Legislature(2017 - 2018)SENATE FINANCE 532
04/27/2017 09:00 AM Senate FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| HB111 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 111 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
April 27, 2017
9:07 a.m.
9:07:17 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:07 a.m.
MEMBERS PRESENT
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Shelley Hughes
Senator Peter Micciche
Senator Donny Olson
Senator Natasha von Imhof
MEMBERS ABSENT
Senator Lyman Hoffman, Co-Chair
ALSO PRESENT
Senator Cathy Giessel; Senator Bert Stedman; Senator Mia
Costello.
PRESENT VIA TELECONFERENCE
Rich Ruggiero, Castle Gap Advisors, Houston, TX; Roger
Marks, Legislative Consultant, Legislative Budget and Audit
Committee.
SUMMARY
CSHB 111(FIN)(efd fld)
OIL and GAS PRODUCTION TAX;PAYMENTS;CREDITS
CSHB 111(FIN)(efd fld) was HEARD and HELD in
committee for further consideration.
CS FOR HOUSE BILL NO. 111(FIN)(efd fld)
"An Act relating to the oil and gas production tax,
tax payments, and credits; relating to interest
applicable to delinquent oil and gas production tax;
relating to carried-forward lease expenditures based
on losses and limiting those lease expenditures to an
amount equal to the gross value at the point of
production of oil and gas produced from the lease or
property where the lease expenditure was incurred;
relating to information concerning tax credits, lease
expenditures, and oil and gas taxes; relating to the
disclosure of that information to the public; relating
to an adjustment in the gross value at the point of
production; and relating to a legislative working
group."
9:08:48 AM
RICH RUGGIERO, CASTLE GAP ADVISORS, HOUSTON, TX (via
teleconference), discussed the presentation, "Petroleum
Fiscal Design HB 111" (copy on file).
Co-Chair MacKinnon handed the gavel to Vice-Chair Bishop.
Mr. Ruggiero addressed slide 4, "How Are Explorer/Producer
Costs Recovered?":
Net Operating Losses (NOLs) are created in any year
where the sum of the costs exceed the amount of
revenue available for recovery of those costs
For gross based fiscal systems (like most of the lower
48), there is generally no allowance for costs
recovery, as the tax is based on the gross revenue
back to the well, lease or unit boundary
- There are some allowable deductible costs
between the sale point in the market and the
well, lease or unit boundary
- LNG shipping and long distance pipeline
transportation are examples
Net based systems in use around the globe have many
different mechanisms for cost recovery
- "Cost Oil" in Production Sharing Agreements
(PSAs)
- Cost deductions, ranging from a limited
percentage up to 100 percent of available revenue
- Recovered as per a schedule, much like the
depreciation of capital
- And others
Vice-Chair Bishop handed the gavel to Co-Chair MacKinnon.
Mr. Ruggiero addressed slide 5, "What is the Value of
'Recovery'?":
Looking at the same project, but run against the
fiscal systems in several different regimes, the
internal rate of return (IRR) and net present value
(NPV) to the producer (and thus the net present cost
to the government) varies greatly
- Project IRR and NPV are key aspects of
investment decision making
These variations are the result of several different
methods of accounting for the costs or NOLs
- Which costs incurred are eligible for recovery?
- How much time does it take to recover them?
- Is there any interest or uplift provided?
- Is there one or multiple tax rates (i.e. can
the effective tax rate differ from when the NOL
is created to when the NOL is recovered)?
- Is the recovery of costs against the petroleum
tax ultimately deductible against corporate
income tax?
