Legislature(2017 - 2018)HOUSE FINANCE 519
04/08/2017 01:00 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB111 | |
| Amendments | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 111 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 8, 2017
1:59 p.m.
1:59:35 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:59 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Ken Alper, Director, Tax Division, Department of Revenue;
Representative Charisse Millet; Representative Chris Birch;
Representative Dan Saddler, Representative Colleen
Sullivan-Leonard; Representative DeLana Johnson;
Representative Gary Knopp; Representative Gary Knopp;
Representative Dave Talerico; Representative Jennifer
Johnston; Representative George Rauscher; Representative
Louise Stutes; Representative Lora Reinbold; Representative
David Eastman; Representative Dean Westlake; Representative
Mike Chenault.
PRESENT VIA TELECONFERENCE
Susie Shutts, Legislative Legal Services, Juneau; Rich
Ruggiero, Consultant, Castle Gap, Houston, TX.
SUMMARY
HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
CSHB 111 (FIN) was REPORTED OUT of committee with
4 "do pass" recommendations, 4 "do not pass"
recommendations, 2 "no recommendation"
recommendations, 1 "amend" recommendation, and
with a new fiscal impact note by the Department
of Revenue.
SB 26 APPROP LIMIT & PER FUND:DIVIDEND;EARNINGS
CSSB 26 was HEARD and HELD in committee for
further consideration.
Co-Chair Foster reviewed the agenda for the day.
HOUSE BILL NO. 111
"An Act relating to the oil and gas production tax,
tax payments, and credits; relating to interest
applicable to delinquent oil and gas production tax;
and providing for an effective date."
2:00:29 PM
Representative Pruitt informed the committee that the
consultant [Rich Ruggiero, Consultant, Castle Gap Advisors,
LLC;] was available to answer questions during the meeting.
Vice-Chair Gara commented that the consultant had been
available since mid-March for every member to contact at
any time. He voiced that he had never been given the same
courtesy in the past as a longtime member of the committee.
He noted that the committee had previously held 8 hearings
on the bill starting on March 20, 2017 and Mr. Ruggiero was
available a week prior to the stated date.
Co-Chair Foster relayed a list of legislators in the
audience. [See above under "Also Present"]
Representative Wilson appreciated the expert testimony for
prior meetings. She was not looking to slow the bill down
but felt that the bill had changed dramatically and wanted
additional clarification.
2:05:24 PM
Co-Chair Foster commented that he intended to discuss the
two amendments and then proceed to questions for the
consultant.
Representative Pruitt appreciated the accommodation. He
noted that the Legislative Budget and Audit Committee (LBA)
approved his request for Mr. Ruggiero to consult with the
committee during the meeting.
^AMENDMENTS
2:07:21 PM
Co-Chair Seaton MOVED to ADOPT Amendment 1.
1 Page 31, lines 5 - 28:
2 Delete all material and insert:
3 "{2) AS 43.55.01l{g){3), the monthly production
tax value of oil
4 taxable under AS 43.55.0ll{e) produced by a
producer during a month
5 CA) from leases or properties in the state that
include land
6 north of 68 degrees North latitude is the gross
value at the point of
7 production of that oil, less 1/12 the producer's
lease expenditures under
8 AS 43.55.165 for the calendar year incurred to
emlore for, develop, or
9 produce oil and gas deposits located in the state
north of 68 degrees North
10 latitude or located in leases or properties in
the state that include land
11 north of 68 degrees North latitude, as adjusted
under AS 43.55.170;
12 CB> in a calendar year that is before or during
the last
13 calendar year under AS 43.55.024(b) for which the
producer could take a
14 tax credit under AS 43.55.024Cal. from leases or
properties in the state
15 outside the Cook Inlet sedimentary basin, no part
of which is north of 68
16 degrees North latitude, other than leases or
properties subject to
17 AS 43.55.0llCpl. is the gross value at the point
of production of that oil,
18 less 1/12 the producer's lease expenditures under
AS 43.55.165 for the
19 calendar year incurred to explore for, develop,
or produce oil and gas
20 deposits located in the state outside the Cook
Inlet sedimentary basin and
21 south of 68 degrees North latitude, other than
oil and gas deposits located
22 in a lease or property that includes land north
of 68 degrees North latitude
23 or that is subject to AS 43.55.0llCpl or, before
January l, 2027, from
1 which commercial production has not
begun. as adjusted under
2 AS 43.55.170;
3 CC) from leases or properties subject to AS
43.55.0ll(p) is
4 the gross value at the point of production of
that oil, less 1/12 the
5 producer's lease expenditures under AS 43.55.165
for the calendar year
6 incurred to explore for develop or produce oil
and gas deposits located in
7 leases or properties subject to AS 43.55.0llCp)
or, before January l, 2027,
8 located in leases or properties in the state
outside the Cook Inlet
9 sedimentary basin, no part of which is north of
68 degrees North latitude
10 from which commercial production has not begun,
as adjusted under
11 AS 43.55.170;
12 (D) from leases or properties in the state no
part of which is
13 north of 68 degrees North latitude, other than
leases or properties subject
14 to CB) or CC) of this paragraph is the gross
value at the point of?
15 production of that oil less 1/12 the producer's
lease expenditures under
16 AS 43.55.165 for the calendar year incurred to
explore for, develop, or
17 produce oil and gas deposits located in the state
south of 68 degrees North
18 latitude, other than oil and gas deposits located
in a lease or property in
19 the state that includes land north of 68 degrees
North latitude, and
20 excluding lease expenditures that are deductible
under (B) or (C) of this
21 paragraph or would be deductible under CB> or CC)
of this paragraph if
22 not prohibited by (bl of this section, as
adjusted under AS 43.55.170; a
23 separate monthly production tax value shall be
calculated for
24 (i) oil produced from each lease or property in
the
25 Cook Inlet sedimentary basin;
26 (ii) oil produced from each lease or property
outside
27 the Cook Inlet sedimentary basin, no part of
which is north of 68
28 degrees North latitude, other than leases or
properties subject to
29 CQ of this paragraph [(3) OF THIS SUBSECTION]."
Representative Wilson OBJECTED.
