Legislature(2007 - 2008)SENATE FINANCE 532
11/07/2007 01:00 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB2001 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
November 7, 2007
1:30 P.M.
CALL TO ORDER
Co-Chair Bert Stedman convened the Senate Finance Committee
meeting at 1:30:04 PM.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Kim Elton
Senator Donny Olson
Senator Joe Thomas
Senator Fred Dyson (via Teleconference)
MEMBERS ABSENT
None
ALSO PRESENT
Senator Gary Stevens; Dudley Platt, Consultant, Department of
Revenue; Jon Iverson, Director, Division of Tax, Department of
Revenue; Kevin Gibson, Petroleum Investment Manager, Acting
Deputy Director, Division of Oil & Gas, Department of Natural
Resources; Jerry Burnett, Director, Division of Administrative
Services, Department of Revenue; Cheryl Nienhuis, Petroleum
Economist, Tax Division, Department of Revenue
SUMMARY
SB 2001 "An Act relating to the production tax on oil and gas
and to conservation surcharges on oil; relating to the
issuance of advisory bulletins and the disclosure of
certain information relating to the production tax and
the sharing between agencies of certain information
relating to the production tax and to oil and gas or
gas only leases; amending the State Personnel Act to
place in the exempt service certain state oil and gas
auditors and their immediate supervisors; establishing
an oil and gas tax credit fund and authorizing payment
from that fund; providing for retroactive application
of certain statutory and regulatory provisions
relating to the production tax on oil and gas and
conservation surcharges on oil; making conforming
amendments; and providing for an effective date."
SB 2001 was HEARD & HELD in Committee for further
consideration.
SENATE BILL NO. 2001
"An Act relating to the production tax on oil and gas and
to conservation surcharges on oil; relating to the issuance
of advisory bulletins and the disclosure of certain
information relating to the production tax and the sharing
between agencies of certain information relating to the
production tax and to oil and gas or gas only leases;
amending the State Personnel Act to place in the exempt
service certain state oil and gas auditors and their
immediate supervisors; establishing an oil and gas tax
credit fund and authorizing payment from that fund;
providing for retroactive application of certain statutory
and regulatory provisions relating to the production tax on
oil and gas and conservation surcharges on oil; making
conforming amendments; and providing for an effective
date."
1:31:22 PM
DUDLEY PLATT, CONSULTANT, DEPARTMENT OF REVENUE, informed the
committee of his experience as a petroleum engineer and his
current position as a consultant to Department of Revenue. He
outlined his experience as a forecaster.
1:33:57 PM
Mr. Platt gave a presentation titled, "North Slope Crude Oil &
Natural Gas Liquids Production Forecast, Department of Revenue
Fall 2007" [copy on file]. He explained to the committee the
things that he does not forecast and provided a list.
Resources not included in fall 2007 Forecast:
· No undiscovered resources.
· 100% Ugnu viscous oil (20 billion barrels)
· 96% of West Sak viscous oil
· 88% of Schrader viscous oil
· Federal Outer Continental Shelf (Sivillug, Kuvlum,
Sandpiper)
· NPR-A (except known pools near Alpine)
· Slope wide implementation of low salinity water flood
Some addendums to the list include:
Resources that have been discovered but due to the sensitivity
of the information are not available for discussion.
ƒSome forecasts (420 million barrels) from West Sak core
area.
ƒHe noted the importance of considering that he does not
forecast any known discoveries in the Federal Outer
Continental Shelf (OCS). The list includes those slated
for non commercial.
ƒHe does forecast some known pools near Alpine such as
Spark, Rendezvous, and Moosestooth.
He commented on the new technology barrels from low salinity
water flood. He went on to say that currently there is a
demonstration project at Endicott that could prove to be very
viable. The new technology would allow for 20-30% recovery of
oil remaining in fields.
1:36:21 PM
Mr. Platt addressed page 3, Methodology:
· Production forecast is a "bottoms up" approach
· Forecast 3 types of production
- Currently producing
- Under development
- Under evaluation
· Combines the following:
-Decline curve analysis
-Engineering principles
-Site inspections
-Discussions with operators
-Use of private & public information
· Operators are given an informal opportunity to review and
comment on forecast assumptions
· Continually review forecast assumptions and update daily
production volumes.
Mr. Platt stated that each field behaves differently noting that
each has different size, complexity and drive mechanisms. He
underlined the importance of looking at each field every six
months to really understand it.
1:37:10 PM
He extrapolated definitions from the Department of Revenue
Spring Forecast 2007.
Currently producing: baseline production; and presumes a
continued level of expenditures sufficient to promote safe,
environmentally sound operations. He added that "currently
producing" presumes continued injection of water and gas for
pressure support.