The combination of all of the above will inform the
producers as to the attractiveness of the fiscal
regime
9:14:16 AM
Mr. Ruggiero looked at slide 6, "Retaining Value for NOLs
i.e. Cost Recovery":
Current Alaska structure provides for 100 percent of
cost recovery "value" through the concept of the
cashable credit
Removal of the cashable credit option then creates a
challenge as to how to preserve the full "value" of
cost recovery
- Switch to carry forward of net operating losses
(CF NOLs)
Applying CF NOLs to possible future North Slope
projects surfaced issues related to the interaction
with per barrel credits and gross minimum taxes
resulting in producers possibly not getting full value
for their costs and NOLs
- Defined this inefficiency as "Wasted NOLs"
Mr. Ruggiero highlighted slide 7, "Basic Alaska Structure":
Start with the GVPP or Gross Value at the Point of
Production
- Subtract Current Costs
- Subtract CF NOLs
- Subtract appropriate GVR if eligible
This results in the PTV or Production Tax Value
- Cannot be less than $0
- Calculate preliminary petroleum tax at 35
percent of PTV
- Subtract eligible per barrel credits
This results in the "net" petroleum tax due
- Cannot be less than $0
Calculate the "gross" minimum tax
- 4 percent of the GVPP at prices above $25
Tax due is the greater of the "net" or "gross" amount
Mr. Ruggiero addressed slide 8, "Basic Alaska Structure":
Start with the GVPP or Gross Value at the Point of
Production
- Subtract Current Costs
- Subtract CF NOLs
- Subtract appropriate GVR if eligible
This results in the PTV or Production Tax Value
- Can not be less than $0
- Calculate preliminary petroleum tax at 35 percent of
PTV
- Subtract eligible per barrel credits
This results in the "net" petroleum tax due
- Can not be less than $0
Calculate the "gross" minimum tax
- 4 percent of the GVPP at prices above $25
Tax due is the greater of the "net" or "gross" amount
Mr. Ruggiero looked at slide 9, "Simple Single Barrel
Example":
First, lets look at the calculations before the
introduction of CF NOLs
For NON-GVR
- Net tax is 4.25
- Gross minimum tax is 2.60
- Tax Paid is the greater of so 4.25
For GVR
- Net tax 2.70
- Gross tax 2.08
- Tax Paid 2.70
Mr. Ruggiero looked at slide 10, "Simple Single Barrel
Example - Add in CF NOLS":
Assume 50 in available CF NOLs
For NON-GVR
- Use 35 CF NOL to take the PTV to 0
- Net tax is 0
- Gross minimum tax is 2.60
- Tax Paid is the greater of so 2.60
FOR GVR
- Use 22 CF NOL to take the PTV to 0
- Net 0
- Gross - N/A as per barrel credits pierce the
floor
9:21:16 AM
Mr. Ruggiero looked at slide 11, "Simple Single Barrel
Example - Optimize CF NOLS":
Assume 50 in CF NOLs
Use only the amount of CF NOL to optimize use
of per barrel credits and min floor
For NON-GVR
- Only need to use 4.7 and not 35
- 30.3 NOL wasted, or 86 percent wasted
FOR GVR
- Only need to use 1.77 versus 22
- 20.2 NOL wasted or 92 percent wasted
Senator Olson looked at slide 10, and wondered whether all
the net operating losses (NOLs) must be used to bring the
production tax values (PTVs) to zero. Mr. Ruggiero replied
that the current legislation stated that the producers were
obligated to take all available and carryforward costs and
apply them until the PTV became zero. The remainder became
a carryforward loss for the following year.
Senator Olson surmised that one did not need to use all the
NOLs to get to zero. Mr. Ruggiero responded that the
current bill would allow to choose the number of NOLs to
equalize the net and gross taxes.
9:25:34 AM
Mr. Ruggiero addressed slide 12, "What is the Takeaway?":
Because of the interaction of the various mechanisms
within the fiscal structure, no one item should be
viewed stand alone and care should be taken to make
sure the level and degree of inter-dependency is
understood.
So long as Alaska keeps some form of GVR, per barrel
credits and hard floors related to gross minimum
taxes, the impact of CF NOLs will range from slightly
less to much less than what one would expect.
Changing other mechanisms, such as increasing the
minimum tax or reducing per barrel credits, will alter
the value to the producer and the impact to the state
for CF NOLs.
For 100 percent used and useful NOLs the proffered
language in the SRES CS will allow producers to only
use NOLs when useful to reduce taxes.
