Legislature(2017 - 2018)SENATE FINANCE 532
04/28/2017 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 | |
| Presenation: Senate Fiscal Plan | |
| HB111 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | HB 111 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
April 28, 2017
9:03 a.m.
9:03:49 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:03 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 Kevin Meyer; Senator Cathy Giessel; Senator John
Coghill; Senator Pete Kelly; Representative Chris Birch;
Representative Dave Talerico; Representative Charisse
Millett; Representative George Rauscher; Representative
Chuck Kopp; Representative Colleen Sullivan-Leonard;
Representative Cathy Tilton; Representative Tammie Wilson;
Representative Mike Chenault; David Teal, Director,
Legislative Finance Division; Representative Colleen
Sullivan-Leonard; Representative Jennifer Johnston;
Representative DeLena Johnson; Representative Lora
Reinbold; Representative Dan Saddler; Representative Gary
Knopp; Alexei Painter, Analyst, Legislative Finance
Division; Rob Carpenter, Analyst, Legislative Finance
Division; Kara Moriarty, President and Chief Executive
Officer, Alaska Oil and Gas Association; Dan Seckers, Tax
Counsel, ExxonMobil; Scott Jepsen, Vice President of
External Affairs and Transportation, ConocoPhillips; Pat
Foley, Senior Vice President - Alaska Operations, Caelus
Energy; Jeff Hastings, Managing Member, Kuukpik SAE and
CEO, SAExploration; Kate Blair, Government and Public
Affairs Manager, Tesoro.
PRESENT VIA TELECONFERENCE
Damian Bilbao, Vice President of Commercial Ventures, BP.
SUMMARY
HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
HB 111 was HEARD and HELD in committee for
further consideration.
PRESENATION: SENATE FISCAL PLAN
Co-Chair MacKinnon noted that Co-Chair Hoffman would not be
present at the meeting. She informed that Senator Kevin
Meyer had joined the committee at the table.
9:04:57 AM
AT EASE
9:05:34 AM
RECONVENED
^PRESENATION: SENATE FISCAL PLAN
9:06:17 AM
Co-Chair MacKinnon emphasized that Alaska was facing a
particularly difficult fiscal challenge. She spoke to a
$2.78 billion revenue shortfall in the FY18 budget, and an
over $4 billion deficit the previous year. She noted that
the state had removed over $10 billion from its savings
accounts, and planned to withdraw close to another $3
billion. The Senate believed it had presented a plan to the
other body, and had tried to propose responsible cuts and a
spending limit to continue downward pressure on the budget.
Additionally, the Senate had proposed structural reforms
targeted at the largest cost drivers of the state.
Co-Chair MacKinnon continued, stating that the Senate
required reductions from the other body and the
administration, as well as an obligation to institute a
spending limit before accessing use of Alaska's earnings
reserves. She emphasized that the earnings reserves were
the only thing available to address a $2.78 billion revenue
shortfall.
9:08:08 AM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
conveyed that the committee had asked him to discuss the
Senate version of SB 26 [a bill relating to the Alaska
Permanent Fund and the structure of funding state
government - reported out of the Senate Finance Committee
on 3/10/17]. He stated that the bill touched every Alaskan,
not only because it set a formula for the Permanent Fund
Dividend (PFD), but because it affected the way the state
funded government and the level of funding available to
government. He summarized that SB 26 had provided a fiscal
plan. He shared that he would address two issues at the
meeting:
1. Why do we need a fiscal plan?
2. Does the SB 26 plan offer a solution to our fiscal
problem?
Mr. Teal discussed the presentation "SB 26 - A Fiscal
Plan," (copy on file). He showed slide 2, "Budget
Reductions Since FY13," which had a graph entitled 'Total
Agency Operating Budgets, Statewide Items and Capital
Budget Compared to Revenue.' He explained that the slide
gave a good indication that the state had a fiscal problem.
He referred to the graph, which showed a line depicting the
state's Unrestricted General Fund (UGF) revenue. The bars
indicated UGF expenditures. The dark portion of the bars
represented agency operations, the lighter blue represented
statewide items, and the yellow portion showed capital
expenditures.
Mr. Teal continued discussing the chart of slide 2, noting
that despite tremendous reductions in spending (from $7.8
billion in FY 17 down to $4.1 billion in the current year),
the state faced a large deficit. The state faced a $2.5
billion deficit for FY 18, considering the higher spring
forecast numbers for production and price. He continued
that not too far in the past, there were reserves that
could have absorbed a deficit of $2.5 billion, however the
state was in its 6th consecutive year of spending that had
exceeded revenue.
9:11:15 AM
Mr. Teal turned to slide 3, "End-of-Year Budget Reserve
Balances, FY07-FY18," which showed a bar graph depicting
the Statutory Budget Reserve Fund (SBR) and the
Constitutional Budget Reserve Fund (CBR) from FY 07 to FY
18.
Mr. Teal directed attention to the $16.3 billion balance at
the end of FY 13, and noted that the six years of deficits
had reduced the state's reserves to about $2.5 billion at
the end of FY 18. The calculation assumed that the FY 17
and FY 18 deficits would be filled by drawing money from
the CBR. He shared that the outlook was for continuing
deficits. He did not want to turn the meeting into a long
discussion of the implications of revenue covering less
than half of current expenditures. He considered that
talking about what the state would do when reserves were
gone was comprised of many policy decisions and was
precisely why the committee was considering SB 26.
Mr. Teal emphasized a point before leaving the slide: the
CBR served not only as a shock absorber to absorb the
deficits, but also as a cash management tool. He added that
even in times of surplus, the state started the year with
little revenue and high cash outflow. To fill the cash
needs early in the year, funds were borrowed from the CBR.
He relayed that the Office of Management and Budget (OMB)
believed there should be a minimum balance of $2.5 billion
in the CBR to serve the function of a cash management tool.
He emphasized that the amount was the bare minimum for the
purpose, and did not leave much room for the CBR to be used
as a shock absorber.
9:13:30 AM
Mr. Teal spoke to slide 4, "What Does A Solution Look
Like?":
1. Healthy Reserve Balances?
- No less than $2.5 billion in the CBR?
- An Earnings Reserve Account (ERA) that is
stable/growing?
2. A Sustainable Budget?
- A balanced budget? How fast? How big?
- Time for a phased approach? How much time?
Mr. Teal thought that slide 4 presented several questions,
not statements, because there would be disagreement on how
to measure success in addressing the fiscal problem. He
stated that he could not define "healthy reserves," but
rather considered it a policy question whether it meant the
bare minimum (the $2.5 billion that OMB cited); or if
"healthy reserves" signified that the state was building
fund balances. He thought some might say "I just want
stable/growing reserves and I don't particularly care how
we do it," while others may note that the path was just as
important as the destination. He mentioned questions with
major policy implications pertaining to the amount of the
PFD, the size of government, and how much individuals would
have to pay.
Mr. Teal indicated that points 1 and 2 on the slide
overlapped. He considered that the points could be the same
question phrased a different way. He saw point 1 as a
direct response to the problem of vanishing reserves, and
point 2 as a better way to emphasize the path to a solution
rather than the destination alone. He pondered if the state
should try to balance the budget immediately, or if a glide
path was acceptable or even preferable.
Mr. Teal asserted that it was possible to balance at any
level given a sufficient amount of revenue. He asked how to
choose the expenditure level that will be balanced by
revenue. He thought that choosing a path forward involved
many policy decisions, some of which were addressed by SB
26.
9:16:03 AM
Senator Micciche asked to return to slide 4. He wondered
about the philosophy the Legislative Finance Division (LFD)
might have. He referred to the question of policy on a
healthy fund balance. He wondered what Mr. Teal's
definition of "adequate fund balance" was, particularly in
the CBR. He did not believe that government's role was
being a bank, particularly when discussing potential future
revenues coming from Alaskans. He did not think that
building a fund balance was a primary function of
government. He thought adequate funding for essential
services was a better definition.
Mr. Teal agreed with OMB that $2.5 billion was a minimum
balance for cash flow, but preferred to see a minimum
balance of $5 billion, which was roughly equivalent to one
year's budget. He emphasized that he was offering his
personal opinion as requested. He thought building reserves
beyond $5 billion was fine as long as the needs of the
citizens were met first. He pondered if the state needed to
build reserves to weather another fiscal challenge such as
the state was experiencing. He hated to imagine what would
have happened if the state had not had $16 billion in
reserves.
9:19:21 AM
Mr. Teal discussed slide 5, "What Does SB 26 Do?":
Provides:
1. A Payout from the ERA to the General Fund (that
greatly reduces the deficit and revenue volatility)
2. A Payout from the ERA for Dividends
3. A Payout (Revenue) Limit
4. An Appropriation Limit
5. Additional Royalties to the General Fund
Mr. Teal thought the most significant policy change in the
bill was the use of permanent fund earnings to fund
government operations. The provision was the primary
deficit filler. A Payout from the ERA (of 5.25% for 3 years
then falling to 5%) went to the General Fund (GF). The
payout amounted to $1.8 billion that would grow over time
under the baseline assumptions. The provision greatly
reduced the size of the deficit, and also reduced revenue
volatility by providing a source of revenue that was as
large or larger than the state's traditional source of
revenue (oil). He added that the payout helped diminish
fluctuations and reduced the amount that was needed to draw
from the CBR.
Mr. Teal pointed out that the bill also revised the formula
for dividends. Instead of basing dividends on permanent
fund earnings, it would be based on the balance of the
permanent fund. A 25% share of the total payout, which
amounted to about $1,000 annually, would be paid out as
dividends. He thought some might wonder how the dividend
amount affected the problem of vanishing reserves. He
explained that as dividends went up, the government share
of the payout went down. He emphasized that dividends
clearly and directly affected the health of reserves.
Mr. Teal addressed the payout limit, which would further
reduces revenue volatility by cutting off revenue peaks.