Co-Chair Seaton spoke to the technical amendment. He
indicated that the original bill mistakenly omitted AS
43.22.160 (h) (2) in section 25 of the bill. He explained
that under current law, oil and gas were taxed separately
after 2022, but lease expenditures for both oil and gas
were able to be deducted against the tax on oil. The
amendment ensured that the deduction continued by adding
back the language regarding the expenditures for gas in the
calculation of production tax value, which matched the
language in current statute.
Representative Pruitt thought the amendment was more than a
technical amendment. He wanted verification.
2:09:18 PM
AT EASE
2:11:56 PM
RECONVENED
2:12:27 PM
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
wanted the committee to understand what would happen in
2022. He noted that the provision was part of the AKLNG
legislation that passed in 2014 [SB 138 (Gas Pipeline;
AGDC; Oil & Gas Prod. Tax) [Chapter 14 SLA 14 - Enacted
05/08/2014]. He indicated that in 2022 the state
transitioned to a gross gas tax. The tax was part of the
state accepting payment in kind for gas in lieu of taxes
and royalties for the state's share of throughput into the
pipeline that the state partially owned. He furthered that
a lot of technical and conforming language was necessary in
statute beginning in 2022. In January 1, 2022, the net tax
was only on oil but the expenses from oil and gas were
subtracted from the tax on oil. The amendment amended the
section to describe the tax calculation, not only for the
base 25 percent tax but also on the new 15 percent
surcharge on the amount of profits above $60 per barrel.
The Committee Substitute (CS) did not delineate that both
the oil and gas expenditures were counted against the oil
value for calculating the tax. He revealed that the
Department of Law (DOL) attorney, Mary Gramling, discovered
the oversight and brought the issue to Co-Chair Seaton's
attention. The amendment language was written by a
Legislative Legal Services attorney, which he agreed, was
in accordance with the bill's intent. The amendment
included language regarding how the amendment affected the
Middle Earth tax cap and Cook Inlet, which he felt was
irrelevant. He detailed that the relevant change was in
subsection (a) that stated oil and gas expenditures were
counted against oil value.
2:15:01 PM
Representative Pruitt reiterated his question regarding
whether the amendment "truly" was technical in nature.
SUSIE SHUTTS, LEGISLATIVE LEGAL SERVICES, JUNEAU (via
teleconference), introduced herself. She provided a brief
overview of AS.43.55.160. The statute determined the
production tax value of oil and gas that was broken down in
subsection (a) as follows: "for oil and gas produced before
January 1, 2022" and in subsection (H), "for oil after
2022." She elucidated that subsection (h) paragraph 1,
dealt with the production tax value for the purposes of
subsection (e) and paragraph 2, dealt with the production
tax value calculations for the purposes of subsection (g)
which was the new subsection added to AS 43.55.01 (g) (3),
for the additional surcharge tax calculated at certain
price points. She relayed that the changes in the amendment
added oil and gas lease expenditures and broke down the
calculation to the same that existed in AS 43.55.160 (h)
and would be under subsection (h) (1) in an amended bill.
2:17:35 PM
Representative Pruitt asked why the provision was missed in
the initial CS version. Ms. Shutts responded that the
production tax value could be calculated differently for
the purposes of (g) versus (e). She indicated that the
amendment calculated the production tax for the purposes of
(g) the same as for (e); the break down was the same and
the lease expenditures for oil and gas was deducted. The
calculations could be done several different ways, but the
amendment specified the break down and the same type of
lease expenditure deducted in the calculation of production
tax value. Representative Pruitt asked whether the
amendment was a substantial change in policy. He surmised
that the "ability to break down and separate the two [oil
and gas] was hampered because the gas was being pumped back
into the ground." The ability to write off anything related
to gas was limited. He asked whether his understanding of
the amendment was correct. Ms. Shutts encouraged him to
direct his policy question to the sponsor of the amendment
in terms of intent. She offered that the amendment change
was in line with paragraph 1, subsection (m). The decision
was whether the committee wanted to deviate from the
existing statute for the purposes of the calculation under
subsection (g).
Vice-Chair Gara explained the purpose of the amendment. He
recounted that the legislature had made a policy call to
encourage a future gas pipeline by allowing certain gas
expenses to be deducted from oil taxes. He indicated that
one provision in the current CS failed to include the word
"gas" which created uncertainty over whether the previous
policy was included in the CS. He noted that the policy was
not wholly embraced and might be debated again in a future
legislature. However, Amendment 1 maintained the policy
that future gas expenses were an allowable deduction from
oil production taxes. Mr. Alper clarified that in current
statute, oil and gas were taxed together establishing a
single tax on the North Slope. Beginning in 2022, by
existing law, gas tax changed to a gross tax. He drew the
committee's attention to page 29 of the CS, subsection (h)
[AS 43.55.160 (h)] line 16, relating to oil produced after
January 1, 2022, and the words, "oil produced." He noted
that the words were changed from "oil and gas" in
subsection (a) of the previous CS. He pointed to line 24
that referred to the costs to produce oil and gas deposits,
and commented the calculation against oil revenues applied
in 2022 according to a provision adopted by the 28th
legislature in 2014. He referred to page 31, subsection ii
[line 1] and reported that the language contained the same
structure for calculating taxable value for the purposes of
the new 15 percent progressivity bracket. He cited the
language, "applicable to the oil" on lines 12 and 20 [page
31], and pointed out that the references to gas were
missing and brought it to the Co-Chair's attention. He
restated that when correcting the bill, the drafters went
further and applied the changes to Middle Earth and Cook
Inlet in subsections (b), (c), and (d). He emphasized that
the main concern was how oil and gas were taxed, which was
specified on line 9 of the amendment. He opined that
subsection (b) was most likely unnecessary because the
Middle Earth credit had never been used. He furthered
clarified that subsection (c) related to oil that was
subject to the Middle Earth 4 percent gross tax cap through
2027 and subsection (d) referenced the Cook Inlet tax. He
focused attention to subsection (a) that specifically
addressed the relevant issue.
