Legislature(2017 - 2018)BARNES 124
02/01/2017 06:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Presentation(s): Update: Status of the Oil and Gas Tax Regime | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
February 1, 2017
6:01 p.m.
MEMBERS PRESENT
Representative Andy Josephson, Co-Chair
Representative Geran Tarr, Co-Chair
Representative Dean Westlake, Vice Chair
Representative Harriet Drummond
Representative Justin Parish
Representative Chris Birch
Representative DeLena Johnson
Representative George Rauscher
Representative David Talerico
MEMBERS ABSENT
Representative Chris Tuck (alternate)
COMMITTEE CALENDAR
PRESENTATION(S): UPDATE: STATUS OF THE OIL AND GAS TAX REGIME
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
PAT GALVIN, Chief Commercial Officer/General Counsel
Great Bear Petroleum
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing of the status
of the oil and tax regime in Alaska, and answered questions.
DAVID WILKINS, Senior Vice President
Hilcorp Energy Company
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing of the status
of the oil and gas tax regime in Alaska, and answered questions.
BENJAMIN JOHNSON, President/CEO
BlueCrest Energy, Inc.
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing of the status
of the oil and gas tax regime in Alaska, and answered questions.
KEN ALPER, Director
Tax Division
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Continued a PowerPoint presentation begun
during the meeting of 1/30/17 entitled, "Alaska Oil and Gas
Taxation - Status Report" dated 1/30/17, and answered questions.
ACTION NARRATIVE
6:01:55 PM
CO-CHAIR GERAN TARR called the House Resources Standing
Committee meeting to order at 6:01 p.m. Representatives Tarr,
Birch, Drummond, Johnson, Parish, Rauscher, Talerico, Westlake,
and Josephson were present at the call to order.
^PRESENTATION(S): UPDATE: STATUS OF THE OIL AND GAS TAX REGIME
PRESENTATION(S): UPDATE: STATUS OF THE OIL AND GAS TAX REGIME
6:02:33 PM
CO-CHAIR TARR announced that the only order of business would be
an update on the status of the state's oil and gas tax regime.
6:03:01 PM
PAT GALVIN, Chief Commercial Officer and General Counsel, Great
Bear Petroleum, informed the committee Great Bear Petroleum is
an exploration company on the North Slope that holds 590,000
acres of state oil and gas leases located directly south of
Prudhoe Bay and Kuparuk River Unit fields, but not in the
Foothills. Great Bear has completed five years of 3D seismic
acquisition - covering its approximately 1,000 square miles of
leases - and has drilled three wells, two that targeted shale
intervals; however, due to economics, the company has turned its
attention to conventional fields. Great Bear utilized seismic
data to identify six conventional oil prospects that will be
explored with three wells and that have the potential to produce
billions of barrels of oil. Further, Great Bear has spent
almost $250 million in drilling and seismic acquisition, and has
earned about $140 million in reimbursable tax credits, a large
portion of which remain unpaid by the state. Mr. Galvin
provided a brief personal background. Turning to the status of
Alaska's oil and gas tax system, he advised that the oil tax
system is very complicated because it has developed over time
and through a number of adjustments, and cautioned that under
these circumstances policymakers may fail to see all of the
ramifications of their actions. It is very important to develop
a set of principles or objectives to follow in order to avoid
unintended consequences. One of the driving principles of the
state's oil and gas policy over the past 20 years has been a
recognition of the need for competition on the North Slope; new
companies as explorers and developers, and then as producers,
create a different market with more activity and competition.
He opined the aforementioned principle ensures economic equity
between the incumbents and new companies, so that investment
dollars hold the same economic value. Mr. Galvin cautioned
against a return to a tax credit system that is more beneficial
to an incumbent. Firstly, the existing reimbursable tax credit
system ensures that new companies receive the same economic
value as incumbents because incumbents immediately deduct their
expenses and reduce their taxes, and reimbursable cash payments
are equivalent to the value of an incumbent's tax savings; thus
if the state fails to make payments, the investment value shifts
back to the incumbent. Secondly, net operating loss credits are
part of the tax system that allow a company with no revenue to
deduct expenditures from zero and convert them to a credit.