The limit would also increase future payouts to the general
fund and to dividends. He continued that there was an
appropriation limit (spending limit) in the bill that would
cut off revenue peaks beyond those affected by the payout
limit. He noted that neither of the limits would take
effect in the standard model scenarios that would be
demonstrated later in the presentation. He qualified that
the lack of limit modelling did not mean the limits were
ineffective, it meant the limits would kick in only if
revenues were much higher than expected in the base
scenario. He stated that the base scenarios were with
fairly stable earnings (at the rate projected by the
permanent fund) and midline oil price assumptions.
9:23:08 AM
Mr. Teal continued discussing slide 5, and noted that LFD
did not worry much about modeling scenarios with high
revenue because the situation was not a problem for the
state. He emphasized that it was easy to have a fiscal plan
when deficits were eliminated. He thought it was important
to know that if the state had the good fortunate of high
revenue, the limits would restrain expenditures, and may
not work under the models that would be shown in the
presentation.
Mr. Teal pointed out that SB 26 redirected some royalties
to the General Fund. He pointed out that the constitution
required that 25 percent of royalties go to the fund. It
was possible to place another 25 percent on new fields
(about 30 years old), which amounted to about $60 million
to $70 million per year, and growing. The funding flow
helped increase GF revenue and reduce deficits.
Mr. Teal reviewed slide 6, "Baseline SB 26," which showed
an interactive graph. He stated that the graphs were a shot
of a model output under baseline assumptions, which were an
OMB growth forecast. He pointed out that there was an
increasing expenditure line, with the budget growing by
about $1 billion between FY 17 and FY 26. He stated that
the forecast was not completely adjusted for inflation, but
had retirement assistance growing from approximately $200
million to $450 million.
Mr. Teal informed that LFD had used the Department of
Revenue (DOR) spring price forecast when formulating the
graphs, as well as a P10 production forecast. He continued
that LFD had received some new numbers from DOR the
previous day, but had not had time to build them in to the
model. He recalled that the committee had been in a long
discussion with DOR about the production forecast, and the
fact that FY 18 had a stale number for oil production. He
confirmed that LFD had adjusted for the stale number by
using the P10 forecast, which signified that outcomes would
be at or above the forecast 90 percent of the time, or
below for 10 percent of the time.
Mr. Teal thought the P10 forecast would be very similar to
the revised forecast, but had not had a chance to compare.
He clarified that the forecast removed the 12 percent
production decline (from FY 17 to FY 18) that had concerned
many members. He specified that the forecast started at
approximately 475,000 barrels of oil per day with a shower
decline than the mid-production forecast would have. He
thought it was a reasonable adjustment to the forecast, and
should be just about the same as when the new numbers were
built into the model.
9:27:16 AM
Co-Chair MacKinnon clarified that the graphs showed
particular assumptions under the baseline of SB 26. She
thought most models would be wrong, and emphasized that the
committee was trying to use the best information that was
available to forecast and test particular actions. She
stated that when the committee was specifically looking at
the budget growth as represented on the charts, it was not
an endorsement, but rather a projection by OMB as to how
the budget would grow if nothing else transpired.
Mr. Teal clarified that the models were projections rather
than predictions. He furthered that LFD used numbers
provided by DOR, the Department of Natural Resources, OMB,
and by the Alaska Permanent Fund Corporation (APFC). He
emphasized that as model builders, LFD did not want to be
put in the position of using its own assumptions, which
would determine the output. Rather, LFD tried to choose
assumptions which were the best numbers from those best
qualified to produce the numbers. He thought the baseline
assumptions were a reasonable starting point, and suggested
that OMB's expenditure projection kept up with inflation.
He emphasized that the models were interactive in order to
enable the committee to look at different scenarios.
Co-Chair MacKinnon asked about the 'UGF Revenue/Budget'
projection graph on slide 6, and made note of the
differently colored bars that represented funding to
support state services. She asked Mr. Teal to provide
clarity for those that might be listening to the meeting.
9:30:17 AM
Mr. Teal agreed to provide some detail on the bars, but
first commented that there was one more assumption to
consider on the graphs; that the Permanent Fund had a rate
of return of 6.95 percent. He stated that the assumption
made the model function.
Mr. Teal referred to the 'UGF Revenue/Budget' graph in the
upper left of slide 6, and directed attention to the
expenditure line that reflected the OMB forecast. He
explained that the bars represented state revenue, and were
broken into pieces according to revenue source. He stated
that the blue portion of the bars represented traditional
revenues (oil and other things). Additionally, it was
possible to see the CBR draw represented in the yellow bar,
which drastically diminished starting in FY 18 as the state
began to draw a payout from the ERA. He explained that the
yellow bar stacked on top of the traditional revenue bar,
leaving a deficit.
Mr. Teal posited that when there was a deficit, it was
assumed it would be filled from the CBR. He directed
attention to the 'Budget Reserves' Graph on the lower left,
which showed a declining CBR balance.
Mr. Teal looked at the graphs on the lower right of slide
6, which showed dividend information. He pointed out that
the 'Permanent Fund' graph showed the balance of the fund
growing to approximately $70 billion by 2026, which was 108
percent of the fund's FY 17 value after being expanded for
inflation.
He indicated that the Permanent Fund was keeping up with
inflation and not being depleted under the scenario. He
referred to the 'Dividend Check' graph on the upper right
of the slide, which showed dividends at roughly $1000, and
fairly flat over time under the current scenario. He
thought the committee was paying most attention to the
quadrants of revenues and expenditures, which would change
the most over time. He thought that dividends would not
change much; but that expenditures, revenues, and deficits
would be subject to greater change.
9:34:07 AM
Senator von Imhof looked at the 'Dividend Check' graph on
the top right of the slide. She asked about the red 'status
quo' line, which she assumed included having $10 billion in
the ERA along with $45 billion in the corpus of the
permanent fund invested in the same way it was currently.
She discussed a scenario predicated on the event that SB 26
did not pass, money was taken from the ERA through a
majority vote, and APFC made different decisions in how it
invested the ERA. She thought a full quarter of the fund
could be prudently invested (with lower risk) to manage
cash flow. She thought the state would not see the full
investment value in the ERA if the bill did not pass and
draws on the ERA began. She emphasized that the state could
not manage cash flow while having investments that locked
up cash for many years. She shared concerns that dividends
could drop precipitously if such a scenario would occur.
Mr. Teal thought that Senator von Imhof was being very mild
in her assessment. He pointed out that the 'Status Quo'
line on the 'Dividend Check' graph assumed that the state
could continue to pay dividends if SB 26 was not passed. He
asserted that if the bill was not passed, there would not
be $1.8 billion (and growing) going to the GF. The deficits
would then be filled from the CBR. He continued that once
the CBR was gone in FY 19, government would have to be cut
by 50 percent immediately, or the state would have to begin
to use money from the ERA. If there was a $2.5 billion draw
from the ERA to fill the deficit, the account would be
depleted rapidly and there would be no dividends. He was
not sure the committee wanted to discuss the status quo
scenario if the bill were not to pass, and opined that it
simply did not work. There was not sufficient cash to avoid
beginning a structured draw from the ERA as SB 26 proposed
to do. He thought the problem went far beyond the impact of
lowered returns, and emphasized that the 'Status Quo' line
showing large dividends simply would not happen due to lack
of funds.
9:38:04 AM
Senator Micciche stated that he had a problem with the
model, but thought it was the best tool for examining all
the components being considered. He stated that part of SB
26 was to enable a dividend in perpetuity. He asserted that
the reason for the meeting was to demonstrate that the
Senate fiscal plan worked. He referred to previous
testimony by DOR that indicated a 12 percent decline from
523,000 barrels per day to 459,000 barrels per day in oil
production; even though there had been a two-year increase
in oil production. He pointed out that the P10 forecast
still demonstrated a nine percent decline in oil
production.
Senator Micciche continued discussing the model, and
emphasized that there was an extremely conservative
assumption on likely oil production in the subsequent years
shown on the model. He emphasized that there were many
layers of conservatism layered in the graphs.
Co-Chair MacKinnon asked that Mr. Teal continue his
presentation so that Alaskans could understand how the
legislature was trying to measure any proposal being
considered. She asserted that the plan tried to ensure that
the corpus of the PF was protected. She asked if it was
accurate that in a baseline model, the fund performed
better than the status quo scenario.
Mr. Teal answered in the affirmative.
Co-Chair MacKinnon noted that the baseline model under SB
26 assumed a Percent of Market Value (POMV) draw at 5.25
percent for the first few years, dropping down to a 5
percent draw that would lower with time.
Mr. Teal concurred.
Co-Chair MacKinnon relayed that Co-Chair Hoffman and
herself had met with the governor to discuss the Senate's
plan. She relayed that the governor had originally stated
to all Alaskans that the legislature should look at a
manageable draw from the Permanent Fund earnings to protect
the people's dividend. She was supportive of the statement,
but thought the administration had modified its goals in
recent days. She mentioned oil and gas tax reform and an
income tax on Alaskans. She interjected that her intent was
to protect the dividend. She thought the 'Dividend Check'
graph on slide 6 contained optimistic projections that did
not reflect the actual challenge that both bodies were
facing in trying to meet payroll for the government at its
current size. She stated that the Senate's effort to reduce
payroll was difficult to accomplish without a supportive
administration.
Co-Chair MacKinnon pointed that while FY 19 might seem as
though it was far in the future, it was in fact the
following year (for planning purposes).
Mr. Teal affirmed that the legislature was currently
working on the FY 18 budget.
Co-Chair MacKinnon asked when the FY 18 budget began.
Mr. Teal specified that the FY 18 budget began July 1,
2017.
Co-Chair MacKinnon noted that the school district operated
on yet another schedule, and were budgeting a different way
than state agencies. She thought that some budgetary
numbers could be confusing.
9:43:50 AM
Mr. Teal commented on Senator Micciche's choice of
assumptions. He thought that the assumptions used were
reasonable, and leaned towards conservative. He commented
that the assumptions that went in to the baseline were be
justifiably conservative. He thought it was better to err
on the side of caution, and have more (revenue) than
previously assumed.
