Legislature(2009 - 2010)BUTROVICH 205
04/06/2010 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB271 | |
| HB306 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | HB 306 | TELECONFERENCED | |
| = | SB 271 | ||
SB 271-OIL AND GAS PROD. TAX: CREDITS/INTEREST
3:33:43 PM
CO-CHAIR MCGUIRE announced consideration of SB 271.
PAT GALVIN, Commissioner, Department of Revenue (DOR), gave an
overview of SB 271, the governor's oil and gas tax credits bill.
He said the bill deals with three primary themes, the first is
to increase tax incentives available for activities that will
result in more oil and gas jobs, the second is to provide all
taxpayers with the full value for incentives currently offered,
and the third is to provide fairness in administration of the
production tax. This goes to the provision dealing with the
application of interest for underpayment of taxes due to a
retroactive application of a regulation.
SENATOR STEDMAN joined the meeting.
3:36:04 PM
COMMISSIONER GALVIN said SB 271 consists of four main
components: one is that it establishes a 30 percent credit for
well-related expenditures (infield drilling) that would fill an
existing space in the oil and gas credit area where they already
provide a blanket 20 percent credit for capital expenditures
across the board. If it takes place outside of existing areas of
activity they provide either a 30 or a 40 percent credit. This
credit is intended to target well related expenditures within
existing fields. Second, it eliminates the current requirement
that the capital credits must be spread over two years and
allows them to be used in the year in which they are earned. The
third one is to eliminate the current reinvestment requirement
(taxpayer must demonstrate that they are reinvesting in the two
subsequent years) for those taxpayers who want the state to buy
their credit when they don't have current production tax
obligations to put their credit up against. They have found it
could provide a barrier to companies who are looking to partner
on individual exploration projects where they may come in as an
investor for a particular well program and then see what happens
after that. Their impression of their ability to get full value
of the credit will be based upon whether they expect to make
additional investments in the future. Finally, it provides a
waiver of interest when retroactive regulations are put in place
that result in an underpayment in a past tax return.
3:39:45 PM
COMMISSIONER GALVIN provided more detail to the first component,
the 30 percent credit for infield drilling. They saw the overall
level of investment and well activity raising after ACES passed,
but not the number of wells being drilled. This provision raises
the 20 percent credit currently available for all well-related
work to 30 percent for well-work within existing units. It also
provides a 30 percent credit for certain well-related operating
costs that currently don't qualify for any credit.
3:41:59 PM
SENATOR WAGONER asked what would insure the state will get
additional production for that additional 10 percent credit.
COMMISSIONER GALVIN answered there is no guaranty that the
activities qualifying for the credit will be additional, because
they can't easily identify what they would have done otherwise.
However, the department recognizes that they have seen the level
of activities among explorers increase, so they anticipate that
these credits for this particular type of activity will
encourage more of it.
3:43:35 PM
SENATOR STEDMAN said he sees it as more of a 50 percent credit.
Several years ago when they did PPT [revising the state oil tax]
legislative consultants cautioned that if the state moved the
credit from the 25 percent base tax it would be offering credit
that wasn't needed, and he didn't recall ever discussing a
credit as high as 30 percent. So he thought as they go down this
road they should have some cash-flow modeling.
3:46:29 PM
COMMISSIONER GALVIN said he would agree if they were looking at
increasing the capital credit across-the-board from 20 to 30
percent. But here they are trying to incentivize specific
activities similar to the existing exploration incentive credit
program which is at 30 percent and sometimes a 40 percent for
particular activities. They have modeled the fiscal impact of
this based upon the expected spending they are seeing in the
next couple of years. While they expect it to go up, they have
estimated $250-300 million per year in additional credits being
generated by this activity that would qualify for these credits.
SENATOR STEDMAN said he understands these credits are targeting
Prudhoe Bay, Kuparuk, and Alpine, the older side of the field
with a lot of heavy oil and comparatively lower operating costs
(where most of the oil and the money are). Consultant David Wood
had done some work in that area and testified in Finance about
concerns with some of the timing and placement of the
incentives.
3:49:07 PM
SENATOR FRENCH said his question goes back to the ACES debate
and the model that was done by Rich Ruggerio [Gaffney Cline] and
Bob George that showed high profitability for Prudhoe and
Kuparuk wells of 50 percent and under almost any taxation
structure. He wondered where that level of profitability plays
into the governor's calculation of the size of the stimulus that
is necessary, given that drilling wells there is "like shooting
fish in a barrel."