Mr. Ruggiero looked at slide 14, "Time Can Have More Impact
than Tax Rate":
Modeled a hypothetical field for purposes of only
showing the effect of timing on producer economics
All model runs are based on the same data
- Producer investment of 100
- Total revenue of 400
100 cost recovery
300 of profit split between producer and government
In each of case 1 to 3 the total cash to the producer
and to the government is identical, only the timing
changes
Depending on how cost recovery is handled, the results
range from a very doable and profitable project to a
project that would not get developed
Mr. Ruggiero looked at slide 15, "4 Timing Scenarios of
Same Total Dollars":
Immediate Recovery 100 percent Useful - i.e. money
back right after investing IRR = 27 percent, NPV = 46,
CF=120
Accelerated Recovery 100 percent Useful - i.e. all
available revenue for cost recovery before profit
splits IRR = 20 percent, NPV = 27, CF=120
Delayed Recovery 100 percent Useful - e.g. cost
recovery through depreciation of an asset IRR = 14
percent, NPV = 14, CF=120
Only 50 percent Useful Recovery - i.e. As suggested by
the other body IRR = 6 percent, NPV = -12, CF=100
*CF = undiscounted cash flow
9:32:26 AM
Mr. Ruggiero highlighted slide 16, "Uplift Compensates for
Timing Differences":
Many regimes offer some form of "uplift" or interest
on carry forward losses to allow the producer to
recover some of the time value loss as well
We could fill several days of testimony on what is the
right or fair rate of uplift
- Companies, depending on size, will argue long run
returns in the 12 percent to 20+ percent and would
need an equivalent uplift to be kept whole
- Governments tend to view the world as long run 4
percent to 6 percent return and view anything higher
as a "giveaway"
- Settling somewhere in the 'middle' means both sides
give a bit
10 percent annual uplift falls nicely in between
expected return rates
Mr. Ruggiero addressed slide 17, "Impact of Interest Rate
on Time Value of Money":
The yellow highlighted cells basically show, at the
interest rates listed across the top, how long it
takes to double your money
Mr. Ruggiero looked at slide 18, "Uplift - For How Long?":
Many aspects of the fiscal regime and the particular
project will suggest what is the right length of time
for providing uplift
This is a self-correcting mechanism
- Those that can use the NOLs quickly are not
disadvantaged and thus need little uplift
- For whatever circumstances lead to prolonged
recovery, uplift is a means of keeping whole
Legacy producers with sizeable current production are
advantaged
New players may, depending on price forecasts, take
decades to recover their costs
9:39:53 AM
Mr. Ruggiero highlighted slide 19, "Quick Modeling Runs -
Observations":
Life-cycle Model plus Legacy on 6 percent decline
- $10 TandS, $30 costs for Legacy
- Used 500,000 bpd as legacy production
With a hard floor at 4 percent
- At prices above $50/bbl there is sufficient
taxable value from the legacy production to be
able to immediately deduct the new project
capital costs
- Economically, this is nearly the same as
cashable credits
- Relative to a producer with no legacy
production, this adds 3.5 percent to 4 percent to
the project return (IRR) and doubles the
discounted net present value
With no hard floor
- The absence of a gross minimum hard floor
provides very small improvement to project IRR
and net present value for new development
9:42:19 AM
Mr. Ruggiero looked at slide 20, "Legacy Operator, Legacy +
New Oil Field (GVR eligible), No Wasted NOLs, No Hard
Floor":
Assumptions:
- 7 years pre-production investment
- GVR benefits are realized for 3 years only (does not
reflect current statute)
9:49:16 AM
Senator Micciche wondered whether the numbers were
severance only. Mr. Ruggiero replied in the negative. The
state tax included royalty.
Mr. Ruggiero highlighted slide 21, "Legacy Operator, Legacy
+ New Oil (GVR eligible), No Wasted NOLs, With a Hard
Floor":
Assumptions:
- 7 years pre-production investment
- GVR benefits are realized for 3 years only (does not
reflect current statute)
Mr. Ruggiero looked at the column under "$55", and remarked
that that the NOLs would not be recovered until year 37.
Mr. Ruggiero looked at slide 22, "New Operator, New Oil
(GVR Strict 3 years), No Wasted NOLs, No Hard Floor":
Assumptions:
- 7 years pre-production investment
- GVR benefits are realized for 3 years only (does not
reflect current statute)
With no hard floor, no tax is paid during minimum tax
period
9:54:37 AM
Mr. Ruggiero referred to slide 23, "New Operator, New Oil
(GVR Strict 3 years), No Wasted NOLs, With a Hard Floor":
Assumptions:
- 7 years pre-production investment
- GVR benefits are realized for 3 years only (does not
reflect current statute)
Senator von Imhof surmised that there was a "trade-off"
between the state receiving more money in the short-term
with a hard floor, but prolonging the NOL's final recovery
year. Mr. Ruggiero agreed.
Senator von Imhof stated that the slide assumed a $5 per
barrel credit, which did not pierce the floor. She asked
for more information regarding that assertion. Mr. Ruggiero
replied that the $5 per barrel was only applied to the
first three years. He stated that starting in year four of
production, it would move to the sliding per barrel credit
that would not be allowed to pierce the floor.
Senator von Imhof noted that it did not reflect current
statute. Mr. Ruggiero agreed. The slide was an analysis.
Mr. Ruggiero furthered that it was based on a request. The
intent was to see the impact of the NOL recovery.