2:24:13 PM
Representative Pruitt asked whether the intent of the
change meant that the new 15 percent tax would remain the
same beyond 2022. Mr. Alper answered in the affirmative. He
explained that the 25 percent tax applied to the net; gas
and oil costs were deducted. The amendment enabled
subtraction of gas costs to the base tax. He maintained
that the amendment was not merely a correction, but more of
a policy amendment. He felt that the amendment kept the new
tax policy beyond the 2022 timeframe and was a substantial
change.
Representative Wilson MAINTAINED her OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Gara, Grenn, Guttenberg, Kawasaki, Ortiz, Foster,
Seaton.
OPPOSED: Pruitt, Thompson, Tilton, Wilson.
The MOTION to ADOPT Amendment 1 PASSED (7/4).
Representative Wilson wondered whether her Amendment 2 "was
on the right track."
2:27:44 PM
Representative Wilson commented that the CS was much
different from the original proposal. She understood that
it was very similar to Alaska's Clear and Equitable Share
(ACES) when applied to the lower oil price ranges of $55 to
$90 versus $100. She asked for comments.
2:28:49 PM
RICH RUGGIERO, CONSULTANT, CASTLE GAP, HOUSTON, TX (via
teleconference), commented that her question contained many
questions. He deduced that the CS was not the same as ACES.
The CS changed to a progressive net tax with a much
different form of progressivity. He delineated that the
progressivity was much more favorable to issues regarding
marginal tax rates and only applied to dollars and volumes
above a certain point, instead of being retroactive to all
volumes and profits. He offered a high-level view regarding
the bill. He discerned that Alaska had a very complex tax
system and the complexity could be removed through a tax
system that started taxing at a low rate and increased as
the profitability increased versus the existing high base
rate with per barrel credits, which was a form of negative
progressivity. He had recommended an alternative structure
and advised that members review the "compendium" of his
former presentations. He advised utilizing "more than two
levels" for a net progressive tax system. He indicated that
the way the CS was crafted, heavy oil and Cook Inlet was
not included but believed they should be included as a
"multi-step net system" versus a two-step system. He
recommended eliminating Middle Earth, Cook Inlet, North
Slope, gas and heavy oil distinctions and utilize one tax
system. In his tax scenario, the decisions focused on how
much the legislature thought a fair tax rate was at low
profitability and how high a tax should increase as
profitability improved. He recounted previously discussing
achieving two goals simultaneously: one was addressing the
taxable credits issue and the other was to maintain oil
throughput. He thought that the legislation solved some of
the cashable credit issues by removing some of the state's
financial burden. In terms of increasing the amount of oil
in the pipeline, he felt that at least one more
progressivity step was necessary to account for the lower
unit profitability in Cook Inlet and other areas to boil it
down to one tax system. He judged that the more the tax
system was combined into one simpler system the less other
elements like oil versus gas expenses, state and federal
land issues, etc. needed to be factored in separately.
2:33:56 PM
Representative Wilson provided a hypothetical example
regarding non-transferrable credits between exploration
companies and development companies. She expressed concern
regarding the consequences of the bill being antithetical
to the main goal of incentivizing more oil production. Mr.
Ruggiero responded that the way to meet the goal of more
oil in the pipeline was to ensure development lead to
production. He heard concerns about companies merely using
the credits as deductions against income; where companies
purchased credits and did not develop fields. He concluded
that the goal of increased production was not met in that
scenario. He warned that allowing a third-party to purchase
credits from an explorer needed a system that ensured the
credits were used in the production of new oil and not
current oil. Representative Wilson agreed and shared the
concern. She asked about the provision that began to expire
lease expenditures after 7 years. She asked whether that
would deter developers that anticipated unforeseen project
delays. Mr. Ruggiero answered that Representative Wilson
raised a valid concern regarding the "forces outside a
company's control" that can influence how quickly a project
was completed. He was unclear whether the seven-year
timeframe was adequate. He thought that data regarding
companies' actual experiences should be accessed. He
deduced that the amount of the total development costs that
were spent until the time of the delay was encountered
might need to be considered, but felt that most of the
projects costs were not incurred until after the problem
was solved and development ramped up. He favored a cutoff
date because it forced the discovery into a production
stage.
2:38:23 PM
Representative Wilson mentioned competitiveness. She
wondered whether the bill made Alaska competitive. Mr.
Ruggiero surmised that the provision to move from 50
percent NOLs (net operating losses) to 100 percent NOLs was
beneficial because it allowed companies to recover costs
and kept the state in a competitive position. He stated
that the tax rates in the CS were less than many other
countries' tax rates. He furthered that timing and
minimizing the risk of cost recovery played an important
role in investment. He indicated that the CS allowed for
deductions as soon as revenues were realized, which kept
Alaska in a "very good competitive position." He noted the
necessity to factor in other elements of the tax system for
a complete assessment of competitiveness. He provided an
example by questioning when and how an NOL could be used in
a scenario where a company did not incur enough revenue to
cover current expenses and carry forwards. The NOLs could
be reduced or eliminated, if current expenses were required
to be deducted first. He counseled that allowing NOL
deductions first provided a more beneficial outcome for the
company. He advised that the "nuts and bolts" of how the
tax worked determined the competiveness of the system.