Senator Hughes appreciated the fact that the P10 value was
conservative, but shared concerns about the 6.95 percent
Permanent Fund investment return rate. She thought the
number seemed high, and wondered what would happen if the
actual return fell short of what was projected.
Mr. Teal stated that there was a reason that LFD used
numbers provided by APFC, which had the knowledge to
project rates of return. He continued that APFC had
modified its projection slightly over the years. Previously
the projected rate of return was 8 percent, and the APFC
had generally met its investment targets. He relayed that
Angela Rodell, the Executive Director of the corporation,
believed that a 6.95 percent projected rate of return was
achievable. He reminded that the Retirement Board had a
projected target of 8 percent, so he considered that a 6.95
percent projected rate on long-term investments of a well-
balanced portfolio seemed achievable.
Senator Hughes thought she had heard Ms. Rodell assert that
a projected 5 percent rate of return made her a little
uncomfortable. She hoped that the actual return would be
higher, but reiterated that the 6.95 percent seemed a
little high.
9:47:25 AM
Senator Micciche relayed that the committee had spent a
great deal of time with APFC as well as independent
evaluators. He clarified that many experts had testified
that 6.95 percent was an expected return rate as for any
sovereign investment fund. He thought it was important for
people to realize that the projected rate of return was an
appropriate and conservative number.
Co-Chair MacKinnon commented that APFC had a portfolio that
was balanced differently than the stock market. She
continued that APFC had a core base of real estate that
showed gains differently than the stock market. She pointed
out that the stock market was currently moving upward under
the new administration. She asserted that the 6.9 percent
projected rate of return was reasonable, as was the 5
percent and 5.25 percent draw.
Co-Chair MacKinnon continued, and referenced previous
testimony by Ms. Rodell that opined that the draw amounts
were reasonable. She furthered that actuaries from the
administration had backed up the calculations that were
included in SB 26. She informed that the legislation
included a drop in the POMV payout, as well as a three-year
review to confirm that the assumptions were accurate and
the Permanent Fund principal and other state savings
accounts were not being stressed.
Mr. Teal emphasized that any time a model output was shown,
it was important to use words of caution. Mr. Teal reminded
that the graphs in the presentation represented
projections, and that the future was uncertain. He stated
that LFD expected the committee to understand that its
policy decisions had to address the uncertainty. The base
scenario used stable earnings and oil prices, despite the
fact that it was known that both items would be volatile.
Mr. Teal stated that the precision of the model was not
high; suggested that the committee should consider trends
when looking at numbers, rather than looking at the numbers
themselves. He asserted that LFD was within a margin of
error of $200 million, which was the best that could be
done. He highlighted that it was very easy to change the
assumptions being used, and it was up to the committee to
see how well a model survived with different assumptions.
He suggested that the committee look at the projections for
FY 18 revenue, one of which had been $7 billion.
9:52:12 AM
ALEXEI PAINTER, ANALYST, LEGISLATIVE FINANCE DIVISION,
referred to the lowest projection for FY 18, which was in
the spring 2016 forecast and had been $500 million lower
than the current forecast. The highest projection was made
when oil was $120 per barrel, and had forecast
approximately $7 billion of revenue for FY 18. He thought
the difference between projections in the long term may be
plus or minus $5 billion, probably not minus $5 billion.
Co-Chair MacKinnon asked about the base model and the
assumption of a $180 million capital budget for UGF. She
asked if he recalled the size of the previous year's
capital budget UGF spending.
Mr. Teal recalled that there was $96 million of UGF
spending in the previous year's capital budget, and it
thought it would probably be less than $100 million in the
current year. He stated that the $180 million was a long-
term assumption, and he could modify the assumption when
the committee began looking at an active model.
Co-Chair MacKinnon stated that she raised the issue in
order to provide understanding that the committee had tried
to put stressors within the budgeting scenario to test the
model.
Mr. Teal continued, cautioning that the models should
always be stress tested by using less favorable assumptions
regarding earnings, oil prices, and other factors.
Mr. Teal pointed to slide 6, and referred to the table of
numbers under the 'Budget Reserves' graph. He referred to
the protection of the Permanent Fund and funding a flat
dividend. He stated that the table showed in that FY 18
about three quarters of the projected $2.5 billion deficit
was filled under the baseline assumptions, leaving a
deficit of about $600 million. The deficits declined in the
future, with 86 percent filled before relying on the CBR.
He asked the committee to remember precision, and suggested
that the 86 percent was a trend.
Mr. Teal thought it was critical to note that the CBR was
not empty in FY 19 as slide 3 implied - the scenario
provided time to deliberate. He stated that with SB 26 the
CBR, although it was declining, would last a number of
years. He pointed out that the chart of the bottom of the
slide showed the deficit, and the years to exhaust the
deficit.
9:56:21 AM
Senator Meyer thought it seemed using 2.89 percent to
calculate CRB earnings was quite low. He asked if the
number was based on historical returns for the CBR.
Mr. Teal stated that the CBR did not earn much as the
returns were correlated with the investment strategy. When
there was little money in the CBR, and there was potential
demands on using the money, it could not be put into long-
term investments. The funds would essentially be held as
cash or cash-equivalents, and therefore it would not be in
a portfolio designed to generate higher earnings.
Co-Chair MacKinnon relayed that DOR Commissioner Randall
Hoffbeck had made the decision because there could be a
required call on cash to liquidate most of the CBR.
Senator Meyer thought that some had speculated that
inflation could go up considerably in the near future due
to the new president and stimulus to the economy in the
Lower 48. He asked a higher rate of 5 percent would impact
the financial picture.
Mr. Teal looked at the interactive models. He stated that
he skipped slide 7, which had shown the Senate budget, and
was a reduction of about $185 million from the governor's
proposed budget.
In order to discuss different hypothetical scenarios, he
thought it was best to look at the graphs and enter
different inflation rates, different capital budgets,
different budget cut scenarios, and different revenue
measures. It was also possible to stress-test the scenarios
with higher oil prices and lower returns, to demonstrate
that SB 26 could hold up under some difficult fiscal
assumptions. He cautioned that there was no guarantee that
the assumptions being used were not very optimistic, even
though LFD was taking a conservative approach.
10:00:43 AM
Senator Meyer wondered how LFD chose to use a 2.25 percent
inflation factor.
Mr. Teal stated that 2.25 was the assumption that APFC
used.
Co-Chair MacKinnon suggested that the committee test the
model starting with Senate recommendations for cuts in the
current year's budget, which she thought totaled around
$185 million. She thought a variety of scenarios could then
reflect if the state's reserves were growing, and whether
the corpus of the Permanent Fund was affected.
Mr. Painter entered a target cut of $185 million into the
interactive spreadsheet.
Co-Chair MacKinnon commented that it was possible to see a
slight uptick in the state's reserves after inputting one
year's worth of cuts.
Mr. Painter pointed out the graph on the bottom left, and
noted that changing a variable to include the proposed $185
million in cuts reduced the deficit, and thereby increased
the balance of the CBR in future years. He did not think it
was quite enough to turn the trend upwards, but thought
that more cuts would achieve the desired effect. He
clarified that the $185 million mentioned was the reduction
below the governor's proposed budget (but not below FY 17 -
the baseline for the model was the governor's proposed
budget).
10:02:51 AM
Senator Micciche recalled that the committee had viewed
similar models before the spring forecast had come out. He
commented that the estimate of a 9 percent decline in oil
production was conservative. He wanted to look at a more
probable production estimate, if the scenario just assumed
the two years was more of a trend rather than being
considered an anomaly. He mentioned a long list of new
projects expected to be online by 2021. He asked Mr.
Painter to add $100 million of other revenue on the summary
tab.
Mr. Painter stated that it was difficult to show what
Senator Micciche was requesting, and that he would instead
show the funds as additional budget reductions.
Senator Micciche observed that inputting $285 million in
reductions showed the state rebuilding its savings. He
looked at revenue for FY 18.
10:06:15 AM
Senator Micciche asked Mr. Painter to address the motor
fuel tax on the interactive graphs, and to drop the capital
budget variable to a more realistic number. He wondered if
Co-Chair MacKinnon was comfortable dropping the capital
budget to $100 million.
Senator Micciche perceived that with the requested changes
to the graph, one could observe that by FY 19 there were
increased CBR savings, and the ERA started growing rather
rapidly. He thought that the bill would build the CBR,
would balance the budget within two years, and would begin
to grow state savings. He stated that the committee was on
guard against over-capitalizing government. He mentioned a
spending cap and a revenue limit, which were part of the
concept of the plan.
Vice-Chair Bishop believed that the proposed fiscal plan
was the beginning of sound economic policy for the state.
Senator von Imhof observed that one of the components of
the plan was spending in the future. She thought that if
there had previously been a spending cap in place, there
would be more in reserves. She asserted that one important
component of the fiscal plan was a spending cap, which was
at about $4.1 billion for UGF. She thought that the
spending cap, in concert with a POMV draw, could be
considered redundant. She mused that if revenue increased
in the future, there could be pressure to increase
spending. She thought it would take discipline and resolve
by future legislators to refrain from increased spending
and be thoughtful about what expenses to address. She
thought a spending cap would keep a level of discipline in
place and was a core requirement of the plan. She was
pleased that there was a spending cap in SB 26.
10:11:22 AM
Mr. Teal referred to Senator von Imhof's "belt and
suspenders" analogy relating to redundancy. He discussed
the payout limit, and thought some might be concerned that
funds could not be spent. He explained that there was a
choice between spending $10 million per year forever or
spending $200 million one time. If the legislature chose to
operate under the revenue limit, there would be a
continuous $10 million per year to support operating budget
increases. He thought the spending limit was different in
that it did not reduce the draw from the ERA like the
revenue limit did. He thought that the two measures worked
well together.
10:14:13 AM
Senator Hughes asked to look at the top of the center table
on the interactive graph sheet. She directed attention to
the target cut, and thought the reduction factor in the
model over time was incredibly important so as to avoid the
need for additional revenue measures. She also resisted the
necessity to have the deficit be zero, and thought downward
pressure to continue to make reductions was important. She
thought the temptation would be to continue to increase
spending, rather than continue to make reductions. She
emphasized that it was necessary to not only think of state
services, but communities and the private sector. She hoped
line 8 (target cut) would continue to be present as part of
the model, and thought reductions were the best way to
bring down the deficit.
