Legislature(2017 - 2018)BARNES 124
03/01/2017 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB111 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 111 | TELECONFERENCED | |
HB 111-OIL & GAS PRODUCTION TAX; PAYMENTS; CREDITS
1:03:20 PM
CO-CHAIR TARR announced that the only order of business would be
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."
1:04:25 PM
RICH RUGGIERO, Consultant, Legislative Budget and Audit
Committee, Alaska State Legislature; Managing Partner, Castle
Gap Advisors, Castle Gap Energy Partners, provided a PowerPoint
presentation, entitled "HB 111," dated [3/1/17]. Mr. Ruggiero
noted that his previous presentations have discussed oil and gas
tax provisions that were not directly "on point" to HB 111. In
his experience, [governments] with an issue before them may fail
to see the "whole environment," and his previous presentations
intended to give the committee a better understanding of all of
the factors of Alaska's oil and gas tax environment. Further,
in making changes to Alaska's petroleum tax environment, there
is a need to establish long-term goals and short-term needs. In
the past decade, Alaska has experienced an increase in spending,
an arresting of decline, and an increase in production. Mr.
Ruggiero advised Alaska's system is one of the most complex
petroleum taxation systems.
MR. RUGGIERO stated a goal of any taxation system is durability
- not stability - because durability can be attained with
frequent changes; in fact, he said, "As long as changes are made
in a responsive manner to the market and the circumstances, you
can have a large number of changes and still be deemed a stable
place to do business." Furthermore, infrequent changes in the
wrong direction can make a system unstable [slide 2]. Mr.
Ruggiero discussed long-term goals, or guiding principles, and
short-term objectives, such as production flowing through the
Trans-Alaska Pipeline System (TAPS) and addressing the
challenges to state government due to low income from petroleum
operations [slide 3]. He observed Alaska has made major
structural and narrowly focused changes to its current tax
system over the last six or seven years.
1:09:57 PM
REPRESENTATIVE JOHNSON returned attention to slide 2 and asked
how HB 111 would fulfil the first short-term objective of
keeping industry activity as high as possible during a period of
low to negative margins. [Response is found later in the
meeting.]
MR. RUGGIERO said he would address HB 111 beginning with slide
[6] of his presentation. He continued with observations and
pointed out the goal of Alaska's current taxation legislation is
to create balances between big and small, and new and incumbent
industry parties in a complex system. In response to
Representative Johnson, he said that the model on net operating
loss (NOL) that was previously provided to the committee, is
correct, although one part needs to be corrected and he would
make changes to the model - based on new understanding from the
administration - as soon as possible. He stated that the
complexity of Alaska's tax system requires significant state
resources to administer, and significant taxpayer resources are
required to understand and file taxes. Mr. Ruggiero said he
would provide corrected data to the committee as soon as
possible [slide 4].
1:13:21 PM
MR. RUGGIERO referred to the previous committee presentation [on
2/27/17] of an alternative option to current law, which was to
show how to simplify Alaska's tax system and return it to a
common business model of revenue minus expenses times tax,
without multiple complicating factors. He explained that the
model was meant to show a simplified option and was not a
recommendation for dramatic changes to Alaska's taxation system
[slide 5].
1:14:58 PM
REPRESENTATIVE BIRCH referred to a slide presented at the
committee's work session [2/27/17], which compared Senate Bill
21 [passed in the Twenty-Eighth Alaska State Legislature] with
"stepped net" [income] and showed that the two systems result in
nearly identical [state] take. He asked if the aforementioned
graph was affected by the incorrect NOL model.
MR. RUGGIERO responded the aforementioned model was unaffected
and is accurate. Continuing, he grouped the suggested changes
within HB 111 into two categories. The first category is
increasing taxation, including items that minimize the downside
risk for the state at low prices as follows: raising the gross
minimum, hardening the floor, changing the conversion rate on
net operating losses (NOLs) from 35 percent to 15 percent, and
reducing the per barrel credits. In order to address the
state's short-term need, it is understandable to increase state
take; however, he cautioned that regimes make changes to
government take for a variety of reasons, including the
situation Alaska is facing, and raising taxes when others are
not "is not something that would absolutely view Alaska in a
good light." Conversely, a change in minimum take by 4 percent
or 5 percent in Alaska may be balanced by the fact that other
jurisdictions are leasing acreage for 20 percent royalty or
more. Mr. Ruggiero cautioned that for a project, the gross
minimum, including royalty, is the first hurdle to clear.
