.
One of the problems may be with melding GVR field costs
with non-GVR fields. He asked if it would be problematic to
have costs associated with GVR fields only offsetting costs
or profits from GVR fields. He wondered if it would be
problematic to ring fence the two things separately since
there was such a large differential with 20 percent GVR in
the fields.
Mr. Jepsen responded that anytime ring fencing was applied
it created problems including different classes of assets.
Additionally, it made it more difficult to evaluate how to
invest as a function of a company's overall portfolio. He
stated that ring fencing had been talked about a number of
times related to heavy oil and GVRs. Philosophically he
believed it would put the state in a bad place - it did not
necessarily incentivize the right behavior as it was
important to have people investing in the best projects. He
believed the current system (without ring fencing) lead to
a more reasonable development scenario where companies
invested in the best projects and the best outcome from
investments.
5:24:59 PM
Vice-Chair Gara referred to the realized oil price at the
bottom of the supplemental slide 1. He wondered if it
represented the average Alaska oil price in 2016. Mr. Rusch
responded in the affirmative.
Vice-Chair Gara continued to address the slide referred to
the $233 million in profit for the company in Alaska. He
noted that in general terms for oil companies $233 million
was not a substantial profit. He asked if the company's
breakeven price in Alaska was at oil prices in the $30s per
barrel or lower.
Mr. Jepsen could not comment on what the Alaska breakeven
price may be; it was not publicly disclosed information.
Vice-Chair Gara surmised the breakeven was somewhere below
$41.93.
Co-Chair Seaton interjected that the questions were not
answerable.
5:26:37 PM
AT EASE
5:27:36 PM
RECONVENED
BENJAMIN JOHNSON, PRESIDENT, BLUECREST ENERGY II, LP (via
teleconference), provided a PowerPoint presentation titled
"House Finance Committee - CS for HB111, J. Benjamin
Johnson Testimony" dated March 22, 2017 (copy on file). He
read from a prepared statement:
Good afternoon Co-Chairs Foster and Seaton, and
members of the Committee. For the record, my name is
J. Benjamin Johnson. I am the president and CEO of
BlueCrest Energy Inc. Thank you for the opportunity to
speak concerning this very important matter.
Mr. Johnson commented that he was the first of the smaller
producers and also the only producer testifying from the
Cook Inlet. He continued to address prepared remarks:
First, I want to echo what we've heard today from Kara
Moriarty and other members of the industry. In
particular, I want to emphasize the importance to
Alaskans of fostering an environment that helps get
Alaska's vast resources developed and brings value to
its residents.
Just last year we heard many voices claiming that
Alaska's oil industry was dying. The conventional
wisdom said that it was time to "move on" beyond oil.
But now we know that was wrong! In fact, the positive
changes to the state's tax system over past years has
attracted the capital and new companies so that the
natural decline of TAPS has been stemmed - at least
for now - and the state has laid the foundation for
decades of continued production.
And of course, we've all heard about three gargantuan
oil finds that have been announced on the North Slope.
But that's just what has been announced! Who knows
what else may be coming as result of more
exploration!? These huge new fields will take time and
a lot of money to reach production. But if these new
finds can be developed, they are poised to usher in a
new era of productivity and long term wealth for
Alaska.
5:31:00 PM
Mr. Johnson moved to slide 2 and 3 and continued prepared
remarks:
In the Cook Inlet, we have also seen a re-birth of old
fields, doubling the total Cook Inlet production of
oil and ending the gas supply crisis.
Right now, BlueCrest is developing a substantial new
field in the Cook Inlet. The Cosmopolitan Unit is
poised to become the largest oil producing field in
the Cook Inlet and has the potential to provide enough
natural gas to supply the Southcentral utilities for
many years to come. Because of the location, Cook
Inlet fields can be developed much more quickly than
those on the Slope. Yes, the size is smaller than some
of the largest North Slope fields, but so are the
costs and time to bring online. For example, we built
and turned on our initial onshore production facility
in Anchor Point in a little more than a year.
5:32:16 PM
Mr. Johnson advanced to slide 4 and provided prepared
remarks:
And now, we have completed and started-up the most
powerful Extended Reach Drilling rig in Alaska,
specifically designed for this project. A couple of
weeks ago, we successfully finished drilling the
longest-reach well ever in the Cook Inlet, resulting
in thousands of feet of net pay for new oil
production. And yesterday, we began drilling the next
well that will include two long horizontal production
zones. We have the potential to drill up to 20 of
these large new wells, likely more than doubling or
even tripling the current Cook Inlet oil production.
While we are drilling, we create between 200 and 300
jobs, and they are almost all filled by Alaskans.
We know the oil is there; it's just a matter of
spending the money to implement the technology to get
it out.
5:33:13 PM
Mr. Johnson moved to slide 5 and read prepared remarks:
Now let me tell you a little bit about BlueCrest's
story. Most of you know that, although our corporate
headquarters are in Texas, I am from Alaska. My
parents lived in Anchor Point and Homer in the '40's
and '50's before I was even born, and I grew up in
Kenai. I worked my way through college on the Cook
Inlet Platforms and then for ARCO as an engineer on
some of the early Prudhoe and Kuparuk projects. I
later earned my master's degree from UAA with my
thesis written on "What to do with the North Slope
gas?" When BlueCrest's current managers initially
formed BlueCrest about 7 years ago, I personally hoped
we'd be able to come back to Alaska and bring new
value to this land. But, in our role as managers of
assets for global private investors, we have to do our
best to ensure that their investments receive the
highest returns possible.
5:34:19 PM
Mr. Johnson discussed slide 6 and read from prepared
remarks:
We've heard this theme earlier today - and I can
personally testify that it's a fact. The oil business
is largely a matter of competition for investment
dollars. Large oil and gas investors look all over the
world, and the investment money will naturally go
wherever they believe it can generate the highest
return. Our investors have the opportunity to invest
their money in many locations around the world, and we
have to offer a better deal to get them to invest in
Alaska.
Long before we made the decision to come here, the
BlueCrest management team looked all over the US for
investment opportunities that would allow us to find
and develop new oil and gas. We certainly expected
that Alaska had the resources in the ground, but
Alaska's costs and administrative processes simply
made it non-competitive with fields in the Permian,
Gulf Coast, or North Dakota basins. Investments in
Alaska are daunting: it costs roughly three to five
times as much to drill a well or build production
facilities in Alaska as it does anywhere else in the
U.S.
5:35:32 PM
Mr. Johnson moved to slide 7 and continued to read from
prepared remarks:
We weren't even considering investing in Alaska until
2009 when we met some representatives from the State
of Alaska who had a booth at the North American
Petroleum Exposition. They were enthusiastically
urging new companies to come north to develop the
state's resources. State officials handed out a book
ironically called "Dispelling the Alaska Fear Factor"
and provided information sheets describing the
incentives the state was providing for new explorers
and developers to come to Alaska. The state was
remarkably offering to rebate a portion of upfront
investments made by oil companies in order to help
make the Alaska investments more competitive with
investments in the Lower 48, and the state has offered
a consistent schedule up until last year for reviewing
and paying those credits on time. The tax credits were
meant to tip the balance in favor of Alaska. The
bottom line is that BlueCrest chose to invest hundreds
of millions of dollars in Alaska (instead of investing
elsewhere) because the incentives offered by the State
were believed to be enough to offset the cost
differences between Alaska and the Lower-48.
Let me be very clear. We would not be here - and we
would not be developing Cosmopolitan that can provide
hundreds of millions of dollars to the State over time
- but for our initial belief in the good faith of the
State of Alaska to follow through on its promises to
us.
When we first looked at developing the Cosmopolitan
project a few years ago, we very carefully made sure
that we would have the investment funds necessary to
get us to completion. We believed that the State would
follow through with its highly-promoted tax credit
program that actually paid cash rebates to small
companies for their investments in the state. Granted,
that was a one-of-a-kind opportunity. But
nevertheless, it was what the State clearly announced
it would do.
So before we ever started, we made sure that we would
have enough investment money available to get us to
the point where we could finally be cash-flow-positive
and begin paying back the investors. And, of course,
as committed to us by the state's representatives,
that plan was based on the belief that a portion of
the total investments would be covered by the state
tax credits.
