Legislature(2015 - 2016)HOUSE FINANCE 519
04/05/2016 08:30 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB247 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 247 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 5, 2016
8:32 a.m.
8:32:22 AM
CALL TO ORDER
Co-Chair Thompson called the House Finance Committee
meeting to order at 8:32 a.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Ken Alper, Director, Tax Division, Department of Revenue.
PRESENT VIA TELECONFERENCE
Richard Ennis, Managing Director, ING Capital; Jared Green,
President, ENSTAR Natural Gas; Moira Smith, Vice President,
ENSTAR Natural Gas; Moira Smith, Vice President and General
Counsel, ENSTAR Natural Gas.
SUMMARY
HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G
HB 247 was HEARD and HELD in committee for
further consideration.
Co-Chair Thompson reviewed the agenda for the day. The
committee would be hearing from ENSTAR Natural Gas and ING.
HOUSE BILL NO. 247
"An Act relating to confidential information status
and public record status of information in the
possession of the Department of Revenue; relating to
interest applicable to delinquent tax; relating to
disclosure of oil and gas production tax credit
information; relating to refunds for the gas storage
facility tax credit, the liquefied natural gas storage
facility tax credit, and the qualified in-state oil
refinery infrastructure expenditures tax credit;
relating to the minimum tax for certain oil and gas
production; relating to the minimum tax calculation
for monthly installment payments of estimated tax;
relating to interest on monthly installment payments
of estimated tax; relating to limitations for the
application of tax credits; relating to oil and gas
production tax credits for certain losses and
expenditures; relating to limitations for
nontransferable oil and gas production tax credits
based on oil production and the alternative tax credit
for oil and gas exploration; relating to purchase of
tax credit certificates from the oil and gas tax
credit fund; relating to a minimum for gross value at
the point of production; relating to lease
expenditures and tax credits for municipal entities;
adding a definition for "qualified capital
expenditure"; adding a definition for "outstanding
liability to the state"; repealing oil and gas
exploration incentive credits; repealing the
limitation on the application of credits against tax
liability for lease expenditures incurred before
January 1, 2011; repealing provisions related to the
monthly installment payments for estimated tax for oil
and gas produced before January 1, 2014; repealing the
oil and gas production tax credit for qualified
capital expenditures and certain well expenditures;
repealing the calculation for certain lease
expenditures applicable before January 1, 2011; making
conforming amendments; and providing for an effective
date."
8:33:33 AM
RICHARD ENNIS, MANAGING DIRECTOR, ING CAPITAL (via
teleconference), shared that his company had utilized that
oil and gas tax credit program in the state. He shared that
the bill proposed a "phase-down" of credits over a multiple
years, and felt that it was beneficial to the Alaskan
companies. He remarked that two of his clients were in
multi-year development programs in the North Slope and Cook
Inlet. He felt that the provision was beneficial for their
decision making processes. He noted that the current bill
included an ongoing assignment provision to the lender of
the tax credit, which was an important part of the credit
division. He felt that ING was in the position of buying
and remitting the credit upon its maturity. He expressed
concern with the bankruptcy in the underlying client, and
the ability of other creditor and/or the state to come
between his company and the assignment provision. He noted
that the legislation did not contain clarifying language
concerning bankruptcy intervention. He noted the new
provision in the bill, which allowed the right of offset by
the state against the client or oil company. He remarked
that the provision kept his company from realizing the
value of the assigned credit. He did not want to return to
the lender to obtain representation or audit review of any
offsetting claims that may impact the already assigned tax
credits. He noted the discussions regarding a cap on the
amount paid. He shared that the cap was originally $25
million, and the current discussion was $200 million. He
felt that $200 million would satisfy almost everyone to
keep the reimbursement of the credits at short-term. He was
not concerned with a reduction of the $200 million, and was
comfortable taking a multi-year repayment obligation. He
noted that the appropriations issue was the overriding
issue, but did not know if that was fixable. He remarked
that appropriations were assigned annually. He wanted
clarification in the current legislation regarding a multi-
year commitment to the program.
8:39:19 AM
Vice-Chair Saddler requested more detail related to the
right of offset. Mr. Ennis replied that the current
legislation had a provision that said, should the state
have any claim for other taxes or license fees; or state
excised tax on gasoline or diesel fuel; any claims against
the oil company that assigned the credit to the bank could
be offset against the credits. Therefore, it reduced value
of the credit after it had been assigned to his company.
Vice-Chair Saddler surmised that there would be other
obligations that the recipient of the credit would pay back
to the state before it would pay the banker. Mr. Ennis
agreed, and furthered that the state a right to reduce the
value of the credit.
Vice-Chair Saddler wondered how an exploration or
development company would use the credits; and where ING
fit into the provision of resources. Mr. Ennis responded
that the credit program took between 15 to 20 months from
the time that money was expended to the time that it could
be reimbursed by the state. He stated that ING provided the
working capital through the 20-month financing, by
advancing immediate money to the company. He stated that
ING was "stepping into" the oil company's rights to receive
those credits when the credits were available.
Vice-Chair Saddler asked Mr. Ennis about his background.
Mr. Ennis provided his professional background of which he
had been a banker for over 30 years.
8:43:33 AM
Representative Gara queried an opinion on the $25 million
cap per tax credit holder. Mr. Ennis replied that $25
million was not a very large credit amount for the types of
expenditures that ING was funding. He remarked that the
credits were currently designed to expire after 10 years,
which would limit the total value to $250 million. He felt
that there was a significant appropriations risk under
those circumstances, should the repayment be limited to ten
years, as opposed to 10 months.
