Legislature(2017 - 2018)BUTROVICH 205

04/19/2017 02:00 PM RESOURCES

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Audio Topic
01:58:39 PM Start
02:01:28 PM HB111
03:14:31 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Time --
+ HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         April 19, 2017                                                                                         
                           1:58 p.m.                                                                                            
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Cathy Giessel, Chair                                                                                                    
Senator John Coghill, Vice Chair                                                                                                
Senator Natasha von Imhof                                                                                                       
Senator Shelley Hughes                                                                                                          
Senator Kevin Meyer                                                                                                             
Senator Bill Wielechowski                                                                                                       
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Bert Stedman                                                                                                            
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
COMMITTEE SUBSTITUTE 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."                                                                                                                         
                                                                                                                                
     - HEARD & HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB 111                                                                                                                  
SHORT TITLE: OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                          
SPONSOR(s): RESOURCES                                                                                                           
                                                                                                                                
02/08/17       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/08/17       (H)       RES, FIN                                                                                               
02/08/17       (H)       TALERICO OBJECTED TO INTRODUCTION                                                                      
02/08/17       (H)       INTRODUCTION RULED IN ORDER                                                                            
02/08/17       (H)       SUSTAINED RULING OF CHAIR Y23 N15 E2                                                                   
02/08/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/08/17       (H)       Heard & Held                                                                                           
02/08/17       (H)       MINUTE(RES)                                                                                            
02/13/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/13/17       (H)       Heard & Held                                                                                           
02/13/17       (H)       MINUTE(RES)                                                                                            
02/17/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/17/17       (H)       Heard & Held                                                                                           
02/17/17       (H)       MINUTE(RES)                                                                                            
02/20/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/20/17       (H)       Heard & Held                                                                                           
02/20/17       (H)       MINUTE(RES)                                                                                            
02/22/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/22/17       (H)       Heard & Held                                                                                           
02/22/17       (H)       MINUTE(RES)                                                                                            
02/22/17       (H)       RES AT 6:30 PM BARNES 124                                                                              
02/22/17       (H)       Heard & Held                                                                                           
02/22/17       (H)       MINUTE(RES)                                                                                            
02/24/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/24/17       (H)       Heard & Held                                                                                           
02/24/17       (H)       MINUTE(RES)                                                                                            
02/27/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/27/17       (H)       Heard & Held                                                                                           
02/27/17       (H)       MINUTE(RES)                                                                                            
02/27/17       (H)       RES AT 7:00 PM CAPITOL 106                                                                             
02/27/17       (H)       Heard & Held                                                                                           
02/27/17       (H)       MINUTE(RES)                                                                                            
03/01/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/01/17       (H)       Heard & Held                                                                                           
03/01/17       (H)       MINUTE(RES)                                                                                            
03/01/17       (H)       RES AT 6:00 PM BARNES 124                                                                              
03/01/17       (H)       Heard & Held                                                                                           
03/01/17       (H)       MINUTE(RES)                                                                                            
03/06/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/06/17       (H)       Scheduled but Not Heard                                                                                
03/06/17       (H)       RES AT 6:30 PM BARNES 124                                                                              
03/06/17       (H)       Heard & Held                                                                                           
03/06/17       (H)       MINUTE(RES)                                                                                            
03/08/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/08/17       (H)       Heard & Held                                                                                           
03/08/17       (H)       MINUTE(RES)                                                                                            
03/08/17       (H)       RES AT 6:00 PM BARNES 124                                                                              
03/08/17       (H)       Heard & Held                                                                                           
03/08/17       (H)       MINUTE(RES)                                                                                            
03/09/17       (H)       RES AT 5:00 PM BARNES 124                                                                              
03/09/17       (H)       -- MEETING CANCELED --                                                                                 
03/10/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/10/17       (H)       Heard & Held                                                                                           
03/10/17       (H)       MINUTE(RES)                                                                                            
03/11/17       (H)       RES AT 12:00 AM BARNES 124                                                                             
03/11/17       (H)       -- MEETING CANCELED --                                                                                 
03/13/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/13/17       (H)       <Bill Held Over from 3/11/17>                                                                          
03/14/17       (H)       RES AT 3:00 PM BARNES 124                                                                              
03/14/17       (H)       -- Continued from 3/13/17 Meeting at                                                                   
                         1:00 PM --                                                                                             
03/15/17       (H)       RES RPT CS(RES) NT 4DP 4DNP 1AM                                                                        
03/15/17       (H)       DP: PARISH, DRUMMOND, JOSEPHSON, TARR                                                                  
03/15/17       (H)       DNP: TALERICO, BIRCH, RAUSCHER, JOHNSON                                                                
03/15/17       (H)       AM: WESTLAKE                                                                                           