5:37:57 PM
Mr. Johnson moved to slide 8 and continued to read from
prepared remarks:
And we did it. As of today, we have successfully
proved up the large oil and gas resources in the
Cosmopolitan Unit. We have completed a large new
production facility (on-time and under-budget), and we
have built and started-up the most powerful drilling
rig in the state. We have just finished drilling a
record-length well that could be the first of many
future wells with decades of production. And that new
production will likely generate more than $750 million
dollars in royalties alone for the state.
5:38:33 PM
Mr. Johnson moved to slide 9 and 10 and continued to read
from prepared remarks:
To date, BlueCrest has invested over $300 million, and
we have received about $26 million in tax credits. And
every penny of those credits has been re-invested in
the field development.
But here's the rub. BlueCrest has done its part and
invested everything we said we would, but the State
has failed to live up to its original commitments to
pay the tax credits that have been earned to date. We
fulfilled our commitments to invest hundreds of
millions of dollars in hard cash for development of
the Cosmopolitan resources. But the State has so far
failed to pay its share of the tax credits, and that
has left a large hole in our plans for funding the
continuation of the field development.
5:39:29 PM
Mr. Johnson moved to slide 11 and continued to read from
prepared remarks:
But if the remaining tax credits are not paid, the
results to the state are tangible: Without receipt of
the rest of the tax credits as originally promised, we
could be forced to slow or stop drilling the new oil
wells that would unquestionably provide large returns
to the state, resulting in a loss of hundreds of jobs
for Alaskans. Surely it goes without saying, but if
the wells aren't drilled, Alaskans get nothing.
Alaska's residents lose jobs. Alaska vendors lose
business opportunities. And the state and local
governments lose revenue.
A competitive production tax system with incentives
for new development is absolutely not a give-a-way. As
a major land-owner, Alaska benefits from every barrel
that is produced on its lands, and I contend that you
should be looking at this as an investment
opportunity. Alaska stands to generate tremendous
future revenues from a dynamic and successful oil
industry. The more you can do to stimulate new
development and enhanced production from existing
fields, the more Alaska's residents will benefit.
Remember, the state gets zero value if that oil is
never found or stays in the ground.
5:40:41 PM
Mr. Johnson moved to slide 12 and continued to read from
prepared remarks:
HB111 is a great example of a terribly misguided and
shortsighted attack on the goose that lays Alaska's
golden eggs. Do you really think you can dramatically
alter the tax structure for short term gain or create
incredible administrative burdens and still get the
same production value in the future? I've been
involved in the US oil industry for over 40 years now.
I've engineered and managed oil and gas developments
all over the country, and I can tell you that passing
HB111 will deprive Alaska of future developments and
will result in less future state revenues and fewer
Alaskan jobs. In the interest of time, I will only
address a couple of the specifics in the bill, but I
do agree with the testimony of AOGA and the other
companies we've heard today.
I've got to tell you that the pre-approval provision
in section 26 has got to be the most egregious waste
of government and industry resources I've ever seen in
my career. First of all, it's not even possible to
conduct oilfield operations if we have to stop and
wait for every expenditure to be approved in advance.
We can't even always do that internally, because we
deal in a business that is fraught with uncertainties,
and we often have to react quickly. We have to
authorize our line-level managers to make many
spending decisions on the spot, and there would
absolutely be no time for an external review. When we
encounter something while drilling or operating wells
and facilities, we have to handle it immediately.
Secondly, no matter how you look at it, any money
spent by industry costs industry far more than any tax
deduction or credit. So no prudent oil company wants
to spend one more dollar than is necessary. And keep
in mind that under the current existing process, every
expenditure is actually reviewed by the DOR after the
fact. No deductions or credits are allowed if they are
not in compliance with current regulations. So this
proposed pre-approval process would provide zero added
value to the State, it would require a huge increase
in State staff, and it would delay projects. It is a
lose-lose proposition.
5:43:28 PM
Mr. Johnson moved to slide 13 and 14 and continued to read
from prepared remarks:
Paramount to BlueCrest and other smaller companies in
the state is payment of the tax credits that have
already been earned and are now owed. We now
understand that you may decide to change or even
eliminate the tax credit incentives going forward -
but please at least honor the state's commitments for
the amounts that have already been earned.
So to wrap up, I'd like to re-emphasize the future
potential wealth this state can have if the
competitive economic environment is done right. Alaska
is a land of tremendous undeveloped potential. I urge
you to encourage growth to realize the state's true
potential. Let's all work together to wisely develop
and grow Alaska's long term value.
5:44:37 PM
Vice-Chair Gara appreciated Mr. Johnson's presentation. He
understood Mr. Johnson knew about the state's $3 billion
deficit, that there was no tax on oil in Cook Inlet, and
that the state owed close to $1 billion in tax credits. He
asked him what the state should do in terms of paying the
tax credits.
Mr. Johnson offered that the state should do something to
pay the tax credits even if only a portion was paid. He
stated it was not so important that the company receive
everything it was owed immediately, but whatever it could
get was better than nothing. Additionally, he noted that
Alaska had money in savings; however, he recommended
against spending the money if it would be lost and gone. He
advised it was a very careful decision to make in terms of
how to invest. He continued that the state was investing in
the future through its tax program. He believed it was key
to ensure the future was positive.
Representative Wilson wondered if certain projects were
halted if tax credits were not paid.
Mr. Johnson responded that BlueCrest had enough money from
its investors to finish the first well and almost finish
the second well. He detailed that if the company had all of
the credits it was owed by the end of the current year -
roughly another $100 million - it would have the ability to
continue drilling. He elaborated that there were 20 wells
the company could drill - it could be drilling wells for
years. However, if BlueCrest did not receive any payment
for its credits the board would likely have to borrow more
money to enable completion of the second well. After that
point, the board had not approved continued drilling. He
explained it would be necessary to determine alternative
ways to finance the future. He concluded that the oil was
there and the company had a great team; he would hate to
have to shut down operations.
Representative Wilson asked if Mr. Johnson meant that the
company would be forced to lay people off or to stop
advancing construction.
Mr. Johnson clarified that BlueCrest was not talking about
laying off its production people, but it may need to
temporarily shut down the drilling program at some point in
the future. He specified that if drilling was shut down,
the individuals currently working in that area would not
have a job for a while.
Co-Chair Foster thanked Mr. Johnson for his presentation.
He indicated that the committee would take a 10 minute
break.
5:49:22 PM
AT EASE
6:04:26 PM
RECONVENED
PAT GALVIN, CHIEF COMMERCIAL OFFICER and GENERAL COUNSEL,
GREAT BEAR PETROLEUM, noted that he was the first North
Slope exploration company to testify on the bill and to
provide perspective on the playing field and the balance of
tax impacts on incumbents versus new companies. He provided
a PowerPoint presentation titled "House Finance HB 111"
dated March 22, 2017 (copy on file). He intended to
distinguish between companies with current production that
were able to offset their expenditures against their
revenue versus new companies without revenue that were
incurring losses until production began. He addressed slide
2 and relayed that the bill did not work for new companies.
He detailed it abandoned the long standing state interest
of encouraging new companies to invest in the North Slope.
The bill reduced the incentive for investment and tilted
the playing field and disproportionately treated the new
companies poorly in relation to the same investment that
may be made by an incumbent company. The bill also treated
new companies very differently and negatively in relation
to incumbents.
Mr. Galvin began by addressing the investment aspect. He
intended to speak to how investment made by an incumbent
was treated under the current tax system and how it was
treated for a new company. He addressed a situation where
an incumbent made a discovery and had to invest $1 billion
to make the new project work (slide 3). Following
investment, the company could immediately deduct the
expenditure from its revenue. The deduction meant the
company would save $350 million on its tax bill (35
percent). He clarified that the 35 percent was not the
company's effective tax rate. He detailed that because SB
21 was different than its predecessor, the impact of
investment was different. He specified that because the per
barrel credit came after the tax calculation, the amount of
investment an incumbent made received a 35 percent
reduction in its tax bill.
