Legislature(2017 - 2018)BARNES 124

03/10/2017 01:00 PM RESOURCES

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Audio Topic
01:02:50 PM Start
01:03:25 PM Presentation(s): Department of Revenue - the Competitivness Review Board (o&gcrb)
01:16:57 PM Confirmation Hearings(s): Alaska Oil and Gas Conservation Commission (aogcc)
02:11:46 PM HB111
03:06:17 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: AK Oil & Gas Competitiveness Review TELECONFERENCED
Board by Commissioner Hoffbeck
+ Confirmation Hearings: AK Oil & Gas Conservation TELECONFERENCED
-- Public Testimony --
Heard & Held
-- Testimony <Invitation Only> --
**Streamed live on AKL.tv**
       HB 111-OIL & GAS PRODUCTION TAX; PAYMENTS; CREDITS                                                                   
2:11:46 PM                                                                                                                    
CO-CHAIR TARR  announced that the  final order of  business would                                                               
be  HOUSE BILL  NO. 111,  "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;  and                                                               
providing for an effective date."                                                                                               
2:12:01 PM                                                                                                                    
CO-CHAIR  JOSEPHSON   moved  to  adopt  the   proposed  committee                                                               
substitute  (CS)   for  HB  111,  Version   30-LS0450\N,  Nauman,                                                               
3/10/17, as the working document.                                                                                               
2:12:19 PM                                                                                                                    
CO-CHAIR TARR objected  for discussion purposes.   She stated the                                                               
intent of the  co-chairs is to give the  committee an opportunity                                                               
to review the  CS and, following that, the bill  would be held in                                                               
[A discussion  ensued regarding  the committee's  development and                                                               
handling of the CS.]                                                                                                            
2:19:50 PM                                                                                                                    
LISA WEISSLER,  Staff to Representative Andy  Josephson, directed                                                               
attention  to a  document, entitled  "Comparison of  HB 111  with                                                               
Committee Substitute  Work Draft  (Resources)," dated  3/9/17, to                                                               
point  out  the side  by  side  analysis/comparison.   The  first                                                               
change is an addition of  intent language such that contingent on                                                               
the  passage of  a  fiscal  plan, a  substantial  portion of  the                                                               
outstanding transferable  and production tax  credit certificates                                                               
would be purchased.                                                                                                             
CO-CHAIR TARR  interjected that another vehicle  for establishing                                                               
legislative  intent could  be  brought via  a  letter of  intent;                                                               
however,  having the  language included  in the  bill provides  a                                                               
stronger  message in  which to  outline  a means  to address  the                                                               
existing debt.                                                                                                                  
MS.  WEISSLER said  the interest  statement in  Section 1  became                                                               
Section 2 in the CS ("Version  N"), without change.  Section 2 in                                                               
the original  bill raised  the minimum  tax from  4 percent  to 5                                                               
percent; Section  6 in Version N  would set the minimum  tax at 5                                                               
percent, when the  average Alaska North Slope (ANS)  price is $50                                                               
or more,  and at 4  percent, when the  average ANS price  is less                                                               
than $50, and it would remove the variable minimum tax rate.                                                                    
2:22:46 PM                                                                                                                    
The committee took an at-ease from  2:22 p.m. to 2:24 p.m. due to                                                               
technical difficulties.                                                                                                         
[A   series  of   intermittent   technical  difficulties   caused                                                               
interruptions and some testimony was lost.]                                                                                     
CO-CHAIR  TARR commented  that changing  the minimum  oil tax  to                                                               
reflect  a  benchmark rate  of  $50.00  per  barrel was  done  in                                                               
response  to industry  to better  reflect  the current  low-price                                                               
2:25:11 PM                                                                                                                    
The committee took an at-ease from  2:25 p.m. to 2:34 p.m. due to                                                               
technical difficulties.                                                                                                         
2:34:04 PM                                                                                                                    
MS. WEISSLER returned attention to  the comparison and said there                                                               
was a mistake in Section 2  of the original bill, which ended the                                                               
minimum tax for  oil in 2022 when the net  production tax for gas                                                               
was slated to change  to a gross value tax.   Version N makes the                                                               
necessary   correction  to   apply   the  minimum   tax  to   oil                                                               
indefinitely and end it  only for gas in 2022.   A new section to                                                               
AS 43.55.011 related to reducing  the minimum tax below the floor                                                               
was not  changed.   In order  to stop industry's  use of  the per                                                               
barrel tax credit in months  that would reduce their tax, Section                                                               
7 of Version  N would delete language in AS  43.05.011(q) and add                                                               
new language in AS 43.05.011  (j) that better addresses the issue                                                               
