03/16/2011 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB49 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 49 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 16, 2011
3:33 p.m.
MEMBERS PRESENT
Senator Joe Paskvan, Co-Chair
Senator Thomas Wagoner, Co-Chair
Senator Bill Wielechowski, Vice Chair
Senator Bert Stedman
Senator Lesil McGuire
Senator Hollis French
Senator Gary Stevens
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Senator Cathy Giessel
COMMITTEE CALENDAR
SENATE BILL NO. 49
"An Act relating to the interest rate applicable to certain
amounts due for fees, taxes, and payments made and property
delivered to the Department of Revenue; relating to the oil and
gas production tax rate; relating to monthly installment
payments of estimated oil and gas production tax; relating to
oil and gas production tax credits for certain expenditures,
including qualified capital credits for exploration,
development, and production; relating to the limitation on
assessment of oil and gas production taxes; relating to the
determination of oil and gas production tax values; making
conforming amendments; and providing for an effective date."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 49
SHORT TITLE: PRODUCTION TAX ON OIL AND GAS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
01/19/11 (S) READ THE FIRST TIME - REFERRALS
01/19/11 (S) RES, FIN
03/09/11 (S) RES AT 3:30 PM BUTROVICH 205
03/09/11 (S) Heard & Held
03/09/11 (S) MINUTE(RES)
03/11/11 (S) RES AT 3:30 PM BUTROVICH 205
03/11/11 (S) Heard & Held
03/11/11 (S) MINUTE(RES)
03/14/11 (S) RES AT 3:30 PM BUTROVICH 205
03/14/11 (S) Heard & Held
03/14/11 (S) MINUTE(RES)
03/16/11 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
BRUCE TANGEMAN, Deputy Commissioner
Department of Revenue (DOR)
Juneau, AK
POSITION STATEMENT: Explained tax issues involved in SB 49.
LENNY DEES, Master Auditor
Department of Revenue (DOR)
Juneau, AK
POSITION STATEMENT: Explained tax issues involved in SB 49.
SHERI NIENHUIS, Petroleum Economist
Department of Revenue (DOR)
Juneau, AK
POSITION STATEMENT: Answered revenue questions about SB 49.
ACTION NARRATIVE
3:33:46 PM
CO-CHAIR JOE PASKVAN called the Senate Resources Standing
Committee meeting to order at 3:33 p.m. Present at the call to
order were Senators Stedman, French, Stevens, Wielechowski, Co-
Chair Wagoner, and Co-Chair Paskvan.
3:34:44 PM
SB 49-PRODUCTION TAX ON OIL AND GAS
CO-CHAIR PASKVAN announced SB 49 to be up for consideration and
said that today's presentation would be from the Department of
Revenue about oil and gas production tax credits.
3:36:00 PM
BRUCE TANGEMAN, Deputy Commissioner, Department of Revenue
(DOR), introduced himself.
3:37:22 PM
LENNY DEES, Master Auditor, Department of Revenue (DOR), said
these tax credits are under AS 43.55 and that he planned to go
into four different areas starting with the types of production
tax credits, then on to the credits that would have been applied
against production tax liability, credits that have been issued
in the form of transferable tax credits certificates and then
information about the refunds that the state has paid out since
inception.
He said there are seven different kinds of credits: capital
expenditure credits, alternative tax credits for oil and gas
exploration, net operating loss carry-forward credits,
transitional investment expenditure credits, additional non-
transferable tax credits, well lease expenditure credits and the
Cook Inlet jack-up rig credit.
MR. DEES said that the AS 43.55.025 credit was the first credit
that was adopted in 2003; it has historically been known as the
exploration credit. At the inception of PPT on April 1, 2006,
various other credits were enacted. Probably the most popular
credit was the one for qualified capital expenditures and carry-
forward annual losses. There were also the transitional
investment credits, the new area development credit and the
small producer credit.
3:40:29 PM
With the advent of ACES in 2007, various aspects of these
credits changed and he said he would go into those details as he
talked about the particular credits. In last year's legislation
two new credits were enacted; one was the well lease expenditure
credit for areas south of 68 degrees north latitude and the Cook
Inlet jack-up rig credit.