03/20/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/20/17       (H)       Heard & Held                                                                                           
03/20/17       (H)       MINUTE(FIN)                                                                                            
03/21/17       (H)       FIN AT 9:00 AM HOUSE FINANCE 519                                                                       
03/21/17       (H)       Heard & Held                                                                                           
03/21/17       (H)       MINUTE(FIN)                                                                                            
03/21/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/21/17       (H)       Heard & Held                                                                                           
03/21/17       (H)       MINUTE(FIN)                                                                                            
03/22/17       (H)       FIN AT 9:00 AM HOUSE FINANCE 519                                                                       
03/22/17       (H)       -- Continued from 3/21/17 at 1:30 PM --                                                                
03/22/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/22/17       (H)       Heard & Held                                                                                           
03/22/17       (H)       MINUTE(FIN)                                                                                            
03/23/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/23/17       (H)       Heard & Held                                                                                           
03/23/17       (H)       MINUTE(FIN)                                                                                            
03/24/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/24/17       (H)       Heard & Held                                                                                           
03/24/17       (H)       MINUTE(FIN)                                                                                            
03/25/17       (H)       FIN AT 10:00 AM HOUSE FINANCE 519                                                                      
03/25/17       (H)       Heard & Held                                                                                           
03/25/17       (H)       MINUTE(FIN)                                                                                            
03/27/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/27/17       (H)       Heard & Held                                                                                           
03/27/17       (H)       MINUTE(FIN)                                                                                            
04/07/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
04/07/17       (H)       Heard & Held                                                                                           
04/07/17       (H)       MINUTE(FIN)                                                                                            
04/08/17       (H)       FIN AT 1:00 PM HOUSE FINANCE 519                                                                       
04/08/17       (H)       Moved CSHB 111(FIN) Out of Committee                                                                   
04/08/17       (H)       MINUTE(FIN)                                                                                            
04/09/17       (H)       FIN RPT CS(FIN) NT 4DP 4DNP 2NR 1AM                                                                    
04/09/17       (H)       DP: GARA, GUTTENBERG, SEATON, FOSTER                                                                   
04/09/17       (H)       DNP: WILSON, THOMPSON, PRUITT, TILTON                                                                  
04/09/17       (H)       NR: ORTIZ, GRENN                                                                                       
04/09/17       (H)       AM: KAWASAKI                                                                                           
04/10/17       (H)       MOVED TO BOTTOM OF CALENDAR                                                                            
04/11/17       (H)       TRANSMITTED TO (S)                                                                                     
04/11/17       (H)       VERSION: CSHB 111(FIN)(EFD FLD)                                                                        
04/12/17       (S)       READ THE FIRST TIME - REFERRALS                                                                        
04/12/17       (S)       RES, FIN                                                                                               
04/13/17       (S)       RES WAIVED PUBLIC HEARING NOTICE,RULE                                                                  
                         23                                                                                                     
04/13/17       (S)       FIN WAIVED PUBLIC HEARING NOTICE,RULE                                                                  
                         23                                                                                                     
04/14/17       (S)       RES AT 3:00 PM BUTROVICH 205                                                                           
04/14/17       (S)       Heard & Held                                                                                           
04/14/17       (S)       MINUTE(RES)                                                                                            
04/15/17       (S)       RES AT 9:00 AM SENATE FINANCE 532                                                                      
04/15/17       (S)       Heard & Held                                                                                           
04/15/17       (S)       MINUTE(RES)                                                                                            
04/15/17       (S)       FIN AT 9:01 AM SENATE FINANCE 532                                                                      
04/15/17       (S)       <Pending Referral> Uniform Rule 23                                                                     
                         Waived                                                                                                 
04/15/17       (S)       FIN AT 2:00 PM SENATE FINANCE 532                                                                      
04/15/17       (S)       <Pending Referral> Uniform Rule 23                                                                     
                         Waived                                                                                                 
04/15/17       (S)       RES AT 2:00 PM SENATE FINANCE 532                                                                      
04/15/17       (S)       Heard & Held                                                                                           
04/15/17       (S)       MINUTE(RES)                                                                                            
04/17/17       (S)       RES AT 1:00 PM BUTROVICH 205                                                                           
04/17/17       (S)       Heard & Held                                                                                           
04/17/17       (S)       MINUTE(RES)                                                                                            
04/17/17       (S)       RES AT 5:00 PM BUTROVICH 205                                                                           
04/17/17       (S)       Heard & Held                                                                                           
04/17/17       (S)       MINUTE(RES)                                                                                            
04/18/17       (S)       RES AT 2:00 PM BUTROVICH 205                                                                           
04/18/17       (S)       Heard & Held                                                                                           
04/18/17       (S)       MINUTE(RES)                                                                                            
04/19/17       (S)       RES AT 2:00 PM BUTROVICH 205                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
ROGER MARKS, Legislative Consultant                                                                                             
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Discussed loss recovery: how  it works under                                                             
SB 21,  and how it  would work under some  possible modifications                                                               
in CSHB 111(FIN)(EFD)(FLD).                                                                                                     
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
1:58:39 PM                                                                                                                    
CHAIR  CATHY   GIESSEL  called  the  Senate   Resources  Standing                                                             
Committee meeting  to order at 1:58  p.m. Present at the  call to                                                               
order  were  Senators  von  Imhof,  Coghill,  Hughes,  and  Chair                                                               
Giessel. Senator Meyer arrived shortly thereafter.                                                                              
                                                                                                                                