However, a current producer with no revenue would deduct
expenses and generate net operating losses. He clarified that
losses are not credits and can be carried forward into a
subsequent year; the difference between credits and net
operating losses must be recognized and understood.
6:14:14 PM
REPRESENTATIVE BIRCH asked what other investments have been made
by Great Bear Petroleum.
MR. GALVIN said the company's focus is solely on Alaska and the
North Slope; Great Bear was created by investors to pursue the
"Shell play" in 2010. Subsequently, the company partnered with
a new managing partner, and he provided a brief background on
its new CEO. All of Great Bear's employees live in Anchorage.
REPRESENTATIVE PARISH surmised from Mr. Galvin's remarks that
the state's current tax structure puts larger firms at a
competitive advantage.
MR. GALVIN clarified that he is worried that the state is
"definitely moving in that direction."
REPRESENTATIVE PARISH observed that it is imprudent for the
state to pay statutorily recommended amounts of tax credit
liabilities, given the state's financial difficulties.
MR. GALVIN remarked:
... I was there writing the statute that dealt with
the reimbursable fund, and that is not intended to be
a statutorily recommended amount. That was intended
to be strictly a mechanism to establish the fund and
to ensure that there was a way in which the fund would
automatically receive a calculated amount, but it was
always intended, and was from day one up until ...
present, fully funded to the expected amount of the
reimbursable credits that were supplied; in fact, it
was written into the budget that it would be funded at
whatever was necessary to cover the credits up until
the governor vetoed that language a year ago. The
legislature has always funded it completely, and that
statute was never intended to be a limit or a
recommended amount ....
REPRESENTATIVE PARISH posed the analogy of a person who spends
$100 at a market and receives a coupon worth $60 off their next
purchase. The state has created an unwise expectation that its
coupon will be immediately repurchased, which is unfair to
industry. He questioned how to restructure the current tax
regime to level the playing field, because now the majors have
an unfair advantage.
6:21:15 PM
MR. GALVIN disagreed with the foregoing analogy. For example,
the state has advertised that exploration companies get $0.60
back for each $1 spent, and that current producers get $0.60
off. He described the present situation, and said the state has
"changed [its] mind." Mr. Galvin could not say how to fix the
situation; the question is not whether the state can afford to
pay, but that in order for all to participate, the state has to
treat all of the industry the same. He questioned the
administration's "fix" by having companies sell their credits to
incumbents who then pay less, because the state pays out the
same amount: the fix is an attempt to hide the cost on the
"revenue side" for political expediency. Mr. Galvin said the
state should not create a profit center for one company and a
disincentive for another, and urged for fairness.
CO-CHAIR JOSEPHSON acknowledged there is - or is an appearance
of - a "promise" made by the state through the credit regime.
He surmised Mr. Galvin's concern about a tax holiday in the
initial years after production begins, "is that you couldn't get
to production."
MR. GALVIN said that exploration is different from development
and production in that it holds significant risk that there may
be no return, thus a company cannot borrow against an
exploration play. In Alaska there is a long lead time between
exploration and production, so the expectation is that the
return will be much higher; in fact, the cost of capital for an
exploration company is that a five- to ten-year wait between
expenditure and "a certain amount of cash" means nothing in
value. For an exploration company there is a degrading of the
economic value of a payment "way out in the first few years of
production ...."
6:28:00 PM
CO-CHAIR JOSEPHSON questioned whether the state and the people
of the state are entitled to a system that has the Department of
Natural Resources (DNR) evaluate the financing and geology of a
project, and establish a priority list based on merits, but not
on the status of a company.
MR. GALVIN opined the public discussion that companies are
making money off of the tax credit program without making good
economic decisions is a fallacy. Great Bear's investors may
invest between $15 million and $25 million to drill an
exploration well in Alaska; after credits, the cost remains
between $9 million and $15 million. An identical well in Texas
would cost $2 million to $3 million. With this amount of money
at risk, Great Bear does not need DNR's guidance. He recalled
that when the tax credit program was established it was debated
whether state oversight was needed, but Mr. Galvin's experience
is that the industry is better equipped than DNR to assess risk.
