Legislature(2017 - 2018)SENATE FINANCE 532

04/27/2017 09:00 AM FINANCE

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as
Download Video part 1. <- Right click and save file as

Audio Topic
09:07:17 AM Start
09:08:48 AM HB111
10:45:11 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS TELECONFERENCED
Heard & Held
+ Rich Ruggiero, Castle Gap Energy Partners - LB&A TELECONFERENCED
Consultant
Roger Marks, LB&A Consultant
+ Bills Previously Heard/Scheduled TELECONFERENCED
CS FOR HOUSE BILL NO. 111(FIN)(efd fld)                                                                                       
                                                                                                                                
     "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;                                                                    
     relating  to carried-forward  lease expenditures  based                                                                    
     on losses  and limiting those lease  expenditures to an                                                                    
     amount  equal  to  the  gross value  at  the  point  of                                                                    
     production of  oil and gas  produced from the  lease or                                                                    
     property  where  the  lease expenditure  was  incurred;                                                                    
     relating to  information concerning tax  credits, lease                                                                    
     expenditures, and  oil and gas  taxes; relating  to the                                                                    
     disclosure of that information  to the public; relating                                                                    
     to an  adjustment in  the gross value  at the  point of                                                                    
     production;  and  relating  to  a  legislative  working                                                                    
     group."                                                                                                                    
                                                                                                                                
9:08:48 AM                                                                                                                    
                                                                                                                                
RICH RUGGIERO, CASTLE GAP ADVISORS, HOUSTON, TX (via                                                                            
teleconference), discussed the presentation, "Petroleum                                                                         
Fiscal Design HB 111" (copy on file).                                                                                           
                                                                                                                                
Co-Chair MacKinnon handed the gavel to Vice-Chair Bishop.                                                                       
                                                                                                                                
Mr. Ruggiero addressed slide 4, "How Are Explorer/Producer                                                                      
Costs Recovered?":                                                                                                              
                                                                                                                                
                                                                                                                                
      Net Operating Losses (NOLs) are created in any year                                                                       
     where  the  sum  of  the costs  exceed  the  amount  of                                                                    
     revenue available for recovery of those costs                                                                              
                                                                                                                                
      For gross based fiscal systems (like most of the lower                                                                    
     48),  there   is  generally  no  allowance   for  costs                                                                    
     recovery,  as the  tax is  based on  the gross  revenue                                                                    
     back to the well, lease or unit boundary                                                                                   
          - There are some allowable deductible costs                                                                           
          between the sale point in the market and the                                                                          
          well, lease or unit boundary                                                                                          
          - LNG shipping and long distance pipeline                                                                             
          transportation are examples                                                                                           
                                                                                                                                
      Net based systems in use around the globe have many                                                                       
     different mechanisms for cost recovery                                                                                     
          - "Cost Oil" in Production Sharing Agreements                                                                         
          (PSAs)                                                                                                                
          - Cost deductions, ranging from a limited                                                                             
          percentage up to 100 percent of available revenue                                                                     
          - Recovered as per a schedule, much like the                                                                          
          depreciation of capital                                                                                               
          - And others                                                                                                          
                                                                                                                                
Vice-Chair Bishop handed the gavel to Co-Chair MacKinnon.                                                                       
                                                                                                                                
Mr. Ruggiero addressed slide 5, "What is the Value of                                                                           
'Recovery'?":                                                                                                                   
                                                                                                                                
                                                                                                                                
      Looking at the same project, but run against the                                                                          
     fiscal systems in several different regimes, the                                                                           
    internal rate of return (IRR) and net present value                                                                         
     (NPV) to the producer (and thus the net present cost                                                                       
     to the government) varies greatly                                                                                          
          - Project IRR and NPV are key aspects of                                                                              
          investment decision making                                                                                            
                                                                                                                                
      These variations are the result of several different                                                                      
     methods of accounting for the costs or NOLs                                                                                
          - Which costs incurred are eligible for recovery?                                                                     
          - How much time does it take to recover them?                                                                         
          - Is there any interest or uplift provided?                                                                           
          - Is there one or multiple tax rates (i.e. can                                                                        
          the effective tax rate differ from when the NOL                                                                       
         is created to when the NOL is recovered)?                                                                              
          - Is the recovery of costs against the petroleum                                                                      
          tax ultimately deductible against corporate                                                                           
          income tax?                                                                                                           
                                                                                                                                
      The combination of all of the above will inform the                                                                       
     producers as to the attractiveness of the fiscal                                                                           
     regime                                                                                                                     
                                                                                                                                
