Legislature(2015 - 2016)Kenai Visitor Cntr
06/17/2015 09:00 AM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Overview of Alaska's Oil and Gas Tax Credit Regime | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
JOINT MEETING
HOUSE RESOURCES STANDING COMMITTEE
SENATE RESOURCES STANDING COMMITTEE
Kenai, Alaska
June 17, 2015
8:59 a.m.
MEMBERS PRESENT
HOUSE RESOURCES
Representative Benjamin Nageak, Co-Chair
Representative David Talerico, Co-Chair
Representative Bob Herron
Representative Kurt Olson
Representative Paul Seaton
SENATE RESOURCES
Senator Cathy Giessel, Chair
Senator Peter Micciche
Senator Bill Stoltze
Senator Bill Wielechowski
Senator John Coghill
MEMBERS ABSENT
HOUSE RESOURCES
Representative Mike Hawker, Vice Chair
Representative Craig Johnson
Representative Andy Josephson
Representative Geran Tarr
SENATE RESOURCES
Senator Mia Costello, Vice Chair
Senator Bert Stedman
OTHER LEGISLATORS PRESENT
Senator Lesil McGuire
Senator Anna MacKinnon
Representative Mike Chenault
Representative Guttenberg - via teleconference
COMMITTEE CALENDAR
OVERVIEW OF ALASKA'S OIL AND GAS TAX CREDIT REGIME
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
RANDALL HOFFBECK, Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Testified on Alaska's oil and gas tax
credits.
KEN ALPER, Director
Tax Division
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Presented an overview of Alaska's oil and
gas tax credits.
JANAK MAYER, Chair and Chief Technologist
enalytica
Washington, D.C.
POSITION STATEMENT: Reported on oil and gas production tax
credits at low oil prices.
NIKOS TSAFOS, President and Chief Analyst
enalytica
Washington, D.C.
POSITION STATEMENT: Reported on oil and gas production tax
credits at low oil prices.
PATRICK FOLEY, Senior Vice President
Caelus Energy Alaska
Anchorage, Alaska
POSITION STATEMENT: Presented an overview of Caelus Energy
Alaska operations.
BENJAMIN JOHNSON, President and CEO
BlueCrest Energy
Fort Worth, TX
POSITION STATEMENT: Presented an overview of BlueCrest Energy
operations in Alaska.
JOHN BARNES, Senior Vice President
Hilcorp Exploration & Production, Alaska
Houston, TX
POSITION STATEMENT: Presented an overview of Hilcorp operations
in Alaska.
JASON BRUNE, Senior Director
Land and Resources
Cook Inlet Region, Incorporated (CIRI)
Anchorage, Alaska
POSITION STATEMENT: Spoke in favor of oil and gas tax credits.
ACTION NARRATIVE
8:59:59 AM
CHAIR CATHY GIESSEL called the joint meeting of the House and
Senate Resources Standing Committees to order at 8:59 a.m.
Representatives Nageak, Herron, Seaton, Olson, and Talerico, and
Senators Stoltze, Micciche, Coghill, Wielechowski, and Giessel
were present at the call to order. Also in attendance were
Senators Lesil McGuire and Anna MacKinnon and Representative
Mike Chenault. Representative Guttenberg listened via
teleconference.
9:01:55 AM
CHAIR GIESSEL recognized staff and thanked the Kenai Chamber and
Visitor Center for the use of their building. She announced that
the only order of business would be an overview of Alaska's oil
and gas tax credit regime.
^Overview of Alaska's Oil and Gas Tax Credit Regime
Overview of Alaska's Oil and Gas Tax Credit Regime
9:03:04 AM
CHAIR GIESSEL said there is misunderstanding on this topic, and
she wants to make things clear to legislators and the public.
9:04:12 AM
RANDALL HOFFBECK, Commissioner, Department of Revenue (DOR),
said there is a growing interest in tax credits, particularly
with regard to Alaska's budget situation, "and that became even
more clear in Fairbanks, where a lot of people identified
credits as an issue," but they did not really understand them
very well. People need to understand the tax credits a lot
better than they do right now, he stated. The credits are
probably the most complex part of the oil and gas tax structure.
9:07:08 AM
SENATOR STOLZE asked about the administration's position and if
it would have been advantageous to the state to withhold
reimbursement of tax credits. He asked the consequences of not
funding the credits. That question will be the core of this
discussion, he stated.