6:31:59 PM
DAVID WILKINS, Senior Vice President, Hilcorp Energy Company,
paraphrased from the following written statement [original
punctuation provided]:
Good evening Co-Chairs Josephsen and Tarr, My name is
Dave Wilkins and I'm the Senior Vice President for
Hilcorp Alaska. I appreciate the opportunity to speak
with the resources committee today and to take part in
a discussion that is very important to me personally,
it's important to my company and to our State.
Hilcorp, founded in 1989, is one of the largest
privately-held oil and natural gas exploration and
production companies in the United States.
Headquartered in Houston, TX, Hilcorp has nearly 1,500
employees in multiple operating areas including the
Gulf Coast of Texas and Louisiana, Wyoming, the
Northeast United States, and Alaska's Cook Inlet and
North Slope. Here in Alaska, Hilcorp operates in both
Cook Inlet and on the North Slope. Just over 500 full-
time employees support our operations in Alaska and
I'm proud to say that nearly 90% are Alaskan
residents. I'm also proud to say that we've worked
very hard to build efficiencies over the last several
months. We were successful in doing so, and because of
that I'm happy to report Hilcorp has had zero layoffs
during this unpredicted drop in oil price. The support
industry's willingness to help us weather the storm
should not go unmentioned. While they have seen job
losses overall, Hilcorp's activity, on average,
employs approximately 400 full-time contractor
positions and hundreds more part time contractor
positions. Again, these are hard-working Alaskans
helping us develop the State's resources safely and
responsibly and are a major part of Alaska's overall
economy. Hilcorp operates approximately 53,000 gross
barrels of oil per day and 150 million cubic feet of
gross gas sales per day from approximately 500
producing wells, for a total net production to Hilcorp
of approximately 57,000 barrels of oil equivalent per
day. Keep in mind we did not come to Alaska until
2012, so this represents a tremendous investment in
Alaska in a very short time period. Before I go any
further, and I realize you've heard this from earlier
testimony, but it's worth saying again, from our point
of view the system is working. I'm proud to say that
we had a role in last year's historic increase in
North Slope production. It's quite a feat for an
operator that's only been on the Slope since late
2014. It's also important to note that we have worked
very hard and invested hundreds of millions of dollars
in the Cook Inlet basin as well. Our activity has
increased both oil and gas production- increasing
revenues for paid to the state and providing long-term
energy security for Alaska's largest population hub.
SB21 was in place when Hilcorp made the decision to
expand our operations in Alaska to the North Slope. It
was a significant investment at a time when prices
were significantly higher than they are today. It's
worth mentioning that despite the economic and
logistical challenges, Hilcorp continues to invest and
works hard to move the needle on oil and gas
production. We've made great progress in all three
producing fields we operate on the Slope - Northstar,
Milne Point and Endicott. We continue to invest time
and money in the Liberty Development. It's a project
that could add an additional 70,000 barrels a day down
the pipeline. We also recently built a new drilling
rig for those fields. We call it the Innovation rig,
it's a state of the art rig that is already bringing
more production online at Milne Point. If the
legislature decides to change tax policy again, we
will evaluate the economic impact to our company and
adjust our spending accordingly.. We believe that the
passage of SB21 was a good policy decision, and one
that has yielded the results it intended. And as I
watch the new legislative session take shape, I'm
encouraged to hear that folks are recognizing the
value of stability. Production from new exploration
plays can take several years and hundreds of millions
of dollars to bring online; maintaining and growing
production from existing/aging fields requires
significant and continual investments. I urge you to
foster stability let good policy continue to benefit
the state in the way it was intended and as a result
we will continue to invest our capital in Alaska. We
want to keep Alaskans employed. We want to put more
oil in the pipeline, and so I'll close with
this...Policy matters, the current system is working.
Let's continue to work together, to provide stability
not only for the industry but for the State. Thank
you.
6:38:55 PM
CO-CHAIR TARR inquired as to tax credits for which Hilcorp was
eligible in Cook Inlet.
MR. WILKINS said Hilcorp was eligible for credits and invested
its credits into activity in Cook Inlet; five years ago there
was concern that natural gas supplies in Cook Inlet were
depleted, and importing natural gas may become necessary.