9:14:16 AM                                                                                                                    
                                                                                                                                
Mr. Ruggiero looked at slide 6, "Retaining Value for NOLs                                                                       
i.e. Cost Recovery":                                                                                                            
                                                                                                                                
                                                                                                                                
      Current Alaska structure provides for 100 percent of                                                                      
     cost recovery "value" through the concept of the                                                                           
     cashable credit                                                                                                            
                                                                                                                                
      Removal of the cashable credit option then creates a                                                                      
     challenge as to how to preserve the full "value" of                                                                        
     cost recovery                                                                                                              
          - Switch to carry forward of net operating losses                                                                     
          (CF NOLs)                                                                                                             
                                                                                                                                
      Applying CF NOLs to possible future North Slope                                                                           
     projects surfaced issues related to the interaction                                                                        
     with per barrel credits and gross minimum taxes                                                                            
     resulting in producers possibly not getting full value                                                                     
     for their costs and NOLs                                                                                                   
          - Defined this inefficiency as "Wasted NOLs"                                                                          
                                                                                                                                
Mr. Ruggiero highlighted slide 7, "Basic Alaska Structure":                                                                     
                                                                                                                                
                                                                                                                                
      Start with the GVPP or Gross Value at the Point of                                                                        
     Production                                                                                                                 
          - Subtract Current Costs                                                                                              
          - Subtract CF NOLs                                                                                                    
          - Subtract appropriate GVR if eligible                                                                                
                                                                                                                                
      This results in the PTV or Production Tax Value                                                                           
          - Cannot be less than $0                                                                                              
          - Calculate preliminary petroleum tax at 35                                                                           
          percent of PTV                                                                                                        
          - Subtract eligible per barrel credits                                                                                
                                                                                                                                
      This results in the "net" petroleum tax due                                                                               
          - Cannot be less than $0                                                                                              
                                                                                                                                
      Calculate the "gross" minimum tax                                                                                         
          - 4 percent of the GVPP at prices above $25                                                                           
                                                                                                                                
      Tax due is the greater of the "net" or "gross" amount                                                                     
                                                                                                                                
Mr. Ruggiero addressed slide 8, "Basic Alaska Structure":                                                                       
                                                                                                                                
                                                                                                                                
      Start with the GVPP or Gross Value at the Point of                                                                        
     Production                                                                                                                 
     - Subtract Current Costs                                                                                                   
     - Subtract CF NOLs                                                                                                         
     - Subtract appropriate GVR if eligible                                                                                     
                                                                                                                                
      This results in the PTV or Production Tax Value                                                                           
     - Can not be less than $0                                                                                                  
     - Calculate preliminary petroleum tax at 35 percent of                                                                     
     PTV                                                                                                                        
     - Subtract eligible per barrel credits                                                                                     
                                                                                                                                
      This results in the "net" petroleum tax due                                                                               
     - Can not be less than $0                                                                                                  
                                                                                                                                
      Calculate the "gross" minimum tax                                                                                         
     - 4 percent of the GVPP at prices above $25                                                                                
                                                                                                                                
      Tax due is the greater of the "net" or "gross" amount                                                                     
                                                                                                                                
Mr. Ruggiero looked at slide 9, "Simple Single Barrel                                                                           
Example":                                                                                                                       
                                                                                                                                
                                                                                                                                
      First, lets look at the calculations before the                                                                           
     introduction of CF NOLs                                                                                                    
                                                                                                                                
      For NON-GVR                                                                                                               
          - Net tax is 4.25                                                                                                     
          - Gross minimum tax is 2.60                                                                                           
          - Tax Paid is the greater of so 4.25                                                                                  
                                                                                                                                
      For GVR                                                                                                                   
          - Net tax 2.70                                                                                                        
          - Gross tax 2.08                                                                                                      
          - Tax Paid 2.70                                                                                                       
                                                                                                                                
Mr. Ruggiero looked at slide 10, "Simple Single Barrel                                                                          
Example - Add in CF NOLS":                                                                                                      
                                                                                                                                
                                                                                                                                
      Assume 50 in available CF NOLs                                                                                            
                                                                                                                                
      For NON-GVR                                                                                                               
          - Use 35 CF NOL to take the PTV to 0                                                                                  
          - Net tax is 0                                                                                                        
          - Gross minimum tax is 2.60                                                                                           
          - Tax Paid is the greater of so 2.60                                                                                  
                                                                                                                                