9:08:42 AM
COMMISSIONER HOFFBECK said the administration did not want to
get into an oil and gas tax debate this year because there were
bigger issues to deal with. Philosophically, the credits are an
integral part of the financing of [oil and gas] projects, and
the administration would not have unilaterally tried to reduce
the credits because of the impact it would have had on the
companies that are relying on them. Going forward, the
administration will engage in the dialog in light of Alaska's
budget situation, but to just cut oil and gas tax credits at
this time would not have been appropriate, he explained.
9:09:58 AM
KEN ALPER, Director, Tax Division, Department of Revenue (DOR),
said there are many different oil and gas tax credits coming
from several pieces of legislation; some are layered over each
other and some are stacked. He showed an update of the magnitude
of Alaska's tax credit system and said there are about $1.5
billion worth of credits received by industry in one of two
ways. There are credits using tax liability, which means the
taxpayer will not pay the tax; these are used primarily by major
producers that owe taxes. There are also refundable credits that
are repurchased, primarily used by smaller companies that do not
have profits and therefore no tax liability, and "the state is
writing them a check, essentially, in repurchasing their
credits."
CHAIR GIESSEL asked if the state writes the check or if the
credit is sold to another company.
9:12:17 AM
MR. ALPER said the state purchases tax credits subject to money
being available through appropriations. There is also an open
market to sell them to a third party who could then use them
against its own tax liability. He gave the example of Alaska's
film tax credit, which cannot be repurchased but can be sold on
the open market, and other Alaska corporate taxpayers have been
buying them to use against their own tax liability. That ability
exists for oil and gas tax credits, but because of Alaska's
historic open-ended repurchase policy, "almost all of the
credits have gone by that route in the last five or six years."
CHAIR GIESSEL said Mr. Alper's charts are available online.
9:13:46 AM
MR. ALPER said the modern credit era began in 2007 when Alaska
started a net profit tax regime with the PPT [Petroleum
Production Tax], and about $7.4 billion worth of oil and gas tax
credits have been used since. The largest portion is $4.3
billion used against tax liability primarily by the major
producers. The second largest figure is $2.2 billion in refunded
credits on the North Slope, and it is used by new producers and
startup companies that do not have enough tax liability against
which to take the credits, and the state will be repurchasing
their credits. The non-North Slope group, primarily Cook Inlet
and "Middle Earth," used less than $0.1 billion against tax
liability. The number is misleading as there is not much tax
liability in Cook Inlet because of the underlying tax caps and
other statutory limitations, but "about $0.8 billion have been
refunded in Cook Inlet, and that number has been increasing
rapidly in the last several years because of some statutory
changes made in 2010." Another $0.74 billion in taxes were not
paid because of the Cook Inlet tax cap. "Middle Earth" is a term
used for every place in Alaska south of 68 degrees latitude and
outside of the Cook Inlet basin.
9:16:04 AM
MR. ALPER said the first "modern era" tax credit is called the
"alternative credit for exploration." "Alternative" because
there were some credits from the 1980s that are not now used.
Originally, the alternative credit was 20 to 40 percent,
depending on the type and location of the work. Created in 2003
when the state was still under ELF [Economic Limit Factor tax
scheme], most of the credits required some kind of qualification
from DNR [Department of Natural Resources]. There was no
repurchase mechanism and the credits were intended to be held
until the company had a future tax liability or until sold to a
third party, he explained. On slide 8 he showed several new
credits from the PPT, which is when tax credits "really took
off," he said. The most important PPT credit was a 20 percent
carry-forward annual loss credit or "net operating loss credit."
The loss credits intended to balance the playing field between
the active producers and the newcomers.
9:17:51 AM
MR. ALPER explained that the state reimbursed smaller players at
the same percentage as the major players. The other significant
PPT credit was the qualified capital expense (capex): "the 20
percent capex credit that became a very prominent part of our
tax regime." The small producer credit gave an additional credit
of up to $12 million, an "off-the-top cut," to cover higher
marginal expenses of smaller operations. The "clawback" credit
was created to benefit companies who had already invested in
projects previous to the creation of the credits. The PPT was
the beginning of the state buy-back, he said, where "we put in a
repurchase mechanism, capped it at $25 million per company per
year, and limited it just to smaller companies producing less
than 50,000 barrels per day." He turned to the next slide
covering ACES [Alaska's Clear and Equitable Share tax scheme],
which passed only a year after the PPT. There was an increase in
the base rate in ACES, the carry-forward annual loss credit
increased to 25 percent, the transitional expenditure and claw-
back credit were removed, and the $25 million per company cap
was eliminated. The legislature created the tax credit fund,
which the state uses for repurchasing credits. It is open-ended,
because the secondary market for credits is soft (50 to 70 cents
on the dollar), so the state decided that as long as it had the
funds, it would purchase the credits at full value. In 2010,
there were several oil and gas bills, and one gave a credit for
the Cook Inlet gas storage facility and increased a number of
Cook Inlet production credits, including creating a 40 percent
well-lease expenditure credit. Another bill, by Senator McGuire,
created a larger credit for jack-up rig drilling in Cook Inlet.