        HB 111-OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                    
                                                                                                                                
2:01:28 PM                                                                                                                    
CHAIR   GIESSEL  announced   consideration  of   HB  111.   [CSHB                                                               
111(FIN)(efd)(fld) was  before the committee.]  It was  heard for                                                               
the first  time on April 14;  then two hearings on  April 15, two                                                               
hearings  on April  17, and  yesterday, April  18, the  committee                                                               
heard  from   the  Department  of   Revenue  and   a  legislative                                                               
consultant.  Today they  would hear  from  the other  legislative                                                               
consultant, Mr. Roger  Marks, who would talk  about loss recovery                                                               
and cost  recovery and the  different ways  those play out  in HB                                                               
111.                                                                                                                            
                                                                                                                                
2:02:08 PM                                                                                                                    
ROGER  MARKS, Legislative  Consultant, Alaska  State Legislature,                                                               
Juneau,  Alaska, testified  that  he was  asked  to discuss  loss                                                               
recovery, how it  works under SB 21, and how  it would work under                                                               
some possible modifications.                                                                                                    
                                                                                                                                
2:02:49 PM                                                                                                                    
SENATOR WIELECHOWSKI joined the committee.                                                                                      
                                                                                                                                
2:03:07 PM                                                                                                                    
MR. MARKS explained that the current  tax system, SB 21, is a net                                                               
tax system with a  35 percent rate. There is a  floor on that net                                                               
tax equal  to 4 percent of  the gross revenue. His  examples look                                                               
at North Slope  non-GVR oil, but the loss mechanisms  for GVR oil                                                               
are similar,  so there is  not a lot to  be gained by  looking at                                                               
them separately.                                                                                                                
                                                                                                                                
The definition of  loss recovery (slide 3) is when  35 percent of                                                               
loss value  is used to  reduce taxes in  future years. So,  if he                                                               
has $50  in income, $50  in gross revenue  and $150 in  costs, he                                                               
has a  $100-loss. At  the tax  rate of 35  percent, the  value of                                                               
that loss is $35 in terms of being able to deduct it.                                                                           
                                                                                                                                
2:04:37 PM                                                                                                                    
Slide 4 illustrates how losses  are recovered under SB 21. First,                                                               
there  is a  floor of  zero on  the production  tax value  (PTV),                                                               
which is  the same as  the net value  less the upstream  costs. A                                                               
loss  is  a  cost  (upstream "lease  expenditure")  that  is  not                                                               
deductible in  calculating the PTV  (because the PTV has  a floor                                                               
of zero). If  a company's gross value is $20,  and upstream lease                                                               
expenditures are  $25, it can  only use $20  to get down  to zero                                                               
PTV. So, $5 of  that is a loss. Under SB  21 losses are recovered                                                               
where 35 percent of the losses become a credit.                                                                                 
                                                                                                                                
Three  things can  be  done  with a  credit:  it  can be  carried                                                               
forward  to reduce  taxes  in future  years, it  can  be sold  to                                                               
another taxpayer  (transferable credits), and that  hasn't had an                                                               
active market  since its  inception in 2006,  or if  the taxpayer                                                               
qualifies to be cashed out by the state with limitations.                                                                       
                                                                                                                                
The losses  under SB 21 can  bring the tax below  the gross floor                                                               
to zero and any unused credits can be carried forward.                                                                          
                                                                                                                                
2:06:49 PM                                                                                                                    
Slide 5 illustrated  how a loss is generated under  SB 21 in Year                                                               
1 as follows:                                                                                                                   
                                                                                                                                
ANS Price $30                                                                                                                   
Transportation Cost ($10)                                                                                                     
Gross Value $20                                                                                                                 
Upstream Costs ($25)                                                                                                            
PTV $0                                                                                                                          
Loss $5                                                                                                                         
  Loss Carryforward Credit (LCFC)                                                                                               
  35 percent of loss              $1.75                                                                                         
                                                                                                                                
2:07:30 PM                                                                                                                    
CHAIR GIESSEL asked where royalty comes into play.                                                                              
                                                                                                                                
MR.  MARKS replied  that basically  one has  royalty barrels  and                                                               
non-royalty  or taxable  barrels. Here  he is  talking about  the                                                               
taxable barrels. So, in the case  of a 1/8 royalty contract, if a                                                               
company produces  eight barrels, it  will write a check  for 12.5                                                               
percent of  the value of one  barrel, and then the  seven barrels                                                               
are subject  to the exercise on  slide 5. The upstream  costs are                                                               
the costs associated with producing  both royalty and non-royalty                                                               
barrels.                                                                                                                        
                                                                                                                                
CHAIR GIESSEL  asked how long it  takes for a company  to ask for                                                               
royalty relief.                                                                                                                 
                                                                                                                                
MR.  MARKS  answered it  takes  a  lot  of  time and  effort  and                                                               
involves reviewing  of a lot  of material. Of the  companies that                                                               
have  gotten   royalty  relief,  he  wasn't   familiar  with  the                                                               
timeframe involved.                                                                                                             
                                                                                                                                
2:09:08 PM                                                                                                                    
Slide 6 illustrated  how a loss is generated under  SB 21 in Year                                                               
2 as follows:                                                                                                                   
                                                                                                                                
ANS Price $55                                                                                                                   
Transportation Cost ($10)                                                                                                     
Gross Value $45                                                                                                                 
Upstream Costs ($25)                                                                                                            
PTV $20                                                                                                                         
Tax before LCFC $7                                                                                                              
LCFC ($1.75)                                                                                                                    
Tax before p/bbl credit $5.25                                                                                                   
Per barrel credit ($3.45)                                                                                                       
Tax $1.80                                                                                                                       
                                                                                                                                
Gross minimum $1.80                                                                                                             
                                                                                                                                
2:11:16 PM                                                                                                                    
He was asked to analyze the modifications (slide 7).                                                                            
1. Instead of  converting the loss to a credit  at 35 percent the                                                               
loss itself is carried forward  and deducted along with the other                                                               
lease expenditures:                                                                                                             
-no longer refundable                                                                                                           
-no  longer  transferable:  losses  stay with  the  company  that                                                               
earned it                                                                                                                       
                                                                                                                                
He  said there  is no  mathematical difference  between giving  a                                                               
credit of  35 percent of the  loss or deducting the  gross amount                                                               
of the  loss and  subjecting it  to a 35  percent tax  rate. That                                                               
would be illustrated in the next slides.                                                                                        
                                                                                                                                