      FOR GVR                                                                                                                   
          - Use 22 CF NOL to take the PTV to 0                                                                                  
          - Net 0                                                                                                               
          - Gross - N/A as per barrel credits pierce the                                                                        
          floor                                                                                                                 
                                                                                                                                
9:21:16 AM                                                                                                                    
                                                                                                                                
Mr. Ruggiero looked at slide 11, "Simple Single Barrel                                                                          
Example - Optimize CF NOLS":                                                                                                    
                                                                                                                                
                                                                                                                                
      Assume 50 in CF NOLs                                                                                                      
                                                                                                                                
      Use only the amount of CF NOL to optimize use                                                                             
     of per barrel credits and min floor                                                                                        
                                                                                                                                
      For NON-GVR                                                                                                               
          - Only need to use 4.7 and not 35                                                                                     
          - 30.3 NOL wasted, or 86 percent wasted                                                                               
                                                                                                                                
      FOR GVR                                                                                                                   
          - Only need to use 1.77 versus 22                                                                                     
          - 20.2 NOL wasted or 92 percent wasted                                                                                
                                                                                                                                
Senator Olson looked  at slide 10, and  wondered whether all                                                                    
the net  operating losses (NOLs)  must be used to  bring the                                                                    
production tax  values (PTVs) to zero.  Mr. Ruggiero replied                                                                    
that the current legislation stated  that the producers were                                                                    
obligated to  take all available and  carryforward costs and                                                                    
apply them until  the PTV became zero.  The remainder became                                                                    
a carryforward loss for the following year.                                                                                     
                                                                                                                                
Senator Olson surmised that one did  not need to use all the                                                                    
NOLs  to  get  to  zero. Mr.  Ruggiero  responded  that  the                                                                    
current bill  would allow  to choose the  number of  NOLs to                                                                    
equalize the net and gross taxes.                                                                                               
                                                                                                                                
9:25:34 AM                                                                                                                    
                                                                                                                                
Mr. Ruggiero addressed slide 12, "What is the Takeaway?":                                                                       
                                                                                                                                
                                                                                                                                
      Because of the interaction of the various mechanisms                                                                      
     within  the fiscal  structure, no  one  item should  be                                                                    
     viewed stand  alone and  care should  be taken  to make                                                                    
     sure  the  level  and  degree  of  inter-dependency  is                                                                    
     understood.                                                                                                                
                                                                                                                                
      So long as Alaska keeps some form of GVR, per barrel                                                                      
     credits  and  hard  floors  related  to  gross  minimum                                                                    
     taxes, the impact  of CF NOLs will  range from slightly                                                                    
     less to much less than what one would expect.                                                                              
                                                                                                                                
      Changing other mechanisms, such as increasing the                                                                         
     minimum tax or reducing  per barrel credits, will alter                                                                    
     the value to  the producer and the impact  to the state                                                                    
     for CF NOLs.                                                                                                               
                                                                                                                                
      For 100 percent used and useful NOLs the proffered                                                                        
     language in  the SRES CS  will allow producers  to only                                                                    
     use NOLs when useful to reduce taxes.                                                                                      
                                                                                                                                
Mr. Ruggiero looked at slide  14, "Time Can Have More Impact                                                                    
than Tax Rate":                                                                                                                 
                                                                                                                                
                                                                                                                                
      Modeled a hypothetical field for purposes of only                                                                         
    showing the effect of timing on producer economics                                                                          
                                                                                                                                
      All model runs are based on the same data                                                                                 
          - Producer investment of 100                                                                                          
          - Total revenue of 400                                                                                                
      100 cost recovery                                                                                                         
                                                                                                                                
      300 of profit split between producer and government                                                                       
                                                                                                                                
      In each of case 1 to 3  the total cash to the producer                                                                    
     and  to the  government is  identical, only  the timing                                                                    
     changes                                                                                                                    
                                                                                                                                
      Depending on how cost recovery is handled, the results                                                                    
     range from  a very doable  and profitable project  to a                                                                    
     project that would not get developed                                                                                       
                                                                                                                                
Mr. Ruggiero looked at slide 15, "4 Timing Scenarios of                                                                         
Same Total Dollars":                                                                                                            
                                                                                                                                
                                                                                                                                
      Immediate Recovery  100  percent Useful  - i.e.  money                                                                    
     back right after investing IRR  = 27 percent, NPV = 46,                                                                    
     CF=120                                                                                                                     
                                                                                                                                
      Accelerated Recovery  100  percent Useful  - i.e.  all                                                                    
     available  revenue  for  cost  recovery  before  profit                                                                    
     splits IRR = 20 percent, NPV = 27, CF=120                                                                                  
                                                                                                                                