Because of [Alaska oil and gas tax regime policies] Hilcorp made
investments and earned credits by drilling over 50 wells in the
Cook Inlet basin, which doubled oil production and stabilized
the gas market. At this time, Hilcorp can no longer exercise
cashable credits, but he opined that the tax credit policy was
successful for Alaska.
CO-CHAIR TARR, as an aside, stated that if a company produces
over 50,000 barrels of oil per day it is eligible to deduct net
operating loss against tax liability, but not for cashable
credits.
REPRESENTATIVE RAUSCHER asked where the Hilcorp rigs are
located.
MR. WILKINS answered on the North Slope, the Kenai Peninsula,
and offshore on the King Salmon platform.
6:42:07 PM
BENJAMIN JOHNSON, President/CEO, BlueCrest Energy, Inc.
(BlueCrest), informed the committee that he supports the
previous testimony by other members of the industry and stressed
the importance of fostering an environment that brings Alaska's
resources to development and value to its residents. Policy
matters here, and positive changes to the state's tax system
have stemmed the natural decline of oil through TAPS, fostered a
rebirth of oil fields in Cook Inlet, and ensured that large new
fields such as BlueCrest Cosmopolitan are under development.
Further, new large oil finds have just been announced, which
will require time and a lot of money to reach production, and
begin a new era of productivity and wealth for Alaska. Also,
BlueCrest is developing a smaller field in Cook Inlet which has
the potential to deliver oil and natural gas within a short
period of time and for years to come. In Cook Inlet, BlueCrest
is utilizing an extended reach drilling (ERD) rig specifically
designed to finish a new well that should be in production this
summer, and a second new well may be producing by late fall.
Mr. Johnson advised that the foregoing activities were commenced
based on the belief that the state will stand behind its
commitments concerning incentives to invest in Alaska. He
acknowledged that the incentive plan may change, but urged that
the state honor its commitments for the amounts that have
already been earned. Mr. Johnson provided brief personal
background information. Now, as a manager representing global
private investors, he must ensure the highest returns possible
from assets; he restated that the oil business is a competition
for investment dollars and the money follows the promise of
highest return. In its search for investment opportunities,
BlueCrest knew that Alaska has resources, but its high cost of
development did not compete with the Lower 48 until the
incentives offered by the state were sufficient to offset the
higher cost. He stressed that BlueCrest would not be developing
Cosmopolitan except for its trust in the state to follow through
on its promises. At the time BlueCrest was evaluating the
Cosmopolitan project, it relied on the "one-of-a-kind
opportunity" announced by the state and based its plan on that a
portion of the investment funds would be covered by the state
tax credit. BlueCrest has successfully proved-up Cosmopolitan,
completed a production facility, and built a large drilling rig
which is drilling wells. Furthermore, BlueCrest has invested
almost $400 million in a project that will require $500 million
to reach the point of positive cash flow, and has earned the tax
credits for the remaining, which should have been paid. Without
confidence that the tax credits will be paid as due, in a timely
manner, BlueCrest may lack the ability to continue unimpeded
development; the results to the state are tangible, and
BlueCrest may be forced to slow or stop drilling new wells that
will provide large returns to the state. He recalled his
previous testimony that the tax credits are a good investment
for Alaska and represent a return of several hundred percent on
the state's tax credit investment. In addition to oil reserves,
BlueCrest also has a large proven gas field offshore in Cook
Inlet that could provide energy security to Southcentral, but
has stopped gas well drilling due to the uncertainty of the
future of the tax credit program. Mr. Johnson urged that the
committee work with industry to wisely develop Alaska's wealth.
6:51:21 PM
CO-CHAIR TARR inquired as to which credits benefit BlueCrest.
MR. JOHNSON responded that BlueCrest utilizes credits for
intangible and tangible well lease expenditures and net
operating loss; House Bill 247 cut the earned credits in half,
and after calendar year 2017, there will be no further credits
available in Cook Inlet.
REPRESENTATIVE BIRCH asked for the magnitude of BlueCrest's tax
credit liability against its total investment in Cook Inlet.
MR. JOHNSON stated that BlueCrest has invested $400 million and
has received $26 million in total tax credit payments to date.