3:40:45 PM
The first credit, "tax credits for certain losses and
expenditures," is known as the capital expenditure credit. Under
AS 43.55.023(a)(1), he explained, a company can get 20 percent
of qualified capital expenditures that are defined under USC 26
[United States Code, Title 26 - IRS] regardless of how a company
choses to use those credits on its federal tax return.
CO-CHAIR PASKVAN asked if this particular capital expenditure
credit has been effective under ACES.
MR. DEES replied that companies are incurring these types of
expenditures and are applying for the credits, but he couldn't
say it had led to additional production. The statute only says
that the credits have to be qualified capital expenditures in
accordance with USC 26.
SENATOR WIELECHOWSKI asked him to expand on what these credits
can be used for.
MR. DEES replied they can be used for whatever qualifies as a
capital expenditure, like improving buildings and purchasing
vehicles.
SENATOR WIELECHOWSKI asked if these apply anywhere on the North
Slope.
3:43:44 PM
MR. DEES replied it is a statewide credit and applies even in
Cook Inlet. They see it used primarily in developing areas, not
just on the Slope.
SENATOR MCGUIRE joined the committee.
SENATOR WIELECHOWSKI asked if it can be added on to other
credits.
MR. DEES replied the expenditures that qualify for this credit
can also be part of the expenditures that could generate a net
operating loss carry-forward situation for a particular
taxpayer. So, a dollar capital expenditure under .023(a)(1)
could attract not only the 20 percent credit, but also be part
of the expenditures that lead to a net operating loss under
section .023(b).
CO-CHAIR PASKVAN asked if it is for only new companies in Alaska
as compared to those already established in Alaska.
MR. DEES replied that the net operating loss credit is available
to any company.
SENATOR WIELECHOWSKI asked if he had a breakdown of which
expenditures were used for drilling, construction, new
equipment, and so forth.
MR. DEES answered no; current statutes require companies to
provide the department with the amount of capital expenditures
that generate the credit as they either apply for these credits
or take them against their tax liability. They are required to
report those expenditures on an annual basis during the "true
up" that occurs at the end of March (for the previous year).
3:46:47 PM
SENATOR WIELECHOWSKI asked for a breakdown of what credits are
being used for in as detailed a form as possible.
SENATOR FRENCH said his understanding is that in defining
"capital expenditure credit" they look to the IRS definitions.
MR. DEES replied yes, the federal definition in USC 26.
SENATOR FRENCH asked him to contrast a capital expenditure with
an operating expenditure.
MR. DEES answered that a capital expenditure is one that will
benefit a company beyond a year as opposed to an operating
expenditure that is only for a particular period.
SENATOR FRENCH asked if wages to employees are considered
operating costs.
MR. DEES replied that it depends on what the wages are used for.
Wages used in the construction of capital assets become part of
the capital costs of a particular asset.
SENATOR FRENCH said it looks like the amount of capital
credits being claimed is going up every year pretty
substantially. It's almost $391 million this year. It looks like
evidence of increased capital spending on the North Slope -
largely since ACES passed.
MR. DEES agreed that the numbers do reflect that and explained
that the latter half of 2010 and all of 2011 is based on
estimated capital expenditures; the department will true up 2010
at the end of this month.
SENATOR FRENCH said the estimates are based not so much on the
department's crystal ball, but on numbers the industry sends
them on what it thinks it will spend next year.
MR. DEES agreed.
SENATOR WIELECHOWSKI asked how long section .023(a) has been on
the books.
MR. DEES answered that it came into effect with PPT on April 1,
2006. He said the fact that these expenditures also qualify for
net operating loss carry-forward in addition to the non-capital
expenditures could lead to a net operating loss for a particular
taxpayer. The same expenditures in this particular category do
not qualify for the exploration credit. This means if you have
taken a credit for an expenditure under section .025, you cannot
claim that same expenditure under section .023(a)(1).
3:52:20 PM
SENATOR WIELECHOWSKI asked if section .023(a)(1) applies to
maintenance costs.
MR. DEES replied yes, if the expenditure is considered
"capital." He said that typical maintenance work is operating in
nature. If it's called "maintenance," it's restoring something
to its previous capacity or efficiency. Very little
"maintenance" would be considered "capital."