      Delayed  Recovery  100  percent  Useful  -  e.g.  cost                                                                    
     recovery  through depreciation  of  an asset  IRR =  14                                                                    
     percent, NPV = 14, CF=120                                                                                                  
                                                                                                                                
      Only 50 percent Useful Recovery - i.e. As suggested by                                                                    
     the other body IRR = 6 percent, NPV = -12, CF=100                                                                          
                                                                                                                                
     *CF = undiscounted cash flow                                                                                               
                                                                                                                                
9:32:26 AM                                                                                                                    
                                                                                                                                
Mr. Ruggiero highlighted slide 16, "Uplift Compensates for                                                                      
Timing Differences":                                                                                                            
                                                                                                                                
                                                                                                                                
      Many regimes offer  some form of "uplift"  or interest                                                                    
     on  carry  forward  losses to  allow  the  producer  to                                                                    
     recover some of the time value loss as well                                                                                
                                                                                                                                
      We could fill several days of testimony on what is the                                                                    
     right or fair rate of uplift                                                                                               
     -  Companies, depending  on size,  will argue  long run                                                                    
     returns  in the  12 percent  to 20+  percent and  would                                                                    
     need an equivalent uplift to be kept whole                                                                                 
     -  Governments tend  to view  the world  as long  run 4                                                                    
     percent to  6 percent  return and view  anything higher                                                                    
     as a "giveaway"                                                                                                            
     - Settling somewhere in the 'middle' means both sides                                                                      
     give a bit                                                                                                                 
                                                                                                                                
      10 percent annual uplift falls nicely in between                                                                          
     expected return rates                                                                                                      
                                                                                                                                
Mr. Ruggiero addressed slide 17, "Impact of Interest Rate                                                                       
on Time Value of Money":                                                                                                        
                                                                                                                                
                                                                                                                                
      The yellow highlighted cells basically show, at the                                                                       
     interest rates listed across the top, how long it                                                                          
     takes to double your money                                                                                                 
                                                                                                                                
Mr. Ruggiero looked at slide 18, "Uplift - For How Long?":                                                                      
                                                                                                                                
                                                                                                                                
      Many aspects of the fiscal regime and the particular                                                                      
     project will suggest what is the right length of time                                                                      
     for providing uplift                                                                                                       
                                                                                                                                
      This is a self-correcting mechanism                                                                                       
          - Those that can use the NOLs quickly are not                                                                         
         disadvantaged and thus need little uplift                                                                              
          - For whatever circumstances lead to prolonged                                                                        
          recovery, uplift is a means of keeping whole                                                                          
                                                                                                                                
      Legacy producers with sizeable current production are                                                                     
     advantaged                                                                                                                 
                                                                                                                                
      New players may, depending on price forecasts, take                                                                       
     decades to recover their costs                                                                                             
                                                                                                                                
9:39:53 AM                                                                                                                    
                                                                                                                                
Mr. Ruggiero highlighted slide 19, "Quick Modeling Runs -                                                                       
Observations":                                                                                                                  
                                                                                                                                
                                                                                                                                
     Life-cycle Model plus Legacy on 6 percent decline                                                                          
          - $10 TandS, $30 costs for Legacy                                                                                     
          - Used 500,000 bpd as legacy production                                                                               
                                                                                                                                
      With a hard floor at 4 percent                                                                                            
          -  At prices  above  $50/bbl  there is  sufficient                                                                    
          taxable  value from  the legacy  production to  be                                                                    
          able  to   immediately  deduct  the   new  project                                                                    
          capital costs                                                                                                         
          - Economically, this is nearly the same as                                                                            
          cashable credits                                                                                                      
          -   Relative  to   a  producer   with  no   legacy                                                                    
          production, this adds 3.5 percent  to 4 percent to                                                                    
          the   project  return   (IRR)   and  doubles   the                                                                    
          discounted net present value                                                                                          
                                                                                                                                
      With no hard floor                                                                                                        
          - The absence of a gross minimum hard floor                                                                           
          provides very small improvement to project IRR                                                                        
         and net present value for new development                                                                              
                                                                                                                                
9:42:19 AM                                                                                                                    
                                                                                                                                
Mr. Ruggiero looked at slide  20, "Legacy Operator, Legacy +                                                                    
New  Oil  Field (GVR  eligible),  No  Wasted NOLs,  No  Hard                                                                    
Floor":                                                                                                                         
                                                                                                                                