COMMISSIONER GALVIN said the economic modeling they did during
the ACES session was based on numbers the companies
(particularly BP) provided, and he thinks those were an accurate
reflection. He did not believe those particular wells needed
this kind of credit, but he further expects a second wave of
well work that will be less economic - because either the costs
are higher or the production profile would be less attractive -
and those wells are not being drilled. This credit seeks to
provide a broader economic uplift, looking to bring on some
activities (infield drilling) that are currently being passed
over.
3:52:17 PM
CO-CHAIR WIELECHOWSKI asked how the $350 million fiscal note is
apportioned between new wells and what they expect to be drilled
because of this credit remembering the increase from the 20-30
percent in the old wells that would have been drilled anyway.
COMMISSIONER GALVIN answered they don't have any projections,
and technically the fiscal note is indeterminate for this bill.
It is the balance between the additional credits that the state
would incur because of the additional activity with the
offsetting additional production; so he couldn't give him an
accurate revenue impact.
3:53:45 PM
CO-CHAIR WIELECHOWSKI echoed Senator Stedman in that it is
important to do some kind of modeling to figure out what the
state is really getting for the $350 million. He would have a
hard time supporting giving it away for wells that would be
drilled anyway, but if they are going to get new wells out of
it, he would be more supportive. He asked how much more oil
would be going into the pipeline and how much more revenue would
be generated because of these credits.
COMMISSIONER GALVIN said he appreciated the sentiment and felt
that they would model this if they could, but without additional
detail from the companies they can't do it. However, they do
know that the increased credits in the exploration areas are
working, and that kind of credit doesn't exist for infield
drilling, and they think it is worth trying.
3:56:32 PM
CO-CHAIR WIELECHOWSKI commented that it is hard for him to make
a big policy call without this information, and now he is
hearing that the commissioner cannot give him any confidence
that one single well will be drilled as a result of this credit.
COMMISSIONER GALVIN responded that he can't say specifically how
much activity is going to be created, but he can say this credit
will result in more favorable economics for the wells being
evaluated for a decision. That will increase the likelihood that
more wells will be drilled and that more production will occur.
3:57:47 PM
SENATOR WAGONER asked if this credit doesn't result in any wells
being drilled, then the state isn't out any money, right?
COMMISSIONER GALVIN responded yes.
SENATOR WAGONER asked what history he has about the wells that
have been drilled over the past five years, so they can use it
for comparison.
COMMISSIONER GALVIN said he will have to look at how detailed
their information is on specific incremental production that
results from drilling activities.
3:59:03 PM
SENATOR FRENCH wondered if they had looked at the Kuparuk
experience where prior to the PPT tax revisions in 2006 the
severance tax was nearly zero.
COMMISSIONER GALVIN replied that they don't see this as falling
in the rubric of lower taxes means higher production. Rather
they see this as investment results in a credit off your current
tax bill. It changes the dynamic significantly in terms of
investment decision making.
SENATOR FRENCH asked where the $250 to $300 million comes from -
from projecting the current level of infield drilling activity
or does it envision some modest increase?
4:00:29 PM
COMMISSIONER GALVIN answered that it actually breaks the current
level of total expenditures down into activities that are
considered to potentially be subject to this credit.
4:01:38 PM
CO-CHAIR WIELECHOWSKI asked where he gets the information to
make these projections and based on these projections do they
expect an increase, a decrease or the same amount of drilling
compared to now.
COMMISSIONER GALVIN answered that their information comes from a
variety of sources. The projected overall expenditure comes from
the companies, themselves, that under the current tax system
have to project spending levels for a number of years in the
future. They get a bit more detail on past spending from other
past reports and have tried to differentiate well-related costs
from non-well related costs.
4:03:09 PM
CO-CHAIR WIELECHOWSKI asked again if he expects an increase, a
decrease or the same amount of drilling in future years.
COMMISSIONER GALVIN replied that the level of overall
expenditure is expected to increase, which would lead them to
expect additional wells will be drilled. It is a combination of
new exploration and development wells and what would be
considered infield drilling type programs, but they don't have
information that there is going to be an increase in any of
those individual segments.
CO-CHAIR WIELECHOWSKI asked what level of increase they expect.
How many years out does this information go? Is it public? Can
he get a copy of it?
COMMISSIONER GALVIN replied that it is part of the department's
revenue forecast.
CO-CHAIR WIELECHOWSKI asked what the projected increase is over
the next five years without this credit.
COMMISSIONER GALVIN replied the overall (capital) expenditure is
expected to go up about 10 percent a year, but that would
include things that don't qualify for these credits.
CO-CHAIR MCGUIRE pointed out that if no investment is made no
tax credit is given. It's a question of whether or not the state
feels it's worthwhile to "partner in the risk." She said this
committee has been looking at a number of tax credits and that
she has heard from industry that ACES is broken. She thanked the
governor for bringing stakeholders together to discuss how
corporate behavior could be influenced in a way that would net a
positive outcome for the state.
