Legislature(2015 - 2016)BILL RAY CENTER 230
05/15/2016 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB247 | |
| Public Testimony | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 247 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
May 15, 2016
9:02 a.m.
9:02:13 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Anna MacKinnon, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Peter Micciche, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Dan Seckers, ExxonMobil, Juneau; Barbara Huff Tuckness,
Director, Legislative and Government Affairs, Teamsters
Local 959, Juneau; Senator Cathy Giessel; Representative
Tammie Wilson; Representative Sam Kito; Senator John
Coghill; Representative Dan Ortiz; Representative Paul
Seaton; Representative Louise Stutes.
PRESENT VIA TELECONFERENCE
Jon Cook, CFO, Airport Equipment Rentals, Fairbanks; Kara
Moriarty, CEO, Alaska Oil and Gas Association, Anchorage;
Pete Stokes, President, Alaska Support Industry Alliance,
Anchorage; Maynard Tapp, Self, Anchorage; Carl Portman,
Self, Anchorage; Scott Jepsen, Vice-President, External
Affairs, ConocoPhillips, Anchorage; Bill Armstrong,
President and Owner, Armstrong Oil and Gas, New Orleans;
Jeff Hastings, Self, Anchorage; Michael Erstrom, Self,
Soldotna; Marleanna Hall, Executive Director, Resource
Development Council, Anchorage; Andy Bond, Self, Anchorage;
Michael Heiring, Representative, Udelhoven Oil Field System
Services, Anchorage; Dale Hoffman, Self, Anchorage; George
Pierce, Self, Kasilof; Pat Foley, Caelus Energy Alaska,
Anchorage; Mike Coons, Self, Palmer; Gretchan Stoddard,
Self, Anchorage; Pamela Throop, Self, Fairbanks; Steve
Sutherlin, Self, Anchorage; Linda Leary, Self, Eagle River;
Javen Ose, Self, Anchorage; Jeffrey Ham, Self, Kenai;
Deborah Brollini, Self, Anchorage; Daniel Donkel, Donkel
Oil and Gas, Orlando; Mary Toutonghi, Self, Anchorage;
William Reiner, Self, Anchorage.
SUMMARY
2d CSHB 247(RLS)am
TAX;CREDITS;INTEREST;REFUNDS;O & G
2d CSHB 247(RLS)am was HEARD and HELD in
committee for further consideration.
PUBLIC TESTIMONY
2d CS FOR HOUSE BILL NO. 247(RLS) am
"An Act amending the powers of the board of trustees
of the Alaska Retirement Management Board to authorize
purchase and sale of transferable tax credit
certificates issued in conjunction with the production
tax on oil and gas; relating to interest applicable to
delinquent tax; relating to the oil and gas production
tax, tax payments, and credits; relating to
exploration incentive credits; 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 confidential
information status and public record status of
information in the possession of the Department of
Revenue; relating to oil and gas lease expenditures
and production tax credits for municipal entities;
requiring a bond or cash deposit with a business
license application for an oil or gas business;
establishing a legislative working group to study the
fiscal regime and tax structure and rates for oil and
gas produced south of 68 degrees North latitude; and
providing for an effective date."
9:03:22 AM
^PUBLIC TESTIMONY
9:03:23 AM
JON COOK, CFO, AIRPORT EQUIPMENT RENTALS, FAIRBANKS (via
teleconference), opposed the current version of the
legislation. He stated that his company was the largest
heavy and light duty equipment rental company in the state,
including branches in Deadhorse and Kenai. He announced
that the company was a Fairbanks family-owned based with
125 employees. He understood that there were many difficult
choices currently facing the legislature. He understood
that there would be some reform necessary. He stressed that
the state was experiencing problems paying the earned past
credits, and struggling to issue certificates for moneys
owed. He remarked that the certificates would be able to be
sold in the secondary financial markets and allow customers
to pay their bills. He stressed that there was current
uncertainty in the supplier and contractor community in the
financial departments related to changes to programs on a
retroactive basis. He stated that there were $7 million
that the state had yet to pay in past liabilities, so he
did not feel that there should be a new credit regime. He
shared that his company, and others like it, had invested
millions of dollars a year for credit-funded projects.
Without the credits, the companies would cease investment.
He did not feel that retroactive changes were the wrong
choice, because it would be detrimental to the state's
reputation and bond rating. He did not feel that there
should be arbitrary payments to the state. He felt that
there were some perceptions that the credits only related
to Wall Street hedge funds and the three major oil
producers. He stressed that he had a small company, and the
change would negatively affect his business. He reiterated
that there were many small Alaskan business affected by the
change in the regime.
9:07:31 AM
Senator Dunleavy queried the number of statewide employees
in Mr. Cook's business. Mr. Cook replied that he had 120
employees.
Senator Dunleavy queried the specific negative impacts to
the company, should the credit program be changed. Mr. Cook
responded that his company would be able to weather the
change, but he stated that many other companies would have
a difficult time adjusting to a change.
Senator Dunleavy noted that many people in Alaska believed
that the credits only affected the large oil companies. He
wanted to understand how many support services would be
affected by the change in the oil tax credit system.
9:09:43 AM
AT EASE
9:10:13 AM
RECONVENED
9:10:20 AM
AT EASE
9:12:05 AM
RECONVENED
9:12:31 AM
KARA MORIARTY, CEO, ALASKA OIL AND GAS ASSOCIATION,
ANCHORAGE (via teleconference), read from a prepared
statement:
Good Morning Co-Chairs MacKinnon and Kelly, and
members of the Committee. For the record, my name is
Kara Moriarty and I'm the President/CEO of the Alaska
Oil and Gas Association, commonly referred to as
"AOGA".
Thank you for the opportunity to testify on the
Committee Substitute (CS) for HB 247. I have unanimous
consent of my diverse group of members to offer these
brief thoughts today.
In listening to your discussion yesterday, I was
encouraged several of you were asking very important
questions such as, "What will the bill do to
production and jobs?" We would also encourage you to
ask, "How will state revenues be impacted by this bill
next year or even five years from now? What will
Alaska's economy look like following the adoption of
this bill?"
HB 247 is a dramatic shift in oil tax policy for both
Cook Inlet and the North Slope, and it will definitely
result in less production, less investment, fewer
Alaskans working, and ultimately, and somewhat
ironically, less revenue for the State.