                                                                                                                                
      Assumptions:                                                                                                              
     - 7 years pre-production investment                                                                                        
     - GVR benefits are realized for 3 years only (does not                                                                     
     reflect current statute)                                                                                                   
                                                                                                                                
9:49:16 AM                                                                                                                    
                                                                                                                                
Senator   Micciche  wondered   whether   the  numbers   were                                                                    
severance only.  Mr. Ruggiero replied  in the  negative. The                                                                    
state tax included royalty.                                                                                                     
                                                                                                                                
Mr. Ruggiero highlighted slide  21, "Legacy Operator, Legacy                                                                    
+  New Oil  (GVR  eligible),  No Wasted  NOLs,  With a  Hard                                                                    
Floor":                                                                                                                         
                                                                                                                                
                                                                                                                                
      Assumptions:                                                                                                              
     - 7 years pre-production investment                                                                                        
     - GVR benefits are realized for 3 years only (does not                                                                     
     reflect current statute)                                                                                                   
                                                                                                                                
Mr. Ruggiero looked at the  column under "$55", and remarked                                                                    
that that the NOLs would not be recovered until year 37.                                                                        
                                                                                                                                
Mr.  Ruggiero looked  at slide  22, "New  Operator, New  Oil                                                                    
(GVR Strict 3 years), No Wasted NOLs, No Hard Floor":                                                                           
                                                                                                                                
                                                                                                                                
      Assumptions:                                                                                                              
     - 7 years pre-production investment                                                                                        
     - GVR benefits are realized for 3 years only (does not                                                                     
     reflect current statute)                                                                                                   
      With no hard floor, no tax is paid during minimum tax                                                                     
     period                                                                                                                     
                                                                                                                                
9:54:37 AM                                                                                                                    
                                                                                                                                
Mr. Ruggiero  referred to slide  23, "New Operator,  New Oil                                                                    
(GVR Strict 3 years), No Wasted NOLs, With a Hard Floor":                                                                       
                                                                                                                                
                                                                                                                                
      Assumptions:                                                                                                              
     - 7 years pre-production investment                                                                                        
     - GVR benefits are realized for 3 years only (does not                                                                     
     reflect current statute)                                                                                                   
                                                                                                                                
Senator  von Imhof  surmised that  there  was a  "trade-off"                                                                    
between  the state  receiving more  money in  the short-term                                                                    
with a hard  floor, but prolonging the  NOL's final recovery                                                                    
year. Mr. Ruggiero agreed.                                                                                                      
                                                                                                                                
Senator von  Imhof stated  that the slide  assumed a  $5 per                                                                    
barrel credit,  which did  not pierce  the floor.  She asked                                                                    
for more information regarding  that assertion. Mr. Ruggiero                                                                    
replied  that the  $5 per  barrel  was only  applied to  the                                                                    
first three years.  He stated that starting in  year four of                                                                    
production, it would  move to the sliding  per barrel credit                                                                    
that would not be allowed to pierce the floor.                                                                                  
                                                                                                                                
Senator  von Imhof  noted that  it did  not reflect  current                                                                    
statute. Mr. Ruggiero agreed. The slide was an analysis.                                                                        
                                                                                                                                
Mr. Ruggiero furthered  that it was based on  a request. The                                                                    
intent was to see the impact of the NOL recovery.                                                                               
                                                                                                                                
9:58:10 AM                                                                                                                    
                                                                                                                                
Mr. Ruggiero  highlighted slide 24,  "New Operator,  New Oil                                                                    
(GVR eligible),  No Wasted  NOLs, With a  Hard Floor  and 10                                                                    
percent Uplift":                                                                                                                
                                                                                                                                
                                                                                                                                
      Assumptions:                                                                                                              
     - 10 percent Uplift                                                                                                        
     - 7 years pre-production investment                                                                                        
     - GVR benefits are realized for 3 years only (does not                                                                     
     reflect current statute)                                                                                                   
                                                                                                                                
Mr.  Ruggiero addressed  slide  26, "Alaska  Competitiveness                                                                    
Under Senate Resources CSHB111":                                                                                                
                                                                                                                                
                                                                                                                                
      For legacy players                                                                                                        
          -  See this  as positive  as defines  the priority                                                                    
          use of the various deductions                                                                                         
         - Allows quick recovery of costs and NOLs                                                                              
          - Allows  credits to  be recovered  from corporate                                                                    
          income taxes                                                                                                          
                                                                                                                                