By the end of this year, BlueCrest will have an additional $100
million due, which is approximately 25-30 percent of its total
investment.
REPRESENTATIVE BIRCH asked for the range of the ERD rig.
MR. JOHNSON said 30,000 feet is reasonable; the well underway
will be 22,000 feet.
REPRESENTATIVE RAUSCHER questioned how far the rig could reach
horizontally.
MR. JOHNSON explained that the horizontal reach is a function of
depth; for example, the wells underway are about three miles out
and about one and one-half miles deep.
REPRESENTATIVE PARISH inquired as to BlueCrest's experience
selling tax credit certificates.
MR. JOHNSON answered that BlueCrest has no experience selling
tax credit certificates to a major company.
REPRESENTATIVE PARISH asked for BlueCrest's average return on
equity, exclusive of Cook Inlet exploration.
MR. JOHNSON advised that BlueCrest is entirely focused on Cook
Inlet, and has no return on equity for investors so far.
REPRESENTATIVE RAUSCHER asked for the cost of drilling a well in
Cook Inlet.
MR. JOHNSON stated that an offshore well drilled in 2013 cost
$45 million; the ERD wells underway cost between $40 million and
$45 million each. Compared to wells in the Gulf of Mexico, the
same well in Alaska is three times more expensive.
6:59:04 PM
KEN ALPER, Director, Tax Division, Department of Revenue,
continued an update begun during the meeting of 1/30/17
entitled, "Alaska Oil and Gas Taxation - Status Report" dated
1/30/17. Mr. Alper acknowledged that the industry was very
unhappy with [Alaska's Clear and Equitable Share (ACES) passed
in the 25th Alaska State Legislature] tax system because of high
marginal rates, especially at high prices, and the windfall
profits tax; however, industry strongly supported Senate Bill 21
because of its effects at different price points and a
perception that it more strongly favors investment. He
explained that with multi-year developments it is hard to
determine at what point a tax change impacts a decision,
investment, or production. Mr. Alper opined large investments
were driven by high prices and the state's generous system of
cashable credits that was financed by state surplus revenue;
neither of which were tied to the tax system in place at that
time. The ACES tax system incentivized capital spending and
Senate Bill 21 [passed in the 28th Alaska State Legislature]
incentivized the production of lower cost oil (slide 42). He
provided a "looking backwards" graph that estimated what
production tax would have been under the tax regimes of [the
Petroleum Production Tax (PPT), passed in the 24th Alaska State
Legislature], ACES, and Senate Bill 21 for the years FY 07
through FY 18. At high prices Senate Bill 21 generates less
revenue, although he questioned whether the foregoing is "the
essential issue before the legislature right now ...." (slide
43).
7:03:36 PM
REPRESENTATIVE BIRCH characterized tax credits not as a gift
but, in a manner similar to a child care tax credit, as an
offset on one's taxes. He asked whether tax credits are an
integral part of what the government levies in its tax program.
MR. ALPER explained tax credits that are deducted against
liability are an integral part of the tax system and are related
to the tax rate set by legislation; however, cash credits are
unique to Alaska and no matter their definition, they are part
of an incentive program to encourage desired behavior. He
advised at this point, the cost benefit of the incentive program
in the future must be evaluated. In response to an earlier
question, he directed attention to slide 43 and pointed out that
in FY 16 and FY 17 projected revenue from ACES is zero because
the 20 percent capital credit not bound by the minimum tax floor
would have offset any taxes due from producers.
CO-CHAIR JOSEPHSON referred to modeling for ACES and Senate Bill
21 and opined the legislature "did not adequately consider this
sort of marketplace ...."
MR. ALPER recalled the Senate Bill 21 model was bound by an $80-
$120 per barrel of oil expected price range. The ACES model
looked at the $40-$80 per barrel of oil price range; however, in
2007, spending was about $20 per barrel and now it is $40, which
creates a big difference when calculating a net profits tax,
thus ACES did not consider very low prices either. He said:
... the minimum tax was a stopgap, something of an
emergency tax. The fact that we've been exclusively
living under it for the last three years and ... it's
our primary production tax for the foreseeable future,
is probably outside the expectations of the bill.