SENATOR WIELECHOWSKI asked, "When you say very little
maintenance would be considered 'capital,' are you applying that
just to this capital expenditure credit or are you applying that
to all capital costs in general?"
MR. DEES replied to all capital costs in general.
SENATOR WIELECHOWSKI asked if they are seeing increased capital
expenditures on the North Slope, is it his opinion that that
would likely not be due to maintenance.
MR. DEES replied, in his opinion, that what may be being called
"maintenance" could be replacement of facilities.
MR. TANGEMAN added that there is some confusion. He said if one
is "maintaining" infrastructure in an existing field that is 25
or 30 years old, that is a "capital" investment and would
qualify for certain tax credits. But for maintenance or
exploration or things like that people tend to look at which
side of the fence that capital expenditure has taken place on
and what the useful life of the piece of equipment is.
SENATOR WIELECHOWSKI asked in reviewing the audits and the
provided expenses if they get a sense of what is being done on
the North Slope in terms of capital costs.
MR. DEES replied most of today's audits have to do with the
newly constructed capital costs on the North Slope. He has
audited through 2006 (PPT) and that was the only year they
audited some of the older fields. That is probably where
"capital" maintenance would be seen and they hadn't seen a lot
of that yet. He reminded them that 2006 was when pipes burst on
the North Slope and that years 2007 and on hadn't been audited.
3:57:40 PM
MR. DEES said the type of capital they have seen from the
taxpayers that have applied for transferable tax credit
certificates are for construction of new facilities and drilling
of wells and those have no maintenance expenditures so far.
He said the capital credit must be spread over two years.
Initially, under PPT a credit could be taken in one year and
then under ACES they were split. Except for last year all
expenditures incurred south of 68 degrees north latitude could
be taken over one year. These credits may be converted into
transferable tax credit certificates or be cashed with the
state.
MR. DESS said the capital credit for exploration activity under
AS 43.55.023(a)(2) is a 20 percent credit for qualifying
expenditures related to exploration or in connection with an
exploration well. This credit requires that data be submitted to
DNR and it must be spread over two years. These expenditures may
also be part of the expenditures that qualify for a net
operating loss (NOL) carry-forward. These capital expenditures
alone with non-capital expenditures may lead to a NOL situation.
These credits may be converted to a transferable tax credit
certificates and may be either refunded by the state or
transferred to other taxpayers.
SENATOR WIELECHOWSKI asked if exploration credits can be
combined with section 023.(a)(1) or (2) credits.
MR. DEES answered no.
SENATOR WIELECHOWSKI asked what an "exploration credit" is.
MR. DEES replied that it's an exploration well drilled within a
unit for a company that is trying to delineate the field or find
a new pocket of oil within that unit. This particular activity
wouldn't qualify for section .025 credit because it wouldn't
meet the qualifications of distance from the existing unit or
distance from an existing well.
4:01:24 PM
SENATOR WIELECHOWSKI asked if moving a rig over on the North
Slope would be considered a new exploration well.
MR. DEES replied that he wasn't qualified to say if it is an
exploration well or not.
SENATOR WIELECHOWSKI said he heard that 150 wells were drilled
last year and he wanted to understand what they were about as
well as how they delineate what is exploration and what isn't.
He said he was trying to understand why everyone is making a big
deal out of the fact that we've had no new exploration wells or
only one.
4:03:07 PM
SENATOR STEDMAN explained when you do a capital expenditure of
$100 million, for instance, you're going to get a $20 million
credit, but you can still depreciate the $100 million capital
expenditure on your tax schedule like normal. But you're going
to take it under [section .023(b)] that allows you to write it
off immediately this year. That would enable you to knock down
your income and if you don't have any income, then you can carry
it forward at 25 percent per year and burn it up.
MR. DEES responded that was a correct description.
SENATOR STEDMAN remarked that .023(b) is a pretty strong
stimulus compared to .023(a).
SENATOR WIELECHOWSKI asked if you get to write off $20 million
of the $100 million, are you still able to depreciate it at the
rate of $100 million.
