Legislature(2009 - 2010)SENATE FINANCE 532
02/18/2010 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Production Tax Credits | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
February 18, 2010
9:00 a.m.
9:00:51 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:00 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Joe Thomas
MEMBERS ABSENT
Senator Donny Olson
Senator Charlie Huggins, Vice-Chair
ALSO PRESENT
Pat Galvin, Commissioner, Department of Revenue; Lennie
Dees, Audit Master, Tax Division, Department of Revenue;
Senator John Coghill; Senator Hollis French
PRESENT VIA TELECONFERENCE
None
SUMMARY
2010 OIL & GAS PRODUCTION TAX REVIEW
^PRODUCTION TAX CREDITS
9:02:47 AM AT-EASE
9:04:45 AM RECONVENED
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, listed the
agenda of the presentation and introduced Mr. Dees.
9:07:15 AM
LENNIE DEES, AUDIT MASTER, TAX DIVISION, DEPARTMENT OF
REVENUE, related that he oversees the production tax audit
group and the administration of the tax credit program. He
stressed that many manual processes are used when
administering the program. He stated that the tax credit is
the part of ACES that created a lot of new activity and
interaction with taxpayers, and as a result, the tax audit
group had to change its structure.
Mr. Dees shared slide 2 - the overview of the presentation
entitled, "Production Tax Credits" (copy on file): types of
tax credits, credits applied against tax liability,
transferable tax credit certificates, cash refund history,
and tax credit analysis.
9:10:09 AM
Co-Chair Stedman commented on the significance of the
credits. The state, through the credits, is increasing its
share of the upfront capital cost going into the
development. The credits are very sensitive; a change in
the percentage of credit creates a huge shifting of cash
flow between the industry and the sovereign. The larger the
credit, the more the upfront development cost goes to the
sovereign, and it significantly alters the rate of return
to the industry.
9:11:23 AM
Mr. Dees began by discussing the types of credits - slide
3. Capital expenditure credits found in AS 43.55.023 are
for capital activities that companies undertake in the
production of oil and gas. Exploration credits consist of
two types; one is for capital expenditures and one is for
exploration incentives. The Net Operating Loss (NOL) Carry
Forward Credits are for companies just starting up, for use
before the revenue stream picks up. The Transitional
Investment Expenditure Credit allows expenditures that were
allowed before PPT came into effect. Small Producer Credits
are self-explanatory.
9:13:47 AM
Mr. Dees turned to the Capital Expenditure Credits - slide
4. He said that 20 percent of qualified capital
expenditures (QCE) may also qualify for carry forward
credit. They include drilling, construction of facilities,
and new equipment, and may also qualify for NOL Carry
Forward Credit. The same expenditures do not qualify for
additional EIC credit. The expenditures must be spread over
two years, a change that was made by ACES effective July 1,
2007. The credits may be cashed or transferred.
9:18:09 AM
Mr. Dees explained the two main types of exploration
credits - slides 5 - 8. The capital credit for exploration
activity is a 20 percent credit. Expenditures that qualify
include geologic and geophysical exploration, or
expenditures incurred in connection with drilling and
exploration wells, and must be spread across two years.
They may also qualify for NOL Carry Forward Credits and may
be cashed or transferred. The exploration incentive credits
can be 30 percent to 40 percent of qualified expenditures
depending on well location and proximity to existing wells
and unit boundaries. Qualified expenditures include
expenses associated with seismic and geophysical
exploration work, and exploration well drilling. These
expenditures may qualify for NOL credits, but do not
qualify for Capital Expenditure Credit. To receive credit,
taxpayer must provide certain well data to DNR. These
credits expire in 2016 and may be cased or transferred.
9:20:48 AM
Co-Chair Stedman inquired about a hypothetical example of
someone in Prudhoe/Kuparuk that would qualify for a 20
percent capital credit for a project and someone outside
that arena who qualifies for a 40 percent credit going
after that exploration. He wondered how much upfront cash
the industry would have to provide and how much of the
burden is on the sovereign, including the federal
government.
9:22:36 AM
Co-Chair Stedman clarified that $100 would be expended on a
project with a capital credit. Commissioner Galvin
responded that the $100 would be deducted from the
production tax value which will reduce the tax depending on
the price of oil and progressivity. It could be 25 percent
or higher. In addition, the expense would qualify for the
20 percent credit. Taxes would be reduced by at least 45
percent. An explorer outside the unit that qualifies for
the exploration credit would be able to deduct a further 25
percent as well. He explained how the zero tax liability
deduction is achieved. He gave an example of how a dollar
amount would be divided by various taxes.