Representative Gara wondered if Mr. Ennis was aware of the
provision of the law which was that the state, in lower
revenue years, was only required to pay a lower amount of
money in total tax credits. He shared that the formula for
the current year resulted in a total of $72 million; the
formula in the previous year resulted in approximately $96
million. He stressed that those provisions were in place to
protect the public money, because most the state's revenue
was from oil. Mr. Ennis replied that he was aware of the
provisions.
Representative Gara stressed that ING was a risk-based
company. He remarked that the statute that he mentioned
outlined a specific risk. He wondered if that was a factor
in the investment decision. Mr. Ennis responded
affirmatively. He added that the bank was willing to take
multi-year payment risk, which was essentially the meaning
of the provision.
Representative Gara noted that the payment requirement was
much lower than the historic average, because of the
drastic downturn in oil price. Therefore, he wondered if
the risk was still acceptable. Mr. Ennis replied in the
affirmative.
Representative Wilson queried the effect on interest rates.
Mr. Ennis indicated interest rates would increase.
Representative Wilson wondered if a determined time of
credit delivery would affect the rate less. Mr. Ennis
responded that it would help to know the tenner of the
financing.
8:48:48 AM
Representative Guttenberg queried an explanation of the
change of the worldwide climate on investing in
hydrocarbons over the two recent years of plummeting oil
prices. Mr. Ennis replied that it was a difficult market.
He shared that there were certain parts of his business
that were benefitting from the downturn. He shared that
petro-chemicals were receiving very inexpensive feed
stocks. He shared that the refining and retail entities
were in a similar situation. He shared that the truck stops
and gas stations were seeing a higher level of demand,
which improves their provision. The upstream and major oil
companies were suffering from the recent downturn. He
shared that he had a group based in Houston that only did
upstream oil and gas financing. That group was struggling
with bankruptcies and distressed clients. He shared that he
had been through a few downturned cycles, but felt that his
company would get through it.
Representative Guttenberg queried the difference between
the current climate and no credits at all. Mr. Ennis
responded that the provided credits in Alaska were only
against the tax credit, because of the small size of the
companies that were financed. He shared that Fury had one
producing well in Alaska, and Brooks Range had zero
operating wells; therefore, ING could not lend money
against the value of their reserves. He remarked that
continuing to drill wells, would create diversification and
producing reserves. He stated that the ongoing commitment
to provide financing in Alaska was predicated on how the
state's tax credit program would continue to provide
support. Currently, the small clients were too small for
conventional lending.
Representative Guttenberg clarified that the bank was only
lending to the small developers because of the state's tax
credits. Mr. Ennis relayed that the larger companies did
not go through his entities. Some of the mid-market names
had not come to ING Capital to finance them.
Representative Guttenberg asked for a rough amount of
loans. Mr. Ennis stated that the bank had $150 million.
8:55:02 AM
Representative Pruitt wondered whether he had clients in
other regimes who had experienced a tax increase or
elimination of incentives to produce or explore. Mr. Ennis
replied that the Norwegian tax credit program was very
similar to Alaska's tax credit program. He shared that his
counterparts in Europe had heard from the Norwegian
authorities who wanted to reduce the amount of credits for
the same reason that Alaska was looking to reduce credits.
Representative Pruitt asked if there were any regimes that
were looking to increase incentives or lower taxes to
maintain investment. Mr. Ennis responded in the negative.
Representative Pruitt believed Mr. Ennis had been very
careful with his words. He mentioned that the legislature's
challenge was to maintain the investing climate. He
wondered how Mr. Ennis viewed the governor's version of the
bill versus the current version. Mr. Ennis stated that the
natural gas investors in the Cook Inlet area had been a
good investment. On the North Slope it was small baby steps
that he was seeing. The legacy production was enormous. He
would like to keep doing business in Alaska.
9:00:45 AM
Representative Pruitt wondered how the phasing approach
versus immediately eliminating the credits would affect
future decisions to invest in Alaska. Mr. Ennis replied
that it did not directly affect his future investments, but
it caused financial uncertainty for the oil and gas
companies. He did not want financial uncertainty for those
companies.
Representative Pruitt shared that the legislature was
facing two different approaches: a measured approach to
manage its way out of the credits; or make an immediate
reaction. He wondered if that risk was worth investment.
Mr. Ennis replied that the approach was a political tax
risk, but was routinely analyzed. He stressed that all
taxes were analyzed, in all regimes. He remarked that ING
hoped that it was a gradual, measured approach; as opposed
to a sudden "shift of gears." He spoke in support of the
proposed "phase down" of the credits.
9:03:49 AM
Representative Edgmon commented that the Cook Inlet was a
high-risk and high-cost area as related to exploration. He
noted that the development of Cook Inlet was a separate
part of its model. He wondered if there was a consideration
of the attractiveness of the Cook Inlet Basin, in terms of
its potential and the smallness of the companies. Mr. Ennis
viewed the Cook Inlet Basin as a local supply of natural
gas in an area with no other supply available. He felt that
it was a non-competitive business, with a willing buyer of
the gas. The price was much higher than world or Lower-48
prices for natural gas. He felt that it was an excellent
prospect to make a loan. There was long-term value to both
the company and the state.