of the credits  being applied in different months.   [Indisc. due                                                               
to audio recording technical difficulties.]                                                                                     
REPRESENTATIVE RAUSCHER asked whether  per barrel tax credits are                                                               
being applied in the same fiscal or calendar year.                                                                              
MS. WEISSLER answered  that credits have been  allowed during the                                                               
same calendar year.                                                                                                             
2:37:36 PM                                                                                                                    
The committee took an at-ease from  2:37 p.m. to 2:42 p.m. due to                                                               
technical difficulties.                                                                                                         
2:42:34 PM                                                                                                                    
MS.  WEISSLER  explained  that  HB  111  initially  proposed,  in                                                               
Section [5], to  change the North Slope carry  forward annual net                                                               
operating  loss  (NOL)  credit  rate,  as  established  under  AS                                                               
43.55.023(b), from  35 percent to  15 percent for the  purpose of                                                               
matching the  production tax rate  with the carry forward  or NOL                                                               
rate.  Currently, the per barrel  credits added in by Senate Bill                                                               
21  [passed  in  the   Twenty-Eighth  Alaska  State  Legislature]                                                               
distort the 35 percent matching  rates.  Ms. Weissler referred to                                                               
testimony  by legislative  consultants related  to carry  forward                                                               
losses,  and  noted that  another  provision  of  HB 111  was  to                                                               
eliminate cash credits for NOLs.                                                                                                
REPRESENTATIVE RAUSCHER  paraphrased a  quote from  a consultant,                                                               
stating, "If you're not allowed  to recover your costs, that puts                                                               
Alaska on the bottom of  the competition scale around the world."                                                               
He  noted  that  [the  proposed  change from  35  percent  to  15                                                               
percent] represents a significant percentage drop.                                                                              
CO-CHAIR  TARR advised  that the  remainder  of the  presentation                                                               
should  provide   an  understanding   of  how   the  consultant's                                                               
recommendation is being followed.                                                                                               
MS.  WEISSLER restated  the  original  intent of  HB  111 was  to                                                               
reduce  NOLs to  15  percent and  eliminate  cash credits,  which                                                               
would be  "a very  big hit  to the  independent producers."   She                                                               
said the state  seeks to keep independent  producers operating in                                                               
Alaska;  therefore, Version  N, Sections  9 and  24-26, introduce                                                               
carry forward deductions.  She continued, as follows:                                                                           
     We get rid  of the net operating loss  credits - people                                                                    
     carry  the  deduction  forward.   Now,  typically  that                                                                    
     would be 100 percent of  someone's cost ....  The issue                                                                    
     that we have here in  Alaska is this distortion that we                                                                    
     refer  to of  a 35  percent  tax rate  with per  barrel                                                                    
     credits and where the effective  tax rate is lower than                                                                    
     that 35  percent.  And  so, speaking in the  context of                                                                    
     major producers  who have tax  liability, if  they came                                                                    
     to a  point where  they had a  net operating  loss that                                                                    
     was carry forward,  where they got an uplift  - and the                                                                    
     uplift, I should  mention, and this will  be in Section                                                                    
     26  of  [Version]  N,  is 7  percent  above  the  [U.S.                                                                    
     Federal  Reserve  System]  rate   -  they'll  get  that                                                                    
     interest,  they  carry  forward a  hundred  percent  of                                                                    
     their net  operating loss.  However,  when they accrued                                                                    
     that  loss   they  would  have  only   been  paying  an                                                                    
     effective tax rate  of say 15, 17 percent.   And so, to                                                                    
     ... correct  for that, ...  because of our  tax system,                                                                    
     it's being set at 50  percent of the net operating loss                                                                    
     carry forward, and that has  the same effect as how the                                                                    
     original bill  was written, ...  taking 35  percent tax                                                                    
     rate, 15 percent net operating  losses.  So, ... that's                                                                    
     how this works.                                                                                                            
     For the  major producers, it  won't have a  huge effect                                                                    
     ...  because they  generally have  tax liability;  they                                                                    
     are able to take a  hundred percent of their deductions                                                                    
     in a  year.   Now, we'll  talk about  the independents,                                                                    
     who  don't  have production,  or  the  explorers.   ...                                                                    
     They'll  be  able to  carry  50  percent of  their  net                                                                    