9:24:40 AM
Co-Chair Stedman requested a bar chart which would depict
the impact of the credits to the various entities.
Senator Egan asked if the NOL credits could be transferred.
Mr. Dees explained the NOL carry forward credit - slide 9.
There is a 25 percent net operating loss applied against
tax liability in the following year. The credit can be
cashed or transferred. Senator Egan referred to the
previous slide and asked about the expiration of the
exploration incentive credits in 2016.
Commissioner Galvin explained how the expiration date
works. The date is set and then the program is examined to
see how it is being utilized. If it is being used then the
expiration date tends to get pushed back. As 2016
approaches the legislature will determine whether or not to
extend the date.
Commissioner Galvin addressed Senator Egan's initial
question about whether the loss could be transferred. He
explained that the loss itself cannot be transferred until
it becomes a credit; however, it could be valuable to the
company as a credit which is cashed back to the state or
transferred to another taxpayer.
9:29:39 AM
Mr. Dees commented further on the NOL credits. The
expenditures that do lead to the net operating loss include
both operating and capital expenditures.
Mr. Dees turned to slide 10 - transitional investment
expenditure (TIE) credits. The TIE credit equals 20 percent
of qualifying capital expenditures that were incurred
between March 31, 2001 and April 1, 2006 and do not exceed
10 percent of the capital expenditures incurred between
March 31, 2006 and January 1, 2008. He explained that there
was a limit on the amount of credit companies could take.
He continued to explain that ACES revised the statute to
only cover producers or explorers not having production
prior to January 1, 2008. The TIE credits are not
transferable and may not be carried forward beyond 2013.
The same capital expenditures may not qualify for
exploration credit under AS 43.55.025.
Commissioner Galvin added that these were credits put into
place by PPT as the "look back" or "claw back" and were
intended to provide a recognition for investments companies
had made leading up to the transition from ELF to PPT. When
ACES changes were made, the TIE credits were eliminated -
were capped at the date ACES become effective. Companies
that did not have production earned a TIE credit. There are
a small number of TIE credits outstanding.
9:33:44 AM
Mr. Dee explained the small producer credit - slide 11.
There are two small producer credits. In AS 43.55.024(a)
there is a $6 million credit against tax liability. Small
producer credits are available for companies producing less
than 50,000 bbl/day of oil BTU-equivalent. Production must
be from wells outside of Cook Inlet and the North Slope.
The credit expires in 2016 or nine years after the first
commercial oil or gas production if before May 1, 2016. The
credits may not be cashed or transferred or carried
forward.
9:35:22 AM
Mr. Dees explained the small producer credit under AS
43.55.02(c) - slide 12. This credit is available for
companies producing not more than 100,000 bbl/day of oil
BUT-equivalent. The credit ranges between $12 million and
zero, depending upon the level of production. Credit can
only be applied against tax liability and production is not
restricted by region.
Mr. Dees turned to slide 14 - credits applied against tax
liability. The credits may be claimed in up to two ways:
all credits may be applied against tax liability and some
credits may be converted into a transferable tax credit
certificate. He noted that the .023(a) credits must be
split over two years. The NOL, TIE, small producer, and
.025 credits must all be used in the current year. Some
credits may be converted into a transferable Tax Credit
Certificate.
9:39:19 AM
Co-Chair Stedman asked if .025(a) credits are exploration
credits. Mr. Dees said they were.
Mr. Dees explained a chart on slide 15 tax credits earned
by producers by tax year. The numbers represent millions of
dollars. He discussed each credit by year: Capital
Expenditure, TIE, Small Producer, and Exploration Incentive
Credits. Co-Chair Stedman asked if $1,276,000 is what the
state reimbursed the industry for drilling exploration and
capital work. Mr. Dees said it was not what was reimbursed,
but the credits companies claimed they earned. Co-Chair
Stedman clarified that the companies are deducting the
credits, which results in a direct impact on the state
treasury. Mr. Dees disagreed and turned to slide 16 for
more explanation.
9:42:08 AM
Mr. Dees related that the chart shows what the companies
would eventually be able to deduct. Some of the deductions
must be taken the second year. He noted that the law
changed in 2007.