9:21:22 AM
MR. ALPER said slide 10 lists some secondary provisions of House
Bill 280, the Cook Inlet Recovery Act, which have added to the
credit burden in the last several years. The original law was to
allow the use of credits gained in Cook Inlet to be applied to
Cook Inlet. There used to be a requirement to reinvest the
cashed out credits in a new project, and there used to be a
recapture provision. He explained that because of the Cook Inlet
tax cap, a company would first have to use its credit to buy
down tax liability from what it would have been without the cap
and then only be cashed out on the remaining portion. But, now,
producers are cashed out at the full value of the credit. The
legislation has led to a dramatic increase in Cook Inlet
reimbursable tax credits. In 2012, the Frontier area credit was
created, comparable to the jack-up rig credit, for some of the
first wells drilled in some target basins, and an LNG (liquefied
natural gas) storage facility credit was created, primarily for
the Interior gas project.
9:23:28 AM
MR. ALPER said that in 2013, Senate Bill 21 changed tax credits
primarily on the North Slope. It eliminated the 20 percent
capital credit and replaced it with a production-based credit of
zero to eight dollars a barrel for "legacy" oil, depending on
the price of oil, and a $5 per barrel credit for "new" oil,
unrelated to oil price. There was an increase in the loss carry-
forward credit to 35 percent, because the base tax rate in SB 21
is also 35 percent; however, there was a two-year temporary
increase to 45 percent for 2014 and 2015, because the projects
under construction at that moment were receiving 45 percent from
the state (the 20 percent capital credit and the 25 percent loss
carry-forward credit). A value-added credit for service
providers was also added. In 2014, the refinery credit was
added, which is a capital improvement credit targeted at in-
state refineries to try to keep them competitive.
9:25:08 AM
SENATOR MACKINNON asked whether the infrastructure credit has
been used.
MR. ALPER said it is targeted at corporate income tax and took
effect in 2014, so the state will not see it until the fall.
REPRESENTATIVE HERRON asked about the loss carry-forward credit
and if the state should let it expire.
MR. ALPER said it is not scheduled to expire. His opinion is
that the credit is a playing field leveler between the newcomers
and the incumbent producers, and he would not like to remove it.
9:26:42 AM
MR. ALPER said that when a company applies for a credit and
qualifies, it will get a certificate of the dollar amount. The
owner can sell it or save it until it has tax liability. Also,
the state can repurchase the credit if there is money in the
fund, subject to appropriations. The recent budget included $700
million for repurchases in 2016. If the fund were limited, there
are regulations on how to prioritize the repurchases, which is
first in, first out. The state has no discretion to choose to
repurchase one credit over the other.
9:28:24 AM
SENATOR MACKINNON asked whether that is under statute or
regulation.
MR. ALPER said the repurchase comes from the fund, and without
an appropriation, there would be no money.
SENATOR MACKINNON said there have been discussions about
prioritization. She asked whether Alaska is getting what it
wants "when we specifically pay out cash." Sometimes a credit is
against production and sometimes it is for exploration, she
said. It is a balancing act to get the small producers to
compete. When credits are paid on a first-come, first-served
basis, the larger companies can [benefit by] acting more
quickly, so she asked if the administration is going to make
regulatory changes to prioritize what Alaska wants.
9:30:49 AM
COMMISSIONER HOFFBECK said that will be part of the discussion
with the legislature and the companies. He wants to look at
options that will not impact oil and gas operations but will be
sensitive to Alaska's limitation of funds. The first-in, first-
out system is not viable. One idea was to do a prescreening,
preapproval process, he said, and companies would know that
their spots are preserved and their credit has value. He said
the administration is looking at a lot of different options.
When revenues were flush, it worked well. The administration
will come forward with proposals, he stated.
SENATOR MACKINNON said the North Slope producers have been
contributing 80 to 90 percent of Alaska's revenue, but some
explorers are wildcatting, and Alaska is underwriting that
activity. She said "those companies are going bankrupt and they
are selling their credits ...." She said it will be part of the
discussion.
9:33:42 AM
SENATOR MCGUIRE asked about low interest loans instead of
credits.