9:58:10 AM
Mr. Ruggiero highlighted slide 24, "New Operator, New Oil
(GVR eligible), No Wasted NOLs, With a Hard Floor and 10
percent Uplift":
Assumptions:
- 10 percent Uplift
- 7 years pre-production investment
- GVR benefits are realized for 3 years only (does not
reflect current statute)
Mr. Ruggiero addressed slide 26, "Alaska Competitiveness
Under Senate Resources CSHB111":
For legacy players
- See this as positive as defines the priority
use of the various deductions
- Allows quick recovery of costs and NOLs
- Allows credits to be recovered from corporate
income taxes
For new players
- Uplift helps, but expected timing of new mega
projects would suggest longer than 7 years are
needed for uplift
- Initiation of 1 barrel of oil production
terminates accrual of uplift. This immediate
termination could cost a new player needed uplift
on billions in spending; would suggest that a
sizeable threshold, such as 5000 barrel per day,
be set as to when uplift ceases to be payable
- Is the uplift particular to annual packages and
each gets its own 7 year window, or are NOLs to
be treated as one package regardless of year of
creation and given the same 7 year window for
uplift?
Recommend that the window apply separately to each
annual package amount
NOLs to be used on a first in first out basis
10:06:00 AM
AT EASE
10:10:07 AM
RECONVENED
10:10:40 AM
ROGER MARKS, LEGISLATIVE CONSULTANT, LEGISLATIVE BUDGET AND
AUDIT COMMITTEE (via teleconference), discussed the
PowerPoint, "Senate CS for CS HB 111 (Ver C-P); Some
Observations" (copy on file).
Mr. Marks looked at slide 2, "Summary":
Reduces state credit exposure without compromising
competitiveness of overall fiscal system
Some economic observations regarding the interaction
of loss recovery, the per barrel credit, and the gross
minimum floor under the CS follow
Two lingering issues
Mr. Marks addressed slide 3, "Preface":
The production tax is a net tax with a 35 percent rate
There is a floor on that net tax equal to 4 percent of
gross value
The per barrel credit and loss recovery perform
distinct functions:
The per barrel credits provide tax relief to
partially offset the high burden of royalties at
low prices
It reflects this year's business
If not used they are lost forever, and the
royalty offset role is eviscerated
Loss recovery provides for the deduction of costs
in computing net value that could not be deducted
in prior years
It reflects prior years' business
Since they are distinct issues, using them both is not
redundant
Mr. Marks looked at slide 4, "The Royalty Problem (Using
GVR Oil)":
ANS Price $50
Transp ($10)
Gross $40
Upstream Costs ($35)
Net Value $5
1/8 Royalty ($5)
Producer income before prod tax ($0)
Govt take before prod tax 100 percent
Senator Micciche queried the reason for using $35 for
upstream costs. Mr. Marks replied that his numbers added
$10 to the Revenue Sources Book.
10:17:31 AM
Mr. Marks addressed slide 5, "CS Summary of Credits and the
Floor":
• Losses
- Currently (both Non-GVR and GVR Oil):
• Can use losses to bring tax below floor
- CS: (both Non-GVR and GVR Oil):
• Cannot use losses to bring tax below floor*
• Per Barrel Credit
- Currently:
• Non-GVR Oil: Cannot use credit to bring tax below
floor
• GVR Oil: Can use credit to bring tax below floor
- CS: No change
* If non-GVR and GVR losses were treated differently
it would be necessary to allocate losses between them,
which would be very difficult
Mr. Marks looked at slide 6, "Observation 1: "Hardening"
the Floor"
• Under current law taxpayers can use carried forward
loss credits to bring taxes below the gross minimum
floor
• Under the CS taxpayers can only use carried forward
losses to bring the tax down to the floor
Mr. Marks addressed slide 7, "Hardening the Floor Against
Losses: Loss Recovery on Non-GVR Oil":
• No loss recovery unless prices above about $65/bbl
- Losses on production not generated until prices
below about $35/bbl
- Losses on development of other non-GVR oil
would have offsetting income at all but very low
prices
- Loss recovery on non-GVR oil does not appear to
be a significant problem
10:22:49 AM
Mr. Marks highlighted slide 8, "Hardening the Floor Against
Losses: GVR Oil Tax Calculation at Current Prices":
ANS Price $50
Transp ($10)
Gross ($40)
Gross minimum at 4 percent $1.60
Per barrel credit ($5.00)
Tax $0.00
Mr. Marks addressed slide 9, "Hardening the Floor Against
Losses: Loss Recovery on GVR Oil":
• Most new development would be GVR oil
• Companies with substantial existing production and
income could offset GVR losses
• GVR production from companies without existing
production
• Since per barrel credits cannot be carried forward,
and because of their value, taxpayers would use per
barrel credit first
• Accordingly, taxpayers might only use losses when
prices were high enough such that use of per barrel
credit and losses exceeded floor
• At about $85/bbl, net tax exceeds gross minimum
• Accordingly, these losses may not be recovered until
after GVR status lapses (after 3 or 7 years) and per
barrel credit can no longer take tax below minimum. At
that point taxpayers may start recovering losses.