2. The  floor is hardened:  can't use  losses to bring  below the                                                               
gross minimum. Unused losses can,  with some exceptions, still be                                                               
carried forward just as in the current SB 21.                                                                                   
                                                                                                                                
2:13:09 PM                                                                                                                    
Slide 8  illustrated how under  these modifications a  loss could                                                               
be  generated using  the  same  assumptions under  SB  21 (a  few                                                               
slides back).                                                                                                                   
                                                                                                                                
Generating a Loss: Year 1                                                                                                       
                                                                                                                                
ANS Price $30                                                                                                                   
Transportation Cost ($10)                                                                                                       
Gross Value $20                                                                                                                 
Upstream Costs ($25)                                                                                                            
PTV $0                                                                                                                          
Loss $5                                                                                                                         
Loss of $5 (instead  of converting this loss to a  credit at a 35                                                               
percent rate), is carried forward to the next year.                                                                             
                                                                                                                                
2:13:49 PM                                                                                                                    
Slide  9  illustrates  how  the  tax  is  calculated  using  this                                                               
modification Year 2: Carrying the Loss Forward @ $55 Price                                                                      
                                                                                                                                
ANS Price $55                                                                                                                   
Transportation Cost ($10)                                                                                                       
Gross Value $45                                                                                                                 
Upstream Costs ($25)                                                                                                            
PTV  $20 (Under  the  current  regime, since  the  loss that  was                                                               
carried forward had already been  subjected to a 35 percent rate,                                                               
he calculated the 35 percent tax and then deducted credit.)                                                                     
                                                                                                                                
Loss carried forward ($5)                                                                                                       
Tax base $15                                                                                                                    
Tax before per barrel credit of $5.25                                                                                           
Per  barrel credit  (only  $3.45 of  the $8  credit  can be  used                                                               
bringing the Tax to $1.80 (equal  to the gross minimum floor with                                                               
a 45 percent gross.)                                                                                                            
                                                                                                                                
MR.  MARKS explained  with GVR  oil, a  company can  use the  per                                                               
barrel credit  to bring its tax  below the gross floor,  but that                                                               
doesn't affect  the loss recovery mechanism.  That's what happens                                                               
at a  price of $55,  and since  the loss carried  forward credits                                                               
don't bring  the tax  below the  gross floor,  the answer  is the                                                               
same under SB 21 and these modifications.                                                                                       
                                                                                                                                
2:15:58 PM                                                                                                                    
CHAIR GIESSEL commented that he  was basically taking slide 6 and                                                               
comparing it to slide 9 and saying the result is the same.                                                                      
                                                                                                                                
MR. MARKS answered yes, adding that  the reason one gets the same                                                               
result is  because there are  two different ways of  monetizing a                                                               
$5 loss under the modifications.                                                                                                
                                                                                                                                
CHAIR  GIESSEL commented  that neither  one of  those brings  the                                                               
loss below the 4 percent minimum tax floor.                                                                                     
                                                                                                                                
2:17:16 PM                                                                                                                    
MR. MARKS  agreed, and said he  would show what happens  at lower                                                               
prices.                                                                                                                         
                                                                                                                                
SENATOR VON IMHOF  asked what his models showed at  oil prices of                                                               
$60, $65, and $70.                                                                                                              
                                                                                                                                
MR. MARKS replied they show the same result.                                                                                    
                                                                                                                                
2:18:44 PM                                                                                                                    
Slide 10  illustrated SB 21  Year 2: using  the Loss Credit  at a                                                               
price of $40:                                                                                                                   
                                                                                                                                
ANS Price $40                                                                                                                   
Transportation Cost ($10)                                                                                                       
Gross Value $30                                                                                                                 
Upstream Costs ($25)                                                                                                            
PTV $5                                                                                                                          
Tax before LCFC $1.75                                                                                                           
LCFC ($1.75)                                                                                                                    
Tax before p/bbl credit $0.00                                                                                                   
Per barrel credit ($0.00)                                                                                                       
Tax $0                                                                                                                          
Gross minimum $1.20                                                                                                             
                                                                                                                                
Under SB 21 a  company can use its loss credits  to bring the tax                                                               
below the gross, which is what happened in this example.                                                                        
                                                                                                                                
2:20:52 PM                                                                                                                    
Slide  11 illustrated  what would  happen  at $40  using the  two                                                               
modifications in Year 2:                                                                                                        
                                                                                                                                
ANS Price $40                                                                                                                   
Transportation Cost ($10)                                                                                                       
Gross Value $30                                                                                                                 
Upstream Costs ($25)                                                                                                            
PTV $5                                                                                                                          
Loss of $5 carried forward  ($1.57) (He explained that under this                                                               
modification you  can't bring your  taxes below the  gross floor,                                                               
so he  "back calculated" the loss  carried forward to get  to the                                                               
gross floor. That is $1.57.)                                                                                                    
Tax base $3.43 (subjected to a 35 percent tax rate)                                                                             
Tax before p/bbl credit $1.20                                                                                                   
Per barrel credit ($0.00)                                                                                                       
Tax $1.20                                                                                                                       
Gross minimum $1.20                                                                                                             
                                                                                                                                
He explained  that the LCFC could  not bring tax below  the gross                                                               
minimum tax, because  it increases under the proposal  from $0 to                                                               
the gross minimum.                                                                                                              
                                                                                                                                
2:23:38 PM                                                                                                                    
CHAIR GIESSEL asked if the example  on slide 11 had the choice of                                                               
using the  loss carry  forwards in total  or maximizing  them and                                                               
foregoing the per barrel credit.                                                                                                
                                                                                                                                