MR. DEES replied under the production tax statute, there is no
depreciation. If the $100 million qualified as an .023(a)
credit, you would get a 20 percent credit. The way to derive
one's production tax liability is to take the value of a product
sold (gross value at the point of production for the oil or gas)
and subtract all expenditures from that whether they were
capital or operating. The capital does not have to be
depreciated; it could be written off against that gross value in
the year it was incurred. So, you get a production tax value,
which the tax rate is applied to in order to get the tax
liability. He elaborated:
So, to the extent that you've got this $100 million
expenditure, you get the $20 million worth of credit.
You also get whatever tax rate you're at. That same
expenditure does give you some tax benefit, because
what it's doing is reducing that production tax value.
Now, what Senator Stedman described was if it was this
case that that $100 million led to a negative
production tax value, that negative production tax
value could generate an .023(b) credit of 25 percent.
So, you could say that a dollar of capital
expenditure, if you're a company that doesn't have
much revenue, that dollar could generate 45 percent in
terms of tax credit in that situation. But in any
situation, a capital expenditure will get not only the
20 percent tax credit but also will help to reduce
that production tax value, which in turn reduces the
production tax liability.
MR. DEES said the next credit is the alternative tax credit for
oil and gas exploration under AS 43.55.025. This credit is
commonly referred to as the "exploration credit." It is a credit
of 30-40 percent of qualified expenditures depending on well
location and proximity to existing wells in unit boundaries. The
qualified expenditures under this credit are certain expenses
associated with seismic and geophysical exploration work and
exploration well drilling. These same expenditures may also be
part of what qualifies a taxpayer for an oil carry forward. If a
company claims this particular credit, those expenditures under
.025 cannot be claimed under .023(a).
4:09:01 PM
CO-CHAIR PASKVAN asked if Alaska is seeing more .023(a) or .025
credits.
MR. DEES replied he is seeing more .023(a) credits; the .025
activities are narrower in scope.
SENATOR WIELECHOWSKI asked if his charts have the amount of the
.025 credits that have been taken and those expected.
MR. DEES replied yes; they are further back in the presentation.
Slides 18 and 22 have exploration credits that were applied
against tax liabilities.
4:10:39 PM
He said the net operating loss carry-forward under AS
43.55.023(b) is a credit of 25 percent of a net operating loss
(when a company's revenues are exceed by its lease expenditures
for the year). He said capital expenditures under .023(a)(1) and
(2) can lead to a net operating loss. A company that has this
type of credit can convert it into a transferable tax credit
certificate, which can be sold back to the state or transferred
to another taxpayer to apply against a tax liability.
4:11:48 PM
The next credit (slide 11) is the transitional investment
expenditure (TIE) credit for expenditures that were incurred
prior to PPT, the five year period between March 31, 2001 and
April 1, 2006. A company could get 10 percent of those capital
expenditures. That was changed under ACES and could only apply
to companies that did not have production prior to January 1,
2008.
MR. DEES said AS 43.55.024(a) is a new area development credit
of up to $6 million for a company that is currently producing
from leases of properties outside of Cook Inlet and outside of
the North Slope; it can only be applied against the tax
liability and may not be converted to a transferable tax credit
certificate or carried forward. It has to be used only as a tax
liability for one year and to the extent that a company has a
tax liability. This credit has a sunset date of May 1, 2016.
4:13:40 PM
AS 43.55.024(c) is the small producer credit for companies
producing less than 100,000 barrels of oil btu equivalent per
day. It is pro-rated; so, if a company is producing less than
50,000 barrels, they get the entire $12 million and that is pro-
rated down to zero at 100,000 barrels. The credit can only be
applied against a tax liability; it expires in 2016. It may not
be converted to a transferable tax credit certificate or carry-
forward.
4:14:30 PM
MR. DEES said the last two credits are the well lease
expenditure credits under section .023(l) that was enacted last
year; it is 40 percent of lease expenditures in the state south
of 68 degrees north latitude. The last credit is the Cook Inlet
jack up rig credit under .025(l) of up to $25 million for the
first three unaffiliated persons drilling wells using the jack
up rig. All credits may applied against a production tax
liability; some may be converted to a transferable tax credit
certificate.