Under development: based on new projects either currently
funded or awaiting project sanctioning in the very near future.
(Read from Department of Revenue Spring 2007 Forecast page 35).
He sited examples: development drilling, enhanced oil recovery,
either operating or projected to be operating. The category
also includes roughly 180 million more barrels attributed to
injecting water into Prudhoe Bay gas cap.
Under evaluation: includes technically viable projects
currently in the "pencil sharpening" stage where engineering,
cost, risk, and reward are all being actively evaluated. This
includes certain enhanced oil recovery projects at certain
satellite fields. Includes certain expanded heavy oil
development at Trador and Westsak.
He explained that these are the three types of production he
forecasted. He pointed to page 4 of the handout illustrating the
amount of production over ten years for each type.
Mr. Platt explained that the curve upward on the chart in 2018
for "under evaluation" is the projected time for Point Thompson
to come online.
Co-Chair Stedman noted the legislature has struggled with Point
Thompson for the past decade. He asked if the project just keeps
getting pushed forward.
1:40:59 PM
Mr. Platt responded by saying that Point Thomson is "very
elusive". He pointed out that 2-3 years ago with negotiations
on the gas pipeline, Point Thompson went from a gas cycling
project to a project that would only be commercial under major
gas sales. He explained that it is a very high pressure
reservoir with significant costs associated with it. He
explained that even if a gas contract was available immediately,
it would still be nine years before production, hence the 10-
year projection chart. He emphasized the magnitude of oil
available and the amount of effort it would take to capture it.
He explained that he uses the decline curve analysis approach
using industry accepted software, augmented with basic
engineering principles. He then inspects all the oil fields and
has detailed discussions with the operators. In addition, he
attends meeting on field development with oil companies. When
the forecasting effort is completed, plant managers are given
the opportunity to comment on the findings.
1:45:17 PM
Mr. Platt continued with page 5, titled, Alaska North Slope:
The chart denotes both the spring and fall projections
expressing a steady decline in production, ultimately resulting
in a negative 500,000 barrels per day. He suggested that 6
months from now the lines would likely change to express
something different. He elaborated noting the discrepancies in
the projections from 2008-2013. He explained that when there
are mistakes or differences in the projections he attempts to
reconcile the difference, or at least understand it. He
reiterated the process in which he collects data. He identified
3 main reasons for the discrepancies in the forecast between the
spring and fall forecasts:
1) Additional information was made available that suggested
the timing of new developments had changed.
2) Planned maintenance: He noted that 2006 was identified
as year of integrity management highlighted by the
shutdown. The calendar year 2007 was the year of
infrastructure renewal, life cycle and replacement costs.
Mr. Platt maintained that even healthy, producible reservoirs
can have many things that prevent it from performing to
expectations of both the forecaster as well as the operator.
He pointed out that the difference in the chart from page 5 and
that of page 6 is the removal of the federal oil variable (NPR-A
and Liberty). He maintained that without the federal oil
variable the forecast is more accurate. The fact that the
federal lands do not bring great return in terms of tax revenue
and are difficult to produce, their significance is not as great
in terms of forecasting production {for the sake of
understanding return in revenue to the state}.
1:50:27 PM
Co-Chair Stedman asserted that projections tend to be overly
optimistic on production and pessimistic on price. He asked if
the North Slope basin is in a time of its life cycle that is
difficult to forecast.
1:51:20 PM
In response, Mr. Platt suggested that the state is transitioning
into a time of greater challenges in forecasting price, cost,
and production. He observed that prior to the era (6 years ago)
of infrastructure renewal and integrity management, he could
forecast fairly accurately. He revealed that with the amount of
uncertainty associated with the near term of continued
reinvestment, not necessarily in barrels produced, but to repair
facilities to maintain current production, forecasting becomes
more difficult.
1:53:02 PM
Co-Chair Stedman asked if he understood correctly that the
reservoirs are capable of production at 700,000 barrels per day
with proper reinvestment. Mr. Platt responded that everything
at Prudhoe, Kuparik, and Alpine are producing. He clarified
that the issue is not the ability to produce, but what may go
wrong to slow it down.
1:54:30 PM
Co-Chair Stedman offered that regardless of the incentive
credits, producers have the ability to maintain production at
700,000 barrels per day versus what is reflected on the chart
illustrating 600,000.
Mr. Platt responded that the 600,000 reflects the amount
produced without the inclusion of federal oil.
He continued his presentation with page 8, Production Volume
Forecast Reduced for the Next 8 Years
· Additional volume Reductions from:
-unplanned interruptions
-planned infrastructure renewal
· Slowed the pace of heavy oil
· Delayed timing of new projects to reflect revised industry
estimates
1:56:43 PM
Mr. Platt explained what is meant by "slowed the pace". He
stated that reports from the industry suggest that there are
plenty of capital funds available but they are not necessarily
put towards enhancement projects.