Furthermore, he suggested the legislature and administration
model the impacts of changing the minimum and the per barrel
credits across a $50-$80 range in oil price [slide 6].
1:20:32 PM
REPRESENTATIVE BIRCH advised the ultimate downside risk to the
state is no production, which is zero [revenue]; also, raising
the gross minimum tax to 5 percent creates a higher hurdle to
investment that may compromise Alaska's ability to compete in a
world market for investment capital. He restated the real risk
is no production because the royalty share will always be there.
MR. RUGGIERO explained that because Alaska has long lead times,
"shut[ting] down the investment engine" could postpone the
return of investments for years, even with incentives in place.
The taxation policy must balance the state's current needs with
the risk of shutting down investment and thereby production.
For example, the committee should consider the impact of changes
to the taxation policy on the three recent large discoveries,
which are very important to the state.
MR. RUGGIERO said the other category of changes brought by HB
111 is how to handle credits. Alaska is very unique in
converting NOLs to credits and then offering cash for credits,
which at the time [the tax system was devised] was deemed
necessary to attract new investment and "players" to the state.
Although effective, the system is very complex, and he opined
the state can still attract new investment with other options;
in fact, around the world, regimes allow investors to recover
their costs - within a set of rules and guidelines - at
production, either immediately or over time. He questioned the
need for converting NOLs to credits, and said, "If it becomes
the same, whether I deduct the NOL and apply the tax and then
the barrel credits or I apply the 35 tax and then the $8 barrel
and then subtract the NOL credit - tax credit - and it comes out
the same, why go through all that?" Mr. Ruggiero recommended
allowing existing producers to carry forward and offset NOLs
against future taxable income, in a manner similar to other
jurisdictions. He acknowledged there are some places that have
unique or additional credits, as opposed to converting costs to
credits.
MR. RUGGIERO further recommended that non-producers' NOLs
created by exploration, appraisal, and development activity
resulting in production, should be carried forward as costs,
which could later be recovered through the project's production
revenues. He remarked, "In some locations, those NOLs ... do
receive some degree of uplift to compensate for the time it
takes between exploration, appraisal, and that ultimate first
oil into a pipeline." He said for non-producers, where NOLs are
created by exploration but result in a dry hole, the NOL can be
converted to a cashable credit at a percentage; however, payment
of the credit is subject to a set of prerequisites, such as data
delivery, payment of all service contractors, and the
relinquishment of all leases. This type of payout is not paying
a company for leaving, but paying a company to take the risk of
coming to Alaska and putting in an exploration well. The
credits reduce the risk of exploration and the state
participates as an indirect investor in the exploration.
Finally, he acknowledged the state has outstanding credits to
pay and suggested offering a degree of uplift until funds are
available to pay the credits [slide 7].
1:28:58 PM
REPRESENTATIVE RAUSCHER asked whether such an offer would be
accepted.
MR. RUGGIERO said his experience has shown both outcomes; some
oil companies have found such an offer acceptable, while others
have found it completely unacceptable. In further response to
Representative Rauscher, he explained a "person" in a contract
is defined as the pertinent entity.
CO-CHAIR TARR noted that one goal [of HB 111] is to remain
competitive for new entrants and smaller oil and gas companies.
She asked for further explanation of uplift opportunities for
the benefit of non-producers and exploration companies.
MR. RUGGIERO explained that if an exploration company has a
discovery and turns the project over to another company for
development, "the NOLs would go with the project," thus the
second company would use the credits after it took the field
into production. On the other hand, tax is assessed by company
and not by project, so the exploration company could bring in
partners; at that point, the question is how the NOLs would be
divided between the working interests in the property. Mr.
Ruggiero suggested the division of the NOLs may be determined
between the parties at the time the joint venture is formed. In
his experience, divisions can be based entirely on each party's
working interest, or the exploratory company may keep all the
tax breaks for use against future income. He said he was unsure
whether Alaska law dictates that "things have to work one way or
the other, I believe that they'd leave it up to the commercial
arrangement between the parties."