2:41:19 PM
Representative Pruitt asked whether the provisions in the
CS was more complex or easier to administer than the
current system. Mr. Ruggiero believed the system was moving
in a more streamlined direction. Representative Pruitt
recalled a chart from previous testimony that showed
increases and decreases in tax systems over the last 10
years. He asked whether the CS included a tax increase and
where the state fit in on the chart. Mr. Ruggiero believed
he was referencing the "IHS" chart on fiscal regime changes
that was plotted against the price of oil and had green
boxes denoting more favorable fiscal terms by government
and orange boxes for less favorable terms [found in Castle
Gap Advisors presentation titled: "Petroleum Fiscal Design
HB 111" March 23, 2017 slides 18 through 20 (copy on
file).] He suspected that by simply looking at the tax
rates payable over a range of taxes and expected unit
profitability the CS increased taxes, but when looking at
the overall package, he would have to examine the bill
further to discover whether the effects were net positive
or negative.
Co-Chair Foster recognized Representative David Eastman in
the audience.
Representative Pruitt asked about the issue of ring fencing
for a company currently producing on the North Slope.
2:45:57 PM
Mr. Ruggiero answered that ring fencing by project was
prevalent worldwide. Secondly, he referred to AS 43.55.160
(a) (1) and reported that the tax system already included 7
different ring fencing options. How it impacted the
traditional 3 legacy producers on the North Slope versus
the new producers coming in required analysis of new
projects versus the legacy production and the ability to
write off expenses on new items against existing
production. He defined that a ring fence moved the
deduction out in time. The deduction was still allowed, and
he viewed the effect as a time value loss that depended on
the amount of time to determine whether it was a "major
issue." Representative Pruitt commented that the committee
had had two days to review the bill. He wondered whether
the bill needed more time for review or whether two days
was enough. Mr. Ruggiero opined that he would need more
time but understood the legislative process.
2:49:48 PM
Representative Pruitt asked how Mr. Ruggiero viewed how the
bill would impact North Slope investment. Mr. Ruggiero
urged members to look at likely fields to come into
production within the next 5 years. Alaska only had limited
types of projects. He suggested obtaining data from the
Department of Natural Resources (DNR) and producers to
identify the projects and assess the tax system against the
projects. He communicated that until the state analyzed
projects likely to come online it was impossible to
determine how taxes would affect new production.
Representative Pruitt used the Armstrong Energy, LLC. and
Repsol oil find as an example. He communicated that Repsol
was an international company with investment dollars and
Armstrong owned the leases but were not producers. He
wondered how the CS affected such companies moving forward
with production. Mr. Ruggiero indicated that every company
used a set of criteria to determine where to invest and the
best use its resources. He observed that a benefit for
Alaska was that energy projects had a long life; industry
tended to invest in new technology on long life fields to
increase extraction. He reported that the benefits of
switching from NOL credits to NOL carry-forwards for 7
years then reducing them 10 percent each year was currently
unknown. He reiterated his belief that each project should
be measured against the tax system to determine the impact
on overall profitability and the timing for investment
returns. He was unable to offer an opinion without
performing calculations for each project. Representative
Pruitt referenced information from Mr. Ruggiero's initial
presentation [cited earlier in the meeting] regarding
"long-term drivers and short-term drivers" that highlighted
two things that helped to fill the pipeline: "more from
legacy fields and new big North Slope fields developed"
[slide 9]. He questioned whether the legislation would
result in more production in the legacy fields. Mr.
Ruggiero responded that the CS raised taxes which lowered
the producer's share of revenue. He guessed that due to the
lower profitability environment, companies would view the
CS negatively.
2:56:26 PM
Representative Pruitt inquired whether the legislation was
representative of a slight increase or a "substantial"
increase in taxes, relative to the current price of oil.
Mr. Ruggiero recounted that he had cautioned against using
"averaged" data when raising taxes. He restated that the
impact depended on the "overall profitability" of the
specific field and its cost structure. He ascertained that
the per-barrel credit was based on market price and the
current tax was based on unit profitability. He discerned
that in terms of averages, average field costs and a $30
per-barrel cost structure; fields that were currently
accruing 7 percent to 15 percent effective tax rates paid
the base rate of 25 percent under the legislation.
Representative Pruitt asked how Mr. Ruggiero viewed the
legislation's effect on new investment in Alaska. He asked
whether the tax would be a deterrent for new entrants. Mr.
Ruggiero answered that "overall" many oil regimes attracted
"significant investment" that enacted multiple changes to
their fiscal systems. He qualified that the changes moved
in the "right direction;" higher state take with higher oil
prices and lower taxes at lower oil prices. He remarked
that the unit costs were high, and the project lead time
was long in Alaska along with other places in the world. A
new entrant assessed the two factors against the risk of
profitable investment returns. He perceived that Alaska was
"still attractive to new entrants" because it allowed
investment cost recovery as quickly as production and the
market price allowed. He stated that "players that would
come to the Alaska North Slope were not players that were
in it for the short-term." He added that short-term
developers were not the type of companies the state would
want on the North Slope. Representative Pruitt asked that
in terms of stability, whether the structure in the CS was
a concern for long-term entrants considering operating on
the North Slope. Mr. Ruggiero felt that producers would
view the legislation unfavorably, but producers understood
the economic reality in the state and that it was not
uncommon for heavily oil dependent regimes to engage in tax
changes during fiscally challenging times.