Representative Edgmon indicated that what he was hearing
that the tax credits were crucial to the lending, but not
the most important element to a lending determination. Mr.
Ennis disagreed. He would not be financing the small player
without the tax credit program.
9:08:24 AM
Vice-Chair Saddler queried the general views on the tax and
credit structure as a tool for achieving the state's goals
of both production and revenue. He wondered if revenue and
production could be achieved with the same mechanism. Mr.
Ennis remarked that the credit program allowed development
to occur, which would not have occurred without the
credits. He remarked that the credit program showed
significant benefit in Cook Inlet, but not as significant
in the North Slope. He felt that an incentive program was a
good way to "kick start" new development. He felt that, in
the long run, the state would be the ultimate beneficiary
as the primary royalty holder and tax collector.
Vice-Chair Saddler queried metrics to capture the values of
employment stability, future prospects for continued
production, or keeping the pipeline open. Mr. Ennis
understood the question as whether there was tool to
determine which credits to extend. He stated that the state
must make a decision to provide credits to different
companies based on the plan. He recalled that the state had
programs to make those determinations, but were not
successful, because it became like a "beauty contest" for
the companies that were making the proposals. He stated
that there should be a "blind" system, without trying to
determine the "winners and losers."
9:12:41 AM
Vice-Chair Saddler queried a repeat of the thoughts on
bankruptcy protection, and the importance of that issue.
Mr. Ennis replied that at the moment of the credit
assignment by the company, the credit did not mature until
the filing of the tax return. He explained that a loan did
not become a true security interest until the company filed
its tax return. The company could file bankruptcy in the
interim, so the bank could return to an unsecured place.
The state could provide clarity on the topic, but felt that
Mr. John Iverson could provide some suggested language to
create clarity regarding the intervention of a bankruptcy
while the credits fully mature.
Vice-Chair Saddler wondered if the bank wanted a stronger
position in the chain of interest holders to ensure
repayment of the loan. Mr. Ennis responded affirmatively.
Vice-Chair Saddler queried the tax credit protection for
the lender in Norway's tax credit proposal. Mr. Ennis
replied in the affirmative. He stated that, in Norway, once
the assignment was executed the credit was good, regardless
of the underlying company's financial standing. The
bankruptcy filing did not matter, because the bank could
collect against the stat program without invention from any
other creditor.
Vice-Chair Saddler queried the importance of the bankruptcy
protection provision. Mr. Ennis replied that he would
appreciate the provision, but furthered that the bank would
continue to make loans. He stressed that there would be
more scrutiny with the companies.
Vice-Chair Saddler asked about the importance of
confidentiality agreements. Mr. Ennis stated that the bank
had a waiver.
9:18:00 AM
Vice-Chair Saddler asked if the confidentiality provision
made a big difference. Mr. Ennis stated that the
legislation was public, the company information was not
public. The bank was happy with the flow of information.
Representative Guttenberg commented that the rating
agencies have notified the state that it needed to get its
"Fiscal House" in order. He wondered how the stated would
be perceived by the rating agencies. Mr. Ennis did not wish
to comment.
Co-Chair Thompson thanked Mr. Ennis for being available for
questions.
9:21:17 AM
JARED GREEN, PRESIDENT, ENSTAR NATURAL GAS (via
teleconference), read from a prepared statement:
Good morning Co-Chair Thompson, members of the
Committee, I am Jared Green, President of ENSTAR and
with me is Moira Smith, Vice President and general
Counsel of ENSTAR. We thank you for allowing us an
opportunity to speak today. ENSTAR is here today as
the largest purchaser of natural gas in the Cook
Inlet. Ultimately, our customers are a beneficiary of
the tax credit program that has been in place since
2012. Our customers depend on the natural gas from the
Cook Inlet to heat their homes, their businesses, our
schools, our hospitals and our industries.
Fundamentally, our interest is the fostering of a
stable and appealing natural gas environment in the
Cook Inlet. This environment needs to exist in the
short term, the medium term and the long term.
Mr. Green turned to slide 1: "Natural Gas Supply Needs." He
continued to read from a prepared statement:
· ENSTAR's number 1 priority is safe, reliable
natural gas service to our customers.
· Founded in 1959, the same year as statehood
· Average year is 33 Bcf [Warm = 30Bcf, Cold =
35Bcf]
· Enalytica said total in state use was 80Bcf
· ENSTAR has a very high seasonality to its gas
needs. Moira will explain this further in a
moment, but from a high level, we generally vary
by a roughly 12:1 ratio of winter to summer gas
needs.
· The final aspect of setting the stage is the
daily variability. We live in an environment that
can have substantial variability in gas demands
due to weather. With our current customer base,
we have a potential daily demand of 287 mmcf/d.
This level of demand is most likely to occur in
January of any given year. Now, we also have the
potential of needing less than 100 mmcf/d if we
have a warm spell like we had this January.
· When ENSTAR plans its natural gas portfolio, we
look many years in advance. Operating in a small
closed supply network such as the Cook Inlet
requires very long lead times. We need to know
that we have firm gas supply set for our
customers at least 2 years in advance. Anything
less puts the marketplace at risk of supply
shortages.
· In ENSTAR's business we must have gas available
for our customers on the coldest days, no matter
what. When it is 20 below on a dark January
evening, every single one of our 140,935
customers must have their gas needs met.
· So, what does it mean to be a natural gas
supplier to ENSTAR?