CO-CHAIR TARR asked how such a tax system would keep Alaska
competitive and attractive for new investment.
MR. RUGGIERO acknowledged Alaska is at a disadvantage when
compared to most places in the world, due to its higher cost
structure and harsher work environment. To overcome these
disadvantages, the state must offer terms that are a little bit
better than the average that are offered around the globe and
also maintain an overall tax structure that is competitive. To
do so, the tax structure should allow NOLs and use uplift to
compensate companies for the time value of money and to create a
sense of urgency. For example, a government may compensate
companies based on a certain timeframe to get a project to
production, with incentives for earlier production and penalties
for delays.
1:35:30 PM
CO-CHAIR JOSEPHSON asked how a seismic company would be affected
if its earned NOLs remained with a project after the seismic
company departed.
MR. RUGGIERO said he was unsure. He explained that in the case
of a speculative seismic shoot, the company could sell its
datasets of the survey and then would have income, which could
be offset against costs. For corporate income tax purposes,
there are clear guidelines for income and expenses, but he said
he was unsure how the seismic company's NOLs would be handled
from a petroleum tax perspective.
CO-CHAIR JOSEPHSON turned the subject to publically available
data delivery and transparent information, which has not yet
been addressed by Alaska law. He referred to Mr. Ruggiero's
comments that companies wouldn't come to Alaska and invest a lot
of money without intending to be successful; in addition, it has
been suggested that the state should have a system of prior
approval [regarding oil and gas prospects]. If the quality of a
play is known, he asked whether "all comers should expect to
receive some future benefit or whether the state should assert
some sort of jurisdiction or discretion over that."
MR. RUGGIERO pointed out the state grants rights to companies to
extract the state's resource. Therefore, the state can include
any requirements on licenses to extract, or within leases,
subject to agreement. As the steward of the resources, the
state needs access to - and rights to use - any data created
through activity on state land. He acknowledged there is a
degree of competitiveness to balance; for example, some
information can be released and shared, but companies may seek
to keep information that they have developed confidential for a
period of time. Generally, in countries that have production
sharing contracts, any and all data - and all derivative works
on the data - are owned by the state. He continued:
The state is generally allowed to use as much of that
as they need to encourage investors on new acreage,
new license rounds, et cetera, because it's in their
best interest that they get highest value on the bid,
but also that time and money is not spent doing things
when they've already got a bit of an idea of where a
good spot is, versus where a bad spot is, based on all
the surrounding data that they have. So, this is
where you'll find that balance but generally, outside
the U.S., you'll find that the governments that
control minerals, they control all the data.
1:40:10 PM
CO-CHAIR TARR asked how converting from credits to carry forward
losses would impact non-producers, and how that change would
situate Alaska - relative to other regimes - related to
incentives that are available to non-producers.
MR. RUGGIERO observed that when a producer comes into a new
regime and has a new development, the producer is able to carry
and recover its costs [of development] into the production
period; however, "If you're an explorer and you have a dry hole,
in most places, that's your cost: 100 percent." Thus, offering
a conversion to credit, and subsequently to cash, is an
incentive that puts Alaska a notch ahead of other places where
the costs of exploration are usually a 100 percent loss. For
producers, some countries allow project ring fencing - a method
of taxation where losses on one project are allowed to be used
against income in another project. Alaska allows "ring fencing
by operator" which allows an operator to lump together all of
its projects in Alaska for tax calculations. Mr. Ruggiero said
his recommendations on slide 8 are very consistent for operators
who have a discovery and will ultimately be a producer, and are
an incentive for new players to explore in Alaska, because an
explorer who is unsuccessful is able to cash in credits.
CO-CHAIR TARR asked if the foregoing recommendations would make
Alaska less competitive, relative to other locations.
MR. RUGGIERO opined no.
REPRESENTATIVE BIRCH stated at the time of a lease sale data and
the terms and conditions of the lease are disclosed. He asked
how frequently other regimes make changes to a lease after a
company has complied with the terms of the lease and made a
discovery.