3:03:07 PM
Vice-Chair Gara recalled Mr. Ruggiero's term "bracketed"
when referring to the surcharge at $60 in profits. He asked
how the overall tax rate increases compared to the previous
two profits based tax systems. Mr. Ruggiero compared the CS
progressivity to the progressivity under Petroleum
Production Tax (PPT) and ACES. He explained that under PPT
and ACES "as the profit per barrel increased the tax rate
increased and the tax rate was applied against the entire
production tax value." He compared a bracketed tax to a
wedding cake. The 25 percent was an overall base rate, but
the next layer up was smaller; the 15 percent surcharge
only applied above the $60 price and unlike PPT and ACES
was not applicable back to the first dollar of profit.
Vice-Chair Gara asked whether a bracketed profits tax was
more favorable to industry. Mr. Ruggiero replied that he
would "no-brainer" choose the current CS versus ACES if his
choice was the way brackets were handled under both
systems. Vice-Chair Gara referred to "a law" that reduced
the payment from industry if a company proved the reduction
"made the field economic." He asked how a royalty relief
statute calculated into the decision to invest. Mr.
Ruggiero was not familiar with requests for relief in
Alaska. He believed that the option was available for
producers in Alaska. Vice-Chair Gara asked whether Mr.
Ruggiero thought royalty relief was favorable for high cost
fields. Mr. Ruggiero answered in the affirmative but
recommended a much lower tax rate on "a first bracket,"
therefore, low profitability due to high costs garnered a
lower tax. Vice-Chair Gara wished the CS addressed the low
tax situation in Cook Inlet. He inquired whether Mr.
Ruggiero had an opinion on the matter. Mr. Ruggiero
responded that the amount of changes to the tax structure
was the committee's decision. He reiterated his
recommendation to include more than two brackets in the CS.
3:09:25 PM
Representative Thompson asked whether the loss carry
forwards and the ring fencing provisions combined
discourage new independents and their ability to find
investors. Mr. Ruggiero responded than what Alaska had in
comparison was not different from other regimes. He voiced
that one concern was that the ring fencing provided less
options for cashing in or selling out and the costs
remained with the project, which was the practice "across
the world." Representative Thompson expressed some
confusion about ring fencing. Mr. Ruggiero relayed from
personal experience working in the United Kingdom with two
different types of fields in the North Sea; one highly
profitable and the other with high costs. The ability to
"cross deduct one versus the other" was not available;
therefore, one field paid high taxes while the other field
covered the loss. He was aware of the situation prior to
investing and did not view it negatively. He worked harder
to increase production and made use of carry forward
losses.
3:12:17 PM
Representative Tilton referred to Mr. Ruggiero statements
regarding moving towards a simpler system. She asked
whether the CS reflected his recommendations. Mr. Ruggiero
responded that he had offered more recommendations that
were not included. He voiced that in the end, he was not
the decision maker. He noted that if changes outside of his
recommendations were made he would offer further
suggestions to avoid potential "pitfalls and unintended
consequences" from the decisions. Representative Tilton
mentioned prior discussions regarding increasing taxes at a
lower per-barrel price point, which was the opposite
compared to other regimes. She wanted to encourage
competition and wondered how higher taxes at lower prices
per-barrel helped Alaska. Mr. Ruggiero reiterated that the
whole tax system required consideration and he used Norway
as an example. He articulated that two of the big oil
companies that operated in Alaska were major investors in
Norway and every dollar of production tax value (PTV) was
taxed at 78 percent by a combination of petroleum and
corporate taxes. He observed that both companies were not
deterred from investing in Norway. Norway had extremely
favorable terms for investment recovery. He believed that
the favorable terms on investment returns was the reason
investment occurred in high tax regimes. He cautioned
against focusing on any one aspect and encouraged an
evaluation of the tax as part of a whole package.
Representative Tilton asked whether two days was enough
time to assess how all the tax elements worked together.
Mr. Ruggiero was uncertain about whether enough time was
allotted and attributed the issue to "the workings of the
legislature." He addressed her question regarding the
interplay of the tax provisions. He believed that the
bracketed tax, removing the per-barrel credits, and NOL
provisions contained in the CS "fixed" many of the issues
he had identified in the old system and the prior CS from
the House Resources Committee version.
Vice-Chair Gara asked Mr. Ruggiero to elaborate on his
comments concerning the improvements in the current CS. Mr.
Ruggiero cited his assessment of NOLs in the document
previously provided to the committee titled "Understanding
the Impact of NOLs" dated March 29, 2017 (copy on file). He
relayed that his analysis discovered that where a producer
expected to recover costs through deductions and not paying
tax during cost recovery, that the combination of per-
barrel credits, Gross Value Reductions (GVR), floors etc.
reduced NOLs to approximately 30 percent or 60 percent or
an amount lower than their full value. He added that he
could not model a situation where an NOL was above 80
percent of its value. He reasoned that the cause was due to
the interaction with the per-barrel credits more than the
minimum tax. He pointed out that through elimination of
per-barrel credits (based on market price) and basing the
tax on unit profitability, the focus of the taxation was on
profitability. He stated that the NOLs offered more cost
recovery and were more useful to the producers.
3:21:14 PM
Vice-Chair Gara remarked that in the House Resources
Committee version the minimum tax was raised to 5 percent
and the CS eliminated the increase on the gross tax. In
addition, the House Resources CS eliminated the decreasing
gross tax from zero to 4 percent and adjusted the tax to a
minimum of 4 percent. The current CS reinstated the
decreasing gross tax. He asked how Mr. Ruggiero viewed the
changes. Mr. Ruggiero restated that an evaluation of the
impact on the entire tax system on different operators at
different prices was preferable. He deemed that eliminating
the 5 percent to 4 percent on the top grossing amount
lowered taxes and the 25 percent tax at the first barrel of
profitability represented an increase in taxes. The
reinstatement of the decreasing tax was based on very low
prices that were highly unlikely. He doubted that the tax
had any effect at all; positive or negative.