In my limited time this morning, it is impossible to
go through every section of the bill that causes
concern, especially when industry did not see the full
60 page amendment to HB 247 until it was introduced on
the House floor. There was no opportunity for industry
or the public to fully vet some of the concepts
contained in the bill before you. There have also been
claims that industry was okay with the amendment. Let
me be clear, all AOGA members believe the bill before
you is the worst committee substitute to date.
Unfortunately, in this low price environment we have
seen a dramatic cutback in industry. Most painfully,
Alaskans have lost jobs. We recognize the operating
budgets are not final, but there could be 50-75 state
employees that will lose jobs too. But for the oil and
gas industry, the job loss has been even more severe,
with over 1,000 Alaskans no longer working directly
for industry as compared to a year ago. This does not
include the contractor workforce.
As a reminder, the McDowell Group has estimated that
for every direct job the industry provides another 20
jobs are created throughout the broader Alaskan
economy. I know of no other private sector industry,
or state government agency that creates such economic
growth, so we would respectfully disagree with
comments that suggest cutbacks from the oil and gas
industry would not be as harmful to the Alaskan
economy as reductions in other industries or
government.
There was also a suggestion that the state can't do
anything about the current downturn in the oil
industry because the decisions have been driven by the
price of oil. That is partially true. While there will
be impacts due to price that are out of the state's
control, state policies can exacerbate the problem.
Will the state have policies that drive investment to
Alaska when prices go up?
Under this bill the answer is no. Instead, it creates
policies that will not drive investment to Alaska from
explorers and producers alike when prices go up
because it will now take a much higher oil price for
industry investment to return or increase in Alaska,
if it returns at all.
As the state grapples with low prices, and budget
shortfalls, ironically, the State is actually setting
the stage for an inevitable loss of revenue regardless
of what credits it removes or taxes it raises.
Under this bill, the State will see lower oil and gas
production, which will then drain State finances. For
example, the owners of Prudhoe Bay just updated their
plan of development and have estimated that production
will decline about 20,000 - 60,000 barrels per day due
to the shut-down of 3 rigs. This lost drilling time
could result in a 10-30 percent decline in Prudhoe Bay
alone
Utilizing the Department of Revenue's Spring Forecast,
we have examined what production decline will look
like over the next five years. I believe you have the
charts we have developed. If production estimates stay
where they were in April, production in FY 2021 will
be about 418,600, about a 4 percent decline. However,
if the proposed legislation is enacted, the DOR's
production estimates will become far too optimistic.
In reality, increased taxes and omitting tax credits
will accelerate production decline.
If we had a 10 percent decline per year for 5 years,
production would be about 307,000 barrels per day, and
in terms state revenue, a 10 percent decline in
production will result in $793 million less in
royalties alone for the State.
The technical aspects of operating TAPS are made more
challenging with less production. Alyeska has stated
that TAPS faces a significant operational obstacle at
throughputs at around 300,000 barrels per day, which
is about the 10 percent decline mark. Despite some of
the best and most innovative people in the industry
focused on this scenario, an operational solution has
not yet been identified to sustain TAPS operation at
this level.
It is fair to say, that this 6th change in tax policy
in 11 years makes several fundamental alterations to
SB 21 and to the tax system in Cook Inlet. This new
policy will not attract investment or new independents
to Alaska, causing exciting projects to be shelved.
The bill spells doom for Cook Inlet as some credits
will be removed in less than 6 weeks which is
basically a retroactive tax increase as companies have
made investments for the calendar year expecting a
credit system to remain in place for a longer period.
Additionally in Cook Inlet, the companies will be
faced with extremely high tax rates, which will
invariably be passed onto South Central natural gas
consumers in the near future.
This bill sends a strong signal to the world that
Alaska is constantly changing tax policies, regardless
of oil price, and regardless of the economic condition
of the industry.
In closing, the industry is not asking for a tax
decrease or for tax or royalty relief. But it is my
job to let you know what impacts your decisions will
have.
or Cook Inlet.
Alaska, and will likely drive companies out of the
state.
state.
We understand the politics associated with this issue
are challenging. We get it. And yet, to my member
companies, the politics are largely irrelevant to the
core of what drives decision-making, and that is
economics. My member companies will not pursue
projects that don't pencil out. I can assure you that
HB 247 just made project economics worse for producers
and explorers alike, and the decisions the companies
will make in response will not be good for Alaska.
Thank you for the opportunity to testify today, and
I'm happy to take any questions you may have.
9:20:07 AM
PETE STOKES, PRESIDENT, ALASKA SUPPORT INDUSTRY ALLIANCE,
ANCHORAGE (via teleconference), testified against the
current version of the bill. He stated that the members of
his organization had recently experienced 2000 lost jobs
due to the recent downturn in oil price. He felt that there
was lack of understanding of the fiscal impacts of the
bill. He stressed that the amendments passed on the House
floor were not properly vetted by testimony or committee
process. He stated that the forecast assumed that the price
of oil would be $40 per barrel by FY 17. He remarked that
there could be an updated oil revenue forecast, which
assumed a higher price of oil. He stated that an increase
in oil tax at a low price of oil would be detrimental to
future investment and production. He stressed that the bill
would case additional job loss and opportunities as a
result of increased oil taxes. He urged the committee not
to pass HB 247.
Vice-Chair Micciche stressed that the committee would take
the time to vet the bill and any changes that may occur. He
queried any specific problems with the bill. Mr. Stokes
replied that every change to the fiscal terms had a
multitude of components. He agreed to provide further
information.
Vice-Chair Micciche stressed that he was interested in
specific problems with the legislation.
Co-Chair MacKinnon shared that industry members were given
five to seven minutes, and public testimony was given three
minutes.
9:27:08 AM
MAYNARD TAPP, SELF, ANCHORAGE (via teleconference), urged
the committee to focus on increasing production in the oil
pipeline. He did not believe that revenue would be from
taxes. He felt that taxes and credits only confused the
industry, and how they want to invest in Alaska.
CARL PORTMAN, SELF, ANCHORAGE (via teleconference), spoke
against the current version of the legislation. He
testified against increasing taxes on the oil and gas
industry. He stressed that the industry was losing millions
of dollars in the current environment. He remarked that the
current oil and gas policy had encouraged production.