Senator Meyer referred to Senator Hughes comments. He
mentioned that the Senator and he both sat on the Senate
Labor and Commerce Committee, which had recently
extensively considered an income tax bill. As proposed, the
bill would go into effect in FY 20, and would bring in
additional revenue of $600 million to $700 million. He
estimated that the Senate was proposing an approximately
$250 million deficit for FY 20, so there would be a surplus
of $400 to $500 million extra funds collected from
Alaskans. He considered that the scenario would encourage
over-spending as Senator von Imhof had suggested.
Co-Chair MacKinnon stated that the purpose of the meeting
was to acknowledge that it was short-sighted to consider an
income tax at the current time. She thought that the
economists in the Labor and Commerce Committee had
suggested that the state not do everything at once. She
thought leaving a deficit was not a bad thing if one
believed that government still had an opportunity to do
things more efficiently and perhaps provide services
differently.
10:18:47 AM
Senator Micciche asked to look at the 'Budget Reserves'
graph on slide 6. He commented on possible increased oil
production. He asked Mr. Painter to add a price increase of
$2 per barrel to the forecast.
Mr. Painter stated that there was not a way to merely
change the price of oil in the forecast, but rather only
change the P40 assumption, which meant that there was a 60
percent likelihood (according to DOR) that the price of oil
was lower, and a 40 percent likelihood that it was higher.
The change would equate to a few dollars of price
adjustment in the early years, and 8 or 10 by the later
years.
Mr. Painter turned to a worksheet showing revenue
forecasts, which showed there was an increase to the price
of oil by $4 in FY 18, and up to $10 by FY 26.
Senator Micciche acknowledged that there would be
fluctuation in oil prices. He mentioned the POMV draw,
which he thought would eliminate variability. He thought
the fiscal plan used conservative estimates.
10:22:23 AM
ROB CARPENTER, ANALYST, LEGISLATIVE FINANCE DIVISION,
addressed points made by Senator Micciche and Senator
Hughes; suggesting that the committee observe an inflation-
growth model. He noted that the same results were
observable, which budget constraints in the out years. He
noted that the OMB 10-year plan was flat in the early
years, with 2.5 percent growth after. He emphasized that
the volatility in the projections was significant.
Co-Chair MacKinnon relayed that it was the Senate
Majority's position that the administration had the power
and opportunity to help Alaskans in a way that might not be
observable yet. She mentioned contract negotiations, and
thought there were tools at the administration's disposal
that provided an opportunity to balance the budget. She
pointed out that the only way the plan worked was due to
the blend of the POMV and the improvement of oil price. She
emphasized that the state would be facing huge deficits if
a percentage of the Permanent Fund earnings was not planned
to be used to blend revenues together.
Co-Chair MacKinnon thought the point of the presentation
was that it was possible to balance the budget without
additional taxes if it was based on cuts. If the Senate was
able to achieve $300 million in cuts, no new revenue would
be needed anywhere. She thought a willing House body and
administration were needed to accomplish the cuts. She
asserted that the Senate would continue to pursue a
responsible budget with a spending limit that structurally
reformed different programs that were huge cost drivers.
She emphasized that reductions, a spending limit, and use
of the ERA were a cornerstone of fiscal policy.
10:26:56 AM
Senator Hughes added to Senator Meyer's remarks regarding
the lack of a number on the income line in the model. She
was led to believe by financial professionals that an
income tax would increase the economic recession in the
state. She was concerned about the proposal from the House
Majority, and thought creating surplus revenues would be
very damaging to the economy.
Senator von Imhof stated that the income tax model did not
show the economic and population impacts in the event that
an income tax was implemented. She asserted that those with
the most income were generally the most mobile. She told an
anecdotal story about the State of Connecticut and the
impact of high wage earners leaving the state after an
income tax had been imposed.
10:28:55 AM
Mr. Teal thought it was up to the committee to make a
determination if it felt comfortable with the model, the
assumptions, and the policy choices that were being
considered.
Senator Micciche thought the goal for the day was to
clarify that there was not a remaining $500 million CBR
draw forever. He thought people wanted different things
from the government, and had different expectations. He did
not think it was possible to cut forever, and thought the
government needed to be made as efficient as possible
without over-capitalizing. He thought asking more from the
economy was reckless.
Senator Micciche continued, and stated that the committee
was focused on perpetual dividends. He asserted that
without the changes proposed in the plan, the existence of
dividends by 2026 was at risk. He directed attention to the
'Permanent Fund' graph on the slide, which showed the
status quo scenario reflecting a $10 billion difference in
the corpus of the fund. He envisioned that someday the
corpus of the fund and POMV draw would adequately
capitalize the operation of the government in perpetuity.
He was excited about the plan, and hoped others would
recognize its value.
10:32:08 AM
Vice-Chair Bishop commented that now the state was on a
pathway towards diversification and protection the ERA, he
assumed that the state's credit rating would rise once the
bill became law.
Co-Chair MacKinnon reminded that the state had a bicameral
legislature with a strong executive branch. She asserted
that the Senate's plan worked, and there were policy
choices in all facets of the plan. She thought that the
probability of success depended upon the House, the Senate
and the administration reaching an agreement. She restated
that it was necessary to have a responsible budget. The
Senate was asking the House to reconsider a spending limit.
She thought it was necessary to continue restructure some
of the largest cost drivers of the state.
Co-Chair MacKinnon discussed the value of education. She
referred to Senator Hughes and education reform. She
thought that groups of Alaskans were not receiving the same
education benefits as others. She stated that the Senate,
along with the administration, was trying to advance
structural reform to the K-12 education system. She thought
that if the state could achieve a spending limit and a
responsible budget, the Senate would consider use of the
ERA to create a durable structure for Alaska and ensure
long-term dividends for all Alaskans.
Co-Chair MacKinnon discussed the afternoon agenda.
10:36:24 AM
RECESSED
1:32:29 PM
RECONVENED
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."
1:33:08 PM
Co-Chair MacKinnon discussed the agenda.
1:33:51 PM
AT EASE
1:34:03 PM
RECONVENED
KARA MORIARTY, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
ALASKA OIL AND GAS ASSOCIATION, discussed the presentation
"Senate Finance Committee - HB 111," (copy on file). She
stated that the Alaska Oil and Gas Association (AOGA) was
the state's professional oil and gas trade association; and
its members represented the majority of exploration,
production, and refining companies in the state. She stated
that HB 111 represented the seventh change in oil tax
policy in twelve years.
Ms. Moriarty thought that some had misrepresented AOGA's
position on past oil tax policy changes in the previous
decade. She stated for the record that industry had not
asked the legislature to make any changes in the current
year. She asserted that the current tax structure had
clear, undeniable proof existed that the law attracted new
companies to the state and had created a fiscal climate
that encouraged companies to invest more, which had in turn
facilitated the ultimate goal of getting more oil in to the
Trans-Alaska pipeline system. Ms. Moriarty wondered why the
legislature was considering abandoning and reversing what
she considered to be a successful policy.
Ms. Moriarty looked at slide 3, "House Majority Goals":
There is no silver bullet for solving our fiscal
problem. To maintain the Alaska that we want to live
in, we need a durable solution that includes a
combination of measures: a Percent of Market Value
draw from the Earnings Reserve Account (within the
Alaska Permanent Fund); a reasonable broad-based tax;
a moderate and protected PFD payout; and a
restructuring of the oil and gas tax credits.
Implemented together, these four pillars will lay the
foundation for a prosperous future for all Alaskans.
- Reps. Paul Seaton & Neal Foster (House Finance Co-
Chairs)
Ms. Moriarty discussed slide 4, "Governor Walker's Goals":
Alaska is facing annual deficits of more than $3
billion - even after budget cuts of 44 percent in the
past four years. Without a plan we'll burn through our
budget reserves in less than two years. The New
Sustainable Alaska Plan calls for a combination of
1. Spending reductions
2. Sustainable use of Permanent Fund earnings
3. Modest tax increases
4. Oil and gas tax credit reform
https://gov.alaska.gov/administration-focus/new-
sustainable-alaskaplan/
Ms. Moriarty showed slide 5, "Senate Resources CS for HB
111":
HB 111 "eliminates the state's cash exposure by ending
the program of refundable oil and gas tax credits to
small or new companies. Transitions to a system of
carrying forward operating losses for use against
future tax liability, while protecting the basic tax
components in statute today."
Senate Resources Committee, Summary of Committee
Substitute, 4/24/17
Ms. Moriarty suggested that it was the goal of the leaders
of the House, Senate, and the governor to eliminate cash
credits as proposed by the bill. She thought the
elimination of the credits would increase government take
and impact the economics of several potential projects. She
stated that the version of the bill being considered
addressed several concerns AOGA had outlined in previous
bill hearings. She considered that previous versions of the
bill had multiple sections that had nothing to do with oil
and gas tax credits and were simply tax increases on the
industry. She thought the Senate Resources Committee
version of the bill seemed to be focus primarily on the
goal of eliminating cash credits. She mentioned a memo from
AOGA dated March 13, 2017 that had addressed technical
questions and concerns (copy on file).
1:37:45 PM
Ms. Moriarty spoke to slide 6, "Senate Resources CS for HB
111 Meets Governor's Goals":
HB 1111 resolves four high priority concerns
identified by the governor:
1. Transition Alaska away from the business of
providing cash credits/rebates to the oil and gas
industry
2. Reduce the state's liability related to potential
large future investments
3. Defer the state's direct participation in the cost
of a new project until it comes into production
4. The oil industry should participate as part of the
overall fiscal plan for Alaska
Source: DOR Presentation 4/14/17
Ms. Moriarty referred to a statement by Commissioner of
Revenue Randall Hoffbeck that suggested the blended gross
tax/net tax structure was well designed for the state's
position.