MR. ALPER said the wildcatters are borrowing money at a very
high interest rate, and the state ends up buying all of their
risk. "We're just at the very beginning of what would be a long
path." Instead of buying down their risk, partnering with
industry in some way might put the money into the project
instead of into the financing company.
SENATOR MCGUIRE spoke of lowering lending rates or deferring
interest for these companies.
MR. ALPER said anything along those lines would require a robust
piece of legislation.
COMMISSIONER HOFFBECK said that idea has been floated to some of
the smaller companies, but free money is always more desirable
than a low interest loan, but it's "an option that has some
traction."
SENATOR MICCICHE cautioned the state from trying to pick winners
and losers. He asked if the state does due diligence on the
wildcatters on their financial health or abilities to perform.
"We've been stung a little bit," but Alaska wants new players,
and they should have a foundation, he expressed.
9:36:49 AM
COMMISSIONER HOFFBECK said there are specific requirements for
qualifying for the credits, and as long as a company qualifies,
a certificate is issued. But that has been a point of discussion
on whether [credits should be issued] based on whether it is a
good project or not.
SENATOR MICCICHE said a clear set of expectations will keep the
state from picking winners and losers. Basic qualifications on
knowledge, backing, and experience will provide a greater
probability for production.
9:38:09 AM
MR. ALPER said slide 14 shows the estimate in the operating
budget and the actual amount that was repurchased. For the year
that is about to end, it will come close to $625 million and the
budget estimated $450 million. The prior five years, "we have
overshot the estimate by $560 million." He said it is a very
front-loaded process. Most of the requests come in March, and
there is a statutory 120-day turnaround. It takes several weeks
to process the checks, so by the end of August "you'll see $475
million out the door out of FY16's money."
SENATOR WIELECHOWSKI asked about how much the statute requires
the state to reimburse.
MR. ALPER said there is statutory guidance on supplying the
reimbursement fund with 10 percent of the production tax
revenue. For Fiscal Year 2016, it would be about $91 million,
but the legislature has the ability to fund it at whatever level
it desires. If the legislature had been endowing that fund [with
the 10 percent] instead of "simply spending to the request," he
calculated that the fund would have built up and then gone down
to about zero now, which is the same place it is now. In the
budget passed last week, the decision was made to write it open-
ended for at least one more year at $700 million.
9:42:17 AM
MR. ALPER said that not every company is eligible to get their
credit repurchased. Those that produce more than 50,000 barrels
per day are not able to, but they can sell them or hold and use
them when they have a tax liability. The credits can be sold to
any company that pays a corporate income tax in Alaska, not just
the oil companies. He turned to slide 16. In 2015, the Tax
Division made efforts to compile historic summary information
and make it available. Three such reports are provided to the
committee today and include a table of what credits were in
place in what year; historic and forecasted credits by category
and region; and the impact of the Cook Inlet tax cap. He said
DOR never releases company-specific credit information due to
confidentiality.
MR. ALPER turned to page 17 and said the "023 credits" are by
far the biggest category of credits and should be split into two
major sub-categories. There is a fundamental difference between
the loss credits, 023b, "and then the spending-type credits, the
capital credit, 023a, and the well-use expenditure credits for
Cook Inlet and Middle Earth, 023l." He said the per-taxable-
barrel credit, the SB 21 production credit for the North Slope
starting in FY14, has unusual data points. The number was lower
in 2014 due to higher oil prices. In 2015 and 2016 it is smaller
because of the limit of the 4 percent gross minimum tax. The
company pays the 35 percent net tax and then applies its per-
barrel credit only until it gets down to the minimum tax, 4
percent. At that point, they lose the rest of the per-barrel
credit. He said, "For our own internal accounting," there is a
credit of $590 million in FY2016, and that is half of what is
actually earned. In FY2017, the price of oil is forecast to be
$86.00, but "it doesn't increase the revenue that much; you
don't see Alaska's oil and gas production tax revenues start
increasing dramatically now until the price of oil hits about
$90 per barrel."
9:47:38 AM
MR. ALPER said that it is not realistic to call all $7.4 billion
worth of credits as a cost. Some of them truly are integral
parts of the tax regime and are offsets to what would otherwise
be very high tax rate. He believes that the tax rate itself
would have been lower if not for those credits, and in some
cases, it creates a differential incentive to reinvest a higher
percentage of a company's profits back in Alaska. In SB 21, "the
credit is an offset to the tax and it's designed to create a
progressive element: a little bit lower tax rate at lower
prices, a higher tax rate at higher prices." It is difficult to
consider them a credit as an inducement to doing the work, he
said. Most of the credits against liability fall into that
category. The credits that are refunded are to encourage certain
behavior like getting new companies to drill, explore, and go to
new areas, and those credits are truly credits.