· There is no doubt, it is challenging to supply
natural gas in the Cook Inlet today. ENSTAR is
the largest purchaser of natural gas and we have
very demanding needs as I just noted.
· Between the CINGSA storage facility and our
producer contracts, we need to have the 287
mmcf/d of gas available. However, we do not need
it each and every day. This means producers need
to have significant capacity beyond the average
production rates. It means producers need to have
the operational capability to ramp up production
and also throttle it back.
· This is a very different world than the lower 48.
With the integrated transmission and storage
network, producers can simply drill a well, open
up the taps 100 percent and the large market
simply absorbs it. From the utility perspective,
it is also a nice easy world down there.
Utilities have a lineup of marketers trying to
sell them gas. However, if a contract isn't
fulfilled for any reason, they simply go back to
the trading screen and source the gas from one of
the thousand other suppliers lined up.
9:27:04 AM
Mr. Green continued to read from a prepared statement:
· We do not have that luxury here. We have a very
small, and illiquid market with a handful of
buyers and an even smaller number of suppliers.
Layer on to that the fact that Conoco is selling
its assets which will take another supplier out
of the market and also shrink the buying market
with ML&P becoming largely self-supplied.
· This leaves us in an extremely delicate
marketplace.
· Now, I am not saying that the sky is falling. We
are in a much better place than we were in 2012.
We have transitioned from a time where we were
looking at shortages, from both a total supply
and a deliverability perspective. Today Moira is
going to talk to you about the contract that
ENSTAR has signed with Hilcorp as a key
foundation in our supply portfolio. This contract
takes us out to 2023, which from ENSTAR's view
takes us just beyond the short term window.
· We are in a position where I have good visibility
for our supply into 2021. With a continuation of
activity by Hilcorp, by Furie, by the revived
Cook Inlet Energy and hopefully other new players
like Blue Crest or others, I am optimistic that
we can see our supply horizon moving into the
2025's, however, that statement hinges on the
continued activity by these and new producers. We
need to encourage and foster an environment which
keeps producers engaged.
· I strongly feel that the utilities in the inlet
have a responsibility for this. We have designed
our supply portfolio to balance our number 1
priority of safe, reliable natural gas service,
with the need to foster the long term viability
of the inlet. We have put our support behind
Furie's development of Kitchen Lights and we have
also left open 10 percent of our supply portfolio
for other producers.
· Since 2012 the State has also provided a huge
support to the viability of the gas supply market
in the Cook Inlet.
· ENSTAR is cognizant of the short term budget
challenges facing the state. ENSTAR would love to
see the State continue to help the encouragement
of this marketplace in whatever form keeps it as
an attractive investment for producers.
Before I pass the presentation over to Moira, I have
one final note. I have mentioned, as have others over
the past few days that we are in a good place in the
Cook Inlet right now. And we are. However, weather has
been a very advantageous tailwind over the past 2
years. We are through 2 full warm years and 2016 is
tracking very balmy as well. If we had experienced 3
cold winters, the current facilities may have been
stretched. As a reminder, today we only have 1 well
into Kitchen Lights. There are no production wells in
Cosmo. We have 4 large fields in the inlet which are
old and are aging more every year. With cold weather,
or even if one of the existing platforms or fields had
an issue, we do not have a large contingency of backup
alternatives. As this committee knows, we have no
inter-ties into the lower 48 or Canada and we are 100
percent dependent on this small, illiquid market to
keep half of the State's population warm.
9:31:06 AM
MOIRA SMITH, VICE PRESIDENT, ENSTAR NATURAL GAS (via
teleconference), began with slide 3 "Supply and Demand."
She read from a prepared statement:
This graph illustrates why, as Jared mentioned, ENSTAR is
a complicated customer. Producers prefer to produce gas
from wells at consistent rates. The graph depicts the
variability in our customers' daily demand, as well as
ENSTAR's daily supply, in 2014 and 2015. This is actual
data as to which companies supplied gas each day of those
years, represented in the different colors on the chart;
and how much gas was consumed on each day of those two
years, which is represented in the black line that tops
off the chart. A couple things are worth noting:
· First, the day to day variability is marked - our
customers' demand changes as the weather changes.
· Second is the seasonal variability. In some years,
our customers' demand has a 12 to 1 swing from
winter to summer. This means that in a day in the
winter, our customers consume twelve times as much
gas as on a day in the summer.
· Finally, have a look at the blue lines at the bottom
of the slide. These represent CINGSA injections and
withdrawals. As you can see, on cold days, ENSTAR
withdrew significant volumes of gas from CINGSA to
meet its customers' demand. Look for example at the
middle of November 2015. For those of you who live
in and around Cook Inlet, you'll remember that cold
spell. It is reflected on the chart. Similarly,
while last winter was overall very warm, we did have
some cold weather in February. That, too, is
reflected here. On warm days, ENSTAR injects gas
into CINGSA. ENSTAR's withdrawal capability from
CINGSA is 91 million a day; a little less than 1/3
of ENSTAR's daily demand. Having CINGSA available is
critical in light of the declining production, which
Enalytica detailed in their presentation.