Ms. Moriarty continued discussing slide 6, and believed
that with the elimination of cash credits, the state no
longer had participation in new projects. She emphasized
that not only did the oil industry participate as part of
the state's fiscal plan, but it was the state's largest
taxpayer to date. She continued that the state took the
largest profit share at every oil price, and HB 111 would
increase government take. She referred to a recent report
from OMB that outlined different categories of expenditures
per capita, but failed to mention different income streams
per capita. She detailed that in FY 16, the oil and gas
industry contributed just over $2.1 billion to state and
local governments, which equated to over $2,800 per Alaskan
in the previous fiscal year.
Ms. Moriarty stated that she had a personal stake in
solving the state's fiscal issues. She urged the committee
to not pursue changes that would dramatically impact the
investment climate for Alaska. She thought the state needed
a policy that would continue to put more oil in the
pipeline, which would benefit the entire state economy. She
thanked the committee for the opportunity to testify.
Co-Chair MacKinnon acknowledged Senator Cathy Giessel in
the gallery.
1:41:32 PM
DAN SECKERS, TAX COUNSEL, EXXONMOBIL, testified in support
of the CS by the Senate Resources Committee. He was
supportive of the comments of the previous testifier. He
underscored the concern that oil tax credits (cash credits)
reform had been transformed into changing policy in the
state when companies were struggling. He thought that an
effort to raise taxes when companies were losing money
would not help the economy. He thought the proposed CS did
address the central issue of the reform of cashable credits
while allowing the state to remain globally competitive.
Mr. Seckers continued his remarks, and thought that the CS
being considered maintained the core structure of SB 21
[oil and gas tax legislation passed in 2013]. He thought
that SB 21 had led to more production, revenues, and jobs.
He stated that ExxonMobil had never qualified for the
cashable tax credit program, and did not expect to qualify
for the program in the future.
1:44:40 PM
Mr. Seckers mentioned the memo authored by AOGA that was
referenced by the previous testifier. He discussed concerns
about elements of the bill, including the net operating
loss (NOL) carry-forwards. He referred to Section 23 of the
bill, which provided that the NOL tax credit would be
carried forward as an operating loss. He thought the
provision also created an ordering rule, and provided that
the current year expenses were claimed before an NOL was
claimed. He discussed the current tax structure and thought
there would be a crossover point, at which time the tax on
the net profit would equal the tax on gross profit. He
thought the additional deductions had no value. He thought
the recovery of losses was foundational to a net tax
system, and to eliminate the recovery would make Alaska
less competitive.
Mr. Seckers considered the credits that could be used to
reduce the minimum tax. He thought the CS was not clear
with regard to application of credits against the minimum
tax. He thought the more clarity provided in statute, the
better off everyone would be.
Mr. Seckers addressed the issue of gross revenue exclusion,
which he thought many fields would qualify for. He
reiterated the need for clarity in the bill to establish
the intent of the legislature.
Mr. Seckers highlighted an issue in Section 23 of the bill.
The section provided for uplift and he commented that
ExxonMobil was unlikely to ever qualify due to current
production. The section stated that the uplift could only
be used once the field (generating the uplift) began
commercial production, which he thought created an
ambiguity. He recalled that HB 247 [oil and gas legislation
passed the previous year] changed law regarding determining
qualifications for a gross revenue exclusion. He wondered
about the definitions of 'production' and thought there
should be standardization of terms.
Mr. Seckers concluded by saying that Alaska was an
important part of ExxonMobil's portfolio, and the company
planned to be in the state for many years to come. He
thought that if taxes were increased, opportunities would
diminish accordingly. He thought that the goal of having a
globally competitive fiscal regime was one of the most
important issues for the state. He understood the cash flow
crisis, as well as the attention paid to cashable credits
and how the issue was being addressed. He reiterated that
the CS preserved the core structure of SB 21, which he
believed had been working by leading to more production,
and had led to more royalty payments and taxes.
1:51:40 PM
Vice-Chair Bishop asked if ExxonMobil had changed its
capital investment strategy globally since the downturn in
oil prices.
Mr. Seckers relayed that ExxonMobil had taken a harder look
at investments, and stated that in low price environments,
investments received greater scrutiny.
Co-Chair MacKinnon referred to the previous testifier's
mention of SB 21, and asked Mr. Seckers to specify oil tax
policy rather than use a bill number. She asked if he was
familiar with the advisory opinion issued in March by the
tax director from DOR. She wondered if Mr. Seckers would be
challenging the interpretation, and whether he saw the
opinion as a new interpretation, or rather as an accurate
description of tax policy that had been in place.
Mr. Seckers stated that he was familiar with the advisory
opinion, and it was still under consideration by his
company. He thought the impact on the ExxonMobil
Corporation may not be as severe as for other taxpayers. He
did not agree with the opinion. He thought that the opinion
was a strained interpretation and was not sure it matched
the intent of SB 21. He stated that the corporation had
been surprised by the opinion, but would follow the law.
Co-Chair MacKinnon questioned DOR's interpretation of the
Senate Resources Committee version of HB 111. She referred
to Ms. Moriarty's earlier comments and had understood that
DOR took the position that the bill would decrease costs
for taxpayers. She wondered if testifiers were speaking to
the advisory opinion or to the bill being considered. She
thought current policy had been reinterpreted differently
by the administration's tax director. She thought there was
a different alignment as to how different components of tax
policy were in play and how deductions were taken.
1:56:07 PM
Mr. Seckers recalled that the reference to the tax increase
was from the CS rather than the advisory opinion. He
continued that the impact of the bill was relative to
various companies. He did not know the foundation of the
assessment by the department in saying that there was a tax
decrease. He discussed the contents of the advisory opinion
as related to the CS. He thought that the CS would
represent an immediate tax increase for a number of
companies due to being subjected to a minimum tax.
Co-Chair MacKinnon stated that the committee was working
with DOR to understand why the Senate CS would decrease
taxes.
Co-Chair MacKinnon asked if ExxonMobil received cashable
credits from the state.
Mr. Seckers stated that the corporation had never qualified
for, nor received any cashable credits from the state.
1:58:47 PM
AT EASE
2:01:38 PM
RECONVENED
SCOTT JEPSEN, VICE PRESIDENT OF EXTERNAL AFFAIRS AND
TRANSPORTATION, CONOCOPHILLIPS, discussed the presentation
"Senate Finance Committee - SCS CSHB111\P" (copy on file).
He turned to slide 2, "Activities Since Tax Reform (SB21)
Passed":
· Added two rigs to the Kuparuk rig fleet, 2013-2014
· Two new-build rigs delivered in 2016
•Doyon 142 and Nabors CDR3
•Averaged 4.5 rigs at Kuparuk/Alpine during 2016
· Sanctioned ERD Rig in 2016
· North East West Sak - DS1H
· New drill site at Kuparuk (DS 2S) - on stream a year
ago
· Sanctioned 18 additional wells at Alpine CD5
· Sanctioned Greater Mooses Tooth 1 in 2015
· Permitting Greater Mooses Tooth 2
· Willow discovery and acquisition of 737,000 state
and federal acres in December 2016 lease sale
· Significant other industry investment
Mr. Jepsen emphasized that the list of activities on the
slide represented billions of dollars of investment and
tens of thousands of barrels of new production coming on-
stream. He highlighted the Will discovery, which could
equate to 100,000 of barrels per day and billions of
dollars of investment. He relayed that SB 21 had a
substantial impact on the state in terms of production,
jobs, revenue, and getting more oil down the Trans-Alaska
pipeline system. He discussed the Greater Mooses Tooth 1
project, which had employed 1,000 people. He mentioned new
exploration potential.
Mr. Jepsen thought everyone was well aware that production
had increased in 2016. He discussed increased production in
2017. He directed attention to a bar graph on the lower
right hand corner of the slide, to show ConocoPhillips'
capital investment in the state. He highlighted that 2012
was the last year of Alaska's Clear and Equitable Share
(ACES), and the company had invested about $800 million
while oil prices were about $100 per barrel. Every year
since the company's capital budget had gone up.
Mr. Jepsen noted that ConocoPhillips peak year as a
corporation was 2014, when it spent about $17 billion. The
company had about $1 billion invested in Alaska. He stated
that part of the reason ConocoPhillips still invested in
the state was because there was a competitive investment
climate. He thought SB 21 had been a key to sanctioning
various projects. He stated that the decision to invest in
all of the projects listed on the slide had been dependent
upon the economics and tax investment climate at the time.
2:06:43 PM
Senator Micciche asked what increased production did for
reducing the proportion of expense for a company and
therefore the return to the state.
Mr. Jepsen explained that when ConocoPhillips produced an
incremental barrel on the North Slope, it decreased the
overall transportation cost for every barrel that went down
TAPS. He stated that the company's cost for TAPS was
largely fixed, so the greater the number of barrels, the
cost per barrel decreased, which in turn increased the
taxable value for the state (both for royalty taxes and
severance tax purposes).
Senator Micciche asked if increased production resulted in
a lower transportation cost per barrel and a greater
proportion of dollars that went to the state.
Mr. Jepsen answered in the affirmative.
Mr. Jepsen looked at slide 3, "FY 2017 Cash Flow - Current
Law - all 2016 RSB Assumptions," which showed a graph. He
wanted to expand on a comment by a previous testifier. He
stated that ConocoPhillips was not a member of AOGA, but
did support Ms. Moriarty's testimony provided earlier in
the meeting. He thought that the company was in line with
most of her earlier comments with regard to the bill. He
thought that one of the goals of SB 21 had been to provide
a leveled share of revenue over a broad range of prices,
and he thought the chart demonstrated the accomplishment of
the goal.
Mr. Jepsen continued to discuss the bar graph on slide 2
and pointed out the y-axis that depicted net cash flow, and
the x-axis showed oil price. He described the colored bars
which represented the different shares of cash flow under
current law. He highlighted the state share in the $60 -
$100 per barrel price range, which he felt demonstrated
that the intent of SB 21 had been accomplished. He noted
that the graph showed that the state share was always the
largest of the categories. He highlighted that in the lower
price quadrant, the state share was positive while the
investor share was negative. He alleged that the state
share had components of gross taxes including royalty and
property tax.