MR. RUGGIERO acknowledged there is a tendency for governments to
"meddle with the system" because after every election there is a
new administration and a new "view"; in fact, in most of the
world, the extraction of hydrocarbons is contractual, even
though contracts are not always honored. It is not uncommon to
find governments changing terms agreed to in previous contracts
because circumstances have changed over time.
1:45:15 PM
CO-CHAIR JOSEPHSON referred to a document, entitled "A Net
Profits Tax is very Volatile to Price," provided by the Tax
Division, Department of Revenue, and included in the committee
packet. The document shows tax as a percent of gross value at
the point of production (GVPP) over a spread of different
prices: at $80 per barrel the state's take would be 10 percent
and at $100 per barrel it would be 18 percent. He returned
attention to slide 6 and Mr. Ruggiero's previous comment that
increasing the minimum tax would create a larger hurdle for
investors. He asked if the current tax system is fair to the
State of Alaska when tax as a percent of GVPP is 4 percent at
$60 per barrel and 18 percent at $100 per barrel.
MR. RUGGIERO remarked:
What I can tell you is that where that stands, I
think, is very favorable, relative to other regimes
where [the regimes] invest. So, if you're talking
about an $80 world and only a net 10 percent tax -
granted that lumped on top of that is royalty, and
states see it as corporate income tax, federal
corporate income tax - you get an overall non-operator
take that is very competitive. Whether that's fair to
the state or not, that's not for me to decide.
MR. RUGGIERO indicated slide 8 is not specific to HB 111 and is
also relevant to other proposed bills regarding oil and gas. He
recommended the following:
· stay with a net tax because the state is most competitive
when taxing profitability and not revenue
· stay with ring fencing by operator because ring fencing by
project adds complexity
· simplify where possible
· base sliding scales on margin if used
· establish a data transparency program
1:49:01 PM
REPRESENTATIVE RAUSCHER asked for an explanation of a
comprehensive data transparency program.
MR. RUGGIERO recalled previous discussion that the legislature
could make more informed decisions if it had more
"disaggregated" information; in fact, other regimes in the world
are much more transparent, and he suggested the state attach
data transparency conditions to future licenses, credits,
uplifts, or incentives.
REPRESENTATIVE RAUSCHER questioned whether some data is withheld
because release would compromise [a company's] competitive edge.
MR. RUGGIERO opined a private, for-profit company will release
only what it has to because the information can be used by its
competitors. In his experience, governments have been able to
optimize [production] in their country and minimize costs for
facilities and other entities, and he provided an example. He
acknowledged it is uncomfortable to give away competitive
advantage, but governments with the most data can increase
competitive advantage and provide informed advice.
REPRESENTATIVE WESTLAKE noted that oil, gas, and mining
industries are important to his district, and the related tax
system is extremely complicated. He stated his support for the
"idea for dry holes." Although provisions of previous tax
structures have inadvertently caused problems, previous
legislators acted "with the best information that they had in
front of them." He agreed revisiting the tax system is
necessary, and asked whether the state should make incremental
changes, to prevent severe impacts to his district and other
districts, or change the bulk of the system.
MR. RUGGIERO recommended fixing the system and making it simple,
although doing so is not easy, and would require political will
and time. However, as the system is simplified, the legislature
could add durable and self-correcting pieces so future
legislatures don't have to revisit every individual provision of
the legislation.
1:54:11 PM
CO-CHAIR TARR asked if eliminating credits and using carry
forward losses instead helps a system become more self-
correcting because it is more responsive to actual costs.
MR. RUGGIERO explained when NOLs are converted to a credit at a
percentage, the tax rate that will be effective at the time the
[credits] are actually used cannot be known. He cautioned
against trying to predict the future, and instead urged the
committee to allow the losses to be carried forward as they are
for corporate income taxes. For example, for the purpose of
calculating corporate income taxes, a carry forward loss is
created in a year when the taxpayer's effective net rate is
zero, but then is carried forward and used to offset future
income [at the effective tax rate at the time the NOL is used].