Mr. Galvin spoke to slide 4 and explained that under the
status quo a new company that made a $1 billion investment
in a project would generate a $1 billion loss. The 35
percent NOL credit was intended to provide the company with
an equivalent economic value to the savings the incumbent
received. Under the status quo, they did not receive the
same economic value because the new entrant was not able to
immediately recover a savings. The company generated a tax
credit certificate and received $35 million per year in
payments from the state (under current law) until
production began. If the company decided to take a
significant reduction in the value of its certificate, it
could receive a total of $61 million. Once the company
began production it would begin to use the certificates
against its tax bill. He explained that the new company's
cost of capital was fairly significant and it was a risky
business to be in. He furthered that people expected to
receive a decent return on their investment and the company
was missing out on its ability to use $350 million for
years to come. He noted that the amount also be diminished
in value significantly - in five years' time the value may
be worth only 60 percent of its original amount.
6:10:51 PM
Mr. Galvin turned to slide 5 and explained that under the
current version of HB 111 the new company was only able to
take half of the investment as a loss. He detailed that in
the example he had provided the $1 billion investment
became a $500 million carry forward loss. When a company
eventually had production, revenue was deducted from its
eventual tax obligation and would end up with a combined
aggregate of $175 million value. With the uplift currently
in the bill, the $175 million value was preserved to some
extent. Under the proposed bill, an incumbent making an
investment would immediately receive a $350 million value,
while a new company making the same investment would get a
$175 million value.
Mr. Galvin moved to slides 6 and 7 and addressed a scenario
where an incumbent and new company are 50/50 partners on a
$2 billion project, with each investing $1 billion. The
incumbent company had to spend $650 million for its half,
whereas the new company had to spend $825 million for its
half. He observed that clearly the scenario was unfair. He
continued that the new company would feel disadvantaged in
the system. He remarked that the message would be that the
state would prefer incumbents spend on projects rather than
new companies. Second, the commercial reality was that the
disparate economic value for partners was a problem because
the partners would not reach an agreement on how to
proceed. The partners would be fighting and negotiating on
how to deal with the disparate treatment. He concluded it
would either slow down or doom projects that may otherwise
go forward if companies were being treated equally.
Mr. Galvin sited a third observation about the partnership
scenario. There would most likely be arbitrage between the
incumbent versus the new company related to the project's
value. He explained that under the situation a company
would see the scenario as an advantage and would offer to
buy out the other company. The incumbents would be
economically incentivized to buy out their partner because
they could make an immediate uplift in value by buying out
the partner for a designated amount. He explained that the
incumbent would receive an immediate write off. He had
heard concern from a number of legislators and others that
the NOLs were unaffordable for the state - the companies
would not be paying taxes for years after the project went
into production. He agreed that it may be true depending on
the economics of the project, but eventually once the
company was able to recover its cost, it would begin to pay
taxes on profits. He explained if the incumbent was
incentivized to buy out the new company, it would receive
an immediate tax break and the state would see the
immediate reduction in tax receipts. He reiterated the
reasons the impact was detrimental to the state in many
ways.
6:16:31 PM
Mr. Galvin spoke to the changes provided in HB 111
regarding the small producer credit (slide 9). He noted
there had been significant talk about hardening the [tax]
floor], but one of the things that had not been discussed
was the substantial change it made in the way the state
addressed small producers trying to get up to speed on
production. He explained that the state had set in place an
opportunity for companies who qualified as a small producer
to receive a non-transferrable credit that did not carry
forward and was only available to reduce taxes in a single
year. He continued that it provided a cushion for companies
operating on the margin to bring on new production. He
explained that in the aggregate it did not have a big
impact on the state's bottom line; it was also winding
down. The ability to become eligible for the small producer
credit had expired the previous year. The credit had a 10-
year life and most of those qualifying had become eligible
early in the 10-year period and were currently near the end
of their eligibility period. He expounded that many
companies had invested and become producers with the
expectation the credit would be available to them as they
go forward. He underscored that the elimination of the
ability for a company to use the credit against the minimum
tax meant essentially eliminating the value of the credit.
He noted that swamping the economics for many small
companies was not in the state's interest.
6:18:42 PM
Mr. Gavin scrolled to slide 10. He remarked that a couple
of bill sections dealt with preapproval of expenditures by
DNR. He pointed out that the provisions only applied to
those costs that were expected to become NOLs, meaning that
only new companies would get "this kind of scrutiny" of
their investment decisions. He added there was no
information on what that scrutiny would be. He explained
that the provisions did not come across as treating
companies on an equal basis. Similarly, transparency
sections in the bill only dealt with NOL credits. He stated
that as effective in the particular bill it was "really
kind of a nothing" because it only applied to credits going
away at the same time the transparency would become
effective. However, if the provision was moved over to
follow the NOL carry forward it would mean transparency
would be required only for new companies. He observed there
was not much conversation about the credits taken against
production taxes, but there was much conversation about
credits paid out in cash payments. He stated it was
strictly a function of the way the budget worked;
therefore, the public focused on the cash credit payments
as the problem. He reasoned that if the state ended up with
a transparency that only exposed new companies, it was what
the public policy would tinker around with, which was
unfair and was not in the state's long-term interest. He
encouraged treating new companies equivalent to incumbents
and encouraging new companies to invest in Alaska.
6:22:40 PM
Mr. Gavin spoke to what he understood to be the original
intent of the bill. He believed the intent had been to deal
with the cash credits particularly with the potential for
new development projects coming down the line. He addressed
slide 12 titled "End Cash Repurchase - Pay Outstanding
Certificates: A Bill Explorers and New Producers Could
Support." He believed there seemed to be a potential
opportunity for a workable bill: a bill that would
eliminate NOL credits and associated cash payments. He
noted the dry hole scenario had caused confusion, but he
believed it made sense. He detailed the idea was if a
company came into the state, drilled a couple of wells, was
unsuccessful, and exited the state, it should have the same
economic value of its investment as if it was eventually
achieving some production. He believed there should be some
equivalence to the company's investment value versus what
an incumbent or a new company going to production would be.
He believed that as originally proposed the new company
would have to drill its wells and if it was unsuccessful it
would be responsible for paying vendors and giving up
leases and then it would be treated fairly along with other
companies by receiving a check for its risk. He remarked
that no one would testify the current provision was good
for them because none of them planned to be leaving the
state. He underscored that from the state's perspective it
made sense to try to attract new companies.
Mr. Gavin reasoned that if the credits and cash payments
associated with NOLs were eliminated, it would end the
"cash bleed" the state was concerned about. There would no
longer be an issue of the state having to pay cash payments
as companies moved towards development of new projects and
the loss of value from the status quo would be relatively
small given that current tax credits were not paid out very
quickly; the investment from small companies would not be
slowed down, there would be an equivalence. He continued to
address a bill explorers and new producers could support
(slide 12):
· Allow 100 percent carry-forward, and annual uplift,
for net operating losses
o Treats New Companies in a manner equivalent to
Incumbents
· Commit to repay all outstanding cashable tax credit
certificates within two years
o End the current repayment uncertainty that is
threatening the survival of many new companies to
Alaska
· Eliminate remaining HB111(RES) sections
Mr. Gavin elaborated on the items listed on slide 12.
Allowing 100 percent carry forward to maintain equivalence
with incumbents. The annual uplift was not a giveaway, but
simply captured the value of the current expenditure until
it was actually realized. He explained that the expenditure
needed to grow over time in order to recognize the value of
a deduction was worth much less at present than it would be
in five years. He specified that explorers and new
producers had creditors expecting repayment and the
companies did not have the ability to repay them until the
state did. The items listed on slide 12 would save the
state cash payments and would keep explorers and new
producers on level footing with incumbents.
6:27:02 PM
Mr. Gavin concluded that the bill was flawed and needed
amending. Great Bear wanted to see that if the state
eliminated the cash payment obligations going forward that
it was tied to a recognition it needed to pay back the
credits that were past due. He believed it needed to be
laid out more clearly than "nebulous language" in the
current bill about being associated with a fiscal plan. He
remarked that no one knew what that language actually
meant.
Vice-Chair Gara expressed confusion about the uplift and
noted that the state was not inflation proofing anything
including schools. He discussed that under the uplift
provision the state paid a credit and 8 percent interest on
top of that. He wondered about a 2 percent interest as
something closer to the inflation rate and the "real
growth" of money.