7:08:04 PM
REPRESENTATIVE PARISH returned attention to slide 43 and said
all things being equal, the state would be about $10 billion
poorer if under the Senate Bill 21 tax regime since FY 07.
MR. ALPER pointed out that other factors, such as budgeting and
savings, impact the estimated revenue. In response to
Representative Parish's repeated question, he said yes.
REPRESENTATIVE TALERICO remarked:
... we talk about the $10 billion, that's under the
assumption that capital spending and investment in all
of our oil industry would have remained at the level
it did, had the tax regime stayed there under ACES and
the capital was not actually available to the
companies to invest. So I think an assumption that
that would actually be available might, might be kind
of tough for us to [arrive] at.
MR. ALPER agreed. In response to Co-Chair Tarr, he said for a
period in FY 08, oil prices were over $130 per barrel thus the
state received the ACES greater-than-50-percent tax rate for a
period of two months; further, the progressive tax rate changed
every month based on average profits, which capitalized on the
industry's windfall.
REPRESENTATIVE BIRCH recalled the legislature significantly
increased the amount originally proposed by former Governor
Palin in ACES legislation.
7:12:33 PM
MR. ALPER said yes, and added that the tax base rate of ACES was
25 percent, which was an increase from PPT; in addition, the
slope of progressivity as profits go up was increased from 0.2
percent per dollar to 0.4 percent per dollar. He stressed that
the original bill also provided for a 10 percent minimum tax on
certain large legacy fields, which was removed in response to
industry objections, thus the higher percent "was a tradeoff for
the other."
REPRESENTATIVE BIRCH observed that Senate Bill 21 incorporates a
floor of 4 percent.
MR. ALPER advised the 4 percent floor remains unchanged since
PPT; however, the degree to which certain credits can offset the
minimum tax have changed. For example, in ACES the 20 percent
capital credit could lower beneath the floor, but Senate Bill
21, with the exception of certain factors, holds the legacy
fields to 4 percent of the gross value of oil.
REPRESENTATIVE BIRCH observed Senate Bill 21 is "saving the day
for us here ... under the current price regime."
MR. ALPER questioned whether Senate Bill 21 or ACES adequately
determine state revenue in a very low-price environment.
CO-CHAIR TARR discussed the three ways of "hardening the floor"
included in Senate Bill 21.
MR. ALPER explained that credits that can be used to go below
the minimum tax would be any refundable exploration credits,
which have now expired; the small producer credit; the $5 per
barrel credit for new, gross value reduction (GVR) eligible oil;
and any net operating loss (NOL) credits. He elaborated that
although the exploration credits, other than for [non-North
Slope, non-Cook Inlet areas of the state known as Middle Earth],
have expired, and the small producer credit eligibility has
expired, those that have qualified can receive credits for nine
consecutive years. Mr. Alper then presented two graphs that
compared ACES and Senate Bill 21 in a range of oil prices based
on the Department of Revenue (DOR) fall 2016 forecast models,
not including and including the impact of repurchased tax
credits (slides 44 and 45).
CO-CHAIR TARR referred to the representation of the per barrel
credit on slides 44 and 45.
7:19:44 PM
MR. ALPER noted different proposed versions of Senate Bill 21
called for a flat $5 per barrel credit or one based on a sliding
scale. The sliding scale found in the final version, creates
"odd marginal tax impacts as one gains or loses right at the
margin ... [thus] the oddity of the stair step." He continued
to "looming problems" (slide 46). One issue is not enough
revenue now and possibly in the future. The state's net profit
system is not a pure net profit system but is a hybrid; for
example, income tax is based on profit and royalty is tied to
gross. He provided details on how the production tax system is
also a hybrid (slide 47). He expressed DOR's concern that
cashable credits of reasonable amounts that were intended to
support small exploration companies and diversify the North
Slope, are being earned by large discoveries and will lead to
huge payments the state cannot afford. Furthermore, if the
credits are not paid, the situation is detrimental to companies
that have made investments.
MR. ALPER, in response to Co-Chair Josephson, clarified that
state revenue from oil and gas and restricted and unrestricted
funds in FY 16 was approximately $1.6 billion, and is forecast
at $1.4 billion in FY 17.