     operating  losses forward,  they'll have  the uplift  -                                                                    
     this  interest  that will  address  the  time value  of                                                                    
     money -  but they are  getting 50 percent of  their net                                                                    
     operating losses,  where the major producers,  who have                                                                    
     a tax  liability, are getting  a hundred percent.   So,                                                                    
     this is essentially  a policy call in terms  of our tax                                                                    
MS. WEISSLER pointed  out that this structure has been  set up in                                                               
an  effort  to  level  the   playing  field  between  majors  and                                                               
independents, and  she specified  that the provision  would apply                                                               
to operators  only on  the North  Slope, not  to those  in Middle                                                               
Earth or Cook Inlet.                                                                                                            
2:49:24 PM                                                                                                                    
CO-CHAIR   TARR  recalled   the   work   session  that   included                                                               
information on the carry forward  losses.  By allowing the losses                                                               
to be carried  forward, at the 100 percent level  with the uplift                                                               
included, in  seven years the value  would be 200 percent.   This                                                               
action represents a big commitment on  the part of the state, she                                                               
opined, when an  initial year investment, with  interest, is able                                                               
to grow  by 100 percent  in value in  seven years.   A seven-year                                                               
timeframe is the acceptable time  described for an oil project to                                                               
come on  line.  The effort  here is to make  Alaska attractive to                                                               
investors and to allow producers  to recover 100 percent of their                                                               
losses  and 200  percent of  their investment  over time.   Other                                                               
considerations  are to  ensure  that the  state's  tax policy  is                                                               
sustainable,  that   it  will  allow   the  state  to   meet  its                                                               
obligations,  and  that  it  will   not  result  in  a  financial                                                               
circumstance of being overcommitted.                                                                                            
MS. WEISSLER,  in response to  Representative Birch,  clarified a                                                               
portion  of  the  language  in  Version N  as  described  in  the                                                               
comparison document.                                                                                                            
2:55:12 PM                                                                                                                    
MS. WEISSLER  returned attention  to the comparison  document, on                                                               
page 2,  and said Section  6, removing the ability  for taxpayers                                                               
to  apply for  purchase  of  NOL credits,  remains  the same  and                                                               
appears in  Version N as Section  11.  She noted  that Section 7,                                                               
with amendments to sliding scale  per barrel credits, is found in                                                               
Section 14 of Version N.                                                                                                        
CO-CHAIR  TARR further  explained  that the  current lower  price                                                               
environment, which  led to a change  to the minimum tax,  is also                                                               
reflected in changes  to the per barrel credits.   Currently, per                                                               
barrel credits "slide"  from $8 to zero, which  has been adjusted                                                               
down [from  the highest oil price  of $150 per barrel  and above,                                                               
to $110  per barrel and  above] to  ensure the per  barrel credit                                                               
can be applied  in a lower price environment.   The original bill                                                               
would have cut the credit to $5, which was deemed too extreme.                                                                  
MS. WEISSLER explained that a  dry hole credit was not previously                                                               
in HB  111, and now appears  in Version N  as Section 17.   It is                                                               
designed  to assist  a company  that explored  in good  faith but                                                               
realized no production.  The  language would allow an explorer to                                                               
take up  to a  15 percent purchasable  tax credit  of exploration                                                               
expenditures incurred  for drilling that  results in a  dry hole,                                                               
based  on the  following  specific conditions:    payment of  all                                                               
service contracts;  return of the  lease to the state;  proof the                                                               
explorer has  no oil  or gas production;  and the  expenditure is                                                               
not the  basis for  another credit  claimed under  the production                                                               
CO-CHAIR TARR added that the  aforementioned measure was included                                                               
on the  recommendation of the  consultant to provide a  means for                                                               
explorers that never see production to cover their costs.                                                                       
MS.  WEISSLER explained  that Section  8, without  change, became                                                               
Section 18 in  Version N, and would amend the  tax credit fund to                                                               
reflect  the change  that removes  the ability  for taxpayers  to                                                               
apply  for  a  cash  payment  for  net  operating  loss  credits.                                                               
Section 9, without change, became  [Section 19] in Version N, and                                                               