Ms. Smith continued to slide 4: "Seasonal Average
Deliverability." She continued to read from a prepared
statement:
This chart is a further illustration of the
seasonality of our demand. This illustrates ENSTAR's
average daily deliverability in each month in 2019-
again, our goal is to have 287 MMcf/day under contract
or available from storage in the coldest months of the
year. Here, you can see in blue the Hilcorp contract
Jared referenced, which I'll talk more about in a
moment. The dark blue represents firm deliveries; the
light blue represents optional volumes ENSTAR can call
on if the weather is cold. The dark green represents
firm deliveries under our new contract with Furie, and
the light green represents optional volumes ENSTAR can
purchase in cold weather. So it is important to
understand that our suppliers not only provide
critical volumes throughout the year, they also
provide significant additional deliverability on each
day in winter months.
Ms. Smith moved on to slide 5: "Supply Contract 2016-23."
She continued to read from a prepared statement:
This slide projects ENSTAR's gas supply from now to
2023. Focusing on 2016 and 2017, you see ENSTAR's
portfolio of relatively small contracts. Because we
knew that these contracts were all expiring in 2018,
ENSTAR issued an RFP in late 2014 to solicit gas to
meet its customers' needs in 2018 and beyond.
ENSTAR then engaged in intensive, protracted
negotiations with multiple producers and potential
producers throughout 2015 and into 2016. Our first
priority was to secure an anchor contract, at
reasonable prices, which could form the foundation for
gas supply in the post-2018 world. These negotiations
took a year and resulted in APL-14, a new contract
with Hilcorp that was just filed with the Regulatory
Commission of Alaska on Monday.
9:35:44 AM
Ms. Smith advanced to slide 6: "(TA 280-4) APL-14 GSA." She
continued to read from a prepared statement:
APL-14 is a five year contract that begins on April 1,
2018. It will supply approximately 70 percent of our
customers' needs from 2018-2023. It has both firm as
well as optional volumes - it will supply around 22
billion cubic feet per year of firm gas. And if you
remember the light blue from two slides ago, it also
offers optional volumes to help ENSTAR manage its
weather related variability. This means that ENSTAR
can ramp deliveries up or down depending on its
customers' needs, a key feature in light of our
variable annual demand.
Another key element of the contract is its reasonable
price. You will remember that, in 2013, the State of
Alaska entered into a Consent Decree, which resolved
an antitrust investigation and set price caps. The
price caps escalated 4 percent annually. The weighted
average annual price under APL-12 during its last
contract year will be $8.33 per Mcf, whereas the
weighted average annual price for firm deliveries
during the first contract year under APL-14 will be
$7.56 per Mcf. This is almost a 10 percent decrease in
price.
Perhaps the most important feature of this contract is
what it doesn't do. It does not meet all of ENSTAR's
gas supply requirements. What this means is that fully
30 percent of our portfolio was left open for other
producers to fill. As a public utility, we value
safety and reliability above all else. And we
understand the need to have a diversified supply
portfolio. This not only diversifies supplier risk,
but it also helps to foster investment and drilling,
which is good for the long-term stability of Cook
Inlet supply. Between APL-14 and the new Furie
contract, ENSTAR has 90 percent of its needs met
through 2021. To ensure the entire market has an
opportunity to participate, we sent a second RFP to
producers on Friday to try to acquire supply for the
remaining 10 percent of our portfolio.
We believe this contract represents a huge measure of
stability in the Cook Inlet gas market. Indeed, if
approved, it will be the most significant gas contract
ENSTAR has had approved in 15 years. Assuming
Commission approval, we will have laid the foundation
of ENSTAR's gas supply well into the next decade.
Given where we were just three years ago, this is very
good news.
9:38:31 AM
Mr. Green concluded the ENSTAR presentation by reading from
a prepared statement:
As I noted before, we are working with a very delicate
market with a small number of buyers and a very small
number of producers. ENSTAR has contracts meeting most
of our needs out to 2021 and 2023, but we will need to
negotiate extensions in the next couple of years. It
is very important to all of south central Alaska that
we have a capable producer marketplace who will be
there to provide the gas molecules and the
deliverability that Southcentral Alaska needs.
9:39:17 AM
Representative Wilson queried ENSTAR's current credits. Mr.
Green responded that ENSTAR was a purchaser of natural gas,
and was then flowed through to customers. Therefore, ENSTAR
did not directly receive credits. He stated that the
company bought the gas from the producers who had received
the credits.
Representative Edgmon noted that he did not hear any
comments regarding Blue Crest. He queried more information
about Blue Crest. Mr. Green replied that the Blue Crest
project was the development of the oil reserves. He shared
that there was a deep portion of the reservoir where the
oil resided, and the shallower portion of the reservoir
held the gas reserves. He stated that Blue Crest was able
to access the oil from the onshore pad, but in order to
access the natural gas the reservoir must be developed
offshore. He stated that, currently, that portion of the
development was not in Blue Crest's plan. He hoped that the
gas would be developed in the future. He stressed that it
required the installation of an offshore platform,
development wells, and a pipeline to attach the platform.
Representative Edgmon thanked Mr. Green for the
clarification.
Vice-Chair Saddler queried the impact of the credits on the
improvement of the security of ENSTAR's gas supply. Mr.
Green replied that the entities had already shared whether
or not they invested in Cook Inlet because of the credit
program. He stated that Hilcorp entered the market because
of the credit program. Hilcorp was a key operator in the
Cook Inlet, because they had taken over some significant
fields that supplied the majority of the natural gas to
south-central Alaska. Hilcorp spent approximately $600
million to date on the erection of their off-shore
platform, and the development of their one well. He
remarked that the Furie reservoir had abundant reserves,
and was hopeful that it would be further developed.