      For new players                                                                                                           
          - Uplift  helps, but expected  timing of  new mega                                                                    
          projects  would suggest  longer than  7 years  are                                                                    
          needed for uplift                                                                                                     
          -  Initiation  of  1   barrel  of  oil  production                                                                    
          terminates  accrual  of   uplift.  This  immediate                                                                    
          termination could cost a  new player needed uplift                                                                    
          on  billions in  spending;  would  suggest that  a                                                                    
          sizeable threshold,  such as 5000 barrel  per day,                                                                    
          be set as to when uplift ceases to be payable                                                                         
          - Is the uplift  particular to annual packages and                                                                    
          each gets  its own 7  year window, or are  NOLs to                                                                    
          be treated  as one  package regardless of  year of                                                                    
          creation  and given  the same  7  year window  for                                                                    
          uplift?                                                                                                               
                                                                                                                                
      Recommend that the window apply separately to each                                                                        
     annual package amount                                                                                                      
                                                                                                                                
      NOLs to be used on a first in first out basis                                                                             
                                                                                                                                
10:06:00 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:10:07 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
10:10:40 AM                                                                                                                   
                                                                                                                                
ROGER MARKS, LEGISLATIVE  CONSULTANT, LEGISLATIVE BUDGET AND                                                                    
AUDIT   COMMITTEE   (via  teleconference),   discussed   the                                                                    
PowerPoint,  "Senate  CS  for  CS HB  111  (Ver  C-P);  Some                                                                    
Observations" (copy on file).                                                                                                   
                                                                                                                                
Mr. Marks looked at slide 2, "Summary":                                                                                         
                                                                                                                                
     Reduces state credit exposure without compromising                                                                         
     competitiveness of overall fiscal system                                                                                   
                                                                                                                                
     Some economic observations regarding the interaction                                                                       
     of loss recovery, the per barrel credit, and the gross                                                                     
     minimum floor under the CS follow                                                                                          
                                                                                                                                
     Two lingering issues                                                                                                       
                                                                                                                                
Mr. Marks addressed slide 3, "Preface":                                                                                         
                                                                                                                                
     The production tax is a net tax with a 35 percent rate                                                                     
     There is a floor on that net tax equal to 4 percent of                                                                     
     gross value                                                                                                                
          The per barrel credit and loss recovery perform                                                                       
          distinct functions:                                                                                                   
          The per barrel credits provide tax relief to                                                                          
          partially offset the high burden of royalties at                                                                      
          low prices                                                                                                            
               It reflects this year's business                                                                                 
               If not used they are lost forever, and the                                                                       
               royalty offset role is eviscerated                                                                               
          Loss recovery provides for the deduction of costs                                                                     
          in computing net value that could not be deducted                                                                     
          in prior years                                                                                                        
               It reflects prior years' business                                                                                
     Since they are distinct issues, using them both is not                                                                     
     redundant                                                                                                                  
                                                                                                                                
Mr. Marks looked at slide 4, "The Royalty Problem (Using                                                                        
GVR Oil)":                                                                                                                      
                                                                                                                                
     ANS Price $50                                                                                                              
     Transp ($10)                                                                                                               
     Gross $40                                                                                                                  
     Upstream Costs ($35)                                                                                                       
     Net Value $5                                                                                                               
     1/8 Royalty ($5)                                                                                                           
     Producer income before prod tax ($0)                                                                                       
     Govt take before prod tax 100 percent                                                                                      
                                                                                                                                
Senator Micciche queried the reason for using $35 for                                                                           
upstream costs. Mr. Marks replied that his numbers added                                                                        
$10 to the Revenue Sources Book.                                                                                                
                                                                                                                                
10:17:31 AM                                                                                                                   
                                                                                                                                
Mr. Marks addressed slide 5, "CS Summary of Credits and the                                                                     
Floor":                                                                                                                         
                                                                                                                                
     • Losses                                                                                                                   
     - Currently (both Non-GVR and GVR Oil):                                                                                    
     • Can use losses to bring tax below floor                                                                                  
     - CS: (both Non-GVR and GVR Oil):                                                                                          
     • Cannot use losses to bring tax below floor*                                                                              
     • Per Barrel Credit                                                                                                        
     - Currently:                                                                                                               
     • Non-GVR Oil: Cannot use credit to bring tax below                                                                        
     floor                                                                                                                      
    • GVR Oil: Can use credit to bring tax below floor                                                                          
     - CS: No change                                                                                                            
     * If non-GVR and GVR losses were treated differently                                                                       
     it would be necessary to allocate losses between them,                                                                     
     which would be very difficult                                                                                              
                                                                                                                                
Mr. Marks looked at slide 6, "Observation 1: "Hardening"                                                                        
the Floor"                                                                                                                      
                                                                                                                                