He provided examples: Milne point is challenged because there is
near term rate reduction. This information was accommodated in
the projection. He noted Westsak has great opportunities, but
recently suffered from some reservoir issues. He noted the
technical issues impacting the pace of development are not the
only concern. He further clarified by saying that a producer
may want to proceed with a project, but they may not receive the
support from co-owners. This is something happening at Westsak
presently. How that is accommodated in the projections is he
stretched out the development overtime and represents a delay of
10-15 thousand barrels of oil a day.
1:59:11 PM
He also added that "delayed timing" of new projects as a
variable to reflect new information regarding maintenance and
integrity management.
Senator Elton stated an assumption on planned infrastructure
renewal. He asked if the increased estimation of planned
infrastructure renewal projects are due to problems occurring
from deferred maintenance.
2:00:26 PM
Mr. Platt agreed with Senator Elton's assumption but added that
any prudent operator would look at all infrastructures. The
integrity management plan leads to an infrastructural renewal
plan and the implementation of the plan will take years.
Mr. Platt explained that his discussions with field managers
revealed that in Prudhoe Bay alone there are 1,100 miles of
pipeline and flow lines. At Milne Point over the next 3-5 years
certain flow lines will need to be replaced at a regularly
scheduled pace. This project will slow production, but
ultimately extend the life of oil production.
Senator Elton asked about delayed timing of new projects to
reflect revised industry estimates. He emphasized the
expectation in PPT deliberations was based on the premise that
if a net tax was adopted the pace of investment would increase.
He expressed confusion over the delayed timing of new projects.
Mr. Platt distinguished between Senator Elton's concerns and
what is meant by delayed timing of new projects. He pointed out
that when companies assess future projects, there are a number
steps in the process. Often one or two wells are drilled to
determine what, how much, and under what circumstances
production can occur. A producer's plans can be revised at any
step in the process and potentially "delay timing" of the
project. He emphasized the delay of a project does not mean
abandonment of a project. He provided examples of new projects.
{Liberty BP thought they would develop as a stand alone (more
expensive) facility - one to two drills a year to determine the
success rather than a rapid rise to a peak (delayed production).
Further evaluation revealed there was surplus capacity at the
Endicott facilities where extended reach drilling could capture
that. He also delayed 6 months because due to BP submission to
the Mineral Management service that stated the 6 month time
period.}////////
2:05:06 PM
Currently there is drilling for heavy oil in Ugurik with a
facility sharing agreement pending with Conoco Phillips.
Initially, first oil was projected in the fourth quarter for
2007. When that did not happen, forecasts were adjusted. He
supplied further examples of the difference between expectations
and the actualization of the expectation. He could not comment
on what type of behavior PPT might encourage or discourage.
2:08:10 PM
Mr. Platt addressed page 8 of the handout and explained that he
wanted to express some of what led to the judgments made in
forecasting. The plot represents the fluctuations in production
for 2005 and 2007, January 1 - November 6. He explained that a
single dip in the chart represents maintenance. A double dip or
dips close together represent an unanticipated event. The chart
illustrates significant volatility in 2005.
2:09:30 PM
Mr. Platt expressed the difficulties in making forecast
projections by explaining Page 10, Volume Volatility. The chart
denotes barrels per day produced from September 2006 - September
2007. The dips in the chart represent a TAPS shutdown in 2006
slow output due to tanker traffic delay of North Slope delivery
in November 2006, and planned maintenance at Alpine, August
2007.
2:11:07 PM
He addressed the final page: Changes from spring 2007 in bpd.
One column represents barrels produced per (bpd) day on both
state and federal lands; the other represents bpd for state
lands only. The chart spans from Fiscal Year 2008 to Fiscal
year 2015. He elaborated noting the decrease in production over
the next 5 years and the shift to a production increase in 2014.
In referencing FY 2008, he said it is quite possible the state
would fare better than what is expressed in the chart.
Senator Huggins addressed page 8 and said the assumptions for
2007 were not surprising. He asked Mr. Platt if he was surprised
by what the chart illustrated.
2:13:30 PM
Mr. Platt responded that he was surprised at the number of dips
in the colder months, noting that generally companies perform
maintenance projects in the warmer months.
Senator Huggins asked if there were other elements, other than
water, that are expected to come into play with regards to the
extraction of heavy oil.
Mr. Platt explained that old oil fields produce more water per
unit of oil and they produce more gas. The facilities in Prudhoe
Bay and Kaparak are maxed out on how much gas can be handled.