4:07:09 PM
SENATOR HUGGINS said the commissioner listed the items based on
a letter from the House asking for some adjustments, but there
have to be some things that didn't make the cut. He asked if
there is anything else he could share with the committee that
might be "objective fixes."
COMMISSIONER GALVIN replied that they looked at lowering the
progressivity level from the current .4 percent or changing the
kick off point. Some of the others were more technical, such as
working with the definition of lease expenditures and the way
the facility sharing costs are incurred or accounted for.
4:08:41 PM
SENATOR HUGGINS said the item that intrigued him is the
technique of "bracketing the progressivity." He asked if they
looked at that.
COMMISSIONER GALVIN replied that was looked at before the
session; the other body had also proposed a similar methodology.
Currently, if the production tax value per barrel goes over
$30/barrel, the progressivity rate applies to the entire stream.
The concept would be rather than applying the progressive rate
to the entire stream to apply it to that portion of the stream
above $30/barrel. If you just shear off the bottom $30 with
prices where they are now, that amounts to dropping
progressivity from .4 percent to .2 percent. It means at the
higher end of the progressivity you'll be at a lower state take.
In looking at the question of progressivity, the department
always asked if it would result in more activity (investment,
jobs and production). There seemed to be less connection between
the benefit being provided by that change and the expectation of
increased activity. So, they gravitated more to credits.
4:11:58 PM
SENATOR HUGGINS asked if he thought the timing of these
incentives would positively impact the big gas pipeline,
particularly in the context of a successful instate gas pipeline
and some petrochemical industry.
COMMISSIONER GALVIN answered that he can see it in two different
ways; for example, impacting those who are investing in
exploration almost exclusively for gas in the Foothills right
now. To the extent that the credits will provide incentives to
them, that would be a positive.
One of the limitations to the exploration incentive credit
program is that the activity has to be a certain number of miles
from an existing well, and given the seasonal nature of Alaska's
drilling program, a producer might start drilling one year but
have to wait to finish it the next year and would not get the
same exploration credit for that pad. This measure would benefit
that type of activity. Also, to the extent that a producer is
looking to use these credits for additional infield drilling and
that enhances their expectation of future gas production, it
will decrease their perceived reservoir risk associated with a
long-term commitment on a pipeline. To that extent it could have
an incremental value.
4:14:51 PM
SENATOR WAGONER asked how much development has to happen in a
new field prior to this credit kicking in and being applicable
to each well - for instance at Pt. Thomson.
COMMISSIONER GALVIN replied basically none. Development is not
directly defined as to an existing field or a developed field.
It applies to "all wells."
4:15:28 PM
SENATOR FRENCH asked if the oil industry supports this bill.
COMMISSIONER GALVIN said he believes so. A number of new
entrants spoke very positively with regard to access to the new
credits and the cash back from the state.
4:16:31 PM
SENATOR FRENCH remarked that he didn't see a lot of people in
the audience.
COMMISSIONER GALVIN responded that if he wanted to invite the
industry to comment, he thought they would be here.
CO-CHAIR WIELECHOWSKI asked if this bill passes, does it end the
oil tax debate once and for all.
COMMISSIONER GALVIN replied this is an attempt to address the
concerns that have been raised, and from his perspective it will
send a very positive message that the state is responsive to
industry's concerns. But it is up to the legislature to decide.
4:17:44 PM
SENATOR HUGGINS commented that North Dakota is booming and asked
if the commissioner is familiar with what they are doing.
COMMISSIONER GALVIN said he is not aware that they have any
particular program in place and he suspects the boom is driven
by the resource. Comparing Alaska with any of the Lower 48
states isn't really a fair comparison because they don't own the
resource themselves and don't have the same levers available to
them as Alaska does. Also their relationship to the industry
isn't the same.
SENATOR HUGGINS asked why Alberta is so "upside down."
4:19:37 PM
COMMISSIONER GALVIN replied what he understands from Alberta is
they had a couple things happen to them almost simultaneously to
form a sort of overheating of the industry. The oil sands had a
huge influx of activity, and in that time they significantly
changed their fiscal system by creating tiers. If you come into
it now it is different than a couple of years ago. Then when the
oil prices came down, everything started to implode and their
fiscal system looked out of place. Beyond that he hadn't spent a
lot of time comparing their system to ours.
CO-CHAIR MCGUIRE invited the commissioner to look at what other
jurisdictions are doing with regard to taxes and tax credits
over the Interim.
4:22:05 PM
CO-CHAIR MCGUIRE closed public testimony and set the bill aside.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 306 - Bill Packet.pdf |
SRES 4/6/2010 3:30:00 PM |
HB 306 |