MR.  MARKS  answered  that according  to  a  department  advisory                                                               
bulletin, SB 21  addresses the order in which the  credits can be                                                               
used,  and loss  credits  are  used first.  Then  the per  barrel                                                               
credit is  used. If the  proposed mechanism used the  same order,                                                               
there wouldn't  be a choice.  Right now,  one can't use  the per-                                                               
barrel credit to bring tax below  the floor, and if one can't use                                                               
either the loss  or the per-barrel credit to bring  tax below the                                                               
floor, he  didn't think  it would make  a difference  which order                                                               
was used, because at the end of the day the tax would be $1.20.                                                                 
                                                                                                                                
CHAIR GIESSEL  added that  would be because  in this  concept the                                                               
floor is hardened.                                                                                                              
                                                                                                                                
MR. MARKS replied, "exactly."                                                                                                   
                                                                                                                                
2:25:49 PM                                                                                                                    
He pointed  out under  the current  SB 21, for  the GVR  oil, one                                                               
could use  the specific per barrel  credit for that oil  to bring                                                               
the tax all  the way down to zero. Economically,  that is a "very                                                               
important  provision" given  the challenges  that GVR  oil faces.                                                               
Under the  proposal, a floor  is articulated  on how far  one can                                                               
carry losses,  but not on a  per-barrel credit, and the  order in                                                               
which those are used may matter. That should be considered.                                                                     
                                                                                                                                
CHAIR GIESSEL  asked if the  loss carry-forward could  be carried                                                               
forward.                                                                                                                        
                                                                                                                                
MR.  MARKS responded  if a  company generates  a loss  - slide  8                                                               
generates a  $5 loss -  any loss you can't  use in one  year, you                                                               
can carry forward to subsequent years.                                                                                          
                                                                                                                                
2:28:05 PM                                                                                                                    
CHAIR GIESSEL said on Saturday,  Mr. Marks presented slides about                                                               
a    competitiveness    boundary   between    different    taxing                                                               
jurisdictions  for  oil.  She  asked  what  factors  he  used  to                                                               
establish it. Was  it solely this numeric calculation  in the tax                                                               
policies?                                                                                                                       
                                                                                                                                
MR.  MARKS  replied  that  question  has a  lot  of  aspects.  On                                                               
Saturday,  he "sort  of scratched  the surface"  on the  logic he                                                               
used, and  asked if  she meant  for him to  discuss the  role and                                                               
limitations of using "government take."                                                                                         
                                                                                                                                
CHAIR  GIESSEL  answered   yes.  She  wanted  to   know  how  the                                                               
modifications discussed  in this  hearing would change  Alaska in                                                               
terms of competitiveness.                                                                                                       
                                                                                                                                
MR. MARKS  asked if he should  talk a little bit  about the roles                                                               
of  using  government  take and  competition  in  establishing  a                                                               
fiscal system.                                                                                                                  
                                                                                                                                
CHAIR GIESSEL answered yes.                                                                                                     
                                                                                                                                
2:30:45 PM                                                                                                                    
MR. MARKS said  if a person examines anything, he  circles it and                                                               
looks at  it from  a lot  of different angles:  cash flow  to the                                                               
state, cash  flow to taxpayer,  efficiency of  operations, timing                                                               
of  revenue, cost  recovery, how  risk/reward balance  is shared,                                                               
for instance.                                                                                                                   
                                                                                                                                
A very important  aspect of that examination is  how Alaska's tax                                                               
system compares  to other  jurisdictions. Stepping  back further,                                                               
he said  in 1959, the state  got statehood and in  1962 the state                                                               
was  trying to  figure out  how to  develop the  North Slope.  It                                                               
could have  started its own  state-owned oil company,  but people                                                               
decided  to   bring  the  experience,  the   expertise,  and  the                                                               
resources of the  international oil community to  Alaska to drill                                                               
on the North Slope. That's the  point at which development on the                                                               
North  Slope became  subject to  the forces  of competition,  and                                                               
over the  years those forces  have intensified. The  Soviet Union                                                               
broke up  in 1989, and that  opened a lot of  resources that were                                                               
closed  before,  and  world-wide  competition  became  much  more                                                               
intense. Technology has  increased, as well, and oil  is found in                                                               
more  places  further  intensifying  the  competition.  There  is                                                               
capital to  develop these resources,  but capital is  very fluid.                                                               
It is  also finite,  and so  it will  go where  it gets  the best                                                               
deal.                                                                                                                           
                                                                                                                                
What is  meant by  fair share?  Mr. Marks said  over the  last 35                                                               
years. he  has thought  that a  big part of  fair share  is being                                                               
able  to get  a similar  amount of  money to  what other  similar                                                               
places get,  just because of  the forces of competition.  So, any                                                               
fiscal  evaluation  requires  a  systematic  examination  of  the                                                               
competition, and government  take is a tool to do  that. While it                                                               
is imperfect, it is used by many economists.                                                                                    
                                                                                                                                
MR. MARKS said  net present value (NPV) is a  primary metric that                                                               
companies use in picking out where  they want to invest. A larger                                                               
field  with a  low rate  of  return can  be much  more useful  in                                                               
making a  company grow  than a  small field with  a high  rate of                                                               
return. The difference  in value is two things:  money and timing                                                               
of how it flows,  and government take is a big  part of the money                                                               
side of that equation.                                                                                                          
                                                                                                                                