Mr. Jepsen continued discussing slide 3. He observed that
the state share was always approximately 20 percent greater
than the investor share. He thought that SB 21 had achieved
a balance and had provided a better investment climate. He
thought that if the balance was changed by increasing taxes
to order to increase the state's take, it would impact
investments in the state.
2:10:15 PM
Mr. Jepsen showed slide 4, "Summary":
• Total cost matters. Alaska is a high region -
increasing taxes increases costs and makes Alaska less
competitive.
• The House version, CSHB111, would significantly
increase the tax structure and would negatively impact
ConocoPhillips investment decisions.
• SCS CSHB111 addresses refundable cash credits and
keeps Alaska competitive.
• NOL carry forward provisions may not provide
benefit at low oil prices.
• The fundamental structure of SB21 is working - it
has it has stimulated investment, resulting in jobs
and increased production for the first time in 14
years. Let it continue to work.
Mr. Jepsen felt that there was currently significant
competition for investment dollars, particularly from the
shale plays in the Lower 48. He pointed out that prices
were down, cash flow was down, and the ability to invest in
new projects was limited by the amount of cash that was
available. He discussed large purchases of acreage in the
Permian Basin [a sedimentary basin largely in Western
Texas]. He commented that in the area of the basin wells
were cheap to drill, cheaper to operate, closer to market,
had lower transportation costs, and fewer regulatory issues
than in Alaska.
Mr. Jepsen discussed the concept of total cost and factors
such as taxes, royalty rates, capital costs, and
transportation costs. He asserted that Alaska was high-
cost, and for ConocoPhillips, the cost of supply was
approximately $40 to $50 per barrel. In other locations,
the company could develop resources for $35 per barrel or
less, which he thought was consistent across the industry.
He warned that if the legislature increased the cost to
companies, the companies would be less competitive and
would thereby direct less profit to the state.
Mr. Jepsen commented that HB 111, as it had passed the
House, represented a substantial tax increase that would
have negatively impacted investments by companies such as
ConocoPhillips. He was pleased that the Senate Resources
Committee had adopted a CS that did not change the
fundamental tax structure, but did address cashable tax
credits. He commented that like ExxonMobil, ConocoPhillips
had never qualified for cashable credits and had not
generated an NOL to date.
Mr. Jepsen thought the provisions in the bill did not
affect ConocoPhillips; and if the bill passed in its
current form, it would not have a significant impact on
investments. He asserted that the CS preserved the core tax
framework under the current tax law, which he thought was
important. He emphasized the importance of how the bill
would be translated from statute into regulation.
2:14:15 PM
Mr. Jepsen spoke to the issue of NOLS. He referred to the
comments of previous testifiers, and he thought that NOLS
might not provide benefit to the investor at low oil
prices. He observed that since 2013 there had been
significant investments in the state, which had been
leveraged by having a positive tax climate. He mentioned
increased jobs, greater production, benefits from
throughput in TAPS, and greater revenue to the state. He
thought the bill preserved the core of the current tax
framework, and thought it would result in continued
investment in the state.
Senator Hughes asked if Mr. Jepsen could speak about the
NOL carry-forwards at low oil prices.
Mr. Jepsen discussed the carry-forward of NOLS. He stated
that currently if a company incurred a NOL, it would be
carried forward as an expense, and the amount would be
deducted from cash flow before calculating taxes and using
per-barrel credits. If there was a period of low prices, a
company could meet the minimum tax without needing to use
the NOL carry-forward. He explained that if the NOL was
applied before the per-barrel credits, the NOL was not
providing a benefit.
Senator Micciche asked to turn back to slide 3. He inquired
about the negative cash flow reflected on federal taxes,
and asked if the tax impact was not isolated to Alaska.
Mr. Jepsen answered in the negative. He stated that when
there was negative cash flow, it would be reflective of the
overall position as a company.
Senator Micciche asked if there would be negative cash flow
on federal taxes if Alaska was isolated.
Mr. Jepsen stated that ConocoPhillips could still incur a
negative federal tax liability.
2:18:03 PM
PAT FOLEY, SENIOR VICE PRESIDENT - ALASKA OPERATIONS,
CAELUS ENERGY, testified about the bill. He commented on
the price of oil and the budget deficit. He stated that
Caelus had laid off about 20 percent of its workforce in
the previous year and a half. He informed that Caelus
previously had capital budgets of approximately $200
million, but in 2017 the capital budget was less than $2
million. He expressed admiration for the tenacity that the
state government was displaying in tackling the state's
fiscal problems.
Mr. Foley understood that there would be a transition away
from cashable tax credits. He beseeched the committee to
find a way to get earned tax credits paid. He stated that
Caelus viewed its relationship with the state as a
partnership. He believed that the long-term solution for
the state was to grow North Slope oil production. He
emphasized that tax policy would affect future investment
in the state.
Mr. Foley referred to a presentation the previous day by
Rich Ruggiero (copy on file), and his reference to
competitiveness. He agreed with the presenter that Alaska
needed to remain competitive to attract future investment
dollars. He recounted that the consultant had pointed out
the complexity of the tax structure in the state. He
referenced slide 15 in Mr. Ruggiero's presentation, which
showed what a project would look like if a company had cash
credits. He discussed the bill as it had been passed from
the House.
Mr. Foley discussed the difficulty of attracting funding
for projects with an unexpectedly lower rate of return. He
drew attention to slides 20 through 24 of Mr. Ruggiero's
presentation, which addressed the difference of the same
tax regime between legacy producers versus a new entrant.
He found it surprising that in the $70 per barrel
environment, the same big project was worth six times more
(net present value) to a large company. He explained that
the difference had to do with the tax efficiency of lease
expenditures. He alleged that when a large company made
investments, it could avoid a tax liability immediately.
Conversely, when a new entrant made the same investment, it
received the benefit of the investment dollars 5 or more
years in the future.
2:23:54 PM
Mr. Foley further discussed the presentation by Mr.
Ruggiero, and could not prove or disprove the claims made
therein. He opined that the cashable tax credit was put in
place to help level the playing field to make the
investment of a new entrant on similar footing to that of a
big producer.
Mr. Foley discussed Caelus' purchase of assets from
Pioneer, and considered that Pioneer left the state because
they could make a greater return on investment dollars in
their core Texas business. He stated that Caelus bought the
assets because the price was right, the assets were worthy,
and there was an attractive tax policy in place. The tax
credits reduced the capital that was required to make some
investments.
Mr. Foley discussed tax credits and subsequent earnings by
the state. He mentioned Caelus' Nuna Project, which had $1
billion yet to be expended for oil production starting in
2019. He estimated that peak oil production for the project
would be 25,000 barrels per day. He referred to the
company's Smith Bay project, and after drilling two wells
the company believed there was more than six billion
barrels of oil in place. He thought extraction of the
resource would cost about $10 billion in future
investments, and was unsure of when and how much oil could
be extracted commercially.
2:26:26 PM
Mr. Foley discussed HB 111, which he thought represented a
significant tax increase after losing the benefit of tax
credits. He opined that the bill destroyed project value,
did not encourage investment, and did not result in more
oil through TAPS. He thought the Senate Resources Committee
version of the bill was a great improvement over the bill
that was passed from the house. He thought the new version
of the bill expanded utilization of the tax credit
certificates he had.
Mr. Foley asked the committee to consider two minor
modifications of the bill: the addition of a production
threshold in Section 23 (pertaining to lease expenditures),
and expansion of a definition in Section 12 (pertaining to
alternate tax credits for exploration). He explained his
reasoning and gave examples of how the modifications could
be made and what entities might benefit from the changes.
He qualified that his suggested changes did not address
issuances or validity of tax credits, but rather only the
time frame.
2:29:24 PM
Mr. Foley referred to previous testifiers comments
regarding the ordering of tax calculation. He asked that
the will of the legislature be captured in statute, rather
than relying upon regulation and departmental practice.
Mr. Foley believed Caelus could be part of the solution. He
thought the goal of the legislature was to increase North
Slope production and increase oil through TAPS. He asserted
that the tax policy and decisions made by the legislature
would affect how much investments were made and would
thereby affect job and future revenues. He appreciated the
challenge faced by the legislature, and believed the Senate
had a good plan to provide for a complete resolution of
some of the fiscal problems faced by the state. He pleaded
the committee to take immediate action.
2:32:06 PM
Senator Micciche commented that the state was obsessed with
leveling the playing field. He asked if there were any
wells that Mr. Foley knew of that differentiated companies
by size in an attempt to level the playing field through
credits and other benefits.
Mr. Foley asserted that it was not an issue of company
size. He thought that Alaska had a tremendous oil business
for 40 years, and there had been a narrowing number of
participants. He thought if the state's goal was to have
more companies on the North Slope, he thought it made sense
to have tax policy that encouraged newcomers.
Vice-Chair Bishop asked if Caelus had changed its position
on how it directed capital around the world in the last two
years.
Mr. Foley restated that historically the company had spent
about $200 million on an annual capital budget, and in 2017
the company's capital budget was $2 million. He reported
that currently Caelus was putting 100 percent of its
capital into Alaska.
Senator Olson referred to Mr. Foley's comments about the
legislature acting expeditiously to resolve the state's
fiscal issues. He wondered Mr. Foley had also considered a
broad-based tax as part of the state's fiscal solution.
Mr. Foley had no opinion about the right solution for
Alaska's fiscal issues. He believed in finding a solution
that did the greatest amount of good for the greatest
number of people in the state.
2:34:58 PM
DAMIAN BILBAO, VICE PRESIDENT OF COMMERCIAL VENTURES, BP
(via teleconference), thought the Senate Resources CS for
HB 111 was an improvement from the version passed by the
other body. He asserted that the bill would amend current
oil policy that had a proven record of positive results
including increased production in TAPS, additional
exploration success, and new players on the North Slope. He
encouraged the committee to put policies in place that
would enable future production.