In further response to Co-Chair Tarr, Mr. Ruggiero said the
current system has a 35 percent [tax] base with negative
progressivity, therefore, as stated before, [the effective tax
as a percent of GVPP is 4 percent at $60 per barrel, 10 percent
at $80 per barrel, and 18 percent at $100 per barrel]. He
remarked:
So, when you convert something today, you don't know
if it's going to be one year, two years, or three
years - if you've got a major development, you're
going to be accumulating some very large NOLs. And if
you convert them to credits, it may be several years
down the road before you use them. And if you don't
know what the price is going to be ... - certain
things get used at different effective rates, and get
converted - and you don't know what the absolute tax
rates going to be in the future. ... So as not to
create any potential differences in the future, just
... carry it forward as a loss, [and] use it when it
comes up.
MR. RUGGIERO added the aforementioned mechanism is also used in
production sharing contracts. He continued:
They don't call them carry forward losses, they're
just unrecovered costs and they get carried forward as
costs. They aren't converted to anything else. And
ultimately when there's enough cost oil in the system,
they get to recover those costs. And then anything
after that is deemed profit oil, and then whatever the
split is on the profit oil, that's how that is
distributed between the parties.
CO-CHAIR TARR suggested the committee reconsider, based on
recommendations, the elimination of cashable credits, which was
a provision in the original bill. She reviewed the following:
The cashable credits for which the state pays cash are reflected
on the expense side of [an accounting spreadsheet], and the NOLs
used against tax liability are reflected on the revenue side of
a spreadsheet as a reduction in the revenue the state would
receive after the company [that earned the loss/credit] became
profitable, and at which point the loss would be deducted
against any of the company's profit prior to applying taxes.
CO-CHAIR TARR then asked for details on steps for the state to
take if it were to have prior approval of projects, noting that
suggestions have been made that the state review plans of
production and plans of development as a project progresses.
She asked for Mr. Ruggiero's opinion on strategic ways to
protect the state's status as a co-investor.
2:00:47 PM
MR. RUGGIERO was unsure of the steps already undertaken by the
Department of Natural Resources (DNR), the Alaska Oil and Gas
Conservation Commission (AOGCC), and the Department of
Environmental Conservation (DEC) to review projects. During his
experience in the North Sea working with three countries, oil
and gas projects went through three to five governmental reviews
before being approved for development; projects were reviewed by
governmental agencies ranging from reservoir engineers to
treasury officials, beginning at the initial scoping of the
project, up to very detailed analysis. At the time of a
company's formal submission for approval to develop the project,
"it was just a rubber stamp exercise," because the governments'
issues and concerns about the size of the infrastructure,
pipelines, optimum costs, and efficient operations were
addressed earlier. The governments slightly influenced the
scheduling of projects, but companies were made aware well in
advance. Mr. Ruggiero told of recently concluding a 12-month
review process for a 25-year project in Asia; while he was
negotiating his contract, the government reviewed all aspects of
the project in detail. He remarked:
The dialogue within those reviews helped me get terms
in that contract that they might not otherwise have
given me, because we had these detailed reviews and
they were able to understand what I was planning on
doing and what my needs were, as opposed to what my
wants were.
CO-CHAIR TARR asked if governments ever refused a project during
a particular review phase and if so, whether affected companies
were given an opportunity to reevaluate and propose an
alternative.
MR. RUGGIERO said he was told no many times; however, refusals
were helpful for companies to "define where the boundary line
is," and also allowed companies to propose potential changes to
a government's conditions, and he gave an example. He remarked:
It was always a process that allowed us to bring forth
the, the innovation, the technology, and whatnot that
we thought we could add to, and get them to change
some of the rules and the requirements that they
otherwise had had in place.
CO-CHAIR TARR asked if any part of the approval process was
linked to incentives or regime investment.
MR. RUGGIERO said, "Whatever was in place as the petroleum
fiscal system, once I got approval, then I had to do everything
within that petroleum fiscal system." For example, one project
had requirements linked to it because of its size, capital
commitment, and the 10 years of company fiscal stability that
was needed to overcome the risk of development at that time.
2:07:23 PM
REPRESENTATIVE BIRCH questioned whether the aforementioned 25-
year agreement gets revisited periodically or is a contractual
arrangement.