Using government  take requires  some judgement, and  one element                                                               
of that judgement is what peer  group an analyst is going to use.                                                               
On Saturday, he  talked about how he developed his  peer group in                                                               
terms of their  similarities, but he didn't  talk about countries                                                               
that were not in  that peer group and why, but  maybe it would be                                                               
useful to talk about them now.                                                                                                  
                                                                                                                                
2:35:53 PM                                                                                                                    
MR. MARKS  said he could  think of four jurisdictions  as perfect                                                               
examples of what he didn't include.  Ireland is one; it comes out                                                               
with the  lowest government take  in the world, but  the industry                                                               
joke  is that  it  has  no oil.  Kazakhstan  and Azerbaijan  have                                                               
spectacular  resources  at low  cost,  but  they have  very  high                                                               
government  take, because  they can  command it  (their resources                                                               
are so  good, and their  costs to develop  are so low).  Iraq has                                                               
high government take, but they  have development contracts called                                                               
technical service contracts.  These came into play  in Iran after                                                               
the Iran/Iraq  war when a  lot of  fields were damaged,  and Iraq                                                               
wanted  them  repaired.  Iraq instituted  the  technical  service                                                               
contracts, under which if a company  gets a field up and running,                                                               
it  gets  reimbursed  dollar  for   dollar.  All  its  costs  get                                                               
reimbursed, including  many costs  that have a  profit component,                                                               
and then it  gets a fixed amount of dollars  per barrel for every                                                               
barrel that gets  produced. BP bid a lot of  these for $1/barrel.                                                               
They don't  have to  pay any royalties  or production  tax; maybe                                                               
some  corporate  income  tax.  The  rate  of  return  on  getting                                                               
reimbursed right away, plus $1 dollar, is infinity.                                                                             
                                                                                                                                
Caelus,  for  example, has  this  world  class discovery  on  the                                                               
western  North Slope,  and what  if for  some reason  they walked                                                               
away from that  and the state wanted it developed.  So, the state                                                               
says we're going to develop in  the following way: we're going to                                                               
reimburse  every dollar  you put  into it,  plus $1/barrel.  That                                                               
would be high  government take, but companies would  be lining up                                                               
around the  block to get into  that field. The bottom  line is it                                                               
would not be appropriate to  have those jurisdictions in the peer                                                               
group. That is what he means by "judgement."                                                                                    
                                                                                                                                
2:39:17 PM                                                                                                                    
MR. MARKS  said in  2013, three economists  were working  for the                                                               
administration on  ACES; all three  of them separately  looked at                                                               
government take and  found that something was  "very very wrong."                                                               
Similar groups  were getting somewhere  around 60-65  percent and                                                               
SB 21  was crafted to come  in around that at  higher prices. The                                                               
last DOR Sources Book two years  after the ACES regime when SB 21                                                               
was in effect  indicates production was up  by 50-60,000 barrels.                                                               
Everyone  knew  the  oil  was   there,  but  companies  were  not                                                               
developing it, because under ACES,  there was no upside potential                                                               
(which  was reflected  in the  government take).  So, under  high                                                               
prices comparing ACES  to SB 21 with 50-60,000  more barrels, the                                                               
state is getting more money under  SB 21. The effect it had focus                                                               
was changing the government take.                                                                                               
                                                                                                                                
In the  exercise of looking for  a peer group, Mr.  Marks said he                                                               
looked at  how a country was  established and took an  average of                                                               
government take  at $40-100/barrel. He added  that although using                                                               
government   take  is   an   imperfect   tool,  most   economists                                                               
acknowledge that it  is a very useful tool with  which to look at                                                               
competition.                                                                                                                    
                                                                                                                                
2:42:30 PM                                                                                                                    
SENATOR HUGHES asked  if Alaska moves from a  credit system where                                                               
the  loss is  subtracted  from  the tax  to  a deduction  system,                                                               
subtracting it from  the production tax value, and  wants to keep                                                               
the competitive  boundary in mind,  what he would advise  them to                                                               
do.                                                                                                                             
                                                                                                                                
MR. MARKS replied that he  had not modeled these modifications by                                                               
themselves,  so  that  could be  a  request  through  Legislative                                                               
Budget and Audit (LB&A). It would  be a simple exercise and would                                                               
not take long.                                                                                                                  
                                                                                                                                
CHAIR GIESSEL asked if she should request that.                                                                                 
                                                                                                                                
SENATOR HUGHES answered yes.                                                                                                    
                                                                                                                                
SENATOR VON  IMHOF said yesterday another  presenter talked about                                                               
using the per-barrel credits and  the NOLs together where the NOL                                                               
would go  as far as  they could and  then the per  barrel credits                                                               
would kick  in. That means the  state could get more  of the NOLs                                                               
forwarded to  subsequent years.  She asked  Chair Giessel  if she                                                               
would also  request that Mr. Marks  compare that with what  he is                                                               
presented here  over a  two or three-year  period using  a couple                                                               
different price points.                                                                                                         
                                                                                                                                
MR. MARKS answered he would be happy to do that.                                                                                
                                                                                                                                
CHAIR  GIESSEL said  she would  make that  request, and  asked if                                                               
that is what slide 11 did.                                                                                                      
                                                                                                                                
MR. MARKS responded  the question is probably about  how the per-                                                               
barrel credit would interact with the minimum floor.                                                                            
                                                                                                                                
CHAIR GIESSEL  said that  Senator von  Imhof's question  was what                                                               
happens with the NOLs  if only part of them ($1.57  of the $5) is                                                               
being  used, and  rolling the  remainder forward  in year  3 when                                                               
maybe the Alaska North Slope crude price has gone up.                                                                           
                                                                                                                                