Representative Wilson recounted that SB 21 was brought to a
public vote. She remarked that since that taxation system
went into effect oil production increased. She referenced
Mr. Ruggiero's remarks from previous testimony that a more
equitable way to deal with cashable credits was to add
interest to NOLs to maintain their value. She asked whether
her interpretation was correct. Mr. Ruggiero responded that
he thought it would be fair to eliminate the ability to use
an expense as a cashable credit and receive cash
immediately. However, he favored some "uplift" with the
expectation that expenses were recovered from production,
in consideration of the time value of money between when
the expenses occurred and when the costs were recovered.
Representative Wilson asked Mr. Ruggiero if he was aware of
any location in the world where a system appeared to work
and was changed in a period of low profitability. Mr.
Ruggiero referred to the IHS chart he previously discussed.
He noted that many changes were instituted in many regimes.
He emphasized that the scenario was not the first time an
increase happened in a low-price environment by a
government that heavily relied on oil revenue for its
existence.
3:26:05 PM
Representative Wilson remarked that he had stated the
legislation had many moving parts. She anticipated that the
oil producers would "react" to the changes. She wondered
whether the legislature should have a better understanding
of how the bill worked to avoid revisiting the issue next
year. Mr. Ruggiero restated that issue was the
legislature's decision. He thought that small changes were
easier to adopt; the consequences would be discovered by
the actions of the producers. He voiced that major changes
necessitated more time. Representative Wilson asked if he
thought the CS was a major change or a moderate change. Mr.
Ruggiero assessed that the changes in the CS were "very
small or moderate." He recommended eliminating the 7
different categories of taxes currently in statute (AS
43.55.160), Middle Earth, Cook Inlet, and North Slope
distinctions and employ a bracketed system with 4 to 5
brackets to simplify the tax system for all. The simplified
system provided incentives to small new entities or high
cost projects and appropriately taxed large companies and
profitable projects. Representative Wilson opined that the
simplified system would not incentivize more oil production
in the state.
3:29:04 PM
Representative Wilson MOVED to ADOPT Amendment 2.
Page I, lines I- 9:
2 Delete all material and insert:
3 ""An Act relating to the interest applicable to
delinquent oil and gas production
4 tax; relating to the net operating loss credit
against the oil and gas production tax;
5 relating to lease expenditures; and providing for
an effective date.""
6
7 Page I, line 11, through page 2, line 16:
8 Delete all material. 9
10 Page 2, line 17:
11 Delete "Sec. 3"
12 Insert "Section l"
13
14 Renumber the following bill sections accordingly.
15
16 Page 3, line 12, through page 21, line 28:
17 Delete all material. 18
19 Renumber the following bill sections accordingly.
20
21 Page 22, line 29:
22 Delete "[OR (g)]"
23 Insert "or (g)"
2 Page 23, line 1, through page 27, line 24:
3 Delete all material. 4
5 Renumber the following bill sections accordingly.
6
7 Page 27, line 28:
8 Delete "(h) (l) [(h)]"
9 Insert "(h)"
IO
11 Page 28, line 5:
12 Delete "(h) (l) (C) [(h) (3)]"
13 Insert "(h) (3)" 14
15 Page 28, line 15, through page 31, line 28:
16 Delete all material. 17
18 Renumber the following bill sections accordingly.
19
20 Page 32, lines 21 - 30:
21 Delete all material and insert:
22 "(3) lease expenditures, as adjusted under (m) of
this section, that
23 (A) met the requirements of AS 43.55.160(e) in
the year that
24 the lease expenditures were incurred;
25 (B) were deductible in the
immediately preceding 10
26 calendar years, not counting the year in which
the expenditure was
27 incurred;
28 (C) have not been deducted in the determination
of the
29 production tax value of oil and gas under AS
43.55.160(a) in a previous
30 calendar year;
31 (D) were not the basis of a credit under this
title; and
1 (E) were incurred to explore for, develop, or
produce an oil
2 or gas deposit located north of 68 degrees North
latitude."
3
4 Page 32, line 31, through page 33, line 10:
5 Delete all material and insert:
6 "* Sec. 5. AS 43.55.165 is amended by adding a
new subsection to read:
7 (m) A loss carried forward under (a) (3) of this
section shall increase in value
8 at a rate of 10 percent, compounded annually. An
increase in value under this
9 subsection begins to accrue on January I of the
calendar year immediately following
10 the calendar year in which the loss was
accrued and no longer accrues on
11 December 31 of the calendar year immediately
preceding the calendar year in which a
12 carried-forward annual loss is applied. The
increase in value accrued under this
13 subsection has no value except as applied in this
section. An increase in value may not
14 accrue
15 (I) for a partial calendar year;
16 (2) for more than 10 calendar years, consecutive
or nonconsecutive; or
17 (3) on a loss carried forward by a producer whose
average amount of
18 oil and gas produced a day and taxable under AS
43.55.0ll (e) is more than 50,000
19 BTU equivalent barrels during the calendar year
that the loss was accrued." 20
21 Page 33, line 11, through page 38, line 4:
22 Delete all material and insert:
23 "* Sec. 6. The uncodified law of the State of
Alaska is amended by adding a new section to
24 read:
25 APPLICABILITY. (a) AS 43.55.023(b), as amended by
sec. 2 of this Act, applies to
26 lease expenditures incurred on or after the
effective date of sec. 2 of this Act.
27 (b) AS 43.55.165(a) (3) and 43.55.165(m), added
by secs. 4 and 5 of this Act, apply to
28 a lease expenditure incurred on or after the
effective date of secs. 4 and 5 of this Act." 29
30 Renumber the following bill sections accordingly.
1 Page 38, line 14:
2 Delete "Section 3"
3 Insert "Section l" 4
5 Page 38, line 15:
6 Delete "Sections 3, 30, 36, and 37"
7 Insert "Sections 1, 7, and 8" 8
9 Page 38, line 17:
10 Delete "Section 26"
11 Insert "Section 4" 12
13 Page 38, line 19:
14 Delete "secs. 38 and 39"
15 Insert "secs. 9 and 1O"
Co-Chair Seaton OBJECTED.