Co-Chair Stedman restated that the state treasury would be
shy $1,276,000 as shown in the previous slide. Commissioner
Galvin pointed out that slide 15 is figured on an accrual
basis and slide 16 is figured on a cash basis. Co-Chair
Stedman stressed that these credits have huge impacts. He
requested further information about who is paying
exploration costs on a net basis.
9:45:07 AM
Senator Thomas asked if any company qualifies for the small
producer credits. Mr. Dees replied that most of the credits
were (c). Senator Thomas asked for a breakdown of (a) and
(c) credits. Mr. Dees pointed out that the charts were
derived from tax files. Senator Thomas requested more
information about AS 43.55.024(a) and (c) credits. Mr. Dees
summarized the request: how many small producer credits are
for areas outside and inside Cook Inlet and the North
Slope. Co-Chair Stedman thought that information would be
provided later on.
Senator Thomas asked if net operating loss credits could be
converted to transferable credits. Mr. Dees said they
could.
9:47:56 AM
Co-Chair Hoffman referred to slide 15 and asked about TIE
credits, which are no longer available. He noted that the
largest credit is now capital expenditure, which increased
by $140 million from 2006 to 2008. He wondered what
happened in that area in 2009. Co-Chair Stedman inquired
what might happen in 2010.
Commissioner Galvin referred to the capital expenditure
level chart from yesterday. He stated that capital
expenditure credits are expected to go up. Co-Chair Stedman
asked for that information. Co-Chair Hoffman agreed it
would be good to see those numbers. Co-Chair Stedman
appreciated how slides 15 and 16 were set up.
9:50:53 AM
Commissioner Galvin explained how the charts were prepared
based on tax returns. There are currently no tax returns
available for 2009. He offered to provide an estimate.
9:52:18 AM
Co-Chair Hoffman saw capital expenditure credits on the
rise. He thought the exploration incentive credits weren't
working and suggested the industry should do more seismic
drilling and exploration. Mr. Dees explained that this set
of taxpayers is made up of producers. Exploration activity
is from the explorers who don't currently have tax
liability. He also informed the committee that the year
2006 shows information from only nine months, whereas 2007
and 2008 are full years. Co-Chair Stedman reminded the
committee that the main capital expenditure credit
expenditure of $828 million is taken off the top. That
figure does not appear in committee summary documents. An
attempt is being made to show the total revenue with the
capital credit taken off in order to keep better track of
the credit.
Mr. Dees agreed it was one of the challenges.
9:56:04 AM
Mr. Dees turned to slides 17 and 18, which he said may help
answer a previous question. They contains bar charts
showing the credits applied against tax liability - credits
claimed and credits applied against tax filings from 2006
to 2008.
Mr. Dees detailed the graph on slide 19 which shows both
credits earned and applied to the tax. The gap in 2008
remained the same. There has been talk of taking the tax
credit to sixty percent of the credits earned. This would
result in an immediate impact to the state of about $200
million.
9:59:36 AM
Mr. Dees moved to slide 21 - transferable tax credit
certificates. Since 2001, 211 transferable credit
certificates have been issued. Of those, $228,900,000 have
been for capital expenditure credits, $64,900,000 have been
for capital expenditures for exploration activities, and
$340,000,000 have been for NOL credits.
Co-Chair Stedman asked if there was information on the
breakdown of the credits within the oil basins. Mr. Dees
reported that he has information that will show where the
capital expenditures are happening within the oil basins.
Commissioner Galvin explained that the department would
provide representation of where the economic drivers are
within the fields.
Senator Thomas asked when the "true up" is done.
Commissioner Galvin replied that will be done on the annual
return on March 31.
Senator Thomas asked about the dates on slide 21. Mr. Dees
replied that the transferable tax credit certificates are
current through February of 2010.
Commissioner Galvin informed the committee that the credit
certificates can be applied for during the year
expenditures are made.
10:03:49 AM
Mr. Dees detailed slide 22, transferable tax credit
certificates - exploration tax credits, which originated in
2003. Since then, there have been 59 applications. Growth
expenditures claimed total $945,200,000. There are
currently 23 applications in progress, which represent
gross expenditures of $439,900,000 requesting $148,300,000
in credits.
Mr. Dees reviewed the bar graph on slide 23 depicting
exploration tax credit applications since 2005. He noted
that the applications received in 2007 and 2008 increased
due to exploration activity. He explained that statute
requires that within six months after the drilling activity
the application for the exploration credits must be applied
for. He noted the great amount of exploration activity in
2009.