10:27:51 AM
Mr. Marks looked at slide 10, "Uplift on Cost Recovery":
• Provides net present value boost to companies who
have to wait to have production/offsetting income
• Currently CS limits only to companies without
production
- Companies with only limited production/offsetting
income may not be in a much different situation
• The issue of early GVR cost recovery only at high
prices applies here
- Similarly, may only be invoked after GVR status
lapses (after 3 or 7 years of production)
Mr. Marks addressed slide 11, "Sequencing Under the CS: Two
Possibilities Non-GVR Oil Assuming a $5 Loss Carried
Forward":
ANS Price $55 $55
Transp Cost ($10) ($10)
Gross Value* $45 $45
Upstream Costs ($25) ($25)
Loss ($5) ($0)
PTV $15 $20
Tax before p/bbl credit at 35 percent $5.25 $7
Per barrel credit ($3.45) ($5.20)
Tax $1.80 $1.80
*Gross minimum (at 4 percent) $1.80 $1.80
10:34:21 AM
Mr. Marks looked at slide 12, "Unresolved Issue 1: The
Order of Deducting Losses vs. Per Barrel Credits":
• Recognizing:
- Per barrel credits lapse if not used
- Unused losses carry forward if not used
• The CS does not specify which is used first in
calculating the tax
• Given the hard floor for non-GVR oil:
- It will probably be to the taxpayer's benefit to use
the per barrel credits in getting the tax down to the
floor, and carrying unused losses forward
- Would be consistent with utilizing functional intent
of the per barrel credits and loss recovery inherent
in the statute
Mr. Marks addressed slide 13, "Questions":
• Should the statute specify the sequence?
- Do 100 percent of available losses have to be used
first?
- Do 100 percent of available per barrel credits have
to be used first?
- Can taxpayer mix?
• Should statute specify the sequence? Should statute
leave it up the taxpayer? Should statute leave it up
to the Department?
Mr. Marks displayed slide 14, "Unresolved Issue 2: What
Does it Mean to Use a Credit to Bring Taxes Below the
Floor?"
• Under the CS, for GVR oil, losses cannot bring taxes
below the floor, but the per barrel credit can
• Suppose:
- Tax before credits: $10
- Minimum tax: $7
- Per barrel credits: $5
- Losses: $4
Mr. Marks discussed slide 15, "Taxpayer Options Pursuant to
DOR Interpretation in Similar Situations:
If you use both credits, they are both the cause of
getting below the minimum
Tax before credits: $10
Use $3 in losses to bring tax down to minimum,
but
not use any per barrel credits to reduce tax
further
($3), TAX $7
Tax before credits $10
Use $5 in per barrel credits, but not use any
losses to reduce tax further
($5), TAX $5
Mr. Marks highlighted slide 16, "Taxpayer Options Pursuant
to DOR Interpretation in Similar Situations: If you use
both credits, they are both the cause of getting below the
minimum":
• Start out with $10 in tax before credits or losses
• Use $3 in losses to bring tax down to $7 minimum
• Then use $5 in per barrel credits to bring tax down
to $2
Mr. Marks addressed slide 17, "Analogy":
• Suppose you have $100 in your checking account
• You write two $100 checks
• Did both checks, or the second check, cause you to
be overdrawn?
10:40:45 AM
Mr. Marks looked at slide 18, "At Stake":
• Recognizing the distinct function of each credit
- The per barrel credit is not loss recovery
- Loss recovery is not the per barrel credit
Senator von Imhof stressed that it was important not to
misinterpret the NOL use, because there could be confusion
in the NOL carryforward. Mr. Marks agreed. He supported
less ambiguity in statute.
Co-Chair MacKinnon discussed the following day's agenda.
CSHB 111(FIN)(efd fld) was HEARD and HELD in committee for
further consideration.
ADJOURNMENT
10:45:11 AM
The meeting was adjourned at 10:45 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 111 042717 Senate Finance_CGA Final.pdf |
SFIN 4/27/2017 9:00:00 AM |
HB 111 |
| HB 111 042717 Marks Sen Fin HB 111 042717.pdf |
SFIN 4/27/2017 9:00:00 AM |
HB 111 |