Representative Wilson explained the amendment. She remarked
that the goal was to address the state's liability from
cashable credits. She explained that the amendment deleted
most of the bill, converted the cashable credits into NOLs
that accrued interest to protect their initial value, and
only applied to the smaller companies that currently
received the credits. In addition, the lease expenditures
were extended to 10 years and would end without any
decrease in value over time. She believed that the
extension would address unanticipated project delays and
would offer a tax benefit.
Co-Chair Seaton MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Pruitt, Thompson, Tilton, Wilson.
OPPOSED: Grenn, Guttenberg, Kawasaki, Gara, Seaton,
Foster.
The MOTION to adopt Amendment 2 FAILED (4/7).
Vice-Chair Gara reviewed the new Department of Revenue
(DOR) fiscal note allocated to the Tax Division. He pointed
to page 4 of the fiscal note analysis, which included a
chart that reported the bill's revenue impact. He relayed
that the impacts were $20 million in FY 18, $85 million in
FY 19, $90 million in FY 20, $100 million in FY 21, $145
million in FY 22, and $190 million in FY 23. He noted that
the increases were based on forecasted rising oil prices.
He reported a capital cost of $1.2 million.
3:34:00 PM
Representative Wilson remarked that DOR testified in prior
testimony that the price of oil was not expected to
increase soon. She wondered whether any other factors were
taken into consideration when predicting the bill's revenue
impact. Mr. Alper responded that the numbers built into the
fiscal note were predicated on the Fall 2016 revenue
forecast. The numbers reflected a situation where as the
price of oil rose above $50 to $55 it initiated significant
change in the use of the per-barrel credit. He delineated
that the reason total revenue did not also change
dramatically was due to the 4 percent minimum tax floor. A
company only used a small portion of its per-barrel credit
at $50 to $52 oil before the credit bumped against the
floor, as the price increased more of the per-barrel credit
was used before the minimum tax was reached. He noted that
the amount of per-barrel credit offset on line 5, of the
chart grew significantly larger as more use of the per-
barrel credit was used to achieve the minimum tax floor.
Representative Wilson asked whether the calculations
included volume. Mr. Alper replied in the affirmative.
Representative Wilson asked whether the expected increase
in oil production was based on the tax structure in SB 21.
Mr. Alper responded that future oil production projections
were based on "a number of things including what was known
about company investments." He did not attribute the
forecast to "any particular law." Representative Wilson
queried whether Mr. Alper was suggesting that no matter how
much a company was taxed its behavior remained the same.
Mr. Alper responded that it was reasonable to say that
significant changes to a tax system would change companies'
behavior. Representative Wilson asked whether it was
accurate to say that the state had not seen the amount of
increased production in the last 14 years since the
inception of SB 21. Mr. Alper reported that the production
of oil increased last year over the year prior and was the
first increase since 2001. He agreed that her statement was
correct. Representative Wilson asked how Mr. Alper made the
analogy considering the production increases because the
state taxed companies fairly under SB 21. She asked what
kind of response the state should expect under increased
taxes. Mr. Alper responded that he thought it was a matter
of opinion and speculation and he could not accurately
answer the question. Representative Wilson disagreed with
the fiscal note and commented that fiscal note information
should be accurate.
Mr. Alper directed member's attention to the note included
on page 4 of the fiscal note. He read the following:
Note: The fiscal impact of this proposal is an
estimate based on the Fall 2016 revenue forecast.
Estimates shown here are draft/preliminary data based
on our interpretation of possible changes, and do not
include any changes in company behavior as a result of
the proposal. We reserve the right to make
modifications to estimates for any forthcoming fiscal
notes.
Mr. Alper shared that the department was not trying to
interpret any changes in company behavior, investment, or
production.
3:40:36 PM
Representative Guttenberg voiced the difficulty for Mr.
Alper to speculate on activity that took place in
boardrooms full of local, national, and international
corporations. He believed that it was DOR's job to present
the best facts and not forecast based on assumptions that
were impossible to predict. He stressed that "things that
happened during the time SB 21 was in place did not mean
they were the result of SB 21." Mr. Alper added that the
fiscal note was mostly a "mathematical exercise" based on a
model.
3:42:20 PM
Co-Chair Seaton MOVED to report CSHB 111 (FIN) out of
Committee with individual recommendations and the
accompanying fiscal note.
Representative Wilson OBJECTED.
Representative Wilson spoke to her objection and stated
that "Alaskans would be the true losers." She spoke to job
losses on the North Slope. She agreed that cashable credits
were problematic. She suggested addressing the situation
with adding interest to NOLs. She described provisions in
the CS she felt were damaging to the state: the elimination
of the utilization of cashable credits as collateral, and
transferrable credits. She declared that the citizenry
spoke when they voted for SB 21. She suggested that SB 21
was working, and more fields were coming online. She
anticipated that company behaviors would likely change and
continued to argue against the CS. She believed that the
oil industry "paid the bills for the state" and was being
penalized for making a profit. She believed that the bill
would stop exploration and increase oil job losses. She
believed that Alaska was owed a good portion of revenue for
its resources, but the state received a lot of revenue from
royalties and corporate taxes. She was thankful for the oil
companies and predicted a loss in state revenues. She
apologized to the oil companies for the legislation that
she could not stop.
Representative Thompson compared the bill to his property
tax at home. The bill was tripling the tax and negatively
impacted production, jobs, and investment. He strongly
opposed the bill.
Co-Chair Foster acknowledged Representative Chenault in the
room.
3:48:33 PM
Vice-Chair Gara relayed that Mr. Ruggiero stated that
Alaska was still attractive to new entrants under the bill.