Slide 18 showed activities for credits supplied against a tax
liability for those companies that in their annual filings have
a tax liability and in the course of computing the net payments
to the state have taken these particular amounts off the top of
the tax liability. So, in essence this is money that did not
come into the state treasury or is reduced from the amount that
would have come into the state treasury had it not been there.
CO-CHAIR PASKVAN asked, in addition to them deducting 100
percent, if the figures in the top column are the 20 percent
that they additionally receive in credits.
MR. DEES said that was correct.
SENATOR WIELECHOWSKI asked if the figures were in millions.
MR. DEES said yes.
SENATOR WIELECHOWSKI asked if he had any projections for beyond
2011.
MR. DEES replied no.
MR. TANGEMAN added that these figures are based on information
provided by the producers.
SENATOR WIELECHOWSKI said he knew the DOR did projections for
the next decade and that they relied on production figures for
the next 9 or 10 years. So, does the information exist and does
the department have it?
MR. TANGEMAN replied the department receives longer-term
projections on production and they apply a longer-term
projection on the price of oil. But as far as the capital
expense that a company is going to invest, they only receive
that one year out.
SENATOR FRENCH said he had questions about the exploration
credits and he wanted to refer to the chart on exploration wells
on the North Slope. He went back to 2008 when 16 wells were
drilled and $55 million in exploration credits were applied for
and refunded against a producer's tax liability. In 2009, 9
wells were drilled and there were $28 million in credits. He
could understand that, but he didn't understand what happened in
2010 when the number is cut in half - going from 9 wells in '09
to 4 wells; yet he saw a $34 million tax credit applied for (an
increase from the year before). The year he really didn't get
was 2011. "We've had it pounded in to our brains over and over
that there was only one well, exploration well, drilled in 2011
and yet I see a $20 million tax credit that we're estimating is
going to be asked for and granted." He asked Mr. Dees if he had
analyzed that trend.
4:19:07 PM
MR. DEES responded that you cannot correlate this information
with the chart in terms of wells drilled. He said this chart is
showing, as far as exploration credits are concerned, when
companies chose to take those certificates. Either they
purchased them from other companies or they had exploration
activities themselves and applied that against their tax
liability. This chart does not encompass all of the activity in
exploration credits; it only shows for those companies that have
tax liability that applied these particular credits against that
tax liability. It doesn't necessary mean that this is either the
year that this activity occurred or that these were the
companies that actually drilled those wells.
SENATOR FRENCH asked if there is a timeframe between the timing
of the expenditure and the life of the credit.
MR. DEES replied that these credits don't expire. There was a
timeframe in which the explorers, if they had a credit and
wanted to cash it with the state, had a 24-month reinvestment
period. That changed last year.
SENATOR FRENCH clarified that's not what they are talking about
here, because these are all being applied against someone's tax
liability. Mr. Dees was saying someone could have drilled an
exploratory well in 2009 and in 2011 be applying that
expenditure against their tax liability.
MR. DEES responded that what happens typically is throughout the
drilling season on the North Slope (October - March), the
companies have up to six months after the end of the exploration
activity to apply for an .025 tax credit certificate. The
department audits that credit in full before issuing it. So,
there could be a two-year lag before a company actually gets the
tax credit certificate.
SENATOR FRENCH said these credits could easily have been
purchased.
MR. DEES agreed that could have been the case.
4:23:14 PM
SENATOR WIELECHOWSKI asked when the 2011 projections done. Also,
Repsol said they are going to start spending some of their $768
million this winter on exploration wells and he wanted to know
if he had revised his estimate on 2011.
MR. DEES answered the estimated $450 million for 2011
corresponds with what is in the fall revenue source book that
came out in 2010. That will be updated in March.
MR. TANGEMAN added that he wasn't sure if they revise the
projections in spring to that detail. He knows they do the oil
production and the oil price.
SENATOR WIELECHOWSKI asked if the exploration credits are .025
credits.
MR. DEES replied yes.
SENATOR WIELECHOWSKI said he understood that taking that credit
requires companies to provide well data.
MR. DEES answered no; if you purchased the credit from some
other company, the original company has to provide the well data
to DNR.