9:49:08 AM
REPRESENTATIVE SEATON asked about the credit being progressive.
MR. ALPER said the lower the price of oil goes, the lower the
effective tax rate. If the price per barrel goes up to $160,
Alaska would collect a full 35 percent tax, and now it is 4
percent of the gross. The decision was made to go from the $5
per barrel production credit to a sliding scale, and his
understanding is that it was to add an element of progressivity.
9:50:20 AM
SENATOR MCGUIRE said slide 18 is important, and she encouraged
Mr. Alper to show it to new lawmakers. The credits in SB 21 were
meant to encourage certain behavior, and the legislature could
have required a lower tax rate instead. This discussion was
often left out of debates, she said.
MR. ALPER said Governor Parnell's original version of SB 21 had
a 25 percent flat tax, which became 35.5 percent. At the
expected price range of around $100 per barrel, there was no net
change from 25 to 35.5 percent, he stated. The number of credits
were zero at that price of oil, but in the amended version, it
was $750 million in more tax and $750 million in more credits,
"so is it fair to consider that credit when the net effect to
the state was essentially zero?" He said he agrees with Senator
McGuire. Moving to slide 20, he said that there is a myth that
many of the credits will soon expire. That is not correct,
except for a relatively small portion of the credits. These
include the 20 percent qualified capital expenditure credit for
the North Slope (they will still be available for Cook Inlet).
Additionally, most of Alaska's exploration credits are due to
end, per statute, on July 1, 2016, and those are the standard 30
and 40 percent North Slope and Cook Inlet credits and the jack-
up rig credits. The only exception is that the non-Cook Inlet
and non-North Slope exploration credit will exist for another
five years. "But, realistically, the exploration tax credits
have not been a big dollar item recently; it's been about $25
million, and even after they sunset, many of those same
expenditures will be eligible for other credits, like the net
operating loss or the Cook Inlet capital expenditure credit."
9:54:36 AM
MR. ALPER said there is a temporary oddity with the exploration
credit on the North Slope. The net operating loss credit has
been temporarily increased and the exploration credit remains in
place, so there are circumstances in the North Slope where the
state is paying 85 percent of exploration expenditures for the
big companies. It will remain in place for two years. The third
credit that is winding down is the small producer credit, and it
is not a reimbursable credit-it can only be used by companies
with actual production and profit to offset their taxes by up to
$12 million per year. Last year, ten companies used it, and they
can use it for a total of ten years, but new applicants are not
allowed to sign up for it, he said. A similar statute to the
small producer credit is in the PPT, was never used, and will
sunset as well.
9:56:14 AM
MR. ALPER stated that the second myth is credit reimbursements
are rapidly declining. The DOR projections only include known
projects, so any new project will add credit reimbursements. The
forecasting is very conservative; if the production is in the
forecast, then the underlying credits will be there. Slide 24
shows an example. Repsol, a major producer announced a large
discovery on the North Slope, and that is good news for Alaska-
but what does it mean in practical terms? If that company
decided to spend $1 billion in 2016 on a new oil field, it means
the next year there will be a $350 million operating loss credit
and several years before any actual oil revenue. "So, we have to
take the forecasted credits with a grain of salt," he said. If
Alaska is successful in encouraging new development, it will see
more credits to go along with it. Whether it is a large or small
field, there will be a 35 percent tax credit.
COMMISSIONER HOFFBECK said the slide does not represent what
Repsol actually plans to do; it is just an example. He then
noted that the other large credit impact in the near and midterm
future is AK LNG [Alaska Liquefied Natural Gas Project], and if
it goes ahead, in addition to the project costs itself (about
$50 billion), there is another $5 billion of upstream spending.
He spoke of consultant enalytica estimating a short-term
production tax impact of a little less than $2 billion. The
companies making the investment will be saving almost $2 billion
on their taxes. That cost will show up against the revenue side,
but it is not yet built into the DOR forecast, he explained.
10:00:44 AM
SENATOR STOLTZE asked if there is another myth that Alaska does
not have to pay for these credits. Director Alper worked with
the Democratic minority in the legislature and maybe perpetuated
that myth, he stated.
COMMISSIONER HOFFBECK said it is a myth that the director was
working with the Democratic minority and perpetuating that idea.
Mr. Alper was asked for an analysis, and the department tries to
accommodate requests from all legislators.