7:24:23 PM
CO-CHAIR JOSEPHSON acknowledged that the state will recoup its
investment over the life of a successful oil field, however, he
questioned why the industry would not see that the current
outlay for a large project is not possible, even though the
state may seek to do so.
MR. ALPER, presuming that Caelus' model is accurate and its
field is successful, said a tax credit of $3.5 billion is a
reasonable contribution from the state: the foundational
difference is the state offsetting Caelus' future taxes when
due, versus writing Caelus a check sometime in the next five
years.
CO-CHAIR JOSEPHSON referred to other testimony that production
will not happen without state assistance now.
MR. ALPER agreed that if the state goes too far reducing tax
credits, it will "tip that playing field." He pointed out that
an existing producer, such as ConocoPhillips Alaska, Inc., can
develop a large, new find under an economic structure different
from that of a small explorer because it is already producing
oil in Alaska and has profits. This is possible because, for
tax purposes, the North Slope is a single entity, and every
company has a unified tax return for all of its North Slope
operations thus spending money on development can be offset by
credits against taxes on its profit; however, Caelus, for
example, is in a different situation, and large expenditures
could force it to sell its assets to a major producer, which is
counter to the legislature's and the administration's efforts to
diversify the North Slope and create competition.
REPRESENTATIVE BIRCH referred to a previous chart [chart not
identified] which indicated that the state receives about $1
billion per year when oil is priced at $30 per barrel; he
concluded the state's interest is best served by producing oil.
MR. ALPER agreed that the intent of Senate Bill 21 was that
total government take should remain relatively the same across a
range of oil prices. However, a portion of the state's share is
royalty, and royalty is a fixed number: 12.5 percent of gross.
He gave an example of gross at 30, and 12 percent of that is $4,
and the net profit is $1, so that is a 400 percent tax.
7:31:13 PM
REPRESENTATIVE TALERICO expressed his understanding that there
is a limit on refundable credits per company, at $70 million per
year, with the intent to allow the state to defer cash payments.
MR. ALPER said yes, a provision of House Bill 247 set a limit of
$70 million per company. However, if a company has partners,
the limit is multiplied by the number of its partners, thus the
maximum remains unknown.
CO-CHAIR JOSEPHSON added that the $70 million limit is applied
per year and overages will accrue for a future liability.
MR. ALPER agreed that there is no cap on the amount of tax
credits that a company earns in one year; hopefully, production
will ensue quickly, followed by a tax liability.
CO-CHAIR TARR questioned whether total government share
typically includes the royalty share, noting that in the Lower
48, royalty - the ownership share - is paid to private
landowners.
MR. ALPER explained that DOR analyses of total government take
include royalty; in fact, in an "apples to apples" comparison,
one should look at the total non-producer share.
CO-CHAIR TARR questioned whether corporate income tax paid to
the state is deductible against federal corporate income tax.
7:36:33 PM
MR. ALPER explained that production tax is deductible from state
corporate income tax, and what remains is subject to federal
income tax; net loss credits on federal income tax can be
carried forward to future years. He returned attention to slide
47, and informed the committee the floor in Senate Bill 21 is
permeable to potential loss credits, and could reduce taxes to
zero if the price of oil is at $40 per barrel. "Hardening the
floor" refers to making the minimum tax "solid" so that credits
can't be used, but that raises the equity issue. He opined the
minimum tax is broader than originally intended; in fact, the
minimum tax is in effect up to $80 per barrel because of higher
per barrel spending and the $8 per barrel credit which impacts
the minimum. Also, under the Senate Bill 21 system, there is no
mechanism to replenish the state's savings if there is a return
to high oil prices. Further, a net profits tax system is more
complex to administer (slide 47).
REPRESENTATIVE PARISH questioned whether a gross tax system
would level the playing field between newcomers and larger
producers.
MR. ALPER said a pure gross system would. He recalled that
during the construction of Prudhoe Bay, the producers spent a
lot of money without credits and made money once the oil was
flowing. However, a gross tax does not encourage the
development of challenged resource fields, and pays the state
less when oil prices are high. He concluded that a gross system
is a simple way to "fix the equity question." In further
response to Representative Parish, he suggested other means are
to lower the operating loss credit, or set time limits on the
credits.