These fields are also approaching the maximum of water they can
handle. He explained that if companies don't expand their
ability to handle these non-sellable items, the oil production
will continue to go down.
He asked for clarification from Senator Huggins on the question.
2:15:35 PM
Senator Huggins asked if there were any other variables on the
horizon that may impact heavy oil extraction and production.
Mr. Platt elaborated on the issues of heavy oil. He noted that
production costs are higher, but the value is lower due to the
quality. He discussed the various technologies available for
creating higher quality heavy oil.
Senator Huggins asked Mr. Platt to discuss the possibility for
gas off-take with regards to the possibilities of a gas
pipeline.
2:17:04 PM
Mr. Platt said in Prudhoe Bay there are approximately 25-40
trillion cubic feet (tcf) of gas; Point Thompson as has 4-8
trillion cubic feet of gas. The amount of gas in Point Thompson
could provide 4.5 billion cubic feet (bcf) a day for
approximately six years without having to tap Prudhoe Bay. He
pondered the choices of investment in reinjection, or producing
fuel from Point Thompson to send to Prudhoe Bay for operations.
He noted gas reserves in NPR-A, the trillion feet of cubic gas
in the vicinity of Alpine. He also informed the committee that
Kuparuk will need to start buying gas just to run operations.
Senator Thomas said he understood the term "low salinity water
flood" and asked for the source of the low salinity water.
2:19:11 PM
Mr. Platt understood that British Petroleum (BP) is trucking
fresh water to Endicott Island. This is a demonstration project
and is following successful laboratory test. He said that it is
possible that companies will be able to build desalinator
plants.
2:20:27 PM
Senator Thomas referenced the chart illustrating Alaska North
Slope oil production, page 6. He asked if the dip in 2017
represents a particular event.
Mr. Platt said it represented Point Thompson and its associated
satellite.
Senator Thomas reference page 8 and asked Mr. Platt to explain
"slowed development" and "delayed development".
2:21:20 PM
Mr. Platt named two areas he used when considering the
production forecast: Schrader Bluff at Milne point and Westak.
He noted the first area has funds budgeted for integrity
management, not production. The challenge at Westsak is the
extraction of heavy oil. This requires not only funds, but a
willingness by the company to pursue the project.
Senator Thomas referenced the volatility chart on page 9 of the
handout. He asked Mr. Platt how he determines what is factored
into the chart.
2:22:47 PM
Mr. Platt provided some perspective. When production was at 1
million barrels per day, 5 events per winter season was the norm
for factoring. He explained that at 750,000 barrels per day
there is generally less incident, hence a lesser number of
incidents factored in. He further explained that in order to
track accuracy, he reviews the previous 3 years. If an
influential factor was not foreseen and there is a relatively
constant trend, the forecast is adjusted accordingly. He noted
that in years past he felt his forecast were proactive where
more recently the forecast has been more reactive due to a
number of changing variables, specifically the maintenance and
integrity management.
2:24:16 PM
Co-Chair Hoffman questioned how much the price of oil, tax
structure and particular incentives factor into the production
forecast equation.
Mr. Platt responded that his forecast is based on technically
recoverable barrels, compared to what is reported by the
industry as recoverable. The variables in the equation are as
follows: new information from economic research section of DOR
including price, feeder pipeline tariff, and TAPPS tariff. From
these a model is built on indicative economics: Forecasts from
DOR, plus information from Cambridge energy of operating costs.
For the fields that have a negative economic life, a 4% gross
minimum is applied.
2:25:54 PM
Co-Chair Hoffman asked, what is used to determine barrels per
year increase, when establishing assumptions.
2:26:35 PM
Mr. Platt answered that the total amount of recoverable reserves
has either stayed the same or increased every year for 10 years.
He underlined that he can not estimate the level of investment.
He maintained that if a company knows they can get 13.8 billion
barrels out of Prudhoe Bay they will do whatever it takes to get
the barrels out of the ground.
Co-Chair Stedman asked if the model could track the impact of
PPT credits and incentives.
2:27:30 PM
Mr. Platt offered that initial funds go towards, infrastructural
renewal in order to maintain base production. There is
significant incremental production only after the companies have
a comfort level that they can produce what they have projected.
He reminded the committee that there are some new projects and
provided examples.
2:28:27 PM
Mr. Platt said he would like to see Westsak develop 4 or 5 more
drill sites. The companies consider the flow station integrity
first. He purported that companies are spending now to ensure
there is not another major incident that impedes production.
Senator Elton asserted that throughout the tax debate he had
never heard that net profit tax, with credits, was intended for
infrastructure renewal. He further underlined that the net
profits tax and credits are needed for companies to invest in
new production. The message gleaned from the chart is that the
state should not count on new production but on infrastructure
renewal. He emphasized that the message is a significant shift
from what had been discussed.