10:02:28 AM
COMMISSIONER HOFFBECK pointed out that the credits have been
earned under the current regime and they will either be paid as
a reimbursable credit or against tax liability. "We could not
have avoided those payments."
SENATOR STOLTZE said then that would be another myth.
COMMISSIONER HOFFBECK told him he could call it a myth.
REPRESENTATIVE SEATON spoke of AK LNG and the proposal to take
both royalty and production tax as gas in-kind, and "25 percent
is the nominal range, and yet it seems on this project they are
providing 35 percent of the upstream costs in the project for 25
percent of the value in both royalty and production tax." He
asked if it is a 35 percent production tax credit, "and we're
both including both royalty and production tax and we get 10
percent less than that investment percentage; is the
administration looking at that, at all, or is that a problem for
the equity of the state versus the rest of the people in the
project?"
10:04:12 AM
MR. ALPER said that is an interesting observation. It is true
that the state will be paying, indirectly, 35 percent of the
upstream cost and will be getting 25 percent of the downstream
value. He said he does not believe the administration is
specifically looking at that, but part of the rationale of
former DNR Commissioner Joe Balash wanting the original 25
percent [indecipherable] from the first version of SB 21 "was in
creating some sort of balance for that; that the state's
participation would match the state's ownership share, but we
are creating a bit of a situation where we're paying more on the
upstream than receiving on the midstream."
SENATOR MACKINNON spoke of the benefits of a pipeline, and she
asked whether the state considered, with the knowledge that it
is going into a potential $45-$55 billion project and with the
current tax credit structure, that Alaska's tax credit is a
portion of its purchase price to buy into the shares.
10:06:02 AM
COMMISSIONER HOFFBECK said, "We have talked about buying in on
some of these." The ability to use the Alaska's past credits as
any kind of down payment would be a part of a significant
debate, but he is unaware of the state doing anything more than
due diligence on whether it is a good idea to buy in or not. He
said he does not believe there has been any negotiation on how
those credits would have played in.
SENATOR MACKINNON said she hoped that he keeps the finance and
resource committees apprised. She spoke of a court challenge and
going backwards. "But going forward," she continued, "we can
negotiate with our partners, and we're providing 20-35 percent
of the funds to create the infrastructure, so it looks like we
should be able to get some kind of a benefit ...." She asked if
the state did not pay the owed tax credits, as was suggested by
some members of the public ... would there be an interest
penalty. Mr. Alper noted that [paying the credits] was subject
to annual appropriations, but she asked if there was
flexibility. She asked about an interest clause, and if the
legislature changed the tax structure, would interest counter
balance that change.
10:08:16 AM
COMMISSIONER HOFFBECK answered that if credit reimbursement
funds were short-funded, it would be a deferral of payment, and
it would not remove the obligation. It would be more of a cash
flow issue to pay it later, and there would not be an
incremental cost to the state for waiting a year, so it would be
a financial benefit to the state to wait, but "there's an issue
of honor and good faith and all that that comes along with
that." There is no statutory interest for deferring payment of
credit; it is all subject to appropriations, he clarified.
SENATOR MACKINNON said, "And, then, in a lawsuit, we think that
we would win based on the tightness of our contracts if we
forced, through lack of payment, a small explorer to go bankrupt
because they couldn't meet those high interest payments, which,
at least, that's what I have been told, they're doing with our
cash payout credits to keep their companies functioning." She
asked if Alaska would be held harmless in a lawsuit if there was
an income tax credit that the state could not pay.
10:09:30 AM
COMMISSIONER HOFFBECK said the statutory obligation to the
explorer is to issue a certificate, and the state has always met
those obligations. The statute also requires the DOR to draft
regulations to cover the circumstances of the state being unable
to repurchase the credits.
SENATOR MACKINNON asked if the secondary market is available or
has it been cut off since allowing repurchasing by the state.
MR. ALPER said there is no secondary market. There was nothing
formally created, the statute just allows for a transfer. The
tax credit certificates are sometimes assigned to finance
companies before they are even issued, he noted.
10:10:35 AM
REPRESENTATIVE OLSON said Alaska had six years under ACES and
there was a shortage of auditors.
MR. ALPER said the statute of limitations on production tax
audits is six years, and it was extended from three years with
the passage of ACES. He said it is one of his missions as
director to accelerate that process, and "we will get the 2009s
out before you convene in January." The slowness is due to some
major changes in the DOR in the last few years, including the
drafting of very complicated regulations related to upstream
costs that never had to be addressed before. He said the
department has been implementing major new software, which just
rolled out in January and is enabling the DOR to do much of its
work online. It has been a huge success, but building it and
testing it took a year or more.