9:30:35 AM
SCOTT JEPSEN, VICE-PRESIDENT, EXTERNAL AFFAIRS,
CONOCOPHILLIPS, ANCHORAGE (via teleconference), spoke
against the legislation. He shared that ConocoPhilips had
increased development and production since the most recent
oil and gas tax reform legislation [SB 21]. He shared that
ConocoPhilips was one of the most active investors in the
oil and gas industry in Alaska. He shared various
activities that ConocoPhilips had engaged in to increase
production and investment in the state. He read from a
prepared statement:
COP has historically been one of the state's most
active investors and that is especially true since
passage of SB21.
o We have funded and constructed the first drill
site in Kuparuk in 13 years.
o We have increased our rig count from 3 pre-SB21
to 4 to 5 and as high as 6 during exploration.
This compares to our current L48 rig count of 3,
down from 20+ several years ago.
o We are also pursuing new developments in NPRA
(GMT-1 and GMT-2) as well as additional
development of the viscous oil resource in the
Kuparuk River Unit.
o We have been a net severance tax payer and
continue to be a net severance tax payer.
o We continue to be an active explorer and
investor, but detrimental changes in SB21 could
negatively impact our investment plans both near
term and long term.
o With that as background, I will now talk about
the elements of the House bill that impact
ConocoPhillips. I will not be addressing the
reimbursable tax credits because COP is not
eligible for those credits. In case the committee
is interested, we have put together a one-pager
that summarizes ConocoPhillips' position with
regard to the various tax credits. It is our
estimate that we will receive very little benefit
from any of the tax credit provisions in the next
fiscal year. For the sake of time today, I have
chosen not to go through the one-pager, but if
there is interest, we would be happy to provide
it to the Committee.
With regard to the elements of the bill that affect
ConocoPhillips:
o GVR - The changes in the GVR will make new
field economics less competitive with other
investment opportunities. Developing new fields
like GMT-1 and GMT-2 is more expensive than
drilling in the L48 simply because we need more
infrastructure to bring the wells on line. A
three year GVR does little to help the economics
of these new developments and even a seven year
GVR is only marginally helpful. Changing the GVR
as described in the bill passed in the House may
negatively impact the likelihood of funding for
these types of projects.
o Changes to the gross minimum tax - Changing the
gross minimum tax rate from 4 percent to 5
percent, even as a function of oil price, is
simply sending the wrong signal to investors. One
of the key things Alaska can do to maintain its
competitive edge is to at least keep the basic
tax structure in place. This change represents a
fundamental change in the tax structure and one
that will cause investors like ConocoPhillips to
be much more wary about investing in the state.
o Monthly versus yearly use of the per barrel and
other credits - There is also language in the
bill that attempts to change the use of the per
barrel and other credits from a yearly basis to a
monthly basis. This change is reportedly to
address Director Alper's theory of "migrating"
tax credits. If one reads the SB21 legislation,
it is clear that the intent of the legislation
and the regulations that were drafted from SB21
was to make estimated monthly payments but
finalize payments based upon yearly results.
There is no ability for the tax payer to "shift"
tax credits from one month to another - we are
simply following the regulations laid out by the
State. Attempting to restrict the per barrel and
other credits to monthly results versus yearly
results essentially turns the tax into a monthly
tax which in the end will make tax compliance
more difficult with more complex audits. DOR
already has issues with completing audits in the
six year time frame they have available - this
will make it even harder to complete audits and
is clearly is reformulation of the intent of SB21
without any overarching tax policy framework
other than to increase State take in times of
price volatility.
o NOLs - While we do not envision that the NOLs
by a company like COP are as potentially
significant as Director Alper has claimed, it
does not make sense to limit NOLs by the large
producers to just one year while continuing the
NOL provisions for the small producers, non-
producers and non-tax payers in perpetuity. The
long term investors who have been, and depending
upon the tax framework, may continue to invest
billions in the North Slope, are the large
producers like ConocoPhillips. The philosophy of
continuing NOLs for the small and non-producers
and eliminating a recovery of NOLs against
severance tax liability for the large producers
is not consistent and has a potentially
differential, negative impact on the State's most
consistent investors.
o Interest rate on amounts owed - The increase in
interest rate for payments owed to the State does
not seem reasonable given the very long time
frame it takes for the state to finalize audits.
We typically do not get audit results for 6
years, and then it can take 3 to 4 years to
finally resolve the points of disagreement. We
believe the interest rate provisions in SB21
should be left standing until the state can turn
around and finalize its audits in a reasonable
time frame (for example 3 years).
o Tax credit disclosures - Based upon our review
to date, we do not see any issues with the tax
credits disclosure provisions as described in the
House bill.
Concluding comments
o Any changes that increase the tax burden,
especially in times of low prices when the
industry is cash flow negative, will likely
result in adversely impacting ConocoPhillips'
current and future investments.
o Significant changes in the tax law would
validate concerns regarding the State's ability
to implement a stable oil and gas fiscal policy.
It has only been about 20 months since voters
ratified SB 21. Long term investment requires a
durable, reasonable fiscal framework. We have had
six changes in Alaska's oil and gas tax framework
in the last 11 years. Another significant change
will negatively impact investor's view of Alaska
and could adversely impact long term investment
plans.
Co-Chair MacKinnon requested the analysis and written
comments. Mr. Jepsen agreed to provide that information.
9:37:46 AM
BILL ARMSTRONG, PRESIDENT AND OWNER, ARMSTRONG OIL AND GAS,
NEW ORLEANS (via teleconference), testified against the
current legislation. He announced that his company was the
largest independent oil and gas company in the state. He
stated that the most recently developed fields originated
in his office in Denver. He shared that Armstrong had a
recent new discovery, which would be one of the largest
fields in the history of the North Slope. He felt that it
would possibly produce 120,000 barrels a day, which would
be a significant percentage of the oil in the Trans-Alaska
Pipeline System (TAPS). He stressed that had "brought more
players" and "more money to the state than anybody." He
felt that he was a "walking, talking chamber of commerce
for the state of Alaska oil and gas players." He felt that
Alaska had a positive future on the North Slope.