     • Under current law taxpayers can use carried forward                                                                      
     loss credits to bring taxes below the gross minimum                                                                        
     floor                                                                                                                      
     • Under the CS taxpayers can only use carried forward                                                                      
     losses to bring the tax down to the floor                                                                                  
                                                                                                                                
Mr. Marks addressed slide 7, "Hardening the Floor Against                                                                       
Losses: Loss Recovery on Non-GVR Oil":                                                                                          
                                                                                                                                
     • No loss recovery unless prices above about $65/bbl                                                                       
          - Losses on production not generated until prices                                                                     
          below about $35/bbl                                                                                                   
          - Losses on development of other non-GVR oil                                                                          
          would have offsetting income at all but very low                                                                      
          prices                                                                                                                
          - Loss recovery on non-GVR oil does not appear to                                                                     
          be a significant problem                                                                                              
                                                                                                                                
10:22:49 AM                                                                                                                   
                                                                                                                                
Mr. Marks highlighted slide 8, "Hardening the Floor Against                                                                     
Losses: GVR Oil Tax Calculation at Current Prices":                                                                             
                                                                                                                                
     ANS Price $50                                                                                                              
     Transp ($10)                                                                                                               
     Gross ($40)                                                                                                                
     Gross minimum at 4 percent $1.60                                                                                           
     Per barrel credit ($5.00)                                                                                                  
     Tax $0.00                                                                                                                  
                                                                                                                                
Mr. Marks addressed slide 9, "Hardening the Floor Against                                                                       
Losses: Loss Recovery on GVR Oil":                                                                                              
                                                                                                                                
     • Most new development would be GVR oil                                                                                    
     •  Companies with  substantial existing  production and                                                                    
     income could offset GVR losses                                                                                             
     •  GVR  production   from  companies  without  existing                                                                    
     production                                                                                                                 
     • Since  per barrel credits cannot  be carried forward,                                                                    
     and  because of  their value,  taxpayers would  use per                                                                    
     barrel credit first                                                                                                        
     •  Accordingly, taxpayers  might only  use losses  when                                                                    
     prices were  high enough  such that  use of  per barrel                                                                    
     credit and losses exceeded floor                                                                                           
     • At about $85/bbl, net tax exceeds gross minimum                                                                          
     • Accordingly, these losses may  not be recovered until                                                                    
     after GVR  status lapses (after  3 or 7 years)  and per                                                                    
     barrel credit can no longer  take tax below minimum. At                                                                    
     that point taxpayers may start recovering losses.                                                                          
                                                                                                                                
10:27:51 AM                                                                                                                   
                                                                                                                                
Mr. Marks looked at slide 10, "Uplift on Cost Recovery":                                                                        
                                                                                                                                
     •  Provides net  present value  boost to  companies who                                                                    
     have to wait to have production/offsetting income                                                                          
     •  Currently  CS  limits   only  to  companies  without                                                                    
     production                                                                                                                 
     -  Companies  with only  limited  production/offsetting                                                                    
     income may not be in a much different situation                                                                            
     • The  issue of  early GVR cost  recovery only  at high                                                                    
     prices applies here                                                                                                        
     -  Similarly,  may only  be  invoked  after GVR  status                                                                    
     lapses (after 3 or 7 years of production)                                                                                  
                                                                                                                                
Mr. Marks addressed slide 11, "Sequencing Under the CS: Two                                                                     
Possibilities Non-GVR Oil Assuming a $5 Loss Carried                                                                            
Forward":                                                                                                                       
                                                                                                                                
     ANS Price $55 $55                                                                                                          
     Transp Cost ($10) ($10)                                                                                                    
     Gross Value* $45 $45                                                                                                       
     Upstream Costs ($25) ($25)                                                                                                 
     Loss ($5) ($0)                                                                                                             
     PTV $15 $20                                                                                                                
     Tax before p/bbl credit at 35 percent $5.25 $7                                                                             
     Per barrel credit ($3.45) ($5.20)                                                                                          
     Tax $1.80 $1.80                                                                                                            
     *Gross minimum (at 4 percent) $1.80 $1.80                                                                                  
                                                                                                                                
10:34:21 AM                                                                                                                   
                                                                                                                                
Mr. Marks looked at slide 12, "Unresolved Issue 1: The                                                                          
Order of Deducting Losses vs. Per Barrel Credits":                                                                              
                                                                                                                                