REPRESENTATIVE OLSON asked about the accuracy of the estimates
for the ACES credits.
MR. ALPER said the ACES credits are based on what was claimed,
and there are always adjustments with tax returns and are all
subject to appeal. It is a small amount. He said he was working
late reading the 2008 production tax audits, and he noted that
the state made almost $7 billion in that year. "It was a walk
down memory lane for me to experience what it was like to be
rolling in money," he said, and it will be about 95 percent less
next year. The extent that the [estimates] are not correct will
not materially move the bottom line.
10:13:44 AM
SENATOR MICCICHE said this discussion is timely. Mr. Alper's
selection of myths to be clarified is handpicked and rather
limited. He said he has put out his own list of myths. "If we're
going to expand myths and facts, I'll ask you a couple
questions." The most common myth by the Alaska public is that
Senate Bill 21 has earned less [in tax income]. He said it would
be a helpful item to add to the list.
COMMISSIONER HOFFBECK said the truth of the numbers is that, in
the current $60 per barrel oil price regime, SB 21 has earned
more money than ACES would have because of floor. The myths were
the two that he asked Mr. Alper to address, because people have
been focusing on the [untruth] of credit impacts declining.
SENATOR MICCICHE said his constituents have a knowledge gap and
it is encouraged by some people. He said he thinks that the
total package of earnings for the state is an extremely
important discussion. The tax regime should be a living
document, and people should understand the impacts and benefits
from the various changes.
COMMISSIONER HOFFBECK said the discussion of the "total take" is
important, but he is hoping to get away from the debate between
SB 21 and ACES. The people voted for SB 21 and it is a law, so
the question is how to make it work better.
SENATOR MICCICHE said he does not think [the commissioner's]
intentions are diabolical. He said "we" forget that Alaskans are
not exposed to any of the terminology, so the legislature needs
to communicate at a level that everyone can understand, and that
is missing. He suggested a focus group, perhaps. He wants the
public to understand the changes and why the legislature is
making them.
10:19:17 AM
MR. ALPER said the main reason for the deficit is the low price
of oil. Because the state is in a net profit tax regime, the
taxes go down a lot faster than the price of oil. That is a
simple fact, and a 100 percent tax could not fix the situation.
10:20:17 AM
SENATOR WIELECHOWSKI said that during the legislative debate
nobody was arguing for keeping ACES. He and others wanted to
overturn SB 21 and replace it with something different. Two of
the key proposed items dealt with the gross minimum tax and
fixing the credits, "all of which are problems that we're facing
right now to the point where we are paying out $642 million more
in FY15 and FY16 in tax credits than we would receive in
production taxes." He asked if the state ever before paid out
more in tax credits than it received in production tax.
10:21:09 AM
MR. ALPER said Alaska is not losing money on the overall oil tax
regime, when including royalties, corporate income tax, and the
like. Alaska is not paying anyone to take Alaska oil, with the
possible exception of Cook Inlet. The production tax as a stand-
alone regime - the taxes and the credits offset from those taxes
- has a negative cash flow for FY 2015 and FY2016-that is fact,
he said. That is the way the law is written. The credits are
fixed, and they are tied to spending, but the taxes are tied to
profit. Prior to 2007, Alaska oil taxes were based on gross, so
it was impossible to have a negative tax or cash flow on oil.
But for the first time, it is true that what Senator
Wielechowski said is correct. He added that he hopes it is a
temporary situation "that we're going to work past as the price
of oil recovers."
SENATOR WIELECHOWSKI said that paying more out in tax credits
than Alaska receives in production taxes is not a good thing for
the state; if fact, "I would envision that there's probably not
another state in the country or a country in the world that pays
out more in tax credits than it receives in production taxes."
There is a member on this committee who is not present who has
done some analysis of North Dakota and found that North Dakota
has very limited credits, if any. Alaska has large credits. He
asked about comparing the Alaska tax structure with the tax
structure in North Dakota.
10:23:26 AM
COMMISSIONER HOFFBECK said there is a current analysis by the
Oil and Gas Competitiveness Review Board that includes North
Dakota and other places on how other tax regimes compare with
Alaska's. Some of those comparisons may be difficult.
MR. ALPER said because Alaska has a net profits tax and every
other state uses gross, there is an inherent crossover point.
Generally, a net tax will be higher at higher oil prices, and so
North Dakota probably has higher tax revenue at current prices.