9:44:40 AM
Senator Bishop noted the felt that the state and the
producers were partners. He announced that he had worked in
the oil and gas industry in the past, and remarked that he
had experienced a wage reduction at another time of
business strife. He wondered if there was room to index the
credits, in order to protect the state. Mr. Armstrong
replied that there was some potential with that idea, if
there was a way to make it work for both parties. He felt
that the state always wants more revenue regardless of
whether the price of oil was high or low.
Co-Chair MacKinnon wondered whether Armstrong produced oil,
or only drilled wells. Mr. Armstrong responded that the two
projects created by Armstrong were producing almost 10
percent of the capacity in TAPS. He stated that there was a
new field that was currently under an environmental impact
study, and he hoped that it would come online soon. He
stated that the production on that new field would provide
almost 50 percent of TAPS. He stated that his company was
also drilling new wells.
Co-Chair MacKinnon wondered if Armstrong produced the
wells, or whether it was in partnership. She specifically
wondered if Armstrong's oil was in TAPS, or if another
company had purchased the unit post-drilling. Mr. Armstrong
replied that that there were partners that he had worked
with to produce the barrels. He stressed that his new
development would be Armstrong's development.
9:50:26 AM
JEFF HASTINGS, SELF, ANCHORAGE (via teleconference), read
from a prepared statement:
Good Morning;
My name is Jeff Hastings. I am the Executive Chairman
for SAE Exploration, a managing member of Kuukpik/SAE,
our Joint Venture with the native village of Nuiqsut.
My family has lived and labored in the state since
1987. Our companies employ an average of 400 Alaskans
annually.
I would like to start by extending our appreciation
for the long hours that have been clocked and the
efforts of legislators and their staff. We acknowledge
that these are difficult times and there is no easy
or, single solution to the fiscal gap we Alaskans
currently face.
Today we would like to draw attention to the condition
and state of many of the prime contractors and
subcontractors that are being effected by the
uncertainty and lack of confidence in the current tax
credit program and the provisions in the current
version of HB247.
Over the past 7-8 months we have seen the erosion of
third party lenders willing to project finance, or
lend against outstanding tax certificates. The State's
tax certificates, once regarded as AAA credit worthy
are now wrought with enough uncertainty that even high
risk lenders and factoring firms will not entertain
lending against the program. Our clients, who have had
program financing at the closing table, have watched
the money needed to fund or continue their programs,
vaporize as the uncertainty of monetization under
current programs increases.
The timing of the audit and certification process,
which is now a "first application in, first
certificate out" process, is an unknown variable
adding to the inability to finance the receivable of
the state.
Once a certificate is awarded there is no schedule,
current funding, or apparent plan for the state to
fund and pay for those credits that have already been
earned.
This lack of a viable plan to pay the State's
obligation under the current tax credit program is
causing a trickle down of financial distress that
extends from the explorer, to the prime contractor, to
the subcontractors that depend on the state to meet
its obligation timely.
The latest version of HB247 has several provisions
that will cause further stress on a long line of
Alaskan companies who employ thousands of Alaskans.
This version of the bill further restricts a holder of
a certificate from assigning those certificates to
"The Secondary Market", those entities who currently
pay production tax.
This version of the bill also provides for purchase of
the tax certificates by the pension fund at the rate
of 60 percent. The fund can then turn around and cash
the certificate back into the Department of Revenue
for 100 percent of the face value. When did the State
of Alaska get into the factoring business? Is the
State and expecting Alaskan companies who have earned
and are now owed the funds to take a 40 percent
haircut and in the same motion provide a windfall to
another group of Alaskans that are participants
through the pension fund?
In essence, the State, through the months of
uncertainty of how currently earned credits will be
treated and new provisions contained in the current
version of HB247, has all but eliminated the
opportunity for third party lending, restricted or
nominalized the secondary market to trade or assign
certificates and appears to be taking advantage of the
distress this situation has caused by offering a
factoring facility that will cause damage to many
Alaskans families while providing a windfall for
others.
We all know change is needed in many areas of our
spending. However, to claw back monies earned by
Alaska companies, or not to provide payment visibility
on obligations of the State is negatively effecting
thousands of families in the State. There has to be a
better way to fund the program and provide visibility
to allow companies to help themselves and the State
through this trough.
Thank you for your time this morning. If there is any
information or, support we can provide to you or your
staff we are available anytime.
Senator Bishop wondered how many employees were directly
employed by Mr. Hastings' company. Mr. Hastings responded
that he employed an average of 400 employees a year.
Senator Bishop queried the number of contractors annually.
Mr. Hastings stated that there were approximately 100 to
150 sub-contracts per year, which did not include the
suppliers.
Senator Bishop queried the annual payroll. Mr. Hastings
replied responded that the monthly Alaskan payroll averaged
just above $1.2 million.
9:56:55 AM
MICHAEL ERSTROM, SELF, SOLDOTNA (via teleconference), spoke
against the legislation. He remarked that there would be a
direct effect on the community, should the tax regime
change. He shared that he had seen several companies
retreat from business in Alaska, when the price of oil was
better than the current price. He stressed that there were
companies that were attempting to work in the current
environment, and actively losing money in the meantime. He
felt that changing the rules would make it much more
difficult for those companies to conduct business, and
would make Alaska less appealing for business investment.
9:58:44 AM
MARLEANNA HALL, EXECUTIVE DIRECTOR, RESOURCE DEVELOPMENT
COUNCIL, ANCHORAGE (via teleconference), spoke against the
current version of the bill. She stated that her
organization was a statewide trade association comprised of
individuals and companies from Alaska's oil and gas;
mining; forest products; fisheries; and tourism industries.
She stressed that her members were the "lifeblood" of
Alaska's economy. She believed that the best approach to
expand the economy and generate new revenues for the state
was to produce more oil; attract more tourists; harvest
more fish; and mine more minerals. She stated that raising
taxes on companies that were reporting record losses in a
negative cash flow was not sound fiscal policy. She echoed
Ms. Moriarty's comments.
Vice-Chair Micciche wondered if there was an aspect within
tax credit policy that was appropriate, without deeper
changes to the policy itself. Ms. Hall replied that she was
not a tax expert, and agreed to provide a more detailed
answer. She reiterated that increasing or changing the tax
policy would jeopardize investment. She stressed that the
tax structure change would result in less oil in the Trans-
Alaska Pipeline System (TAPS).