Mr. Gavin clarified that it was not a credit. He detailed
that a loss was carried forward to eventually be deducted
against future revenue. He explained that current
incumbents received an immediate 35 percent deduction in
the same year. The intent was to make the value to a new
company somewhat equivalent. The loss was allowed to be
carried forward and if a company had a 35 percent deduction
the following year given that its money cost significantly
more than the interest rate presented - the net present
value of the deduction would be reduced because of the
company's general cost of capital. The uplift was intended
to mitigate the issue - to recognize that a 35 percent
deduction was worth less in the future than it would be if
taken at present. He elucidated that it was not inflation -
it was about the value of money to the company.
Vice-Chair Gara knew that Great Bear had been around for
some time and he recalled six or seven years earlier when
the company had announced there may be a big shale play on
the North Slope. He asked about progress made on the
exploration. He disagreed with the idea that the state
should make things equal by increasing a new entrant's
deduction to make it as overly generous as the incumbent's
deduction. He did not believe a company paying a 10 percent
profits tax should receive a 35 percent deduction.
Mr. Gavin responded to Vice-Chair Gara's second question
regarding the size of the deduction. He recalled discussing
with the committee in the past that it set the amount. He
advised that if the legislature wanted to reduce the amount
of the deduction it should not take Great Bear down to 50
percent because it believed everyone should be reduced 20
percent. He stated it was not good policy. The purpose of
the uplift was to treat companies equally. He recommended
finding where the legislature was comfortable and keep
companies all even by including the uplift. He moved on to
Vice-Chair Gara's first question and answered that Great
Bear still believed a shale play could work on the North
Slope. It believed that the economics for a conventional
play would work much better, particularly with regard to
initial investment. For the last four years the company had
focused its search on more conventional plays. Its
exploration had resulted in a number of very promising
prospects the company intended to drill in the next year.
Based on a successful conventional development project the
associated infrastructure would support an unconventional
or shale play to follow. He explained that they were all
stacked on top of each other; therefore, it was possible to
follow from the same pads and potentially the same wells.
He was as optimistic about finding economic oil on the
North Slope as he had been throughout his time with Great
Bear and before. The issues it faced were external
including oil prices and potential changes to the state's
tax policy and credits.
6:33:31 PM
Co-Chair Seaton asked whether extending the capital expense
of incumbents to a seven-year depreciation schedule would
even the playing field and prevent arbitrage between the
incumbents and new companies.
Mr. Gavin asked for clarification on Co-Chair Seaton's
question.
Co-Chair Seaton explained that the idea of giving a capital
expenditure write off of 100 percent in the first year for
legacy companies. He continued that normally capital
projects had to be depreciated over time. He continued that
instead of giving new companies a seven-year uplift, legacy
companies could be required to depreciate their capital
expenditures over seven years. He believed it would equal
out the incumbents and new players and would not cost the
state more money. He believed Mr. Gavin wanted new
companies and incumbents treated equivalently. He explained
that he believed it was very rich to allow incumbents to
write off 100 percent of their cap-ex on a severance tax in
a single year. He noted that it cost the state quite a bit
of money. He was trying to determine whether it was
possible to make things more equivalent for incumbents and
new companies instead of paying more on an uplift. He
remarked that many locations made companies depreciate cap-
ex, but Alaska did not. Alternatively, he wondered if there
was another mechanism that would level the playing field.
Mr. Gavin indicated that what Co-Chair Seaton was
suggesting would be a way of mitigating the difference
between the incumbents and exploration companies; however,
the change would create a greater economic hurdle for new
projects to come on board.
Co-Chair Seaton relayed that one of the things the
committee had been trying to do in the previous year in HB
247 was to address production tax credits or expenditures.
He detailed there had been efforts to limit the state's
exposure - for example, in relation to a production tax,
perhaps the state should only give the credits when an
approved development plan was in place. He noted there were
a number of situations where companies had conducted large
seismic projects, but never went into production or did
exploration that may result in a project 20 years later.
He asked if there was any way the state could limit its
exposure of costs to the state related to production tax
carry forward offset. He mentioned the preapproval process
by DNR.
Mr. Gavin thought that what Co-Chair Seaton was describing
had already been resolved by HB 247 and the expiration of
the exploration incentive credits. He detailed that at
present there were only the NOL credits or NOL carry
forward losses. There was no business model he could
imagine where a company would undertake such a significant
expenditure unless they intended to get some sort of
revenue out of production in the future. There was no
ability to monetize, profit, or return any money to
investors through that kind of a system. One of the
problems with the bill's current language pertaining to DNR
it failed to establish a system that encouraged new
investment. He spoke to the importance of encouraging
companies to come in and take risks, drill wells that may
fail, and shoot seismic to learn about the geology and
identify potential areas for future exploration and
production. He continued that investment would dry up on
the front end if the state only provided a lease
expenditure for situations where a discovery had been made
and a company was moving towards production. He elaborated
that it was too risky and the economics were not there to
justify that kind of risk exposure for new companies. He
believed the state had come a long way in terms of what was
seen during the heat of the post-SB 21 uplift in the NOL
rate stacked on top of either Cook Inlet credits or
exploration incentive credits where it had been looking at
75 to 85 percent of costs being covered compared to the
system going forward. The system moving forward allowed a
company to carry a 35 percent loss forward. He explained
that it would result in different behavior. He believed the
things described by Co-Chair Seaton was no longer likely to
be pursued by anyone.
6:42:13 PM
Representative Guttenberg surmised with the crash of prices
and the state's inability to pay credits the industry's
perspective was that the situation had entirely changed. He
referred to NOLs and other items. He asked what had changed
and what the state needed to respond to "that's still out
there."
Mr. Gavin replied that the issue had resolved itself
because multiple things had timed out and HB 247 had ended
the Cook Inlet credit. There had been a two-year increase
in the NOL credit rate from 35 percent up to 45 percent and
exploration incentive credits had been stacked on the NOL
credit. Both items had expired. The only remaining item was
the 35 percent credit or the carry forward loss. That level
of state participation would not alter behavior in the way
the state may have seen in the past.
6:44:07 PM
Co-Chair Seaton suggested that if the 35 percent credit or
the carry forward were not going to alter behavior he
reasoned that the state should not be spending the money.
Mr. Gavin corrected his prior statement. He clarified that
he believed Co-Chair Seaton had been speaking about
imprudent investment decisions and finding a way to cut
them off. He detailed that the motivating factors that lead
to the imprudent decisions were no longer present. The
current status quo would in no way incentivize that kind of
behavior. The state would get people looking for oil who
were making prudent investments associated with the
likelihood that the investment would result in future oil
production - otherwise those companies would be out tens to
hundreds of millions of dollars. The situation would
motivate good decisions on its own.
6:47:03 PM
PAT FOLEY, SVP ALASKA RELATIONS, CAELUS ENERGY, LLC,
mentioned the experts that had testified before him. He
expressed his intent to address why Caelus mattered, about
its production dilemma, and in generalities about HB 111.
He underscored that tax policy mattered. The legislature
decided policy and the industry decided its own behavior.
He encouraged the legislature to incentivize the behaviors
it would like to see. He provided a PowerPoint presentation
titled "Caelus Activity Update: House Finance Committee, HB
111" dated March 22, 2017.
Mr. Foley began on slide 2 and addressed why Caelus
mattered. He relayed that Caelus was an operator on the
North Slope. The company operated the Oooguruk field and
made about 14,000 barrels per day for a total of about
28,000 million barrels of oil (Pioneer and Caelus combined
was more than $2 billion). The company had recently
sanctioned its Nuna project (shown in right on slide 2) -
the project was currently a large gravel pad. The company
had also bought about 350,000 acres to the east and the
previous year it had drilled two successful exploration
discovery wells in Smith Bay.