10:06:53 AM
Mr. Dees discussed slide 25 - cash refunds history. In
order for the state to purchase transferrable tax credit
certificates, certain requirements must be met. In order to
cash the certificates, they must be usable against tax
liability. They also must show subsequent lease bids equal
to the cash sought. They must have a zero tax liability
owed in current and past years and have no more than 50,000
barrels per day of oil production.
Mr. Dees explained slide 26 - tax credits purchased by
fiscal year. The total of credits purchased is
$400,200,000, a current figure through February 12, 2010.
Slide 27 explains the oil and gas tax credit fund which has
a current balance of $90,000,000.
10:09:25 AM
Mr. Dees turned to slide 29 - tax credit analysis:
qualified capital expenditure deductions. The slide is
based on tax filings and is broken down by exploration
area: Legacy Fields, Cook Inlet, and other North Slope
Fields.
Co-Chair Stedman asked which fields were Legacy Fields. Mr.
Dees said they were Kuparuk and Prudhoe. Co-Chair Stedman
wondered if they included Alpine. Mr. Dees explained that
Alpine is included in the "Other North Slope" category.
Co-Chair Stedman looked at the total of $1.76 billion for
the Legacy Fields and wondered if the credit numbers would
match. Mr. Dees referred back to slide 15 to explain the
capital expenditure credits.
10:12:47 AM
Co-Chair Stedman asked about an estimate for FY 09. Mr.
Dees did not know if the estimates were available. Co-Chair
Stedman also wanted to know about credits for
infrastructure in the Legacy Fields and other fields.
10:14:55 AM
Mr. Dees explained slide 30 - credits claimed under .023
against tax liability. This graph includes all fields that
were reported on tax returns. It is about 20 percent for
credits claimed for expenditures.
Co-Chair Stedman asked for a comparison of this chart with
the previous one. Mr. Dees related that this is what the
producers claim on tax files and are subject to audit.
Co-Chair Hoffman referred back to slide 16 and wished to
compare that data to slide 30. Mr. Dees said he would have
to check on it.
10:17:21 AM
Mr. Dees talked about slide 31 - capital credit
certificates under .023(a)(1).
Senator Thomas referred to slides 21 and 22 and asked if
the tax credits were current. Mr. Dees said they were.
10:19:15 AM
Mr. Dees discussed slide 32 - capital credit certificates
under .023(a)(2) - for exploration activity. Slide 33
corresponds to slide 21 and shows expenditures versus NOL
credit certificates.
Mr. Dees said that slide 34 shows expenditures versus .025
exploration credit applications.
10:21:14 AM
Mr. Dees concluded with slide 35. He summarized that the
Legacy North Slope Fields increased in producers' capital
expenditures from 2006-2008, but plateaued in capital
deductions from 2007-2008. In the non-legacy North Slope
fields and in Cook Inlet, there was a steady increase in
capital expenditures. Since 2007, the exploration credit
applications have more than doubled. There was an increase
in .023(a)(2) and in NOL credits in 2007 and 2008, which
suggests an increase in exploration activity.
Co-Chair Stedman returned to slide 22 and asked how Point
Thomson would affect the chart. Mr. Dees pointed out that
some capital expenditures were claimed in 2008. Co-Chair
Stedman requested projected information for Point Thomson
in 2009. Mr. Dees explained that he chose Legacy Fields as
defined in statute to depict in the charts. He offered to
provide the requested information.
10:24:23 AM
Co-Chair Stedman explained the reasoning behind the
requests for more information. Exploration and development
for new oil impacts the state's treasury now and will in
the future.
Senator Ellis thought the presentation was helpful. He
opined that the public lacks knowledge about this
information. Co-Chair Stedman agreed that it is a complex
topic.
ADJOURNMENT
The meeting was adjourned at 10:25 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 2010 DOR Production Tax Credits SFC.pdf |
SFIN 2/18/2010 9:00:00 AM |
Oil and Gas Production Tax Review |
| Agenda 021810 am.docx |
SFIN 2/18/2010 9:00:00 AM |
|
| 2010 02 18 Response DOR OG Tax Credits Ovrvw and Forecast.pdf |
SFIN 2/18/2010 9:00:00 AM |
Oil and Gas Production Tax Review |
| 2010 02 18 Response State Tax Credits Purchased 2007-10.pdf |
SFIN 2/18/2010 9:00:00 AM |
Oil and Gas Production Tax Review |