MR. RUGGIERO answered it is a contractual agreement.
2:07:45 PM
[Co-Chair Tarr handed the gavel to Co-Chair Josephson.]
REPRESENTATIVE TALERICO returned attention to slide 3 and asked
whether the long-term goals and short-term objectives are listed
from most to least important.
MR. RUGGIERO indicated yes.
2:08:34 PM
The committee took an at-ease from 2:08 p.m. to 2:10 p.m.
[Co-Chair Josephson handed the gavel back to Co-Chair Tarr.]
2:10:01 PM
CO-CHAIR TARR observed per barrel credits and gross value
reduction (GVR) are incentive opportunities. She asked Mr.
Ruggiero whether "the interplay" of changing from cashable
credits to carry forward losses should influence the use of per
barrel credits, or gross value reduction (GVR), as incentives.
MR. RUGGIERO said:
I don't think there's an interplay between the two.
But it does bring dynamics of, "If you have a GVR and
you've got the per barrel, how much of the per barrel
credit do you use?" I know you've had that issue of
migrating of the per barrel credits, but, also, how
much of the NOL that you use. Is it only up to the
point where the minimum tax takes effect, or do you
have to use it all to get to zero and then the minimum
tax applies? ... When you have all these moving
parts you get all these different questions as to how
the different aspects interplay between each other.
CO-CHAIR TARR expressed her understanding that Mr. Ruggiero's
previous recommendation to use bracketed profit margins [on
which to base the tax rate instead of oil price] and thereby
eliminate some other provisions - because incentives wouldn't be
used, and taxes would be based on profitability - would change
the dynamic.
MR. RUGGIERO clarified the aforementioned option would take away
unnecessary levers and would attain the same effective tax rate
without worrying about migrating credits; he reiterated the tax
would be based on simple income minus allowable costs.
CO-CHAIR JOSEPHSON questioned whether one benefit of reducing
complexity is to make the system easier to audit and understand.
MR. RUGGIERO said exactly; audits should be "orders of magnitude
easier" as would be compliance by taxpayers. Further, the
proposal would eliminate many administrative costs, and avoid
many disputes between the companies and government.
CO-CHAIR TARR asked if simplifying audits and payments would
give a company higher confidence to invest in a new project,
regardless of a long lead time. For example, the current per
barrel credits are based on the price of oil, so companies have
to adjust for variability that might occur in future prices to
determine a project's economics; in addition, removing some
aspects of the system and focusing on profit margins may make an
investment decision easier for a company.
MR. RUGGIERO responded that simplifying the system allows for
the use of a much simpler economic model that has less of a
chance for mistakes. In fact, companies can make a more
predictive model based on an expected base rate, production
curve, cost, and price forecast. With a simpler system, he said
companies would only have uncertainty in whether future
legislatures would change tax rates at any of the various
bracket points.
2:15:31 PM
REPRESENTATIVE PARISH stated that he is leery of net systems
because they do not clearly incentivize cost savings on the part
of companies as well as do gross production systems; in
addition, net systems are also harder to administrate. He asked
if it is feasible to create a bracketed gross system tied to
price, which would approximate the current tax environment or,
"Are gross systems just going to be inherently more punishing
for these actors or those actors?" Further, he inquired as to
how the state could level the playing field for non-producer,
new entrants in a gross system.
MR. RUGGIERO said it is possible to build a gross system to
mirror a net system, but it would not be accurate after the cost
structure changed. He continued:
The minute the cost structure changes, then you're
getting results different than what you're trying to,
to model. And, the one thing that we do know ... from
one of the charts that I've copied from Ken Alper and
the administration, we've seen sort of the all-in
transportation, OPEX, CAPEX numbers change from plus
or minus [$]15 to up over $40 a barrel in just 10
years. And if you tried to build a gross [system] off
of where you're at today ..., in a few years you'll be
grossly wrong and you'd be fixing it again.
MR. RUGGIERO, in response to Representative Parish's second
question, said he is unsure what could be done to level the
playing field under a gross system.