He elaborated that many fields paid no production tax to
the state; the CS raised taxes above zero. He reported that
as new production took the place of older field production,
the state would have more and more fields in the future
that had a zero percent production rate up to $70 per-
barrel for the first seven years of production. He thought
the public was right in wanting to balance the public's
interest and treat producers fairly. He thought zero was
out of balance. He thought the public wanted to know that
if they were being asked to "chip in," the oil companies
were also expected to chip in. He noted that Conoco
Phillips had made a profit in the previous year in Alaska
at $41 per-barrel, but lost revenue elsewhere in the world.
He thought the tax was fair and was raised or lowered
according to profits. He related that the bill established
a "modest profits tax rate of 25 percent." He reported that
if a field was not profitable, a company was not charged
the 25 percent profit tax and only paid the 3 or 4 percent
gross tax. He reminded the committee that under Alaska law,
a royalty relief reduction was available under proven
"uneconomic" circumstances. The relief offset the 3 or 4
percent gross tax by 7 to 13 percent in royalty reduction,
which he believed was more generous and erased the gross
tax. He mentioned three previous cases of royalty relief.
He believed the bill balanced both the state's and
industry's interest. He cited Mr. Ruggiero statement
regarding the modest nature of the tax change. He
characterized the bill as instituting a "modest profits
tax." In addition, the bill offered NOLs and carry forwards
on losses. He felt that the bill was fair and balanced.
3:54:44 PM
Representative Pruitt declared that he ascertained that the
bill increased taxes. He reported that BP lost $87 million
and paid $822 million in royalties and taxes over the last
two years according to the Alaska Journal of Commerce. He
highlighted how difficult it was to get royalty relief. He
reported from the Petroleum News, December 2014 that only 8
cases were submitted to the Department of Natural Resources
(DNR) for royalty relief since 1995, and only two resulted
in royalty relief. He stated that royalty relief was not
"prevalent." He read from BP talking points that called the
CS a "rig killer" for the North Slope legacy fields. He
believed that the oil companies would reduce spending
resulting in job loss and reduced throughput. In addition,
lower property tax values were a possible "ancillary
effect." He disagreed with increasing taxes when the
industry was "struggling" and felt the action sent the
wrong message to business. He acknowledged that cashable
credits needed changing but thought the bill went too far.
He spoke of people crying when he last campaigned going
door to door and hearing from constituents who had lost
their jobs because of the low oil price. He felt that
current job losses were caused by the "inability of the
legislature to control its own budget." He cautioned
against supporting the legislation.
3:59:53 PM
Representative Kawasaki remarked that he did not want to
see anyone cry. He relayed that BP had just published its
annual report for 2016. The report noted that BP made $115
million worldwide and $85 million of the total was profit
from Alaska. He did not believe the bill would decrease or
cease production in the state. He would be voting in favor
of the bill.
Co-Chair Foster acknowledged Representative Zach Fansler in
the audience.
Co-Chair Seaton commented on the remarks regarding having
to revisit the issue next session due to unintended
consequences. He thought that if the CS was not adopted the
legislature would have to deal with another oil tax bill
next year. He believed that industry was aware that the
current tax system was unworkable and was not designed for
the low oil price environment. Solving the matter now
ensured that a bill was not necessary next session. He
offered that the tax was based on profits and was what the
industry had wanted for many years. In response to industry
testimony, the bill only applied to profitable fields and
at over $60 PTV per-barrel a 15 percent surcharge kicked
in, but only on the amount over and above $60. He added
that the bill eliminated detrimental cash credits, but
offered carry forward NOLs at 100 percent for 7 years. He
reasoned that the 7-year limit incentivized production but
offered time sensitivity for non-production. He noted that
ring fencing on net operating losses primarily applied to
new fields where companies were producing or exploring. The
NOL's were not transferrable for legacy fields that were
operating and profitable and left new field undeveloped. He
believed that transferring NOLs to offset profitable legacy
field taxes as a way to increase oil production "made no
sense". He maintained that ring fencing NOLs would "push"
project development. He felt that the bill was balanced,
and supported the legislation.
Representative Wilson MAINTAINED her OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Guttenberg, Kawasaki, Ortiz, Gara, Foster, Seaton
OPPOSED: Pruitt, Thompson, Tilton, Wilson, Grenn
The MOTION to REPORT OUT CSHB 111 (FIN) PASSED (6/5).
CSHB 111 (FIN) was REPORTED OUT of committee with 4 "do
pass" recommendations, 4 "do not pass" recommendations, 2
"no recommendation" recommendations, 1 "amend"
recommendation, and with a new fiscal impact note by the
Department of Revenue.
Co-Chair Foster reviewed the agenda for the following
meeting.
Co-Chair Foster recessed the meeting to a Call of the Chair
[Note: the meeting never reconvened].
ADJOURNMENT
4:07:04 PM
The meeting was adjourned at 4:07 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 26 CS version U.pdf |
HFIN 4/8/2017 1:00:00 PM |
SB 26 |
| SB 26 Comparision_Senate to House Finance CS_4.7.2017.pdf |
HFIN 4/8/2017 1:00:00 PM |
SB 26 |
| HB 111 Amendment #1.pdf |
HFIN 4/8/2017 1:00:00 PM |
HB 111 |
| HB 111 DOR Tax Division NEW FN 4-7-17.pdf |
HFIN 4/8/2017 1:00:00 PM |
HB 111 |
| HB 111 Gara 4.8.17 Potential Maximum Royalty Reduction Allowed Under Royalty Relief.pdf |
HFIN 4/8/2017 1:00:00 PM |
HB 111 |
| HB 111 Amendment 2 Wilson.pdf |
HFIN 4/8/2017 1:00:00 PM |
HB 111 |