6:49:20 PM
Mr. Foley addressed the Nuna project and read from slide 3:
Nuna Oil Development
Overview
· Caelus holds 100 percent interest
· 2 wells confirm reservoir deliverability
· 2,800 BOPD flowed from 1st Torok well
· 100 - 150 + MMBO 2P reserves
· 20,000 to 25,000 BOPD peak production
· Completed 22-acre NDS drill pad & road
· 600,000 CY gravel / 27,000 loads
· Economic Impact
· 300 FTE contractor construction /drilling jobs
· $2.2 Bn in royalties and taxes
· Next Steps
· Investor Confidence: Legislature
· Modules / Flow lines
Mr. Foley elaborated on slide 3. Caelus hoped to see first
oil as soon as late 2018 - to make that happen it would be
necessary to commit to the project, purchase line pipe, and
install flow lines the current winter. However, the company
was hesitant to take on the activity because of low oil
prices and due to uncertainty in the oil tax regime. He
pointed to the Nuna financials reflected in the lower right
table on slide 3. He explained that the figures were based
on an oil price of $70 per barrel; therefore, the numbers
would not be as high in the current price environment. The
company was working hard to go forward with the project if
the reality was closer to oil prices of $60 per barrel. The
numbers showed that the company had over $2 billion in
future revenues that would go to the state with about $700
million in production tax, $500 million in net profit share
payments, and $1 billion in royalty payments. He noted that
the question was always asked about what was received [by
the state] for the tax credits. He agreed that the state
was helping the industry with tax credits. Under the
current law the Nuna project would continue to accrue and
earn about $150 million in tax credits. He detailed that if
the state helped contribute about $150 million and in
exchange it returned over $2 billion - it was more than a
15 times multiple on the investment. He recognized that
perhaps a more fair way to look at the scenario was the
state's return on all of its tax credit investment was
closer to a multiple of 10.
6:51:34 PM
Mr. Foley provided an update on the Smith Bay discovery
(slide 4) located in the National Petroleum Reserve -
Alaska (NPRA). He emphasized that Smith Bay was the
discovery of a very substantial resource. There were about
6 billion barrels of oil on its leases - it could be up to
10 billion barrels. He detailed that the discovery included
an area of over 300 square miles, the two wells had
confirmed a gross interval of about 1,000 feet in thickness
and the net sand was about 200 feet. He furthered that it
was a tight reservoir and to develop the project
commercially it would be necessary to expend substantial
capital and to drill numerous wells. He stated that the
"thing that saves us out here" was the oil they discovered,
which was about 43 degree gravity oil (about twice the
quality of the average Prudhoe Bay oil). He underscored
that the oil was low viscosity and high mobility - it was
possible to produce more oil due to its quality, through
poor quality rocks.
Mr. Foley continued to address slide 4. He acknowledged
that Caelus had significant work to do on the Smith Bay
project. He noted that "these are not reserves." He
clarified that resource was defined as oil in the ground,
while reserves were economically recoverable. The company
planned to drill another appraisal well in the winter of
2018, which would be a lateral well of about 2,000 feet in
length. The well would be fracture stimulated and a flow
test would be conducted. He clarified that the exploration
activity was taking place out on the Beaufort Sea. The
company would spend well over $100 million to drill the
well. Following the work the company would begin its
environmental regulatory process for an environmental
impact statement. The company hoped to be successful on the
project and hoped to have first oil sometime around 2025.
If the project came to fruition it would represent more
than 200,000 barrels of day into the Trans-Alaska Pipeline
System (TAPS), thousands of oil field jobs, and nearly $28
billion in total revenues to the state. The total came from
$15 billion in royalty payments, $10 billion in tax
payments, and $3 billion in ad valorem payments. He
reiterated that the numbers reflected oil prices of $70 per
barrel. He added that due to the remoteness of the area and
the high cost associated it could take oil prices close to
$70 per barrel for the project to move forward.
6:54:28 PM
Mr. Foley summarized potential Caelus contributions on
slide 5. Contributions could include more than 2 billion
barrels of additional production into TAPS, more than 2,000
jobs during the construction and drilling phase at Smith
Bay, and total payments of over $34 billion to the state.
Mr. Foley turned to slide 6 and addressed what he termed as
Alaska's production dilemma. The slide included a graph
showing Alaska oil production from 2000 to 2040. The
production actual production decline was from 2000 to 2017
was shown in blue and the projected decline for future
years was shown in gray. He reminded the committee that in
2000 TAPS had more than 1 million barrels per day. At
present production was only half that amount at slightly
more than 500,000 barrels per day. He pointed to a pink
horizontal bar on the graph representing where the TAPS
minimum throughput became challenged at about 300,000
barrels per day. He remarked that he had spoken to a group
with Admiral Tom Barrett [president of Alyeska Pipeline
Service Company] in Fairbanks the previous day. He relayed
that Admiral Barrett had reminded everyone that the
industry was very good at solving problems, but there was
not yet a technical solution to continue production through
TAPS at less than 300,000 barrels per day. The collective
goal was not to allow throughput to decline below 300,000
barrels per day. He pointed to two big ledges on the far
right of the slide - the lower peak reflected all of the
known projects Caelus was not a part of, including
Armstrong's Pikka project and ConocoPhillips' work at
greater Moose's Tooth. The graph did not include the
expanded success Armstrong hoped to enjoy due to its new
wells drilled in the current year (including Willow). The
higher light blue peak reflected Caelus's contribution
including Nuna, Smith Bay phase one and two, and hopeful
exploration success in its eastern acreage, which would
bring throughput up to more than 1 million barrels per day.
6:56:38 PM
Mr. Foley advanced to slide 7 and quoted Ken Alper,
[Director, Tax Division, Department of Revenue]:
"… elimination of the NOL would have made it harder
for independents to proceed with their projects"
Tax Director Ken Alper, Alaska Department of
Revenue
Senate Resources Committee, February 1, 2017)
Mr. Foley elaborated that HB 111 did not put more oil in
TAPS and it did not create more jobs or new investment. He
continued to address the slide and provided several quotes
by Rich Ruggiero [tax consultant to the legislature]:
Alaska: great rocks but high costs - "These risks need
to be offset by favorable tax features"
"New players should be encouraged to increase activity
… they bring a fresh perspective"
"Every regime, everywhere you go, allows, especially
with a development like Smith Bay,
everyone who develops gets to deduct the cost of what
it took them to get that production
from future revenues from that project. Every regime."
"To deny that would really move Alaska to the bottom
of the competitive scale. "
Rich Ruggiero, Castle Gap Advisor
Senate Resources Committee, various dates, 2017
Mr. Foley expounded on the slide. He agreed with an earlier
statement by Vice-Chair Gara that Alaska was not a bad
place to do business. He shared that in his previous career
he had worked internationally and had been responsible for
evaluating new country entries. He detailed that when
evaluate the risk it was necessary to consider government
take, the resource potential, how abundant the contracting
community was, above ground risk, and other. He concluded
that all in all Alaska was a great place to do business. He
continued that Alaska had attracted companies such as
Caelus, Great Bear, and Armstrong. He remarked that the
state had worked feverishly to help attract the new
companies and he implored the legislature to help keep them
in Alaska. He agreed with Mr. Ruggiero that fresh
perspective should be welcomed by the state.
6:59:27 PM
Mr. Foley continued to slide 8 titled "Alaska's Future -
Which slice do you want?" He clarified that the slide did
not show a production forecast. He asked members to think
of the pie charts shown on the slide as a cartoon. The
upper left quadrant showed the piece of the pie the state
was entitled to in Alaska on average under the current
system. He detailed that the pie chart reflected 500,000
barrels per day. The blue portion of the chart reflected
the state's share at 60 percent. The pie chart on the upper
right showed the state's share under HB 111 - the state's
portion was bigger. Under an alternative scenario where
production was doubled the chart on the lower left showed
the state's portion of the pie in a growth scenario - the
state's portion of the pie would remain the same. The lower
right pie chart depicted an HB 111 scenario where the state
would receive a bigger pie and a larger piece of the pie.
He understood it was rational economic behavior, but he did
not believe it was a feasible solution. He did not believe
the state could increase taxes, make Alaska less
competitive, and still allow the pie to grow.
7:01:30 PM
Mr. Foley moved to slide 9 remarked there was significant
conversation about Alaska being entitled to its fair share
and a question about what constituted a fair share. He
believed it was the wrong question to ask. He believed the
question to ask was how competitive the state wanted to be
and if it was seeing the activity it wanted. He reasoned
that if the state was satisfied with current activity it
was fine. Alternatively, he recommended raising taxes if
there was too much activity or finding a way to attract
investment if there was too little activity. He agreed with
Mr. Galvin's testimony that there needed to be a way for
the state to make the payment to the companies for credits
they had earned. Caelus had made investments in good faith
and hoped the legislature could find a way to appropriate
money to pay all of the credits it had earned. He explained
that Caelus was continuing to strive to make big
investments, which it could not do with its money. He
specified that when Caelus went to the market for
investment, there were two things that mattered to
investors: confidence and stability. Any changes to the tax
law impacted stability. Additionally, as long as payments
remained unpaid it shook investors' confidence that their
money would be returned if they invested in future
projects.