Vice-Chair Micciche pointed out that it was appropriate for
the committee to evaluate the current status, and stressed
that there should be a focus on production that resulted in
a better bottom line to state. He stressed that he equally
evaluated all companies. He understood that he had asked an
unfair question, because it was not her area of expertise.
Senator Bishop wondered whether any member companies had
done a wage reduction with their employees to remain
competitive. Ms. Hall responded that there had been a large
number of layoffs over the previous 18 months. She stated
that she did not know if there had been any wage
reductions, but restated that there were many layoffs.
10:05:08 AM
DAN SECKERS, EXXONMOBIL, JUNEAU, testified against the
legislation. He stressed that raising taxes on an industry
that was losing money would not lead to more production,
but rather it would do the exact opposite. He remarked that
the committee substitute would not lead to more production,
more investment, more jobs, nor long-term sustainable
revenues. He addressed some detail as related to Vice-Chair
Micciche's concerns about the taxes. He looked at Section
80, which would raise the interest rate on tax over and
under payments. He stressed that the problem with Section
80 was that it did not address the core issue. He remarked
that it was not the interest rate, but rather the length of
time the department was allowed to do audits. He shared
that ExxonMobil had received its 2009 tax assessment six
years after they filed the return; with interest accruing
that entire span of time. He stressed that raising the
interest rate would only provide more incentive for the
department, so the interest could continue to accrue. He
looked at Section 14 would raise the gross minimum tax from
4 percent to 5 percent. Raising the minimum tax on gross
revenue was a regressive tax increase, and would have
significant adverse impacts on future investments. He
believed that BP had shared that a 1 percent increase in
the minimum tax would equate to a shutdown of a rig for at
least one-half year. The loss of any drilling rig meant
lost production, lost jobs, and lost revenues. He felt that
it would send the wrong message to companies looking to
invest in Alaska. He looked at Section 4, which would
eliminate the recovery of future operating losses for most
companies. It would represent a substantial and negative
change to the overall balanced reform that was brought
forth in previous oil and gas legislation [SB 21]. He
stated that SB 21 raised the base tax rate to 35 percent.
As part of the tax rate increase, it allowed for net
operating losses to be carried forward or be determined at
that rate. He stressed that recovering net operating
losses, when a company earned a profit into the future, was
a cornerstone of any net-based tax system. He reiterated
that the tax had more net income based features than a
gross tax. The deductibility of costs and losses that
differentiated a net system from a gross system. Allowing a
company, regardless of its production levels to carry
forward losses that could not be deducted in a current year
was critical to the concept of a net-based tax system, and
the concept of balancing revenues and expenses. He stated
that the allowing of the recovery of losses represented an
immediate and significant tax increase. He looked at
Section 41, which would further raise the production tax by
changing the way the gross value at the point of production
was determined and applied, by preventing the gross value
from dropping below zero. He stated that it seemed like a
reasonable provision. He explained, however, that the
provision represented a disguised tax increase and a
substantive change to the production tax law. He explained
that, under the law, a producer did not file a field-by-
field or unit-by-unit tax return. He announced that the
producer filed by segment. He explained that the production
tax would be based on the true economics of the entire
operations and investment of that entire segment. He stated
that, if the administration intended to limit the
termination and application of the gross value at the point
of production to a field-by-field or unit-by-unit basis,
then it changed the substance of the production tax law. It
changed the consolidated way in which investments were
evaluated, and how a producer's tax liability was
determined.
Mr. Seckers addressed a provision, which was not
technically in the committee substitute, but rather alluded
to by Commissioner Hoffbeck the previous day: the concept
of migrating tax credits.
10:12:28 AM
Vice-Chair Micciche felt that it was awkward to point at
other business models, but felt that the testimony referred
to the industry as a whole. He looked at the past tax
liability interest rate, and understood that the length of
time had been difficult. He queried a position regarding a
change that would take into an account the extension of
time that put an equal impact on the state that would not
penalize the companies. Mr. Seckers replied that most
companies filed its returns as accurately as possible. He
stated that ExxonMobil had licenses who were required by
law to file the returns accurately, and had zero tolerance
who took exception to the rule within the company. He
stressed that the concern was about six years to audit
based on a law that had been in place for over a decade. He
felt that the administration had an incentive to wait with
the results, because the interest accrued could not be
reduced. He felt that mitigation to that problem would be
helpful. He remarked that the state could shorten the
statute of limitations to three years, as was previously in
statute.
Co-Chair MacKinnon shared that a conversation about
interest may be best with the Tax Division present. She
stressed that some tax payers were more forthcoming with
their information request, and others were less likely to
be forthcoming. As a result, some information would be
exchanged several times.
Vice-Chair Micciche queried regimes that would go negative
on tax liability for ExxonMobil. Mr. Seckers responded that
any net income base system has the possibility of allowing
the tax liability to go to zero with losses carried forward
or backward. He urged a conversation with enalytica,
because that company had experience throughout the world.
He shared that most production taxes were not net-based,
which is why the state had many deductions. He stressed
that the system was set up specifically for Alaska, because
it was expensive to conduct business in remote locations.
He stressed that a net-based system allowed for the
equalization of marginal fields and large fields. He felt
that a gross tax would cause a disadvantage to the
independent companies. He stressed that a gross tax
structure taxed phantom income, because companies were
losing money and getting taxed at a higher rate.
10:17:01 AM
Co-Chair MacKinnon wondered if ExxonMobil continued to
conduct business as usual after the price of oil declined.
Mr. Seckers responded that ExxonMobil continued to operate
Point Thompson as it always had. He remarked that
ExxonMobil had shares in other fields, so there was a focus
on what was best for the field at any point in time. He
shared that ExxonMobil had four decision points:
efficiencies; activity levels; discretionary spending; and
layoffs. He stated that ExxonMobil had not yet experienced
layoffs as a result of the lower oil price.
Co-Chair MacKinnon queried efforts to reduce costs. Mr.
Seckers replied that he was focused on taxes in ExxonMobil,
so it was difficult to answer that question. He shared that
the company was examining a broad perspective to bring the
highest value share to Alaskans and ExxonMobil
shareholders.