Mr. Bilbao shared four principles that BP used to assess
oil fiscal policy:
1. Does the policy encourage more oil production
through TAPS.
2. Is the policy an extension in the life of Prudhoe
Bay and the Kuparuk River Unit.
3. Does the policy increase the number of independent
companies on the North Slope.
4. Does the policy refrain from picking winners and
losers.
Mr. Bilbao made note of increased oil production in TAPS in
2016, and as well in the first quarter of 2017. He asserted
that Prudhoe Bay and Kuparuk were the backbone of the North
Slope, with new fields needing production from the legacy
fields to be able to continue to flow down TAPS. BP
believed that more companies on the North Slope was good
for the state and good for industry. He thought that
increased government take and an unstable fiscal
environment discouraged new independent companies from
coming to Alaska. He thought that the bill fell short of
satisfying BP's fourth principle of oil fiscal policy.
2:38:06 PM
Mr. Bilbao read excerpts from an editorial entitled "Oil
taxes would be bad for young engineers," written by
University of Alaska Fairbanks engineering students and
published in the Juneau Empire on April 19, 2017 (copy not
on file):
That same dream is what compels us to voice our
thoughts on the debate going on in Juneau. In our
mind, implementing punitive taxes on the industry that
serves as the backbone of our state's economy is
short-sighted and at odds with prudent long term
endeavors.
In our view, House Bill 111, the current oil tax bill,
will jeopardize the opportunities we young Alaskans
are preparing for in school. It is not a question of
whether Alaska has sufficient natural resources, like
oil and gas, to sustain our economy for decades into
the future. Just this year, Alaskans have heard about
incredible new discoveries that could provide a major
boost to the state's oil production. Companies like
Caelus, ConocoPhillips, and Repsol are sitting on huge
finds that could re-energize our oil and gas industry
for decades. As engineers in training, we want the
opportunity to be a part of bringing those projects
from concept to reality.
…as students looking at the prospect of trying to find
meaningful employment in Alaska in the coming years,
we hope our views will carry some weight to those
receptive to our plight. We are a diverse group of
individuals from all over the world who bring
different viewpoints and experiences with us. What
unites us is a passion for engineering and a deeply
vested interest in Alaska's future. Squeezing the
industry that serves as our state's bread and butter
will not improve our prospects, or those of any
Alaskans, for family-sustaining jobs.
Please, to our elected officials and policymakers, as
you struggle with the pressing issue of how to solve
the state's cash flow problem, take no actions that
might provide a short-term boost, but will lead to
fewer opportunities for the next generation of
Alaskans. Regardless, we appreciate the hard work of
our public servants who are working around the clock
to plug the budget hole, and trust that policy will
outweigh politics when deciding which choices will
benefit Alaskans most in the long run.
Mr. Bilbao thanked the authors of the editorial on behalf
of BP.
2:41:38 PM
AT EASE
2:44:23 PM
RECONVENED
JEFF HASTINGS, MANAGING MEMBER, KUUKPIK SAE AND CEO,
SAEXPLORATION, discussed the presentation "Senate Finance
Committee" (copy on file). He thanked the committee for
giving him the opportunity to offer the perspective of an
Alaskan contractor.
Mr. Hastings looked at slide 2, "Kuukpik - SAE - Born in
Alaska":
· Our team has been partnered with the Kuukpik
Corporation for the past 20 years
· The company employs an average of 400 people per year
· The Kuukpik-SAE JV is a consistent revenue source to
o Kuukpik Corporation and its shareholders
o The village of Nuiqsut
o The hundreds of Alaskan families that benefit
from each program
· We are committed to preferentially hire Native
Alaskans, Alaska residents and Alaskan Contractors
o We are proud of our 80%+ Alaskan hire rate
Mr. Hastings relayed that Kuukpik-SAE was a prime
contractor, sometimes an explorer, and a holder of tax
credit certificates. He directed attention to the graph on
slide 2 entitled 'Aklaq 3D Seismic Program,' which showed
the effect on various groups in the state. He pointed out
that the Aklaq program had benefitted more than 1,000
Alaska families. The project had generated about $57
million in revenue, $49 million of which was earned by
Alaskan contractors and suppliers.
2:46:37 PM
Mr. Hastings turned to slide 3, "Our Core Business -
Collecting Seismic Data":
· Seismic Operations are the pointy end of the spear -
we create the data so exploration wells can be drilled
· Seismic data is critical information, essential to the
success of an exploration program
· Recently, use of new technology is producing higher
resolution images of the subsurface
o Information that is a direct correlation to the
new discoveries which have recently been
announced
· The information gathered from the seismic data is
critical to finding new opportunities, new reserves to
sustain us into the future.
Mr. Hastings likened the collection of seismic data to
owning and operating a cat scan.
Mr. Hastings showed slide 4, "Why is Seismic Exploration
Different?":
· We do not drill for or develop oil
o We do the CAT scan…we are not the surgeons
· When the Tax Credit Program was created by the State
and affirmed by the voters-we started and completed
several multimillion dollar projects under the program
o Special provisions were written for .023 and .025
credits specifically to incentivize companies to
collect seismic data because without it, there is
less exploration drilling
o Seismic is treated differently because the
companies that pay to have seismic collected may
not be the company that will ever drill wells.
o The State receives something of immediate value
when Seismic tax credit projects are completed
and the data is delivered.
2:49:07 PM
Mr. Hastings discussed slide 5, "Historical Seismic
Investment," which showed a graph representing historical
annual seismic revenue from 2012 through 2017. He noted
that embedded in the blue bars on the graph was the number
of seismic programs that were shot in each year for the
entire industry in the state.
Mr. Hastings drew attention to three vertical red bars on
the graph representing milestone dates for the passage of
SB 21, and tax credit appropriation cuts. He pointed out a
dramatic increase in revenue and the number of seismic
programs acquired after the passage of SB 21. He asserted
that there had been an increase in capital spending, an
increase in exploration drilling, and increased production
as a direct result of SB 21. He pointed out an over 50
percent reduction in the amount of activity in the seismic
industry in the state after the tax credit appropriation
cut. He observed that the cuts had negative effects
including decreased capital spending within the contractor
community, less confidence in the state to settle what it
owed, and reduced liquidity to continue investments.
Mr. Hastings continued discussing slide 5, and thought that
the chart represented a barometer of the health of the
exploration industry in the state. He thought the state had
asked the industry to invest in seismic and exploration
drilling; and the companies had done so in partnership with
the state. He felt that investment confidence had been
eroded.
Senator Micciche asked about the average mean on the graph
on slide 5. He considered the five to ten years for
permitting, development, and production; and wondered if
there was a right spend estimate for adequate data
available.
Mr. Hastings thought that there had been a dramatic
increase in the number of programs, and the amount being
spent after the passage of SB 21. He pointed out that there
had not been many independents or seismic explorers going
to work in 2013. He discussed the expense of new
technology, and thought SB 21 had allowed for the use of
advanced technology to find bigger deposits that had been
previously overlooked.
2:54:43 PM
Mr. Hastings spoke to slide 6, "The Impact of HB 111 SRES
CS on Kuukpik/SAE":
· 120 day clock on seismic .025's is a great start
o Our applications are simple
o Once data is delivered and verified by the DNR,
DOR has the ball
ƒBoth of these tasks should be able to run in
parallel
· Bill language does not fully address DOR Tax Division
Advisory Bulletin 2017-01
o This bulletin destroyed the secondary market for
pure seismic explorers
· Expand the corporate income tax language
· Set a payment schedule
The State of Alaska created a program to incentivize the
seismic industry to invest millions and hire thousands of
Alaskans. Our work is the first step in putting more oil
down the pipeline. We played by the rules you set out and
now we need the State to live up to their end of the
deal.
Mr. Hastings lauded the Senate Resources Committee for its
work in making changes to the bill. He thought there was
good elements in the committee's version of the bill, but
suggested some elements could be tweaked. He reminded that
an absence of cash payment from the state, the industry had
to rely on the secondary market. He considered that in a
low price environment, there was not a way to get to a
credit if the floor was hardened. He thought that there
would be no way to be paid back for what the explorers were
owed. He suggested there should be a consideration for NOLs
that could not be carried forward for seismic explorers -
either add the ability to go below the floor, or expand the
tax language to include other corporate taxpayers in the
state.
Mr. Hastings continued to discuss slide 6. He emphasized
that his company was accountable to its shareholders. He
emphasized that without a plan to be reimbursed for the $80
million in tax credits it was owed, it was detrimental to
the fiscal health of his company.
Mr. Hastings considered that the state had created the
program to incentivize the seismic industry, which was the
first step in getting oil to the pipeline. He wondered how
to return to what had been considered an investment between
the state and the seismic proprietors.
2:59:11 PM
Mr. Hastings turned to slide 7, "The Reality":
· For SAE, the delayed tax credit payout forced the
company to a crossroads
o Option 1: seek protection under the chapter 11
bankruptcy code and leave all our Alaska vendors
hanging
o Option 2: restructure the company and work with
our Alaskan subcontractors and suppliers to find
a way to extend payments
· We chose to restructure - eliminating 98% of our
shareholders equity, the majority of which was held by
employees, many of whom are Alaskans
We are Alaskans and are committed to staying
Mr. Hastings commented on the effects of volatility in the
tax structure. He commented that the appropriations vetoes
had forced the company to consider bankruptcy or to
restructure the company to adjust outgoing payments. He
discussed his history in the state, and discussed lost
equity in the company. He was appreciative of the work the
Senate Resources Committee had done, but felt more needed
to be done to change the bill.
He reiterated that the seismic business was a barometer of
the health of the oil and gas industry, as it was first in
the exploration effort and the first expense to be
eliminated when areas were no longer deemed competitive. He
thought the state had the ability to continue the working
partnership with industry that developed after passage of
SB 21. He asserted that the industry needed confidence in
the state's plan to pay its liabilities and have a reliable
tax system. He urged the committee to work to keep the
industry competitive.
3:02:36 PM
Senator Hughes asked about the value of tax credits that
were not paid to Mr. Hastings' company, and for an estimate
of the total owed to all seismic companies.