9:45:13 AM
Mr. Green shared that with the removal of each molecule,
the reservoir declined. He felt that Furie must continue to
develop. He remarked that Hilcorp must continue to invest
in its asset, even to satisfy the current contracts. He
remarked that originally Buccaneer had drilled a well in
the Cook Inlet, because of the credit program. He stated
that Buccaneer had experienced a financial bankruptcy, and
AIX Inc. had received assets after the bankruptcy. He
stated that there were debtors who took issue with the
bankruptcy, but the molecules continued to flow into the
system. He stated that, from ENSTAR's perspective, the
bankruptcy presented a risk, but the molecules continued to
bring value to customers. He reiterated that the credits
were helpful to encourage the current producers to complete
their work. He noted that a slight pause in development and
drilling activities could cause a shortfall in the reserve
development. He stressed that the molecules must be
available to stay warm.
Vice-Chair Saddler asked about the stepdown provisions
versus completely eliminating the credits. Mr. Green
commented that if the credits had to be reduced a stepdown
would be a much more stable action. An abrupt action would
be more harmful. He advocated predictability and stability.
9:49:57 AM
Representative Gara remarked that the Henry Hub price for
natural gas was close to $2 and MCF, but the Alaskan price
was more than triple that amount. He remarked that, without
cash subsidies from the state, the price could go even
higher. He wondered why the high cost of the natural gas
was not a factor in attracting companies to explore when a
new contract became available. Mr. Green responded that
companies know of the high cost of development and
drilling. The prices reflect the cost of the development
activities. He stated that new producers will invest, if
there was a stable marketplace. He agreed that the Cook
Inlet was currently appealing, but producers did not make
decisions simply on the cash flow over a 12-month period.
He stressed that the greater stability in the forecast
periods resulted in producers continued investment
interest. He looked at slide 3, which identified the
challenge of being a producer in the Cook Inlet. He
encouraged the committee to relate the slide to a producer
in the Lower-48. He stated that a producer in the Lower-48
would open a level to its most efficient producing level,
and was left running full tap. That well would be produced
at a flat-line basis, which was how producers wanted to
produce that gas. He stressed that when his company
negotiates with producers, the producers want to produce at
a flat-line basis. Those producers wanted to sell "flat
gas" for the entire year to ENSTAR. He pointed out that, as
reflected in slide 3, ENSTAR could not buy "flat gas" for
the entire year. He looked at the top red line, which was
the maximum needs for deliverability. A Lower-48 producer
would be able to "color everything below" the top red line
and call it "cash flow." He stressed that because of the
deliverability needs in the Cook Inlet, the producers must
build their assets to very robust levels in order to reach
the peak winter needs-but they did not get to sell it year-
round. The summer months did not provide much cash flow to
the producers. The deliverability required overproduced
assets, which resulted in higher costs.
9:55:14 AM
Representative Gara wondered if the buyers were dropping
out because of the higher cost of gas. Mr. Green replied
that the price change followed the actions, from a Cook
Inlet perspective. He remarked that he saw the world LNG
price drop from nine dollars to five dollars. He stated
that it was a good and challenging market. He looked at the
larger projects, which was looking at a market that was
much different than it was at the point of initial
investment. He stated that the ConocoPhillips LNG facility
was looking at world LNG prices, and did not feel that
there would be much LNG produced in that facility. The
Agrium facility was shut down because of the market prices
and overall supply cost to produce throughout the world. He
stated that the price was more driven by the customer need,
rather than the producer need, once more producers dropped
out.
Representative Gara remarked that the state did not receive
any production tax revenue from Cook Inlet, however there
were many tax credits granted to Cook Inlet. He shared that
many industry people had admitted that the tax structure
was unsustainable. The governor had hoped to finance the
producers at a better interest rate than the private
market. He wondered why financing was not considered a
decent way to move forward. Mr. Green replied that there
were many ways to address the problem. He felt that the
best solution was to maintain predictability.
10:00:40 AM
Vice-Chair Saddler had heard that loans from Alaska
Industrial Development and Export Authority (AIDEA) would
not bring much value and would only be replacing a
traditional lender. He stated that the credits allowed the
producers to receive 8 percent of financing in addition to
the valuable credit, as opposed to 20 percent. He queried
the impact of reopening Agrium on the gas supply in south-
central Alaska. Mr. Green replied that ENSTAR was
originally opposed to the ConocoPhillips LNG facility being
approved to export natural gas, seven years prior. He
stated that, at that time, the molecules would not be
available for local markets. He stated that ENSTAR had
changed its views, and had supported the most recent
applications from ConocoPhillips. He explained that ENSTAR
was currently supporting those applications, because
encouraging a stronger demand market increased the supply
attraction. He felt that reopening Agrium, with the supply
to run the facility, would result in fairly active
producers in the Cook Inlet to supply the needs. The active
producers in the Cook Inlet would benefit ENSTAR's overall
needs. He stated that a large industrial load would provide
a greater security to the freezing weather, because of the
greater supply of gas. Therefore, the large industrial load
would benefit ENSTAR. He stated that, over the long run,
the producers will follow the gas demand.