4:25:18 PM
MR. DEES said transferable tax credit certificates (slide 21)
are issued to those companies that don't have a tax liability.
Because they can't take them against a tax liability, they apply
with the department for these transferable tax credit
certificates. The department does a "due diligence review" on
the .023 certificates before granting them. They also maintain
the audit rights to go back and audit the activity. These
certificates may be transferred to another taxpayer or cashed
with the state.
SENATOR FRENCH asked why the exploration credit under 2008 was
$85.5 million now and in an earlier presentation this year to
the Senate Finance Committee that number was $38.5 million.
MR. DEES responded that it could be the difference between
reporting on the calendar year and a fiscal year. He said he
would "reconcile" those numbers for him.
SENATOR WIELECHOWSKI compared slides 22 and 18 saying that in
2009, $29 million in exploration credits were applied to tax
liability and then $56.6 million in tax credits. Then in 2010 it
says $34 million was applied to tax liability and a big spike to
$99.5 million in tax credits. How should he interpret that?
MR. DEES replied that slide 18 shows tax credits that are
actually being applied to tax liabilities. Slide 22 shows the
applications the department has received from various explorers;
these are not actually tax credit certificates. It is what they
have applied for in terms of their requests for receiving
credits for the expenditures they have made.
SENATOR WIELECHOWSKI asked in 2010 if it was fair to say there
was $99.5 million worth of production tax credits claimed.
MR. DEES replied yes.
SENATOR WIELECHOWSKI asked, "So, the exploration was done in
2010?"
MR. DEES replied that it was fiscal year 2010, so the
exploration would have been done in the period between October
2008 and March 2009. They would have received the applications
in September 2009 which would have been the first quarter of
fiscal year 2010. He said this was probably "catching the tail
end of all that exploration activity that was happening in
Alaska during that period of high oil prices back in 2008."
MR. DEES went to slide 24 that showed the actual cash that the
state has not only issued in the form of tax credit certificates
but the payments it has paid out for those certificates. It
indicated the state had issued $1.1 billion of transferable tax
credit certificates and paid out $851 million in the form of
cash. The state has transferred $182 million worth of tax credit
certificates or applied it to taxes. As of this particular date,
$73 million worth of tax credit certificates are outstanding.
CO-CHAIR PASKVAN asked when he uses the term "outstanding," does
that mean "not as yet applied."
MR. DEES answered yes or not as yet paid back in cash by the
state. He said if you want to get the total amount of what the
state has paid out or granted in the form of tax credits you
would compare slide 18 (what has actually been withheld against
tax liabilities) and slide 24 which shows what is outstanding or
what has been paid in the form of cash.
4:33:29 PM
CO-CHAIR WAGONER asked if any other entity in the United States
has a credit system that is even close to how lucrative Alaska's
is.
MR. DEES replied no, not to his knowledge. He said cash refunds
are governed by AS 43.55.028. Basically, in order for a company
to be able to sell their tax credit certificates to the state,
they must not have a tax liability owed in current or past years
and they must have no more than 50,000 barrels of oil production
per day. There used to be a requirement to show a subsequent
investment in the state within 24 months of applying for the
certificates, but that was repealed in 2010. That means a
company can get a tax credit certificate and turn around and
request a cash refund from the state.
Slide 27 showed the amount of tax credits ($851.6 million) the
state had purchased back from explorers through February 2011.
SENATOR WIELECHOWSKI said there's a huge jump in 2011 and that
is just through the first month and he asked for some
perspective on that.
MR. DEES explained that they are talking about a fiscal year
which goes from July 1, 2010 and last year, when the requirement
for the 24-month reinvestment period went away, almost everyone
who was holding a tax credit certificate came forward.
4:36:35 PM
He continued explaining that slide 28 gives a history of the oil
and gas tax credit fund and slide 29 provides a graphic
illustration of a combination of production tax credits paid [in
green] and applied against taxes [orange under the green] each
year. The years 2011 and 2012 are estimates; they estimate that
the Cook Inlet jack up rig credit might be paid out in fiscal
year 2012 (which starts in July 1, 2011) as part of "cashed."