Mr. Platt acknowledged the challenge. He noted that companies
would feel more comfortable producing if the equipment could
sustain it. He reiterated that there currently are new projects
underway and provided examples.
2:31:14 PM
Senator Elton asked if Mr. Platt's assumptions are correct, why
credits are given to companies that could have spent less on
integrity management if it weren't a matter of deferred
maintenance.
2:32:35 PM
Mr. Platt elaborated that every year for the past 5 years there
has been more production made in heavy oil which can be
quantified. He acknowledged the pace is slower than originally
assumed, but there is more heavy oil produced. He emphasized
the point that new projects are still relying on old equipment
to be commercial. He underlined that even though there is oil
available to produce; facilities have to be in a condition to
make the project viable.
Co-Chair Stedman asked Mr. Platt how many barrels per day would
be produced for rest of FY 2008.
2:34:12 PM
Mr. Platt said his projection is 732,000 bpd.
AT EASE: 2:34:55 PM
RECONVENE: 2:47:17 PM
2:48:50 PM
JON IVERSON, DIRECTOR, DIVISION OF TAX, DEPARTMENT OF REVENUE,
provided an overview of tax credits available under PPT and how
they are affected under ACES. He reiterated the PPT Tax
calculation presented by Steve Porter, Legislative Consultant,
Legislative Budget and Audit Committee, Legislative Affairs
Agency handout: Gross value minus transportation costs;
allowable deductions, lease expenditures are subtracted from the
gross value to reach the production tax value. That, in turn,
is multiplied by the rate of 25 percent under ACES (PPT the rate
is 22.5 percent). From that point the credits are subtracted
out. There are three main statutory sections that address
credits: qualified capital expenditure credit (QCE) in section
AS 43.55.023, nontransferable credits, AS 43.55.024, exploration
incentive credits, AS 43.55.025, (in effect prior to the
enactment of PPT).
2:51:12 PM
The qualified capital expenditure credits in AS 43.55.023,
Section (a) are 20 percent of qualified capital expenditures.
He explained these are expenditures that have not been used for
credits under other sections.
2:51:57 PM
In AS 43.55.023 (b) are the loss carry-forward (or net operating
loss credits). These are based on prior years' lease
expenditures; 20 percent of the amount of adjusted lease
expenditures. These are expenditures that are not deductable
for the previous calendar year because the tax would have been
less than zero. To the extent the taxpayer has remaining
credits they can take 20 percent and convert into a loss carry-
forward to be used against subsequent year's tax liability.
2:53:10 PM
Both types of credits are transferable through credit
certificates that are issued by DOR. Under current rules the
department must grant or deny the application no later than 60
days after the following: March 31 of the year following the
year the expense was incurred, the date the statement was filed,
or the date the application was received by the department. The
CS SB2001(JUD) would change 60 to 120 days, allowing additional
time to exam the credit applications.
Mr. Iverson continued to explain AS 43.55.023 (e) sets forth the
authority for an owner of a transferable credit to apply the
credit against their tax liability. Once a transferable credit
is issued by the department, it could be resold and, in certain
circumstances could be refunded under PPT. He said there have
been questions put forth regarding the marketing of the credits.
In answer to that he explained that the department does not
receive information on every credit transferred. The terms are
confidential between the buyer and the seller, and the
department is not privy to that information. He said based on
information that is available, the credits are worth between 90
and 100 percent of market value.
2:55:17 PM
Senator Elton asked why someone would buy a credit at 100
percent.
Mr. Iverson was uncertain and said there must be some other
reason than market value. He added that with transaction costs,
it would not make sense to purchase a credit at 100 percent.
Senator Olson asked if a net operating loss converted to a
credit, could be sold.
Mr. Iverson said yes and elaborated. Once a net operating loss
credit is received it can be converted into a transferable
credit certificate that can then be sold.
2:56:28 PM
Mr. Iverson continued with an explanation of AS 43.55.023(f).
This section addresses refunds of credits for small producers. A
small producer is considered a company producing less than, or
equal to, 50,000 barrels per day. The refund is limited to the
amount spent on capital investments or on bids for state oil and
gas leases within 24 months after applying for transferable
credit certificate. Criteria for the refunds are as follows:
Applicants must not have unpaid delinquent production taxes.
There is a limit of 25 million per calendar year. The amount in
total available for refund is subject to legislative
appropriation. Issuance of transferable credits does not limit
the ability to audit.