     • Recognizing:                                                                                                             
     - Per barrel credits lapse if not used                                                                                     
     - Unused losses carry forward if not used                                                                                  
     •  The CS  does  not  specify which  is  used first  in                                                                    
     calculating the tax                                                                                                        
     • Given the hard floor for non-GVR oil:                                                                                    
     - It will probably be  to the taxpayer's benefit to use                                                                    
     the per barrel  credits in getting the tax  down to the                                                                    
     floor, and carrying unused losses forward                                                                                  
     - Would be consistent  with utilizing functional intent                                                                    
     of the  per barrel  credits and loss  recovery inherent                                                                    
     in the statute                                                                                                             
                                                                                                                                
Mr. Marks addressed slide 13, "Questions":                                                                                      
                                                                                                                                
     • Should the statute specify the sequence?                                                                                 
     - Do  100 percent of  available losses have to  be used                                                                    
     first?                                                                                                                     
     - Do 100  percent of available per  barrel credits have                                                                    
     to be used first?                                                                                                          
     - Can taxpayer mix?                                                                                                        
     • Should  statute specify the sequence?  Should statute                                                                    
     leave it  up the taxpayer?  Should statute leave  it up                                                                    
     to the Department?                                                                                                         
                                                                                                                                
Mr. Marks displayed slide 14, "Unresolved Issue 2: What                                                                         
Does it Mean to Use a Credit to Bring Taxes Below the                                                                           
Floor?"                                                                                                                         
                                                                                                                                
     • Under the CS, for  GVR oil, losses cannot bring taxes                                                                    
     below the floor, but the per barrel credit can                                                                             
     • Suppose:                                                                                                                 
     - Tax before credits: $10                                                                                                  
     - Minimum tax: $7                                                                                                          
     - Per barrel credits: $5                                                                                                   
     - Losses: $4                                                                                                               
                                                                                                                                
Mr. Marks discussed slide 15,  "Taxpayer Options Pursuant to                                                                    
DOR Interpretation in Similar Situations:                                                                                       
                                                                                                                                
     If you use both credits, they are both the cause of                                                                        
     getting below the minimum                                                                                                  
     Tax before credits: $10                                                                                                    
          Use $3 in losses to bring tax down to minimum,                                                                        
          but                                                                                                                   
          not use any per barrel credits to reduce tax                                                                          
          further                                                                                                               
     ($3), TAX $7                                                                                                               
     Tax before credits $10                                                                                                     
          Use $5 in per barrel credits, but not use any                                                                         
          losses to reduce tax further                                                                                          
     ($5), TAX $5                                                                                                               
                                                                                                                                
Mr. Marks  highlighted slide 16, "Taxpayer  Options Pursuant                                                                    
to  DOR Interpretation  in Similar  Situations:  If you  use                                                                    
both credits, they  are both the cause of  getting below the                                                                    
minimum":                                                                                                                       
                                                                                                                                
     • Start out with $10 in tax before credits or losses                                                                       
    • Use $3 in losses to bring tax down to $7 minimum                                                                          
     • Then use $5 in per barrel credits to bring tax down                                                                      
     to $2                                                                                                                      
                                                                                                                                
Mr. Marks addressed slide 17, "Analogy":                                                                                        
                                                                                                                                
     • Suppose you have $100 in your checking account                                                                           
     • You write two $100 checks                                                                                                
     • Did both checks, or the second check, cause you to                                                                       
     be overdrawn?                                                                                                              
                                                                                                                                
10:40:45 AM                                                                                                                   
                                                                                                                                
Mr. Marks looked at slide 18, "At Stake":                                                                                       
                                                                                                                                
    • Recognizing the distinct function of each credit                                                                          
          - The per barrel credit is not loss recovery                                                                          
          - Loss recovery is not the per barrel credit                                                                          
                                                                                                                                
Senator  von Imhof  stressed that  it was  important not  to                                                                    
misinterpret the  NOL use, because there  could be confusion                                                                    
in  the NOL  carryforward.  Mr. Marks  agreed. He  supported                                                                    
less ambiguity in statute.                                                                                                      
                                                                                                                                
Co-Chair MacKinnon discussed the following day's agenda.                                                                        
                                                                                                                                
CSHB 111(FIN)(efd fld) was HEARD and HELD in committee for                                                                      
further consideration.                                                                                                          
                                                                                                                                

Document Name Date/Time Subjects
HB 111 042717 Senate Finance_CGA Final.pdf SFIN 4/27/2017 9:00:00 AM
HB 111
HB 111 042717 Marks Sen Fin HB 111 042717.pdf SFIN 4/27/2017 9:00:00 AM
HB 111