SENATOR STEDMAN commented that a lot of times the only
discussion in the building is about the credits that are cashed
and not the ones that are applied against taxes. Even the
revenue source book has been updated to make it clearer to the
readers about the amount being applied against taxes. It's very
common to miss the whole lower [orange] bar that in 2012 has
$463 million in credits. People are becoming more cognizant of
these two pieces, but it's easy and common to miss the whole
lower bar in discussions.
SENATOR WIELECHOWSKI related that Mr. Dees said early they
didn't have any data on tax credits beyond 2011, but wanted to
know if they have some projected data and asked if it is
something different.
MR. TANGEMAN responded if he said 2011, he misspoke. This is for
the next fiscal year. He didn't know when he would receive
production information from their forecaster, Frank Molly.
CO-CHAIR WAGONER said he didn't think the $67.5 million in jack
up credits would happen in one year; he thought it would happen
over 2 or 3 years. So that needs to be split out. Each well must
be drilled by a non-affiliated company, so it's very unlikely
that they would all be drilled the same year.
MR. TANGEMAN agreed. He said this is one of the estimates where
they know exactly how much it will be for the three actions that
will take place.
CO-CHAIR PASKVAN asked what the effect of the state's stimulus
is on a company's bottom line.
MR. DEES replied for the companies that are applying their
credits against their tax liability it's a lower tax bill.
Without a tax liability, it's a cash flow issue making a project
more economic.
CO-CHAIR PASKVAN said for example in the 2011, the $430 million
in the green bar and the $450 million in the orange bar are
cumulatively earning in that one year with $430 million applied
to the company's bottom line for that tax year.
MR. TANGEMAN corrected that $450 million [bottom orange] would
be applied towards the tax liability. The $430 million [top
green] is the amount that the explorers (smaller folks who don't
have a liability) would cash in.
MR. DEES explained that the department projected that number
would be $430 million in 2011 with the additional tax credit
certificates they will issue between now and the end of the
fiscal year and the likely amount of requests for refunds.
4:42:31 PM
SENATOR STEDMAN said another way to think about that is you've
got $880 million in that column in 2011 and, all else being
equal, they would have that in the treasury. When that money
goes out, it will either go into the industry's hands or the
federal government's.
MR. DEES went on the slide 30 entitled "Capital Expenditures by
Year ($M)."
SENATOR FRENCH said it's a remarkable slide and he didn't know
how else to read it except to say that since ACES passed in
2007, capital spending on the North Slope has gone up 50
percent. That's seems like a pretty health rise in capital
expenditures. This is "living, factual proof to the contrary"
that what some are saying about capital expenditures going down
on the North Slope. He asked if the department's 2011 and 2012
estimates include the fantastic news that Repsol, one of the
largest corporations in the world, is going to invest $768
million on the North Slope.
MR. TANGEMAN said they didn't address that in their current
forecast. As they understand it, that is potential exploration
under the current tax system. He said they agree that the tax
system is very healthy in this state, but the other side of the
equation is that the production curve continues to go down. That
is the whole point behind this legislation.
4:46:17 PM
SENATOR STEDMAN asked Mr. Dees to explain the graph a little
more.
MR. DEES explained that these figures are fiscal year
projections based on information received from taxpayers and
explorers.
SENATOR STEDMAN asked him to detail the documentation on how
they got the $3.1 billion.
SHERI NIENHUIS, Petroleum Economist, Department of Revenue
(DOR), explained that they ask for projections from operators in
October and March of every year. Their cost forecast will be
updated with those projections.
SENATOR STEDMAN said these numbers were given to them by the
industry in the fall for the fall release and that they would
get a spring update at the end of this month before the
legislature adjourns. He asked how far out the department looks.
MS. NIENHUIS said this spring they asked for 2011 through 2015
and they actually forecast out five years.
SENATOR STEDMAN asked if the committee could also look at that
data.
MS. NIENHUIS replied certainly; the department would provide it
to them.
SENATOR WIELECHOWSKI asked if she has tax credit information
based on that information.
MS. NIENHUIS yes.