In current law AS 43.55.023(i) establishes the Transitional
Investment Expenditure (TIE) credits. These are not
transferable and can only used once (cannot be claimed under any
other section as a credit). TIE credits are available for 20% of
qualifying investments (qualified capital expenditures) that are
made during the 5 years prior to the effective date of PPT,
April 1, 2006. A credit is limited to 1/10 of producer's new
investment for each year after.
2:59:13 PM
Co-Chair Stedman asked if Mr. Iverson could comment on what the
expectations were for the application of TIE credits. Mr.
Iverson deferred to Cheryl Niehnuis. CHERYL NIEHNUIS, PETROLEUM
ECONOMIST, TAX DIVISION, DEPARTMENT OF REVENUE, testified that
the expectations were approximately $5 billion dollars over the
5-year period. Under the TIE credits $6.2 billion was applied
for under TIE credits, a difference of $1.2 billion.
Co-Chair Stedman asked about the projections being not 20
percent off but 100 percent off.
3:01:26 PM
Ms Niehnuis explained the capital expenditures were assumed to
be $1 billion a year when in fact they were $2 billion per year,
increasing the amount of applicable expenditures.
Co-Chair Stedman asked if the department recommended removal of
the TIE credits.
3:02:01 PM
Mr. Iverson said the department was in support of removing the
TIE credit.
Mr. Iverson moved on to the AS 43.55.024 credits. Of the two
credits the first is an annual $6 million credit to producers
operating in areas other than North Slope or Cook Inlet. The
credit expires 2016 or the ninth calendar year post first
commercial production. The second credit is for small producers
who have an average daily production less than, or equal, to
50,000 barrels a day. This is a $12 million credit annually and
is phased out when a producer reaches 100,000 bpd. The credits
are nontransferable and do not carry-forward.
3:03:30 PM
He added that the credits are Pre-PPT and transferable, though
there is no provision for them to be refunded in PPT. The
criteria for the credits are either a 20 percent credit or 40
percent credit depending on activity. The credits are targeted
toward exploration activities. He provided examples: 20 percent
allowable credit for a well drilled not less than 3 miles away
from a currently existing well, another 20 percent credit would
be for 25 miles away or more from the boundary of the unit. If
it meets both criteria then the result is a 40 percent credit.
To the extent a seismic shoot is made outside production or
exploration unit boundary, the cost for the shoot are also
available for a 40% credit. He explained there are significant
information requirements in AS 43.55.025. There have been some
suggested revisions from the department based on the need for
DNR to obtain more information.
3:05:18 PM
Mr. Iverson addressed the changes proposed in the ACES bill.
First the loss carry-forward credits are set in PPT legislation
at 20 percent; SB2001 recommended that the percentage change to
match the base tax rate was 25 percent. This provided the
opportunity for companies unable to apply a deduction (lease
expenditures) in the year incurred at the rate that is the tax
rate. If companies are not able to do that then they are
disadvantaged by having a lower credit rate in the subsequent
year for expenditures they would otherwise be able to apply.
This allows for the same benefits in subsequent years for new
entrants who have no tax liability in the previous year.
3:06:51 PM
Co-Chair Stedman asked how net operating losses are dealt with.
3:07:06 PM
Mr. Iverson said there is no estimate of net operating loss
carry-forward.
Ms. Niehnuis said there are forecasts, not estimates. What is
available is information on the true up return, which is actual
data from calendar year 2006. Mr. Iverson said the amount is
approximately $26 million. He clarified that this is for the
actual 9 months ending 12/31/06, subject to PPT.
Co-Chair Stedman asked for more information.
Ms. Niehnuis informed Senator Stedman that there are estimates
available by field, not by company. There are estimates in the
model the expectation of loss carry forward credits as well as
other credits.
3:08:50 PM
Mr. Iverson wanted to point out that net operating loss carry
forward of $26 million is not as significant an amount
as the regular capital expenditure credits at $250 million. Mr.
Iverson summarized that an important change in SB 2001 is the
change of the loss carry-forward rate equal to the tax rate. An
additional change is that tax-exempt entities can not obtain
transferable credits certificates under either the capital
expenditure section or the exploration incentive credit section.
He did point out that if an entity is tax exempt by statute and
then qualifies, an exploration, production, or development
entity could apply for transferable or refundable credits.
3:10:27 PM.
Mr. Iverson reiterated that the department proposed the
elimination of transitional investment tax credits as it was
felt that the producers are being rewarded for past
expenditures.
Mr. Iverson outlined another important piece; linking issuance
of the credit with filing of annual statements, enabling the
department to get the needed information. An additional
provision that has been an issue is the spread of credits over 2
years. He explained that a credit can be use 50 percent each
year. Noting there had been debate on the provision, he
explained both sides. The positive side is a "revenue smoothing
effect". Typically credits are not allowed to be used in their
entirety in a single year internationally. The difficulty with
the provision is the reduction in the net present value of the
credit due to it being extended out another year.