would change the limit on cash  payment of tax credits from a $70                                                               
million  cap  to  a  $35   million  cap  per  company  and  limit                                                               
purchasable  credits  to  companies  with not  more  than  15,000                                                               
barrels per  day production, which  is down from  50,000 barrels.                                                               
She pointed out that this  provision applies only to Middle Earth                                                               
[non-North  Slope, non-Cook  Inlet areas  of the  state], and  to                                                               
qualified capital expenditure credits  and well lease expenditure                                                               
MS.  WEISSLER directed  attention to  Section 27,  "Assignment of                                                               
Tax Credit  Certificates," in Version  N, which would  repeal the                                                               
2013 statute  that allowed for  the assignment of  production tax                                                               
credits to  a third-party assignee.   This provision  is required                                                               
because a  change in current  statute that was intended  to apply                                                               
to gas in  Cook Inlet actually applied to the  entire state; as a                                                               
result of the  current statute, the state has been  placed in the                                                               
position with  banks holding credits,  which Alaska must  now pay                                                               
for in cash.                                                                                                                    
REPRESENTATIVE   RAUSCHER  asked   if   this   measure  will   be                                                               
CO-CHAIR TARR replied no.                                                                                                       
2:59:54 PM                                                                                                                    
MS.  WEISSLER  continued  to  Sections 20  and  21,  "Tax  Credit                                                               
Information," two  new sections in  Version N, which  would allow                                                               
certain information  related to  tax credits  to be  made public,                                                               
and  to Sections  3-5, "Confidential  Tax Information,"  also new                                                               
sections  of Version  N, which  would allow  certain confidential                                                               
taxpayer information to be disclosed  to legislators in executive                                                               
session in conformance with a signed confidentially agreement.                                                                  
CO-CHAIR TARR  informed the committee the  foregoing language was                                                               
the same as  was used [for House Bill 247,  passed in the Twenty-                                                               
Ninth  Alaska  State  Legislature]   and  was  drafted  with  the                                                               
participation of the Alaska Oil and Gas Association (AOGA).                                                                     
MS. WEISSLER continued  to Section 26, "Net  Operating Loss Carry                                                               
Forward,"  a new  section in  Version  N which  would direct  the                                                               
Department of  Natural Resources (DNR) to  develop regulations to                                                               
establish  a  review  process for  agency  preapproval  of  lease                                                               
expenditures  that would  generate a  carry forward  annual loss.                                                               
Finally, Section  28 in Version  N would establish  a legislative                                                               
working group to analyze the Cook Inlet fiscal regime.                                                                          
CO-CHAIR TARR added that a Cook  Inlet working group is needed to                                                               
review  the tax  regime  in  Cook Inlet;  currently,  there is  a                                                               
dollar per barrel oil tax, but  no gas tax, and the working group                                                               
will meet  on this issue  during the legislative  interim period.                                                               
Membership in the working group is open to industry.                                                                            
3:02:56 PM                                                                                                                    
CO-CHAIR TARR  removed her objection  to the motion to  adopt the                                                               
proposed  committee  substitute  (CS)  for HB  111,  Version  30-                                                               
LS0450\N, Nauman, 3/10/17, as the  working document.  There being                                                               
no further objection, Version N was before the committee.                                                                       
3:04:28 PM                                                                                                                    
REPRESENTATIVE  BIRCH  asked  for  clarification  on  the  uplift                                                               
provision in the bill.                                                                                                          
CO-CHAIR TARR said the consultant  recommended seven years as the                                                               
average timeframe  for a  project to  come on  line.   There were                                                               
other options  discussed, and  the decision was  made to  use the                                                               
same interest rate that is applied to delinquent tax payments.                                                                  
CO-CHAIR TARR said the upcoming  hearing schedule on HB 111 would                                                               
be adjusted as necessary to accommodate forthcoming amendments.                                                                 
[HB 111 was held over.]                                                                                                         

Document Name Date/Time Subjects
HB111 Supporting Document - Alaska's Oil and Gas Competitiveness Report 2015 3.7.17.pdf HRES 3/10/2017 1:00:00 PM
HB 111
Seamount ReAppointment Thank you022317.pdf HRES 3/10/2017 1:00:00 PM
Seamount Resume0317.pdf HRES 3/10/2017 1:00:00 PM
Seamount Biography0317.pdf HRES 3/10/2017 1:00:00 PM
HB 111- CS Comparison.pdf HRES 3/10/2017 1:00:00 PM
HB 111
French Oil Field Experience_Redacted.pdf HRES 3/10/2017 1:00:00 PM
Resume Hollis French_Redacted.pdf HRES 3/10/2017 1:00:00 PM
Daniel Seamount, Jr. 2016_Redacted.pdf HRES 3/10/2017 1:00:00 PM
Seamount re-appointment request 2017_Redacted.pdf HRES 3/10/2017 1:00:00 PM
Hollis French_Redacted.pdf HRES 3/10/2017 1:00:00 PM
HB111 Version N 3.10.17.pdf HRES 3/10/2017 1:00:00 PM
HRES 3/13/2017 1:00:00 PM
HRES 3/14/2017 3:00:00 PM
HB 111
HB 111- CS Ver N Comparison 3.10.17.pdf HRES 3/10/2017 1:00:00 PM
HRES 3/13/2017 1:00:00 PM
HRES 3/14/2017 3:00:00 PM
HB 111