Co-Chair MacKinnon shared that Alaskans were also examining
efficiencies. She announced that the legislature had
reduced costs, and had proposed an almost $1.5 billion
reduction. She stated that there had been a change in
activity levels, reduced discretionary spending, and were
examining possible layoffs. She wondered if the contractors
hired by ExxonMobil were currently employed, or were some
contracts discontinued. Mr. Seckers replied that that the
industry was not interested in any change in the law, and
stressed that no one wanted any job loss. He agreed to
provide further information.
Co-Chair MacKinnon stressed that Alaska was attempting to
respond to a shortfall in the same manner that the industry
was responding to the shortfall.
Senator Hoffman queried comments on the Alaska Hire
provisions, and promoting those individuals in order to
receive the credits. Mr. Seckers replied that ExxonMobil
had never qualified for the refundable credit section. He
furthered that ExxonMobil did its best to hire as many
Alaskans as possible. He announced that Point Thompson had
80 percent Alaskans working. He stressed that ExxonMobil
supported the hiring of Alaskans.
Senator Bishop recalled that ExxonMobil had 91 percent of
Point Thompson employed by Alaskans including all
contractors and subcontractors. He felt that ExxonMobil had
sustained its agreement, and thanked Mr. Seckers for their
efforts.
Co-Chair MacKinnon wondered whether ExxonMobil had adjusted
its dividend program. Mr. Seckers responded that ExxonMobil
had maintained its dividend program exactly how it had been
for the previous number of years.
10:24:10 AM
BARBARA HUFF TUCKNESS, DIRECTOR, LEGISLATIVE AND GOVERNMENT
AFFAIRS, TEAMSTERS LOCAL 959, JUNEAU, spoke against
legislation, because she felt the bill negatively impacted
the development of current and future oil. She testified in
support of efforts made to examine additional revenue
sources, adjustments to the Permanent Fund, and sound
reductions to the state's budget. She felt that the
legislature should make the flow of oil through the
pipeline a high priority. She stressed that more oil
production meant more revenue. She furthered that more
production also meant more jobs for the citizens of the
state. She remarked that the oil industry, up until
recently, had paid 90 percent of the state budget. She
stressed that billions of dollars of oil revenue had been
used to improve statewide infrastructure; paid for public
schools; paid for public safety; and paid for capital
projects such as convention centers, sports arenas, and
hospitals. She felt that there would be no conversation
about the adjustment of oil taxes, had the price of oil not
decreased greatly. She urged the committee to carefully
consider the impact of current and future production,
especially in the time of low oil prices. She stressed that
the industry had continued to invest in more new projects
as a result of the recent passage of oil and gas tax
legislation. She understood that there had been fewer
members working in the oil industry, because of the
downturn of the oil price. She stressed that stability in
the oil industry was critical to future investment, because
investment led to new development and jobs. She testified
in support of the Alaska Hire provision in the bill. She
felt that any changes to the bill be conducted in a manner
that would assure that the industry would continue to
invest in the state.
Senator Bishop queried any contract negotiations to reopen
any parts of the North Slope. Ms. Tuckness agreed to
provide that information.
Co-Chair MacKinnon encouraged the testifiers to submit
written testimony.
10:30:23 AM
ANDY BOND, SELF, ANCHORAGE (via teleconference), testified
against the legislation. He felt that the future of Alaska
looked so "bleak", that he did not think his children would
be able to stay and raise families in Alaska. He remarked
that the recent downturn in the oil price had caused
massive layoffs in the oil industry across all companies.
He also stressed that capital investments for Alaska oil
exploration and development had been greatly reduced. He
felt that adding additional taxes on the oil industry would
further reduce investment and require higher oil prices
before many companies could return to business. He had seen
many changes in tax policies; companies; oil prices; and
other impacts. He felt that tax policies were often
overreactions to oil price changes and other factors. He
remarked that the current tax structure was very beneficial
to the state, and had attracted significant investment in
recent years. He felt that the tax credits countered
Alaska's high-cost environment, and allowed the state to
compete with other international oil investments. He
stressed that higher taxes would discourage future
investment. Companies were currently nervous about
additional changes to the tax structure. He announced that
tax policy stability was a key factor for many companies.
He stressed that the state should first reduce the deficit
by making substantial cuts to state government and
services. He also encouraged the committee to use funds
from the state's savings accounts, and reducing or
eliminating the Permanent Fund Dividend (PFD).
Co-Chair MacKinnon wondered if the testimony was
specifically for the North Slope, or if the comments could
also be applied to Cook Inlet. Mr. Bond replied that he was
speaking specifically to the North Slope, but also the
Southcentral gas supply situation.
10:34:09 AM
MICHAEL HEIRING, REPRESENTATIVE, UDELHOVEN OIL FIELD SYSTEM
SERVICES, ANCHORAGE (via teleconference), spoke against the
legislation. He felt that the governor appeared to be
"oblivious to the impact it will have on the future of
Alaska." He did not believe that there had been proof of
the benefit of the legislation. He was not convinced that
the state had reduced the state budget.
10:35:36 AM
DALE HOFFMAN, SELF, ANCHORAGE (via teleconference), spoke
against the bill. He announced his history working for the
oil industry. He remarked that he had witnessed many recent
changes to the oil and gas tax structure. He stressed that
generating cash for the industry provided most of the
state's revenue. He shared that the industry was losing
money, because of the decline in the oil price. He felt
that the state needed a robust oil and gas industry, which
would continue invest capital, exploration, and
development. He stated that the investment would fund the
current economy and provide oil and gas for the upcoming
decade. He shared that he had seen recent layoffs in all of
the companies in the industry, including the company that
he worked for, which laid off 25 percent of its personnel.
He reiterated that increasing taxes on the oil industry
would reduce future investment and require higher oil
prices before many Alaskans could return to work. He shared
that he had worked in California, the Gulf of Mexico, the
Rocky Mountains, and Alaska. He stressed that Alaska was
the most difficult of those places to do business.