Co-Chair Hoffman asked what the monetary difference is between
and annual filing, versus what is currently in statute.
Mr. Iverson clarified question a question regarding the
calculation of progressivity on monthly versus an annual basis.
Cheryl Niehnuis said based on historical information the amount
is a minimum of $18 million depending on prices and other
variables.
Co-Chair Hoffman asked what the reason was for an annual tax
basis.
Mr. Iverson said the primary reason was simplification but also
the smoothing out of price fluctuations.
3:14:01 PM
Co-Chair Hoffman asked if progressivity increased to .4 as is
suggested in SB 2001(RES), would the $18 million double.
Mr. Iverson said that Senator Hoffman's observation was accurate
in terms of noting an increase.
Co-Chair Stedman recalled discussions from a previous meeting
debating a monthly versus annual filing. The intention behind
the monthly filings was to capture the revenue when there were
spikes in price.
Co-Chair Stedman commented on the timing of capital credit. He
noted there has been some interest for establishing a zero
credit in the first year, then 50/50 over the next two years.
The purpose is to stabilize the state's forecasting ability. He
acknowledged that there is an added cost with the 50/50, than
100% up front. He requested an estimate of an opportunity lost
vs. the gain in the budgeting process if the credits were known
ahead of time. He wanted to know the impact to the treasury,
recognizing the difference between a calendar year and a fiscal
year.
3:16:21 PM
Mr. Iverson offered to provide further information regarding
Senator Stedman's comments. Senator Stedman recognized that
there was a time-value impact on the credit. He thought the 20
percent credit was substantial.
Mr. Iverson related that SB 2001 also proposed clean up
provisions regarding Cook Inlet. Regulations were put into
place that weren't expressly set forth in statute, inserting
lease expenditures and credits in Cook Inlet and interfacing
with the Cook Inlet ceiling.
He further noted AS 43.55.028, which establishes a fund
mechanism to facilitate the credit refunds. Currently, the
legislature appropriates funds for credits and the department
then requests supplemental funds to handle the difference.
The proposed fund is within the treasury and would be funded
with a percentage of production tax revenue. The percentage
would be between 15-20 percent depending on the price of oil on
the West Coast. The department would use the fund to pay the
credits.
3:19:10 PM
Senator Elton asked who would manage the fund.
Mr. Iverson said the fund would be managed by the treasury and
receipts would stay in the fund to be used in subsequent years
to pay other credits.
Co-Chair Stedman asked for an explanation of seismic exploration
incentive credits.
Mr. Iverson deferred to the Department of Natural Resources and
explained that DNR was instrumental in creating language on the
exploration incentive credit program under the SB 80.
3:20:43 PM
KEVIN GIBSON, PETROLEUM INVESTMENT MANAGER, ACTING DEPUTY
DIRECTOR, DIVISION OF OIL & GAS, DEPARTMENT OF NATURAL RESOURCES,
said he was available to answer questions.
Co-Chair Stedman asked if he could explain the exploration
incentive credits and their purpose.
Mr. Gibson said exploration incentive credits predate PPT to
encourage exploration. The credits are a substantial 20-40
percent. The seismic data information submitted is critical to
understanding geotechnical information, which determines
prospectivity of various state and federal lands. It is also
valuable to the state, who as a working interest owner, secures
the ability to access information and make it public after
confidentiality expires. This provides value in terms of the
state's long-term exploration goals and hinges on the ability to
encourage new explorers to come in. He explained that as basins
mature and larger players pull out, smaller companies can come
in and have access to that information, which can defray costs.
3:24:31 PM
Senator Thomas asked for the maximum credit amount that could be
received by a taxpayer.
Mr. Iverson said it is too early to tell as plans are made in
advance and PPT has not been in effect for long. Exploration
incentive credits, from inception to date, have been
approximately $250 million in qualified expenditures; $23-25
million of that in seismic. To date there has been approximately
$53 million in credits issued for wells. He concluded that over
time there had been some substantial activity under the
exploration incentive credit program. He added that the
department has heard from companies that the credits are very
valuable due to the net present value impact. He clarified that
the CSSB 2001(RES) version allows companies that have investment
costs, but no production, to have a two-year window to apply for
TIE credits based on investment expenditures.
3:28:08 PM
Mr. Iverson further noted that under the Earned Income Tax
credit there has been $75 million in credits issued in total.
Co-Chair Stedman re-phrased Senator Thomas' question. He asked
what the maximum credit amount industry can claim, noting the
potential of industry stacking up credits and thereby not having
to spend on investment.