Mr. Foley summarized that HB 111 would increase barriers to
entry, it would negatively impact new developments, and it
would make Alaska less competitive for new investments. He
conceded that it may generate short-term gains, but it
would have a harmful effect on the state's fiscal health.
He stated the bill would not attract future investment,
help new developments come online, put more oil through
TAPS, or put more Alaskans to work. He shared a story about
a recent visit to the pipeline training center in
Fairbanks. He furthered that there were numerous graduates
from the program, but very few were going into oil field
jobs. He stated that as changes were made to the tax policy
it was the people who suffered due to lost jobs or other.
He provided a story about the owner of a truck driving
company. The owner had been working to help his drivers
understand that tax policy matters. He underscored that due
to the state's tax system, every Alaskan is in the oil
business.
7:05:23 PM
Representative Wilson asked if Caelus was investing in
projects because of the passage of SB 21 or whether the
projects had already been in the works.
Mr. Foley replied that Caelus had purchased the Pioneer
assets. He detailed that Pioneer had come to Alaska in 1992
and had done significant work. He explained that Pioneer
had a wealth of opportunities in the Lower 48 as one of the
premium companies in the Permian [Basin] shale play. He
furthered that Pioneer had decided to divest its assets and
had sold to Caelus, which had all occurred under SB 21. He
referred to the high progressivity element under the prior
ACES tax regime and although companies could earn tax
credits, the credits could not be monetized unless they
were sold to another company at a discount. He explained
that SB 21 had brought the progressivity down - at higher
prices the share was more equitable - and it allowed new
companies to sell earned tax credits at full value to the
state. He referred to the characterization of tax credits
as a subsidy or handout. He countered that it was not the
intent of the credits. He specified that the intent of the
credits was to level the playing field so the efficiency of
investments for new players was similar to the incumbents.
He believed it was unfortunate to think of them as tax
credits or NOLs. Alternatively, he suggested thinking about
the efficiency of allowing large profitable companies
making lease expenditures to save $0.35 per $1.00. He
furthered that new companies were not able to utilize the
credits until later down the road; therefore, the state
made the decision to pay 100 percent cash value for them. H
Mr. Foley admitted and understood that the state was not in
a position to continue to pay cashable tax credits going
forward. One of the recommendations from a House Resources
Committee consultant was considering allowing the costs to
roll forward and increase them with an interest rate. The
resources committee had said no to the recommendation, but
had allowed companies to take half of the credits. He
implored the committee to maintain a level playing field
for companies. He continued that if current taxpayers
enjoyed a benefit of $0.35 on the $1.00 for every lease
expenditure, the state could put new companies in a similar
position by allowing them to roll credits forward and
compensate for the time value of money with an interest
rate.
7:09:21 PM
Representative Wilson asked if rolling the credits forward
with an interest rate would allow Caelus to do some of the
projects it wanted to. She referred to the option as an
alternative if the state was unable to pay cash credits.
Mr. Foley clarified that there were two very separate
issues. He explained that at present Caelus held cashable
tax credit certificates in excess of $100 million. The
company had done the work to earn another $100 million. The
company would like the state to find a way to honor and pay
the $200 million. He conceded the payment did not need to
be immediate, but a bankable plan was needed. Going
forward, he encouraged finding a way to keep companies in
the same economic position if the program needed to be
discontinued and the company would no longer be eligible to
accrue cashable tax credit certificates. He was troubled
that people became hyper focused on the production tax
element. He reminded members there were numerous elements
to government take including bonus, royalty, ad valorem
tax, and jobs from the activity. He noted it would mean
companies paid less production tax in the future, but the
state would receive royalty from day one.
Representative Wilson spoke to the cashable credit
component. She asked if having a set payment plan (such as
designating that the state would pay the credits owed to
companies within in a five-year period) would be better
than the current situation.
Mr. Foley answered that five years sounded like a long
time.
Representative Wilson stated she had just used that number
as an example. She asked for a more realistic number.
Mr. Foley suggested a two-year period where the state
specified it would pay a given amount at present and
another set amount later. He requested something the
companies could rely and bank upon.
Vice-Chair Gara thought he had heard Mr. Foley testify that
every regime let Caelus recover all of its expenses. He
discussed that states in the Lower 48 ran on a gross tax
and companies were not able to deduct. He referred to
Louisiana that had a gross tax of about 12 percent.
Louisiana had a minimal deduction for well costs for up to
two years. He asked for verification that many other states
with gross tax did not let companies get their money back.
Mr. Foley replied that he believed it was wrong to mix
regimes. He elaborated that in general the Lower 48 was a
royalty system with a gross tax. Alaska was a complex
hybrid of a royalty and a net tax with a gross tax floor.
His statements related to other regimes had been about
international locations with a net tax system.
Vice-Chair Gara spoke to locations with a profits tax. He
remarked that companies did not receive all of their
expenses back in many of those locations. He believed
companies received a portion based on the tax rate. He
asked if the company got every dollar back or was able to
deduct it.
Mr. Foley deferred the question to Rich Ruggiero who would
address the committee at a later date. He added that for
regimes with split profits, profits were always calculated
by the sum of a company's total costs minus the sum of
total revenue; tax was paid on the amount if it was
positive, but the amount was rolled forward if the amount
was negative.
Vice-Chair Gara asked if Caelus's purchase from Pioneer
included Oooguruk and Nikaitchuq.
Mr. Foley answered that Pioneer had been the owner and
operator of Oooguruk; the asset had been purchased by
Caelus when it bought out Pioneer. He furthered that ENI
was Caelus's 30 percent partner; ENI was the 100 percent
owner of Nikaitchuq.
7:15:05 PM
Vice-Chair Gara stated that Oooguruk had been started prior
to the implementation of SB 21 and had received royalty
relief from the state like Nikaitchuq. He stated that no
one had spoken about the benefit the state provided where
if tax was too high on a field, the state reduced the
royalty up to 13 percent.
Mr. Foley answered that Pioneer had sold its assets to
Caelus. During that time Caelus had been looking at the
state and when SB 21 became law, it created an incentive
program that attracted Caelus to come up to Alaska. He
agreed that Oooguruk predated SB 21. He furthered that the
field had qualified for royalty modification, which was
about to come to an end. After the implementation of SB 21,
Caelus had sanctioned Nuna, it had purchased 350,000 acres
of leases in the east, and it had drilled two exploration
wells in Smith Bay. He relayed that Nuna had received a
royalty modification, which was done during an oil price
environment that was similar to the present. The royalty
modification for Nuna would expire - one of the time
requirements was production by a certain date. He added
that Caelus would likely apply for a renewed royalty
modification.
Co-Chair Seaton mentioned the cashable credit regime. He
provided a scenario of a regime where a company had a 35
percent partner. He wondered about the value. He wondered
if the state's participation was seen differently under a
cashable credit scenario.
7:18:15 PM
Mr. Foley replied that he was not certain he understood the
question. He explained that credits were earned in
accordance with how costs were borne. For example, if a new
company and earned a 50 percent working interest it would
earn 50 percent of the credits.
Representative Pruitt stated that one of the major concerns
that was vocalized was that a production tax would not be
seen. He used the Nuna development as an example. He asked
about how long there would be development coming from the
project and how long it would be before the state would see
the production tax come in after the repayment of the
credits.
Mr. Foley answered that Nuna would hopefully have its first
oil in 2018. He furthered there would be a drilling rig for
about four years and production would begin around 20,000
barrels per day. He specified that royalties at Oooguruk
were higher than normal. The large fields had a one-eighth
flat royalty, but Oooguruk had one-eighth royalties plus a
30 percent net profit. He had other leases with a one-sixth
royalty. He did not know when the state would see the
payout of the production tax credits, but the answer was
knowable. He believed Mr. Ruggiero would show the committee
examples of typical oil fields and how they may look in
terms of cash flow.