10:38:56 AM
GEORGE PIERCE, SELF, KASILOF (via teleconference), spoke in
favor of the bill. He felt that scheduling public testimony
on Sunday morning was sneaky, because many people were in
church. He felt that the legislators wanted the public to
believe that the $64 billion in the oil industry was
achieved through tax credits, but disagreed with that
notion. He shared that the state had given more than $7
billion from 2007 to 2015, but the majority of the $64
billion came from the state with zero credits. He remarked
that the oil industry was provided every possible credit
from the state and federal government. He encouraged the
committee to increase taxes on oil companies in the Cook
Inlet and the North Slope. He felt that Cook Inlet was 60
percent of the credit problem. He wanted the credits to
expire, and spoke against extensions to expiration dates.
He remarked that the oil industry was using the credits to
inflate the size of the operating credit.
10:45:15 AM
PAT FOLEY, CAELUS ENERGY ALASKA, ANCHORAGE (via
teleconference), testified against the current version of
the bill. He believed that the bill would result in less
activity, exploration, and production which would lead to
less jobs and dramatically less revenue for the state. He
explained that the bill "stripped away" many of the
incentives created by the current tax structure. The
incentives specifically encouraged Caelus to come to the
state and make significant investments in various projects.
He felt that the damaging aspects of the bill focused on
the sunset of the refundable net operating loss credits. He
disagreed with the application of the five dollar per
barrel, and its limits. He felt that the entire bill
represented a significant tax increase on all companies,
whether those companies were new, old, large, or small. He
stressed that the refundable net operating loss credit
allowed more work to occur. He shared that every company
had limited amounts of capital, so the credits were used to
add to the existing capital which accelerated the pace of
the projects. The bill was only favorable with regard to
the cashable credit, but was terribly unfavorable because
it excluded any exploration activity. He hoped that the
committee understood that exploration was the "lifeblood of
the oil industry", because it was essential to future
development. He shared that, since 2007, over $6 billion in
credits had been paid. Those credits could be divided two-
thirds in the form of avoided taxes, and one-third in
actual refundable credits. He shared that, to date, the
state had received over $60 billion in revenue.
Senator Bishop queried the price per barrel number in order
to conduct new exploration. Mr. Foley replied that between
$60 and $70 per barrels was a level to incentivize
activation in the North Slope and pursue new exploration.
Co-Chair MacKinnon looked at the document provide by Caelus
to the committee (copy on file), which showed the
variability of price ranges and potential revenue to the
state. She wondered if that was the lifetime numbers. Mr.
Foley replied in the affirmative.
Co-Chair MacKinnon queried how the state should
differentiate between the loss of production in response to
the commodity price and its volatility versus tax credit
reform. Mr. Foley responded that Caelus was recently forced
to discontinue its operation on the island, because of the
low oil price. He shared that there needed to be oil price
recovery and confidence in a healthy oil tax environment
before the operation could reopen.
10:54:07 AM
MIKE COONS, SELF, PALMER (via teleconference), queried the
version of the bill.
Co-Chair MacKinnon stated that the version was passed out
of the House as amended on the House floor version C.A.
Mr. Coons testified against the legislation. He spoke to
the amendment that was passed on the House floor, and felt
that the amendment was not properly vetted in the committee
process. He shared that he was in favor of the current tax
structure. He felt that the legislation had serious
negative impact on the state.
Co-Chair MacKinnon handed the gavel to Vice-Chair Micciche.
10:57:23 AM
GRETCHAN STODDARD, SELF, ANCHORAGE (via teleconference),
felt that she did not have representation in the House, so
she was counting on the Senate to represent her family's
interest. She spoke against the legislation. She stated
that she and her husband worked in the Cook Inlet gas
production industry. She shared that her husband's job was
currently in flux, and she did not know whether her husband
and son's health insurance would remain intact. She shared
that she had benefitted from oil and gas tax credits. She
shared that she was a contractor to plan how to shut down
platforms and waste disposal. She understood that there may
be a change in the oil and gas tax structure change, and
that the state may not be able to continue to write checks
at its current level. She was concerned about the changes
to the production taxes. She remarked that there was a very
recent change to the production tax structure, and did not
feel that there should be an additional change. She felt
that there may be a change in Cook Inlet production tax in
2019, but she expressed concern. She remarked that the
state had high health care costs, which affected every
aspect of the state. She stressed that the increased cost
to health care caused an additional budget reduction in
other aspects of the state. She felt that the state needed
to control the high cost of health care. She shared that
she currently had a high-deductible health care plan. She
remarked that her husband sold supplies to the industry,
and his company would be merging with a company, so there
was uncertainty regarding that merger.
11:01:49 AM
PAMELA THROOP, SELF, FAIRBANKS (via teleconference), spoke
against the current version of the legislation. She
announced that she supported the original version from the
governor. She felt that the oil and gas industry was the
most profitable industry in the world, as were able to hire
the best attorneys, accountants, negotiators, and
lobbyists. She remarked that the state did not have the
same money and expertise as the oil companies. She felt
that everything seemed to be skewed in the oil companies'
favor. She stressed that there was a current "trickle-down
distress" to the communities of Alaska. She shared that
many professors in Alaska were worried for their jobs. She
understood that it was expensive to conduct business in
Alaska, but stressed that it was expensive to conduct
business in third-world countries. She remarked that the
oil companies were conducting business in third-world
countries, but it was a more volatile government. She
shared that it was projected to be 13,300 monthly average
jobs in the oil and gas industry, as outlined in the Alaska
economic trends in 2016. She stated that in 2014 there were
14,100 jobs, and in 2015 there were 14,300 jobs. She felt
that the passage of SB 21 had cost the state 1000 jobs,
rather than increasing the number of jobs in Alaska. She
believed that the legislature, administration, and citizens
of the state must impose restraint in order to keep the
state from continuing to waste money. She remarked that
there were credits to encourage South-central Alaska
receive gas, but stressed that there were no efforts in
Fairbanks to bring gas to Fairbanks. She requested a
comparison between Alaska's tax structure and other
sovereigns in the world. She wondered if Alaska was
competitive with those other countries. She felt that
Alaska was paying too high of oil and gas tax credits.
Vice-Chair Micciche requested an explanation of her
perspective. Ms. Throop stated that she wanted to eliminate
the credit in the way that the governor had requested of
the legislature.