SENATOR FRENCH asked to what extent this chart correlates with
exploration activity. For example, today he read that Brooks
Range said they were going to spend another $200 million next
year on one of their developments near Kuparuk. Would that be
picked by this projection or is it separate?
MS. NIENHUIS replied that they try to keep abreast of changes.
The Liberty project was delayed right after they made their
forecast, for instance. The $768 million announcement from
Repsol will be incorporated into their next forecast; that might
not all be being spent in one year.
4:51:06 PM
SENATOR FRENCH asked if this is a snapshot going forward of not
only industry activity in Kuparuk, Alpine and Prudhoe, but in
the exploration areas as well.
MS. NIENHUIS said that is correct.
SENATOR WIELECHOWSKI said he wanted to say this in the most
respectful way, but as these hearings have preceded some
information has been provide by the administration that is not
accurate. He strongly urged them to provide the committee with
accurate information and to tell them if they don't know the
answer.
MR. TANGEMAN apologized and took the advice to heart.
CO-CHAIR PASKVAN said for purposes of the viewer at home, if one
looks at the $3,137,000 estimated capital expenditure for FY12
and applied the capital credit, that would translate to a little
over $600 million in reduction of the bottom line.
MS. NIENHUIS responded that wouldn't necessarily reduce the tax
paid, because some of those capital expenditures would be
expended by companies that do not have a tax liability. That is
where the difference in the tax credits comes into play.
CO-CHAIR PASKVAN expressed that one way or another it reduces
the income to the state by a little over $600 million - whether
it's directly in the taxes, through net or operating loss carry-
forward or cash payout.
CO-CHAIR WAGONER asked under what circumstances, if any, a
company without tax liability would accrue credits and then sell
them to another company instead of just going to the state for
reimbursement.
MS. NIENHUIS replied that she could speak for companies and why
they would do that, but she has seen some tax credits sold to
other companies and used. But since a lot of the restrictions
were lifted, it is less likely that a company would sell its
credits to another company.
4:54:21 PM
MR. DEES continued to the graph on slide 21 that showed the
progressivity index versus the production tax credits.
SENATOR FRENCH asked what progressivity index means.
MR. DEES replied the progressivity portion of the tax.
SENATOR FRENCH asked if that is the amount the state collected
not from the base rate but from the progressivity.
MR. DEES indicated that was correct. He said slide 32 shows the
progressivity portion of the tax versus the total production tax
credits, either applied against tax liability or cashed out. In
2007 the tax credits exceeded the progressivity; in 2008, 2009,
and 2010 progressivity exceeds the tax. Then based on the oil
price projected for 2011 the credits exceed the tax in 2012.
4:56:13 PM
SENATOR STEDMAN recalled that progressivity is estimated to
bring in about $700 million in 2012 where the combined credits
were $860 or so. If you take $60 million out for Cook Inlet
you're around $800 million. So, collectively, under that
scenario the industry would pay zero progressivity. It's similar
to 2011. Clearly, though, the forecast for 2011/12 could change
with a big spike in oil price.
CO-CHAIR PASKVAN presented a tax rate graph from a February 21
presentation with a depiction of the progressivity with credits
applied and he said he thought it showed that at various prices
of crude when credits are applied that the production tax rate
falls below the 25 percent base rate.
MR. DEES answered yes.
MR. TANGEMAN also agreed that was correct saying that is the
effective tax rate.
SENATOR MCGUIRE said she wanted an overarching chart showing how
the $1.1 billion in tax credits (slide 29) leads to production
and/or exploration. Her goal is to get us to production.
MR. TANGEMAN said he would be pleased to get that for the
committee.
5:00:02 PM
CO-CHAIR PASKVAN thanked everyone for their input and adjourned
the meeting at 5:00 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 49_Back-Up_Rev Sources Book Ch 3 Role of Credits in Public Policy.pdf |
SRES 3/16/2011 3:30:00 PM |
SB 49 |
| SB 49_Back-Up_DOR Slide re Effective Tax Rate.pdf |
SRES 3/16/2011 3:30:00 PM |
SB 49 |
| SB_49_DOR_Presentation_Production_Tax_Credits_03-16-2011[1].pdf |
SRES 3/16/2011 3:30:00 PM |
SB 49 |