2:18:42 PM
REPRESENTATIVE PARISH stated his concern that net systems create
a "perverse incentive." He pointed out, "Generally, refining is
a profitable business, and that those profits are made and
typically kept in Texas, is just too bad for us." He opined net
systems allow an externalization of value; for example, for a
company making little profit, and suffering some losses in
Alaska, Alaska production can result in greater profit, but that
is profit that Alaska cannot tax. Representative Parish urged
for incentives that do not encourage significant increases in
costs, noting that costs have almost tripled in the last 10
years. Under a net system, some of those costs are borne by
the state and the federal government, and he asked how the
legislature could mitigate that.
MR. RUGGIERO acknowledged every system has "pros and cons," and
agreed that under a net system, oil companies can "gold plate."
However, in his experience, oil companies that have a high cost
structure do not last very long, regardless of government
deductions. Countries with net systems can mitigate risk
through detailed review processes; for example, governments
learn from each project and operator, which helps governments
compare projects and whether costs are prudent. Although
Alaska's costs have tripled, the costs can still be prudent -
even with the best minds and systems, costs can be expected to
go up when oil prices escalate.
2:22:26 PM
REPRESENTATIVE PARISH returned attention to a point raised in
the presentation that one of the most glaring deficiencies of
Alaska's system is the inability of the state to find out which
companies charge more than others. Although he was told by an
executive that he had no business knowing what Alaska taxes were
paid by the executive's company, the same company reported the
amount of taxes it paid in Alaska to the government of Great
Britain, which is how Representative Parish obtained the figure.
He asked Mr. Ruggiero what the State of Alaska could do "to hold
them to the same standard of disclosure."
MR. RUGGIERO restated that the legislature is the steward of the
state's resources, and any future lease agreements and/or
offered incentives should include requirements, such as for
disclosure. [Speaking from his experience as a representative
of an oil company], he said, "I would not disclose anything more
than I had to because I never know when a piece of data is going
to help me or hurt me." The legislature needs to determine
whether it garners enough information to make well-informed
decisions and if not, it is within the legislature's purview to
get the information necessary.
REPRESENTATIVE PARISH pointed out the most important leases to
the state have already been established; even though pertinent
stipulations could be added to new leases or leases up for
renewal, the legislature is not able to alter existing leases.
MR. RUGGIERO agreed.
REPRESENTATIVE TALERICO, [addressing the issue of transparency
and the collection of data from the oil and gas industry],
assured the committee the state gets "an overall number." He
pointed out that other taxing authorities, such as
municipalities, keep individual tax payments as proprietary
information for a certain amount of time, depending on the
competitive nature of a taxpayer's business. He asked, "To some
degree, as we collect that type of information, wouldn't there
always be - I'll call it a grace period - but isn't there always
a cushion there so that we're not directly providing
[information to competitors] ...?" Citizen legislators do need
to have good data, but he cautioned that legislators may lack
sufficient expertise in the industry and therefore, need to rely
on the expertise of DNR and AOGCC when working with the
producers of oil and gas. He inquired as to what level of
detail the committee seeks - whether down to the nuts and bolts
- and advised that the committee could "bury ourselves with,
with data, that without serious education, it would be very
difficult for us to determine -- when we talk about expenditures
and things like that ...." Representative Talerico restated the
committee needs to have a level of trust in the Division of Oil
and Gas, DNR, and AOGCC, which work directly with producers, and
provide valuable information.
MR. RUGGIERO agreed. Ten years ago, his company was told that
it "could almost double the recovery off North Slope and arrest
the decline if we just spent a certain amount of money,"
although details were not provided about the work, how fast [the
recovery] would come, or how constant the rate of recovery would
be. He opined the state did not have enough information to
propose investments that made sense, or that were economic for
the industry, but simply encouraged the companies to increase
production. He added:
So, it's that type of information that I believe that
you need. And as a state, I don't know if it's public
or whether it's just you know, confidentially through
agencies like the DNR and AOGCC to where then you can
rely on them when they come in and testify that
they've looked at it, they think this is viable, they
would recommend the following. But, somewhere the
state, I think, needs to understand that so that way
prudent decisions could be made, relative to the
taxation system you've got in place, to make the right
things happen.