2:46:43 PM                                                                                                                    
MR.  MARKS   reminded  the  committee  that   these  losses  were                                                               
generally at  $30. The losses for  GVR oil would be  generated at                                                               
higher prices. Ultimately, generating  a loss, unless prices stay                                                               
really low for a long time  and then recover, the issue is timing                                                               
and finding  a net present value  (NPV). So, the question  is how                                                               
firm to make  the floor, and the policy question  then becomes if                                                               
the floor  is "sacred" or  not.  If one  wants to keep  the floor                                                               
perforated, or  eliminate it, it's important  to understand those                                                               
are policy calls.                                                                                                               
                                                                                                                                
CHAIR GIESSEL  said that was a  good point that LCF  would not be                                                               
an  issue   at  higher  prices  in   non-GVR  scenarios,  because                                                               
companies would reduce their costs to  no longer be at a loss. It                                                               
would be interesting to consider  that under the GVR scenario, as                                                               
well.                                                                                                                           
                                                                                                                                
MR. MARKS reminded  the committee that GVR oil  has the $5/barrel                                                               
credit provision  to bring  tax down to  zero. In  his judgement,                                                               
given the challenges  of GVR oil, that is a  useful feature of SB                                                               
21.                                                                                                                             
                                                                                                                                
2:51:02 PM                                                                                                                    
SENATOR VON IMHOF  said the challenge legislators  have is ending                                                               
the state purchasing program for  these cash certificates, but it                                                               
has  a  large  amount  of  cashable credits  in  limbo,  and  the                                                               
questions  is what  to  do  with those  while  modeling what  the                                                               
future  may look  like with  newly generated  NOLs. Does  it make                                                               
sense to  "rev-up this third-party  taxpayer market," and  can he                                                               
create that within his model?                                                                                                   
                                                                                                                                
MR. MARKS  divided that up into  two questions: what to  do about                                                               
the $1  billion in unpaid  credits and how  to use the  market of                                                               
taxpayers  being able  to  sell their  credits.  The reasons  the                                                               
transferable credit market  never took off are  twofold: one from                                                               
the seller  and one from  the buyer. If  the seller had  $100 tax                                                               
credit, the  way it would work  is someone would buy  that credit                                                               
and then  they could  use it  to take $100  off their  taxes. The                                                               
problem is that it  made no sense to pay face  value for that, so                                                               
the buyers were  low-balling the holders of the  credits. That is                                                               
why the  refundable program was put  in place in 2007,  where the                                                               
state started buying credits at 100  cents on the dollar. So, one                                                               
of the  problems with transferable  credits is that  buyers don't                                                               
get face value for them.                                                                                                        
                                                                                                                                
On the  buyers' side,  the reason  the market  never took  off is                                                               
those credits  had a  lot of  limitations on  what could  be done                                                               
with them:  what year they  could be used,  or how much  could be                                                               
used, for instance.                                                                                                             
                                                                                                                                
What to  do with  the $1 billion  cashable credit  balance? Given                                                               
the  state's cash  flow situation,  that  is a  big problem.  Mr.                                                               
Marks said  one way would  be pay it  out very slowly  over time,                                                               
although that  obviously has a  net present value impact.  But if                                                               
the state  were to  write a  check for $1  billion right  now for                                                               
those, it would make the budget debate even more difficult.                                                                     
                                                                                                                                
2:55:47 PM                                                                                                                    
SENATOR MEYER  said the reason legislators  went to SB 21  was to                                                               
come  up with  a tax  system that  had four  pillars: it's  fair,                                                               
simple, durable, and  creates more production. He  wasn't sure it                                                               
was all  that simple, but  the proposed  changes in HB  111 might                                                               
make  it  even more  complex.  He  asked  if  Mr. Marks  had  any                                                               
suggestions on what could be done  to it to meet those four goals                                                               
while making Alaska competitive.                                                                                                
                                                                                                                                
MR. MARKS  replied that a  lot of things  need to be  balanced in                                                               
establishing a tax system, and  government take is not the bottom                                                               
line.  Competitiveness  is  another   dimension,  and  SB  21  is                                                               
competitive. If  the issue is  the gross minimum and  whether the                                                               
state should  be getting  revenue no matter  what, it  is already                                                               
getting  the royalty  no matter  what. That  royalty is  based on                                                               
gross, at high prices, which affects owners of expensive assets.                                                                
                                                                                                                                
But the  state has the  budget to look  at, as well,  and another                                                               
dimension is the question of  if fiscal stability is changing the                                                               
system.  Since  prices  have  dropped,  some  jurisdictions  have                                                               
modified their  systems. Alberta  has a very  complicated royalty                                                               
system (they  don't have production  taxes), and it  gets changed                                                               
frequently as prices  go up and down. It is  a fairly progressive                                                               
system. In general,  companies expect tax changes  maybe every 10                                                               
years, but  changing it  a lot  creates instability.  He recalled                                                               
advising five different governors on  the gas line that the first                                                               
thing  they  should do  is  get  a constitutional  amendment  for                                                               
fiscal stability, because  no one is going to  spend $50 billion,                                                               
and then  once the asset  is in  place, have something  like ACES                                                               
happen to it  where all the value the state  thought it would get                                                               
was taken away.                                                                                                                 
                                                                                                                                
He said,  "Sometimes there  is a  price to  pay for  not changing                                                               
taxes, but  sometimes there's a  price to pay for  changing them,                                                               
and  there's  some  value  in   just  letting  something,  albeit                                                               
imperfect,  just dissipate  for  a while  rather than  constantly                                                               
modifying it."                                                                                                                  
                                                                                                                                