7:21:29 PM
Representative Pruitt appreciated the response. He believed
people could get lost in the credits and fail to recognize
they would bring about a benefit. He noted that Mr. Foley
had highlighted that in a net profits tax everyone was able
to write off the development cost. He believed the concern
was the state wanted its money immediately. He wanted to
ensure there was discussion about the long-term nature of
the projects. He reasoned that receiving money immediately
did not always end up being the best long-term investment
for the state. Beyond the royalty, there will be production
tax coming from investments. He surmised it may just be a
matter of time before the money came in.
Mr. Foley moved to slide 3 showing the Nuna development
overview. He asked members to imagine a scenario where the
state never received a production tax dollar. The state
would still receive royalty of over $1 billion and net
profit share payments of about $500 million. He then moved
to slide 8 showing four pie charts. He wanted to find a way
to "grow the pie." He would like the large blue portion of
the large circle as opposed to the small circle; it was how
the state would be rewarded.
Representative Wilson asked how the discussions the
legislature had annually [pertaining to oil tax] impacted
Caelus's ability to get partners.
Mr. Foley answered that it was challenging. He stated that
the company was not challenged in resources, it was
challenged by raising money at oil prices of $50 per barrel
and due to the uncertainty in the tax regime in the state.
Representative Wilson believed sometimes the legislature
lived in its own bubble and forgot that when it was trying
to recoup money it may actually be losing more because oil
companies could not find partners and development faltered
because the industry was perpetually wondering what the
state would do next.
7:25:13 PM
JEFF HASTINGS, CHAIRMAN and CHIEF EXECUTIVE OFFICER, KUUKIP
SAE AND CEO, SAEXPLORATION, referred to a PowerPoint
presentation titled "House Finance Committee" dated March
22, 2017 (copy on file). He shared that SAExploration was a
prime contractor and an explorer; it was also the holder of
approximately $20 million in tax credits and would probably
receive another $60 million in credits over the next few
months. He read from slide 2:
· Our team has been partnered with the Kuukpik
Corporation for the past 20 years
· The company employs and average of 400 people per year
· The Kuukpik-SAE JV is a consistent revenue source to
o Kuukpik Corporation and its shareholders
o The village of Nuiqsut
o The thousands of Alaskan families that benefit
from each program
· We are committed to preferentially hire Native
Alaskans and Alaska residents
o We are proud of our 80%+ Alaskan hire rate
· We are committed to using Alaskan subcontractors and
suppliers
Mr. Hastings turned to slide 3 titled "Our Core Business -
Collecting Seismic Data":
· Seismic Operations are the tip end of the spear
· Seismic data is critical information, essential to the
success of an exploration program
· Recently, use of new technology is producing higher
resolution images of the subsurface
o Information that is a direct correlation to the
new discoveries which have recently been
announced
· The information gathered from the seismic data is
critical to finding new opportunities, new reserves to
sustain Alaska into the future.
Mr. Hastings elaborated on slide 3.
7:28:42 PM
Mr. Hastings turned to slide 4 and addressed the benefit
from a single program. The graph on the right was titled
"AKlaq 3D Seismic Program," which was a tax credit program
shot in 2016. The single program was benefitting over 1,000
Alaska families. The majority of the revenue generated was
paid to subcontractors and suppliers who are Alaskan. Of
the $57 million in revenue generated, $49 million was
earned by Alaskan contractors and suppliers. Slide 5
included a snapshot of the 190-plus suppliers the company
used per year.
Mr. Hastings moved to slide 6 and discussed an annual
seismic revenue chart from 2012 to 2017. He shared that
seismic activity was a good barometer of the health of the
exploration effort in any given area. The chart showed
three vertical timelines shown in red - in 2012 and 2013
there was approximately $40 million and $57 million spent
respectively. With the passage of SB 21 [indicated by the
first red vertical bar] the increase in spending went to
$139 million and $217 million in 2014 and 2015
respectively. The second red vertical bar indicated the
first cut of the tax credit appropriation ($200 million cut
in the fall of 2016) - at the same time there had been a
decline in commodity price. In many ways there was a
perfect storm happening in Alaska. The desire was for new
ideas and reserves to come online, but the commodity price
was falling, the state had a fiscal gap, funding had been
cut for tax credits, and the result was a 55 percent
difference in the amount of dollars spent on seismic in
2016. The third red vertical bar between 2016 and 2017
reflected the second cut in the tax appropriation, which
also resulted in a 55 percent decrease in seismic activity
spending in Alaska. He noted the chart represented all
seismic spending in the state.
Mr. Hastings turned to slide 7 titled "Historical Seismic
Programs." He pointed to the increase in programs following
the passage of SB 21 and the decrease when the commodity
price began to fall and the tax credit appropriations were
cut in 2015 and 2016. In 2016 the number of seismic
programs fell to two.
7:32:46 PM
Mr. Hastings turned to slide 8 titled "Alaska O&G Tax
Policy: Our Perspective":
· Alaska's current tax structure has resulted in an
increase in capital spending, which has resulted in
more data, new opportunities and reserves.
o Seismic data enabled by current tax structure
resulted in major North Slope reserve discoveries
· The veto of the tax credit budget appropriation in
2015 and again in 2016 has had several negative
effects
o Capital spending is down--Including capital
spending in the contractor community
o There is no visibility, or confidence on the
State's willingness to settle what it owes
o Liquidity/money needed to fund projects has all
but dried up
o Independents, seismic companies, and most
contractors cannot self-fund
o Many contractors are still waiting to be paid for
services they have rendered
Mr. Hastings elaborated on slide 8. He explained that
legacy producers had gone to work and had increased their
capital spending. Alaska had attracted new ideas and
companies into the state with independents and the state's
contractor community had started to invest in new equipment
and innovative ways to lower the cost to offset the falling
commodity cost. The seismic data enabled by the current tax
structure had resulted in four of the recent major North
Slope reserve discoveries announced in the last three to
four months. The new data and new players were resulting in
new reserves and increased production. The veto of the tax
credit budget appropriation in 2015 and again in 2016 had
had several negative effects including reduced capital
spending, no confidence in the state's willingness to
settle what it owes, liquidity and money needed to fund
projects had dried up or was very difficult to get, and
many contractors were still waiting to be paid for services
they had rendered in 2014 and 2015.
7:35:39 PM
Mr. Hastings spoke to the reality for SAE on slide 9. He
explained that the delayed tax credit payout had forced the
company to a crossroads where two options surfaced. Option
one was to seek protection under the Chapter 11 bankruptcy
code and leave Alaska vendors hanging and option two was to
restructure the company and work with Alaskan
subcontractors and suppliers to find a way to extend
payments. The company had opted for option two, which had
eliminated 90 percent of the shareholder equity (the
majority had been held by employees). He shared that he had
moved to Alaska in 1986 and he had built two or three
companies; he wanted to continue investing in the state. He
emphasized that it had been nine months since the last veto
[of tax credit appropriations] and there was still no plan
[by the state]. He spoke to uncertainty and no visible plan
on how the state would fund its debt. As a public company,
SAExploration continued to see its equity eroding as the
uncertainty continued.
Mr. Hastings moved to slide 10 titled "The Impact of HB111
on Kuukpik SAE":
· This bill as proposed reduces the cap on state
purchase of credits from $70 million to $35 million
per company which will dramatically stretch out
payments for the debt owed.
· The secondary market, which is already uncertain of
its ability to purchase credits will be destroyed by
this bill
o many of us will have no other opportunity to
monetize the credits owed other than through the
state
· There is no clear view or timeline for exploration tax
credits:
o When will the applications be processed?
o When will they be issued?
o When will they be paid?
· The impact on this Alaska company, our Alaska
subcontractors and all the Alaskan families that make
their living through these companies will be
significant
Mr. Hastings elaborated on the slide. He explained that the
bill as currently written would destroy the secondary
market. As an exploration company, SAExploration would
never produce a barrel of oil; therefore, it had two
options - for the state to pay the company or to offer it
into a secondary market. He explained that because the
secondary market had been paralyzed, the company only had
one option remaining. He underscored that the company was
in dire need of a strategy and plan from the state to
indicate to investors and shareholders that there was
something to look forward to. He continued that there was
no clear view of the timeline related to exploration tax
credits. He understood the credits had expired; however,
there were numerous credits that still had not been issued.