2:30:02 PM
CO-CHAIR TARR acknowledged the difference in what the state
needs and what the public needs; however, [as a legislator] she
said she has not had enough information to fully understand
certain issues. Part of the challenge regarding taxes is that
information gleaned by the Department of Revenue (DOR) from
proprietary information cannot be shared [with the legislature].
In fact, DOR may recognize a problem, but a change proposed by
DOR cannot be supported by information from tax returns. Co-
Chair Tarr noted legislation has been introduced related to
public disclosure of credits and incentives offered by the
state.
MR. RUGGIERO spoke to the fact that in Alaska, 95 percent of the
information about oil and gas is presented by DOR, which has a
confidentiality obligation; however, in other tax regimes, the
equivalent of DNR presents information on production and
spending because most of its data is not confidential.
CO-CHAIR TARR referred to [Amendment 45, which had been moved
but failed to be adopted during the House Resources Standing
Committee's discussion of] House Bill 247 [passed in the Twenty-
Ninth Alaska State Legislature]. She related that the amendment
had intended to address this issue by requiring policymakers to
sign confidentiality agreements and restricting access to
documents and photographing of documents. She questioned
whether said actions are consistent with the level of security
necessary for such information and if policymakers should seek
better access.
MR. RUGGIERO responded that policymakers need access to
information by whatever route available, so they can make
informed decisions.
2:34:23 PM
CO-CHAIR JOSEPHSON returned attention to the cost of oil
production in Alaska, restating that these costs have increased
150 percent in the last 10 years. The increase in lease
expenditures and transportation components has been linked with
the rising cost of oil, and he asked why the costs did not fall
as oil prices have fallen, but are "stuck at $40."
MR. RUGGIERO answered that information from DOR indicated that
production costs in 2014-2015 have fallen [document not
provided]. He explained there is a lead-lag effect between the
movement in the price of oil and the movement in costs, and
companies have responded to low oil prices through reductions
and belt-tightening. However, production costs do not drop as
far as oil prices because there are fixed components such as
salaries and benefits, which actually grow with time and
inflation. A closer analysis would be required to determine
which costs are directly impacted by oil prices.
CO-CHAIR TARR noted that one provision under consideration is a
change to the per barrel credit which would result in an
increase to the effective tax rate. She returned attention to a
document, entitled "A Net Profits Tax is very Volatile to Price"
and pointed out a mistake in that at $80 oil price, the tax as
percent of GVPP is 8.4 percent, not 10 percent as shown. If
adjustments are made to the per barrel credit that put Alaska at
the 10 percent rate, she queried whether Alaska would remain
competitive. Co-Chair Tarr said her focus is to minimize the
downside risk as long as the low-price environment persists, and
the state should earn more at this time. However, Alaska's
long-term goal is to remain competitive.
MR. RUGGIERO suggested finding the right "tipping point" is
difficult as each company reaches different investment
decisions. He opined making the aforementioned change is "a
minor movement"; however, the additional tax is a large sum of
money that will not go unnoticed. Therefore, it is a good idea
to keep long-term goals and short-term objectives in mind,
although they sometimes conflict, particularly with a treasury
shortfall to consider.
2:39:22 PM
CO-CHAIR TARR summarized that the committee is still evaluating:
the elimination of cash credits, which would be replaced by
carry forward losses; improvements to data transparency for the
public and the legislature; stage-gate approaches;
recommendations on how to remain competitive; and whether
provisions of HB 111 are too aggressive. She recognized that
Alaska is currently in a very different economic environment
than it was when Senate Bill 21 was enacted.
[HB 111 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB111 Supporting Document - Castle Gap Advisors_Presentation to House Resources 3.1.17.pdf |
HRES 3/1/2017 1:00:00 PM |
HB 111 |
| HB111 ver O 2.8.17.PDF |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/20/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM |
HB 111 |
| HB111 Fiscal Note DOR-TAX 2.12.17.pdf |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM HRES 3/13/2017 1:00:00 PM |
HB 111 |
| HB111 Sectional Analysis 2.12.17.pdf |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/20/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM |
HB 111 |
| HB111 Sponsor Statement 2.12.17.pdf |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/20/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM HRES 3/13/2017 1:00:00 PM |
HB 111 |