Mr. Hastings shared that his company had certificated $24
million of $90 million worth of tax credits that had been
assigned. The company was still waiting for the remaining
balance to be issued by DOR. He qualified that for this
reason the company had thought that the Senate Resources
Committee's addition of a 120-day clock on issuances of the
credits was important. He referred to the 023 versus the
025 credits, for which there was no timeline. He thought
that his company had about $44 million worth of assigned
025 tax credits.
Senator Micciche asked if all of the seismic data
commissioned by potential producers that controlled
acreage, or if the company sometimes independently
collected seismic data. He wondered about the proportion
between the two activities.
Mr. Hastings explained that as a prime contractor the
company was contracted by legacy producers or independent
companies to collect data, which the producers owned and
was proprietary. He relayed that an area where there might
be fractured lease holes, or in times of low capital budget
spending; there was a more vibrant speculative seismic
industry. He thought that increased activity from SB 21,
especially the increased seismic program, had been 70
percent proprietary work and 30 percent speculative work.
Senator Micciche assumed that the $66 million in owed
credits was all speculative.
Mr. Hastings answered in the affirmative.
3:06:40 PM
Senator Olson asked about the company restructuring (due to
unpaid tax credits) that Mr. Hastings had mentioned, and
asked what kind of effect it had on the people of Nuiqsut.
Mr. Hastings stated that the people of Nuiqsut were a
direct beneficiary of the revenues of the company (it was a
51/49 partnership) and there was a net profitability share
to the village. When the company did not receive revenues
that were owed, the village did not as well. He specified
that the village had not received expected revenues for the
last two years.
Senator Olson referred to earlier comments and asked if Mr.
Hastings was in favor of the concept that seismic activity
was the only activity that benefitted from a 120-day time
clock.
Mr. Hastings remarked that his company's tax credits were
not under a scenario that could move an NOL forward. He
stated that if the tax credits and the application of the
tax credits were not complex in nature, he did not see a
reason why they should not be a benefit. He thought that if
types of tax credits were not equal perhaps they should
have a slightly different time frame; however in no case
should the tax credits be open-ended.
3:09:22 PM
Vice-Chair Bishop was frustrated that the state was not
paying its bills. He thanked Mr. Hastings for the preferred
hiring practices of his company. He wondered about the
hiring practices of other companies. He asked if the
company rented all its rolling stock and camps.
Mr. Hastings stated that when SB 21 was put in place,
Kuukpik/SAE had partnered with Alaska Equipment Rentals
(AER) in Fairbanks to purchase rolling stock and invest.
The partnership continued, which had been favorable for
both companies over the previous few years. He commented
that Alaska sub-contractors had extended themselves
financially, and he appreciated AER doing so.
Vice-Chair Bishop commented that after AER went out on a
limb, it was now perhaps bankrolling the state.
Mr. Hastings viewed the investment in seismic projects as a
partnership.
Vice-Chair Bishop apologized to Mr. Hastings, and all other
parties that had not been paid for outstanding tax credits.
He remarked that a promise made was a debt unpaid.
3:11:58 PM
Senator Hughes referred to questions by Senator Micciche
regarding the remaining $66 million in tax credits, and
speculative seismic work. She wondered if there was a way
to determine what portion of speculative work yielded
production. She referred to slide 5, and the illustration
of dropping activity after the tax credit appropriation
cut. She commented on the future and wondered what
prospects could expected for future generations based on
seismic data gathering. She asked if Mr. Hastings could
speak to the importance of speculative and proprietary
work.
Ms. Hastings thought that new technology had clearly
demonstrated how important seismic activity was in finding
new reserves. He used the example of Colville River area, a
small area of the North Slope. He commented that there also
new drilling technology to increase drilling recovery and
increase production. He observed that the increase in the
amount of seismic activity was directly related to
discoveries that had happened. He thought that the drop on
the graph on slide 5 was related to the combination of a
low commodity price and a lack of confidence working in the
state.
Mr. Hastings thought that unless the level of seismic
activity and exploratory wells continued to increase, there
would be an issue with the amount of product in TAPS. He
was concerned it would not be possible to replace reserves.
He thought the industry needed confidence that there was a
good investment environment in the state, and an
environment that was competitive on a global scale.
3:16:15 PM
Senator Hughes asked Mr. Hastings to speak specifically to
the speculative work and what percentage turned out to
bring in revenue.
Mr. Hastings discussed the speculative market, and the 10-
year period before the data became public. He stated that
the speculative market allowed (especially at a low
commodity price) for more people to participate, look at
the seismic data, lease the property, and more exploratory
wells to potentially be drilled.
Co-Chair MacKinnon noted that the legislature had tried to
pay for tax credits multiple times, but had not been
successful.
3:18:21 PM
KATE BLAIR, GOVERNMENT AND PUBLIC AFFAIRS MANAGER, TESORO,
read from her written testimony (copy on file):
For the record, my name is Kate Blair and I am the
Public and Government Affairs Manager for Tesoro in
Alaska.
Tesoro Corporation is an integrated refining,
logistics, and marketing company with assets across
the western United States. We operate 7 refineries in
6 states, including our first in Nikiski. We also own
a series of pipelines, tank farms, marine, rail
assets, and a network of retail fuel stations. We have
a proud 48 year legacy in Alaska, supplying jet fuel,
gasoline, and diesel to Alaskans.
Tesoro does not weigh in on oil and gas production
taxes in Alaska, as we are not a production tax payer,
however any loss of production in Alaska would affect
the in-state refinery and potentially make our
economics more challenging. We have therefore
testified on previous versions of this bill to ask
that your colleagues be mindful of any changes to the
current production tax system and its potential effect
on overall production.
Tesoro relies on access to in-state crude from the
Cook Inlet and the North Slope. We refine every drop
of oil that comes out of the Cook Inlet basin, and we
purchase approximately one-third of TAPS throughput,
160,000-170,000 barrels of North Slope crude per day,
shipping it from Valdez for refining in Nikiski or to
our refineries along the west coast. Last year, Tesoro
signed a royalty oil contract with the State that
allows us to purchase 20,000- 25,000 barrels per day
of the State's royalty share of oil, with a benefit to
Alaska of $45-56 million.
The testimony of the producing companies will inform
you on how the current CS will affect their investment
decisions and ultimately, production. We would,
however, like to comment on the changes made to the
refinery infrastructure tax credits, which directly
affects Tesoro.
Tesoro is not advocating for an extension or changes
to the refinery tax credit itself. Our concern is with
how the credit's value will be realized with the
removal of the Tax Credit Fund.
The CS maintains the cashability of the credit,
however it creates ambiguity in how credit refunds are
paid through the appropriation process, which could
create a system where the state is picking winners and
losers. The CS directs the Department of Revenue to
adopt regulations, standards, and procedures to
allocate the money among claims. Without clearly
defined regulations, such as those established for the
tax credit fund, we are concerned that the department
could consistently allocate funds in a way that favors
one type of tax payer over another. We ask that you
consider adding language in Section 6 that requires
the appropriation of funds to reflect the same process
and regulations as the current tax credit fund, with a
statutory limit and a clear process to allocating
available money.
3:22:10 PM
Ms. Blair continued speaking from her written testimony:
Additionally, because the credit is subject to
appropriation by the legislature without a statutory
lower limit, it is possible that no funds could be
allocated to refund credits and those credits must be
carried forward to future years, however, the current
carry-forward limit is five years. Hypothetically, if
there is no money appropriated over a five year
period, those earned credits could expire before their
value is realized by the company that has earned them.
We recommend that the committee alter the carry-
forward period on the credit from the current five
year limit to mirror production credits that do not
have a carry-forward time limit and provide an uplift.
This would provide consistency in the tax policy, and
ensure that companies that make qualified investments,
under the current refinery infrastructure tax credit
program, can realize the value of the credits that
they earn and the time value of their money. Further,
because the bill is scheduled to sunset in 2019, this
would be a relatively short commitment by the state
and would provide the refiners assurance that the
credits they earn will retain their value if money is
not appropriated for their rebates.
Senator von Imhof asked for a copy of Ms. Blair's written
testimony.
Ms. Blair agreed to provide a written copy of her
testimony.
Senator Micciche discussed Alaskan ownership of companies.
He mentioned the preferential hiring practices as discussed
by Vice-Chair Bishop. He asked about the proportion of
resident hire at the Nikiski refinery.
Ms. Blair spoke to the company's resident hire rate, which
was approximately 97 percent for employees in Alaska. She
reminded that resident hire was calculated by permanent
fund dividend eligibility.
Co-Chair MacKinnon discussed the schedule for the following
day.
ADJOURNMENT
3:26:01 PM
The meeting was adjourned at 3:26 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 042817 Revised 4 28 17 SFC SB26.pdf |
SFIN 4/28/2017 9:00:00 AM |
SB 26 |
| 042817 COP HB 111 Senate Finance Testimony Apr 28 2017.pdf |
SFIN 4/28/2017 9:00:00 AM |
HB 111 |
| 042817 Hastings_HB111 Senate finance testimony final.pdf |
SFIN 4/28/2017 9:00:00 AM |
HB 111 |
| 042817 AOGA Testimony SFIN HB 111 04 28 17.pdf |
SFIN 4/28/2017 9:00:00 AM |
HB 111 |
| 042817 HB 111 SFIN Official Testimony Tesoro.pdf |
SFIN 4/28/2017 9:00:00 AM |
HB 111 |
| HB 111 Marks Cost Recovery Hard Floor Crossover 042817.pdf |
SFIN 4/28/2017 9:00:00 AM |
HB 111 |
| HB 111 Public Testimony Letters 1.pdf |
SFIN 4/28/2017 9:00:00 AM |
HB 111 |
| HB 111 Public Testimony Letters 2.pdf |
SFIN 4/28/2017 9:00:00 AM |
HB 111 |
| HB 111 Public Testimony Crondahl.pdf |
SFIN 4/28/2017 9:00:00 AM |
HB 111 |