11:08:25 AM
STEVE SUTHERLIN, SELF, ANCHORAGE (via teleconference),
spoke against the bill. He shared that he worked to advise
companies that wanted to come to Alaska to do business in
the oil and gas industry. He shared that he had worked with
a company that wanted to do business in Cook Inlet. He
shared that he had worked with a company that wanted to
drill off-shore in the Arctic, but those plans fell
through. He hoped that more small companies and deals with
state lands to keep the pipeline operating into the future.
He felt that the tax issues had been represented by those
that were most affected, but he wanted to address the tax
incentives. He felt that there should not be a focus on the
cash tax credit, because those credits would be paid
eventually. He stressed that the smaller companies often
looked to the larger companies when establishing a
strategy. He shared that the regulations placed on the
companies were a greater burden on the smaller producers
than on the larger producers.
Vice-Chair Micciche queried the position on the bill. Mr.
Sutherlin responded that he was against the bill. He urged
the committee to keep the structure the same.
11:15:58 AM
LINDA LEARY, SELF, EAGLE RIVER (via teleconference), shared
that she knew of many small businesses that were impacted
by the claw back provisions. She stressed that businesses
conducted their work based on money that was already
committed and promises made to ensure the work. She
stressed that there would be small companies struggling,
and even filing bankruptcy. She stressed that the state
should pay the money owed to the businesses to ensure
proper business and maintain the state's credit rating. She
felt that the state should meet its past obligation without
hurting the existing businesses.
Vice-Chair Micciche queried the claw back provision. Ms.
Leary replied that there was a provision that discounted
what was owed from a previous tax credit.
Vice-Chair Micciche felt that she was referring to the ARM
Board provision.
11:19:00 AM
JAVEN OSE, SELF, ANCHORAGE (via teleconference), echoed the
remarks of Mr. Pierce and Ms. Throop. He testified against
"giving away half the farm." He understood that there may
need to be an adjustment to the tax structure, and smaller
companies could see a 5 or 10 percent increase. He felt
that the credits in Cook Inlet were "absurd." He stressed
that Alaska did not need to face the hardship of other
third-world countries. He spoke in favor of reducing the
oil company tax credits.
11:21:03 AM
JEFFREY HAM, SELF, KENAI (via teleconference), spoke
against the bill. He explained that investing money in an
industry where the rules and regulations was incredibly
hard. He stressed that, back in 2009, 2010, 2011, there was
testimony about the probability of facilities getting
closed down and gas would be imported into the state. He
felt that the tax credits had a huge impact in the
development of Cook Inlet gas. He shared that there was a
profound difference between the gas industry of 8 years ago
and the current time. He felt that many people forget about
the past, and only acted when faced with a crisis. He felt
that reacting by changing the structure was the wrong
approach. He urged the committee to examine how the dollars
were spent in prosperous and impoverished times. He felt
that the state should not punish the companies that were
currently losing money.
Vice-Chair Micciche surmised that Mr. Ham was against the
bill. Mr. Ham agreed.
11:25:30 AM
DEBORAH BROLLINI, SELF, ANCHORAGE (via teleconference),
spoke against the bill. She stressed that TAPS was shut
down in 2011, but the state was lucky that the contractors
were able to bring it back online in a number of days and
not weeks and months. She stressed that there were great
challenges to operate the pipeline below 500,000 barrels
per day. She shared that the cost of operating TAPS
declines as oil production declines.
11:27:28 AM
DANIEL DONKEL, DONKEL OIL AND GAS, ORLANDO (via
teleconference), spoke against the legislation. He felt
that the state would be better served to not act in haste
in response to the Saudi Arabian flooding of the oil
markets, which he felt was designed to put Alaska out of
business. He remarked that Saudi Arabia was enough money to
put Alaska out of business, because they had a reserve of
$600 billion with a burn rate of $100 billion per year. He
felt that Alaska was smart, and was grateful that the
legislators cared about Alaska. He pointed out that Senator
Bishop and Co-Chair MacKinnon had done a remarkable job. He
stressed that Prudhoe Bay was discovered with one oil well,
but was currently supplying 80 percent of the state's oil.
He stated that the credits provided was the smartest move
by the state. He felt that established credits was intended
to allow the independents compete against the major oil
companies who controlled 99 percent of the oil market. He
remarked that after the Valdez oil spill, there was bond
that restricted the small independent companies from
bringing the oil to California.
11:34:48 AM
MARY TOUTONGHI, SELF, ANCHORAGE (via teleconference),
stated that she was testifying with five other individuals
from District 30, and she announced their names. She spoke
against the legislation. She expressed concern about the
subsidies for the oil companies. She remarked that the
state was making a large number of donations to a group of
oil companies who were not obliged to offer anything in
return. She shared that the state was paying up to $7
million to $8 million per year in addition to the $6
billion offered in the previous year. She felt that a
number of elderly people were not able to receive eight
dollars' worth of food stamps per month for several months.
She stressed that the world was entering a new stage of
development, and the state was behind the other developed
countries.
Vice-Chair Micciche wondered if the testifier was against
the legislation. Ms. Toutonghi replied that she was in
favor of raising the taxes on the oil companies.
11:39:21 AM
WILLIAM REINER, SELF, ANCHORAGE (via teleconference),
testified in favor of halting the credits as of June 2016.
He felt that there would be a lag time to pay off some of
the credits over time. He understood that there was
additional legislation required to accomplish the personal
agendas. He announced that he had provided a 10-K about
Donkel Oil and Gas. He shared that he had worked at Ted
Stevens International Airport, so he was an "end user" of
the oil and gas industry. He felt that the state moved too
quickly to respond to the collapse of the price of oil by
raising the taxes of the end users. He remarked that the
end user was subjected to the business end of the free
market enterprise.
Vice-Chair Micciche queried a position on the bill. Mr.
Reiner replied that he wanted to halt tax credits by June
2016.
Vice-Chair Micciche appreciated the testimony. Mr. Reiner
wondered if the bill was the best option.
Vice-Chair Micciche stressed that public testimony only
related to the bill before the committee.
Vice-Chair Micciche CLOSED public testimony.
2d CSHB 247(RLS)am was HEARD and HELD in committee for
further consideration.
ADJOURNMENT
11:46:57 AM
The meeting was adjourned at 11:46 a.m.