Vice-Chair Saddler understood that most export licenses
included provisions that forced the export of gas to halt
in order to fund domestic needs. He looked at slides 4 and
5, and queried the role of the Cook Inlet natural gas
facility, CINGSA, had in tax situation. He noted that there
was no supply forecasted up until 2018. He wondered if
CINGSA ceased to exist moving forward, or was it too small
to register. He queried CINGSA's role in the long-term gas
supply forecast. Ms. Smith replied that slide 4's graph
represented average daily deliverability on any day in the
depicted months. She explained that, as ENSTAR forecasted
its supply for the months from 2019 to 2021, the injections
were forecasted. The withdrawals would occur, but would
occur on colder than average days. Therefore, they would
not be depicted in the graph. She noted that the total in
January was the total deliverability of approximately 148
million cubic feet per day. She explained that the peak day
was 287 million cubic feet per day, and any day could be
between 100 million and 287 million in the winter time. She
stated that CINGSA provide 91 million cubic feet per day,
would be important in the winter supply withdrawal strategy
well into the future. She looked at slide 5, and explained
that ENSTAR had a 20-year contract with CINGSA that ended
in 2032. She explained that the slide forecasted the gas
that would be purchased to put into CINGSA. She stressed
that storage supply was part of the forecast. The slide
only reflected what was purchased from the marketplace. She
furthered that slide 3 clearly depicted the actual way that
ENSTAR used CINGSA.
10:08:10 AM
Vice-Chair Saddler surmised that he should not consider
that CINGSA was included in the undesignated supply. Ms.
Smith answered in the affirmative.
Representative Pruitt wanted to understand at what point in
time the ramifications were understood. He stated that it
took until 2010 until there was a decision by the
legislature to address what had reached a critical mass. He
discussed that between 2010 and 2012 the state had started
to see the brownout drills. He was concerned about the lag
time. Mr. Green stated that the point would be in 2023, but
it could occur in a terrifying emergency. He shared that
ENSTAR examined its gas supply portfolio in the short-term,
medium-term, and long-term scenario. He stressed that
ENSTAR was expecting to be the natural gas distributor in
south-central Alaska for many decades in the future. He
stated that ENSTAR wanted a stable supply environment, so
the "ups and downs were scary." He stated that there was a
fortunate scenario in Hilcorp's entering the marketplace.
He reiterated that the credits were a factor in Hilcorp's
entering the marketplace.
10:14:31 AM
Representative Pruitt assumed that the price point allowed
a recovery at a reasonable profit, and reinvest to ensure a
supply through 2023. He wondered if there was an
opportunity to invest beyond 2023. He asked if the customer
would be charged for the initial costs to continue to add
to the reserves, to go beyond 2023. Mr. Green responded
that ENSTAR contracted with the producers to provide at a
high winter rate. The peak rate delivery was the most
challenging aspect of the producer's ability to build their
assets. He shared that, if the producers chose to not
continue to invest after 2023, the reserves would not cease
to exist, but there may not be a daily deliverability at
the needs of the Cook Inlet.
10:18:32 AM
Co-Chair Thompson invited Mr. Alper to comment on the
presentation.
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
asked for guidance of where to begin.
Co-Chair Thompson requests comments on the current
investment climate.
Mr. Alper stated that ING, Bank of America, and other
larger operators joined the Alaska market three years prior
in response to legislation that enabled the credit payments
to be directly assigned to the bank. He stated that DOR was
directly writing the check for the credit to the bank. He
stated that it had developed a "greater than first
priority" in the terms of a secured loan. He commented on
the assertion that the security did not mature until the
underlying net operating loss was patented at the end of
the year; therefore, the entity was in a position of a
secured lender. He stated that money was lent against the
tax credits, but the companies were not lending the entire
company lend. He explained that, with an expectation of a
percentage of money through the tax credit program, the
entity would only lend what was expected to be available in
the form of the credit. The companies still needed to seek
other financing for the remaining project costs. He stated
that, by changing the credit program, there was a shift of
balance to need more money at the high interest and could
not access the money at lower interest.
Co-Chair Thompson felt that the legislation would have a
negative effect on the number of jobs; exploration; and
development. Mr. Alper replied that it was difficult to
determine the impact of the tax structure change, because
of the decline in the oil price. He stressed that the
industry was "retrenching" in response to the legislature's
actions. He stressed that production had slowed down as a
result of the low oil price. He remarked that many
companies had halted work, but were holding onto their
leases while waiting for the market to return. He shared
that Black and Veatch had a methodology called "The Tornado
Diagram." The diagram had wide swaths of variables, and
looked like a tornado. He stated that the largest variable
for any of the projects was the price of the resource. He
furthered that interest rate, risk, and other variables
were of secondary or tertiary importance. He stressed that
the program would not "make or break" the market. He
remarked that that the program was not a jobs program,
rather it was in place to encourage investment in the oil
and gas industry. He remarked that there should be an
expectation of a reasonable return on the state's
investment.
10:24:59 AM
Representative Wilson queried the modeling on the
assertions. She felt that the Cook Inlet, Middle Earth, and
North Slope must be divided, because they were very
different from each other. She wondered if the
administration had analyzed the impact on removing all
credits in Cook Inlet. Mr. Alper replied that there had not
been specific analysis of the elasticity of changing one
factor.
Representative Wilson remarked that micromanaging and
drastic decisions were each poor decisions. She queried
proof that the proposal would not crash the market. Mr.
Alper replied that, under current law, the state provided
50 to 60 percent of an ongoing development project in Cook
Inlet. He stressed that it was a larger number than
anything in history. He stated that the credit was intended
to be large, because of the potential crisis in utilities.
He stressed that the state wanted all pilot lights going.