SENATOR MEYER said  SB 21 meets three of the  goals, but asked if                                                               
there is a  way to make the tax structure  simpler, the one thing                                                               
it isn't.                                                                                                                       
                                                                                                                                
MR.  MARKS answered  that he  needed to  think about  that for  a                                                               
while before issuing a judgement.                                                                                               
                                                                                                                                
SENATOR  MEYER suggested  he send  an email  to the  chairman who                                                               
would distribute it.                                                                                                            
                                                                                                                                
CHAIR GIESSEL  said she still  has the  four pillars from  SB 21,                                                               
and the  bullet point of "fair"  stated "fair to Alaska"  and the                                                               
"simple" pillar talked about "being balanced."                                                                                  
                                                                                                                                
3:03:01 PM                                                                                                                    
SENATOR  COGHILL  thanked Mr.  Marks  for  "being willing  to  go                                                               
another round  with us" on  making sure  value is brought  out of                                                               
this field. He  said that the credit system under  SB 21 can't be                                                               
maintained, but  legislators also want  to retain some  value for                                                               
those  on  the  North  Slope  who have  already  made  some  huge                                                               
commitments,  whether it's  a march  down in  their credits  or a                                                               
recognition  of   investment  value.  Yesterday,  one   of  their                                                               
consultants said price sensitivity  will continue to distort that                                                               
value, because Alaska  goes in and out of a  gross and net system                                                               
on a regular basis. The idea was  to retain the value of the NOLs                                                               
into the  future, but some of  the mechanisms in SB  21 make that                                                               
complicated,  and  throwing cash  into  the  budget only  to  get                                                               
vetoed  by the  Governor  is  not a  good  systemic  way to  move                                                               
forward.                                                                                                                        
                                                                                                                                
He said one  of the ways the system returns  value for investment                                                               
is  by  using   a  variable  per-barrel  credit   that  is  price                                                               
sensitive, and  asked if Mr. Marks  had thought through a  way to                                                               
get that based on a principal rather than a price.                                                                              
                                                                                                                                
MR. MARKS  asked if he  was referring to the  sliding-scale, per-                                                               
barrel credit.                                                                                                                  
                                                                                                                                
SENATOR  COGHILL answered  yes. He  is  trying to  get a  clearer                                                               
picture of how  to keep the value for those  who have invested as                                                               
the state "marches down" its cash investment.                                                                                   
                                                                                                                                
MR.  MARKS  said  he  didn't understand  his  question,  but  the                                                               
sliding-scale, per-barrel credit  was the way to  offset the high                                                               
royalties  at  low prices.  As  the  price  goes up  and  royalty                                                               
becomes  less of  an  issue, the  credit goes  down.  One of  the                                                               
imperfections of the sliding-scale credit is that it is dollar-                                                                 
based  rather  than  being a  percentage  of  something.  "Having                                                               
something  fixed in  the code  that  is a  set per-dollar  amount                                                               
eventually will stop doing what you  want it to do for one reason                                                               
or another."                                                                                                                    
                                                                                                                                
SENATOR COGHILL commented  that it seems like they  are trying to                                                               
not pay some of these credits,  but still let people retain value                                                               
for  investment,  and the  current  complex  system has  so  many                                                               
moving pieces to it that he  is still trying to understand it. He                                                               
was probably  asking his question  "in-artfully," and  decided to                                                               
withdraw it.                                                                                                                    
                                                                                                                                
MR. MARKS replied the he would  be delighted to discuss this with                                                               
him any time.                                                                                                                   
                                                                                                                                
CHAIR  GIESSEL remarked  that  can happen  by  going through  the                                                               
Legislative Budget and Audit Committee (LB&A).                                                                                  
                                                                                                                                
CHAIR GIESSEL thanked Mr. Marks  for his presentation and said as                                                               
the state  faces this fiscal  challenge and as she  thought about                                                               
the tax  structure over  the last three  years, she  convened the                                                               
Tax  Credit  Working  Group  with  senators  from  Resources  and                                                               
Finance  Committees, Native  corporations,  industry, and  labor.                                                               
They began to  "wrestle with" the credit system  focusing on Cook                                                               
Inlet at that  time, because that was where most  of the cashable                                                               
credits were going.                                                                                                             
                                                                                                                                
She divided  this topic into  three buckets: the $700  million in                                                               
cashable  credits that  are now  worthless, and  that the  Senate                                                               
seriously wants  to solve, what to  do going forward in  terms of                                                               
accruing more  debt in these  cashable credits, and  reviewing SB                                                               
21 (the Senate believes it is working).                                                                                         
                                                                                                                                
She  said now  they have  found that  because of  this incredibly                                                               
complex  system and  the way  the credits  work, the  floor isn't                                                               
hard, so that  must be dealt with. However,  changing one element                                                               
affects other elements, so it is a challenge.                                                                                   
                                                                                                                                
CHAIR  GIESSEL said  she would  forward  the questions  generated                                                               
today through  the LB&A  process to Mr.  Marks and  Mr. Ruggiero,                                                               
legislative consultants.                                                                                                        
                                                                                                                                
3:14:31 PM                                                                                                                    
CHAIR GIESSEL  adjourned the  Senate Resources  Committee meeting                                                               
at 3:14 p.m.                                                                                                                    
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
AGENDA - 4 - 19 -17.pdf SRES 4/19/2017 2:00:00 PM
HB 111 - Presentation by Marks - Loss Recovery - 4 - 19 - 17.pdf SRES 4/19/2017 2:00:00 PM
HB 111