MR. ALPER returned to the presentation and said in July 2016,
during a special session to address a fiscal plan, the governor
introduced House Bill/Senate Bill 5005 that eliminated all North
Slope net operating loss credits (slide 48).
7:43:37 PM
REPRESENTATIVE RAUSCHER asked whether the aforementioned changes
were modeled.
7:43:44 PM
MR. ALPER stated that a fiscal note was introduced with the bill
and initial modeling was presented at its first hearing. In
further response to Representative Rauscher, he advised the bill
would have negatively affected some projects, as a company would
have had to make back all of its investment from future profits.
He then described "Fiscal Note" modeling DOR will provide to
explain the line item impacts of any of the various components
incorporated in proposed legislation (slide 50). He provided
details of "Life Cycle" modeling that will reveal the various
impacts of proposed legislation to a specific project or oil
field (slide 51). Lastly, he described "Long term scenario
modeling" which revealed the impacts of hypothetical production
from the Arctic National Wildlife Refuge (ANWR) fields (slide
52).
REPRESENTATIVE BIRCH asked whether there is a private
[land]owner component in ANWR.
MR. ALPER responded ANWR is considered federal land, however,
the federal government would get 10 percent royalty, and the
state would get 90 percent royalty and production tax. Turning
to the topic of tax audits, he advised that production tax
audits of oil and gas companies are complex tasks involving very
large companies. Tax audit assessments, like the results of a
legal action, are Constitutional Budget Reserve Fund (CBRF)
revenue. Currently, the statute of limitations for production
tax audits is six years, and Tax Division staff has adapted to
regulations for ACES, new software, and increases in tax credit
applications (slide 54). The 2007 audit was not released until
2014, and the total assessments for 2007 were $387.3 million.
The 2008 audit was completed in 2015, and the total assessments
were $264.4 million. He explained that Senate Bill 21 reduced
the interest rate on assessments from 11 percent compounded
quarterly to 3 percent or 3.5 percent simple interest. In 2009,
the total assessments were $132 million. Most of the foregoing
assessments have been paid, settled, or appealed (slide 55).
Upcoming audits for 2010 should be done in February 2017, and
2011 audits should be done in spring, 2017. Mr. Alper pointed
out that audits for 2010-2013 are very important because they
cover years of high revenue and high progressivity (slide 56).
7:56:15 PM
REPRESENTATIVE PARISH questioned whether from 2007 to 2009 the
state was underpaid in taxes in the amount of over $300 million.
MR. ALPER acknowledged the state claimed underpayment of tax,
but the appeals process gleans follow-up and missing
information; by a multi-stage process, adjustments are usually
made and agreement is found "somewhere in the middle."
REPRESENTATIVE BIRCH observed that the state has well exceeded
former Governor Jay Hammond's admonition of "one-third, one-
third, one-third," and reached 40-50 percent.
MR. ALPER offered to provide further information on shared net
profits, gross value at the point of production of wellhead
value, and the percentage of market value. He agreed that total
government take at this time is in the "mid-60s."
CO-CHAIR JOSEPHSON relayed that industry does not have the
resources to pay 35 percent, not including royalty, at this oil
price.
MR. ALPER directed attention to slide 19 and said in a gross
system it is easier to predict the percentage of revenue because
the tax stays nearly the same. These are questions of public
policy and how much the legislature is willing to accept in
matters of risk, liquidity, and volatility from the oil and gas
tax system.
REPRESENTATIVE TALERICO pointed out that a statement related to
selling credits at $0.70 on the dollar was erroneously
attributed to a previous testifier.
MR. ALPER clarified that DOR is aware when credits change hands,
but is unaware of their value. In 2006, there was anecdotal
information that PPT credits were selling in a 70 percent range.
REPRESENTATIVE TALERICO restated that the previous testifier
provided an example.
8:02:38 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 8:02 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOR Present Oil Tax Status Report HRES 1-30-17 final ka.pdf |
HRES 2/1/2017 6:00:00 PM |
|
| HRES_Hilcorp_1 FEB 2017 FINAL.pdf |
HRES 2/1/2017 6:00:00 PM |