He remarked that the credit had resulted in better
emergency preparedness. The intention of the legislation
was to provide a level of support that was keeping with a
mature basin.
10:32:21 AM
Representative Wilson wondered why the Cook Inlet was not
taxed in the same manner as the North Slope. Mr. Alper
suggested that a legislator would have to initiate a Cook
Inlet tax in the following 5 years. He stated that, without
a legislative change before 2022, there was an awkward and
unstable tax regime in Cook Inlet. It had a 35 percent net
tax, but a 25 percent NOL, with no per barrel credit. He
stressed that there should be a Cook Inlet tax.
Representative Wilson felt that the state did not need to
reinvent the tax regime. She opined that Cook Inlet should
not be considered greater than other locations in the
state. She stressed that the tax credits were already in
place, and felt that the same tax structure on the North
Slope could be used in Cook Inlet. Mr. Alper agreed that an
immediate change the tax regime would be to apply SB 21
statewide. He felt that there would need to be discussion
about the definitions about new GVR oil, and whether the
criteria in SB 21 was appropriate for the entire state.
There needed to be a per barrel credit for gas, which did
not currently exist in SB 21.
10:36:30 AM
Representative Gara surmised that, under the governor's
proposal, a 25 percent credit would be retained. He
wondered if the small producer credit would be retained in
the proposal. Mr. Alper replied that the governor was not
looking to modify the small producer credit in the bill,
with the exception of the floor-hardening provisions. The
small producer credit was sun-setting over the next few
years. He explained that the credit said that you must
apply and receive the small producer credit, with first
production before May 1, 2016. He stated that receiving the
credit by that deadline, allowed for a claim of up to $12
million per year for the first nine years of production. He
explained that someone could keep the credit through 2024.
Furthermore, the producers who had received the credit at
its initiation would be required to pay the tax without the
credit beginning the current or following year.
Representative Gara wondered why the administration found
the limitations of Cook Inlet to be in the state's best
interest in the state loan program. Mr. Alper replied that,
currently AIDEA was already in the business of lending to
entities across the state. He remarked that AIDEA had made
several high-profile loans in the oil and gas industry. He
remarked that AIDEA was required to have balanced and
diversified multi-sector portfolio, but oil loans were
fairly large causing an unbalance in the portfolio.
Therefore, AIDEA felt that there should be a dedicated fund
for oil and gas. He remarked that within that dedicated
fund, AIDEA was able to negotiate competitive interest
rates. He remarked that there was also a provision for
AIDEA that allowed AIDEA to defer payments, or lend money
to an oil project without requiring payments of principle
or interest for four or five years until the company began
production. He stressed that traditional financing did not
often offer payment deferment. He remarked that the
combination of deferred payment and the continuation of the
25 percent operating loss credit, seemed to ensure that the
companies could continue with the development projects.
10:40:33 AM
Representative Gara surmised that there was an intention to
repay the existing tax credit system with a cap of $25
million per year. Mr. Alper replied that there were
currently $675 million in credit applications. He shared
that the FY 18 payments was mostly related to operating
losses and expenditures for calendar year 2016. He stressed
that calendar year 2015 was recently ended, which was
mostly FY 17 credit expenditures. He remarked that it was
related to the tax-filing deadline, with a 120 statutory
turnaround that required certificate issuance. He remarked
that the bulk of the NOL certificates were issued in July
and August, and the companies immediately asked for more
money.
Representative Gara thought the $1 billion was to
capitalize AIDEA. He wondered if $1 billion was intended to
pay all the past-due tax credits. Mr. Alper replied that
the $1 billion was intended to pay the past-due and
anticipated future tax credits. It also was for the
additional $200 million fund capitalization in the AIDEA
proposal.
10:44:19 AM
Vice-Chair Saddler queried the guiding principles in
proposing HB 247. He wondered if the tax credit system was
achieving the goals of the program; and was the tax credit
program providing enough revenue to the state. He wondered
if the legislation was a "money maker" or tax credit
reform. Mr. Alper replied that the legislation was
primarily tax credit reform. He commented that that the
legislation would be considered a "money maker" as related
to AIDEA.
Vice-Chair Saddler wondered if the legislation deprived the
oil producers the ability to recover losses from individual
fields. Mr. Alper responded that the provision was intended
to be at a field-by-field level. He explained that, should
a field have a gross value below zero, it would be
incorporated into the calculation as a zero. Therefore, it
would not be used to offset positive value elsewhere.
Vice-Chair Saddler restated his question. He wondered if
the prohibition against gross value at the point of
production against going below zero deprived the industry
of the ability to deduct that loss in the calculation. Mr.
Alper replied in the affirmative as related to the portion
that brought the gross value below zero. He explained that
the company would still enjoy the full value of its lease
expenditures, which was the difference between the gross
value and net value.
HB 247 was HEARD and HELD in committee for further
consideration.
Co-Chair Thompson reviewed the agenda for the afternoon.
ADJOURNMENT
10:51:27 AM
The meeting was adjourned at 10:51 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 247 Alaska State House Finance Committee 04.05.16.pdf |
HFIN 4/5/2016 8:30:00 AM |
HB 247 |
| HB 247 NEW FN DNR OG 040116.pdf |
HFIN 4/5/2016 8:30:00 AM |
HB 247 |
| HB 247 BP Letter to House Fin Comm 04_06_2016.pdf |
HFIN 4/5/2016 8:30:00 AM |
HB 247 |