He spoke to the compounding impact on the company and
subcontractors waiting in line. The company was already
impacted on its wait for cash. The bill would present
another significant challenge.
7:39:54 PM
Mr. Hastings He underscored it was critical Alaska remained
competitive with regards to global investment. He shared
that every 1.5 days the company moved a 200-person camp
three miles, which cost about $100,000 per day. The same
crew in the Lower 48 was one-third the size and the workers
lived in hotels instead of camps. He stressed the high cost
of operating in Alaska. He concluded with slide 11 titled
"The Way Ahead." He stressed the need for more oil in the
pipeline in order for Alaska to remain competitive; it was
also necessary to find a way to lower costs for companies.
The companies needed the state to issue the tax credits in
a timely manner and for companies to know when they would
be paid. He referred to the third bullet point on slide 11
and explained that if full and timely payment was not an
option for the state, it needed to ensure the secondary
market was available for the selling of credits. In order
to do that, the secondary market needed to have confidence
and a clear understanding of the statutes and regulations.
He stated the company needed a sustainable, lasting tax
structure going forward - one that encouraged new
development and innovation, while maximizing value to the
state.
Mr. Hastings discussed that many people involved had made
difficult choices and he recognized that many legislators
had inherited the issue. He continued that everyone was
facing the low commodity price situation. Companies had
laid people off and were continuing to cut costs. He spoke
to HB 111 and the fair share. He offered that every dollar
the state attempted to put on its side of the fair share
pile was probably a dollar that would not be spent on the
types of things needed to put another barrel of oil in the
pipeline.
7:44:08 PM
Representative Wilson relayed she had not ever heard of the
company and noted the presentation was very good. She asked
how the company's process worked - she wondered if it got
hired by oil companies.
Mr. Hastings answered that SAExploration was a prime
contractor - oil and gas companies hired it to shoot
particular seismic programs. He referred to an earlier
comment by Co-Chair Seaton and explained that the company
also collected speculative seismic data. He used the Aklaq
survey as an example, which was probably the highest
resolution seismic survey ever shot on the North Slope. The
survey was also shot over acreage with six or seven
different leasees. The goal was to find enough underwriting
to drive the cost of the program. In the specific case, the
expiration side of the tax credit gave a credit, which
could lower the company's cost to its end purchasers. The
NOLs were decreased for every dollar the company brought in
- the data was licensed. Every dollar brought in lowered
the NOL credit. It was also important to note that all of
the data became property of the state in order for the
company to apply for the credit; after ten years the state
could use the data for additional leasing incentive.
7:46:25 PM
Vice-Chair Gara referred to Mr. Hastings comment that he
would address Vice-Chair Gara's question on cost. He was
interested in whether cost in Alaska or something else that
had made ConocoPhillips' profits much higher in Alaska than
in almost any other region in the world.
Mr. Hastings explained that the Aklaq survey at that cost
$57 million to shoot in Alaska would cost about $19 million
to shoot in the Permian Basin.
Vice-Chair Gara spoke to his frustration that some were
suggesting the state should tax similarly to North Dakota
or Louisiana with a 10 to 12.5 percent gross tax no matter
what the price was. He stated it could put companies in the
red up until $70 to $90 per barrel. He did not believe the
idea was good. He reasoned that he was interested in
getting a small increase when companies were profitable. He
noted that many legislators were trying to explore that
concept. He did not believe he would ever be able to do
anything that would make an oil company say it would pay
the amount.
Mr. Hastings explained that his comments were more about
the delicate situation in Alaska at present - many
companies were competing for global dollars. Although there
were great opportunities in Alaska, it was extremely
difficult for investors, shareholders, and public equity to
continue to invest in the state. His point had been there
was currently a dangerous balance and he did not believe
anyone understood where the tipping point was. He surmised
the tipping point would be different for every company. He
shared that his company was already working at or below
cost at the current oil price of $45 per barrel. Many
contractors had agreed to work at cost in exchange for
something in the future. When the state looked at raising
taxes or hardening the [tax] floor, which was a cash flow
problem at the end of the day, there had to be more avenues
open to the state than taking another dollar it needed to
be spent on the types of things it would take to get more
oil in the pipeline. The state had assets, which surely
allowed the state to find different ways to bridge itself
across the fiscal gap.
7:50:40 PM
Co-Chair Seaton referred to the language indicating the
bill would reduce the cap on the state purchase of credits
from $70 million credit to $35 million (slide 10). He
remarked that during the meeting the committee had heard
from several companies with over $100 million or more in
credits. Currently the structure was first in, first out.
He needed clarification on the slide. He believed the slide
indicated amount of money going to more companies.
Mr. Hastings replied that he could not speak for all other
companies, but currently SAExploration did not know where
it fell in the queue. The company may have to come before
the committee the following year and relay it had missed
the funding. He explained that if all players were leveled
and credit 1 was the same as credit 21 in timing, everyone
would be looking at $35 million per year. There were
numerous outstanding credits that had not been issued that
had the potential to fall in the next year or following
year's queue that had been earned in 2014 and 2015. He
explained it was a problem.
Co-Chair Seaton asked for clarification on Mr. Hasting's
position. He asked if the legislature should keep the
number at the higher amount so fewer companies received the
money or reduce the number to $35 million as in HB 111 in
order for the money to stretch [across all companies]. He
surmised if there was $300 million, it would stretch
through twice as many companies with a $35 million cap per
year instead of a $70 million cap per year. He thought the
slide appeared to recommend paying the higher amount to
fewer companies.
7:53:41 PM
Mr. Hastings explained there were numerous companies with a
lot of different financing criteria at present. For
example, if a company had $120 million in tax credits,
under the current $70 million limit the company would be
paid in two years. He could only speak for SAExploration,
but obviously getting the money faster was much easier to
sell to stock and bond holders than having to wait for the
funds over a four year period. He underscored that having a
plan was the important thing - something that gave people
visibility. He explained that it was not possible to keep
telling the board or bond holders that the state was
working on it, because it had been saying that for two
years already. He believed they needed to come up with a
plan people felt confident in. It was currently a total
unknown and to continue the unknown would mean only one
outcome for many companies.
Co-Chair Seaton wanted to hear from other companies about
whether they recommended the $70 million or the lower
amount of $35 million.
7:56:03 PM
Representative Tilton thanked Mr. Hastings for providing a
different perspective. She appreciated the company for
employing Alaskans. She referred to the confidence and
clear understanding of statutes and regulations on slide
11. She believed she had heard that the bill made it hard
to have confidence. She asked for the accuracy of her
statement.
Mr. Hastings answered that the secondary market had been
very thin to begin with; there had not been significant
opportunity in the secondary market. He referred to an
advisory bulletin - the secondary market was paralyzed at
the current point. The market did not know whether credits
earned and taken below the floor were allowable under the
new interpretation. He stated that it could be back to the
passage of SB 21 - the regulation was a significant issue
that needed to be clarified. There was already paranoia and
now there was no cash payment for an NOL. He provided a
hypothetical scenario where the credits that were supposed
to go to everyone August 31 were pushed to January 2018. In
that scenario the explorers without any ability to roll
forward the credits based on expenditures would be done.
The bill was written based on the date of issuance, not the
date the credit was earned. Feasibly, $15 million to $40
million in tax credits could roll across the date and the
state would no longer make the cash payment.
Representative Tilton surmised the bill would be unhelpful
to the company, especially since it had already had to
reorganize.
Mr. Hastings replied that the graphs on slides 6 and 7 were
a clear barometer. He stated that people would take their
feet off the investment accelerator. Companies had created
new opportunities, increased production, and had invested
in Alaska's oil and gas future. The vetoed appropriations
in conjunction with a declining oil price and HB 111 meant
companies would decelerate and move cautiously going
forward. He continued that the bill would mean taking time
and analyzing business decisions. He concluded that for
Alaska's future, the business decisions needed to be
aligned.
8:01:20 PM
Representative Thompson noted that Armstrong Oil and Gas
had provided written testimony to the committee.
HB 111 was HEARD and HELD in committee for further
consideration.
Co-Chair Foster provided the schedule for the following
day.