3:29:35 PM
Mr. Iverson explained how credits could be stacked. He
responded that under PPT the credits would be at 52.5%. Senator
Stedman added that with the federal tax added, there would be a
lot of leverage for the industry to help expand the basin. Mr.
Iverson agreed.
Co-Chair Hoffman asked if Mr. Iverson was concerned there would
be issues raised by the federal government about their tax take.
Mr. Iverson had heard no such concerns.
Co-Chair Stedman noted, as the state increases its percent, some
of the percent is taken out of the federal side - most of it out
of the producer's side. Federal dollars do decline. At some
point in time the federal government might get concerned.
3:32:45 PM
Senator Olson asked if there has been feedback by those doing
seismic work regarding information becoming public after 24
months.
Mr. Gibson said explorers would prefer to extend the time period
on confidentiality. Consideration has been given to language
that would allow explorers to apply for an extension. He
underlined the importance of balancing sensitivity to the
concerns and ensuring the state receives the information
required.
Senator Olson repeated the question.
3:34:59 PM
Mr. Gibson said there is no requirement to turn over seismic
data to the state if they are not applying for an exploration
incentive credit. There is no feedback as they are not required
to supply information.
Senator Olson asked if companies are not in favor of a shorter
confidentiality period.
Mr. Gibson said he had not heard from any company holding
seismic information, on the issue.
Senator Elton asked Mr. Iverson about the new credit fund. He
assumed the credit fund would have to be maintained at $500
million.
Mr. Iverson responded that refunds for credits under current
2007 PPT law were approximately $55-$60 million. He noted that
would change with the adoption of AS 43.55.025, exploration
incentive credit (EIC) for refundability. For the nine months
ending 12/31/06, there were $10 million in (EIC).
3:38:19 PM
JERRY BURNETT, DIRECTOR, DIVISION OF ADMINISTRATIVE SERVICES,
DEPARTMENT OF REVENUE, stated that the current legislation, as
proposed, would put 10% of production tax revenues in the fund.
That amount is approximately $200 million. He explained the
fund would be invested in short term cash and securities
requiring no minimum capitalization.
3:39:15 PM
Senator Elton explained the intent of the legislature to take a
percentage for savings and noted that an additional 10 percent
of that is a significant portion of revenue. Mr. Burnett
countered that the intent of the fund is to divert the
approximate expected amount to be used for credits over time.
Under the current system these credits are transferable, taken
directly out of the producer's tax prior to payment to the
state, or paid from an appropriation from the General Fund. He
maintained that fund had no net effect on state revenues. The
revenue forecast is the net of expected credit transactions. He
further maintained that the 10 percent may not be the right
amount, but that overtime the fund would have no net effect on
state revenues.
3:41:09 PM
Senator Elton felt the fund implicates, to some extent, the
power to appropriate by administration. Mr. Burnett emphasized
that there is no intent to have a dedicated fund or a dedicated
revenue stream. What the fund would require is annual
appropriation language within the appropriation budget. The
amount could be looked at annually to determine, over time, if
the percentage was the right amount. He maintained the intent is
to divert money prior to deposit into the General Fund to avoid
competition with other uses. He further noted the fund would be
an accounting management tool to match production tax reported
revenue with the production tax forecast. Even though language
in the bill says the earnings are retained in the fund, it would
still require appropriation. He stressed the purpose of the fund
is to provide a mechanism to manage the expenditures in the
credit fund.
3:43:53 PM
Senator Elton asked if there is any similar mechanism for any
other taxpayer. Mr. Burnett replied that the last refundable
tax credit prior to PPT was in 1982 under the personal income
tax. When there was no longer a payment required on the personal
income tax, there were still tax credits for charitable
donations that could be refundable. In this case, an
appropriation had to be made by the legislature each year. He
said he is not aware of any credits that are directly refunded
as cash to any taxpayer.
Senator Elton mentioned the credits for fish processors
investing in new equipment.
Mr. Burnett clarified that tax credits are given, but they are
given as a reduction to the taxpayer tax bill, rather than as a
cash payment.
Co-Chair Stedman made a point of clarification. The
Administration reports net revenue after credits.
Senator Thomas noted a concern regarding the 20 percent or 40
percent credits for the production tax on exploration wells, as
far as being double approval. He clarified that there is
criteria in place to ensure there is no double dipping on
credits. He asked Mr. Iverson if there have been further
concerns on the matter.
3:47:05 PM
Mr. Iverson said that the analysis is correct - that the intent
is to ensure clarity up front regarding how, and under what
circumstances, the credit can be approved.
3:48:02 PM
SB 2001 was HELD in Committee for further consideration.
ADJOURNMENT
The meeting was adjourned, at 3:48:57 PM.
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