If the price of oil goes above $100, there will be a point at
which Alaska will make more on oil taxes. The question is of
catching more during low prices or during high prices, and that
is the decision the legislature makes when making oil tax
policy.
SENATOR MICCICHE said, "We're still working to confuse Alaskans
on the comprehensive valuation of our oil tax system." He said
he is ready to move on, but asked if it were true that "if the
Yes-on-1 folks were successful, it would have cost the people of
Alaska approximately $400 million in FY2015 and approximately
$550 million in FY 2016 ... if they would have been successful."
10:25:21 AM
MR. ALPER noted that the numbers Senator Micciche quoted are
from the fall forecast, and there were some revisions. He said
SB 21 taxes are coming in largely because of the 4 percent
minimum tax, and had ACES remained in place by the referendum,
the taxes could have been driven to zero, because Alaska would
have been taking in $300 million less.
REPRESENTATIVE NAGEAK said Alaska has benefitted greatly from
the activities of the industry. He said Alaska has learned what
works and what doesn't work. The previous way of doing things
has provide benefit in the sense of operating on both sides of
the equation, the taxers and the taxpayers. He said, "We've
lived together for so long that we have learned to work together
on issues that come when things happen." He recalled the
problems with the fisheries when the Endicott [oil field] was
built, and the industry did a study to learn more about "those
fish and everything else," and [the study concluded] that the
people of the North Slope were right. So the industry made
breaches in the Endicott causeway, and it has worked, he said.
That is just an example of how they work together. When the tax
equation was changed, "I think it helped the local
municipalities by increasing revenues in a lot of cases to
counter losses from before." He said he looks forward to updates
from the industry, not only here, but up in the North Slope.
"When it comes to talking about the benefits and non-benefits of
the previous tax structure, it's a whole lot different than it
was before."
10:29:47 AM
REPRESENTATIVE SEATON said he appreciated the historical
presentation, and he recalled that during the PPT hearings,
consultants said to never give tax credits of over 20 percent,
because credits based on investment will be out of sync with
revenues and could put the state at an extreme risk. It seems
like that is the situation Alaska has found itself in, he noted.
He asked about the Cook Inlet situation. He is glad that there
are investors there, but there is a zero production tax for oil
in Cook Inlet, and there are production tax credits that cannot
be recovered through any production unless royalties are
reduced. If there is a 25 percent net operating loss carry
forward plus a 40 percent lease expenditure, "we're talking
about investing 65 percent into an operation that in the future
will have production with zero production tax return to us," he
said. "Are we really saying that we are offsetting that
expenditure that we are making - that 65 percent of the cost -
with royalty?" He said that it does not seem like Alaska has any
other source of funds from that production other than royalty to
make that expenditure, and it has not been talked about that
way, but it seems like that is where we are. For Alaskans, he
asked, is the legislature looking at how the credits in Cook
Inlet add up.
10:32:30 AM
MR. ALPER said he does not like combining the royalty and
production tax conversation, because they have different
functions. One is Alaska's sovereign right to tax, and the other
is a landowner's right, and Alaska only gets royalty on Cook
Inlet production that is on state land. He said the rationale
behind the tax cap was the potential for Cook Inlet gas
shortages. The legislature, in 2005, when the PPT was being
introduced, was worried that a tax would be an undue hardship on
the companies exploring and producing gas that supplied the
utilities in Southcentral Alaska. "It is zero" because it locked
in the ELF multipliers and rates. So, for all the old fields in
production, it was zero, and it varies from gas field to gas
field, but the average gas tax in Cook Inlet is 17.7 cents, and
that tax regime has a sunset in 2022. He said the analysis
Representative Seaton spoke of is true with a project under
development: a 40 percent credit plus the 20 percent net
operating loss. He explained that it is usually "between the 20
and the 40; some fraction of their spending falls under the one
credit and some under capital, so we're paying 55 percent, let's
say, for an explorer in Cook Inlet." The phenomenon that the tax
cap brings in is that even an active producer who does not have
a net operating loss is still eligible to receive those well-
drilling credits. So, he said, there are circumstances where a
company could be producing and not paying taxes because of the
cap, or paying a very low rate, and still be eligible to receive
large credits for well drilling and capital expenditures.
10:34:03 AM
COMMISSIONER HOFFBECK said there has been a fairly substantial
increase in property taxes within Cook Inlet because of the new
development; although, it does not offset the credits.
REPRESENTATIVE SEATON expressed his concern that the chart on
the historic and forecasted tax credits shows that total tax
credits are going up $95 million from 2015 to 2016, and $490
million from 2016 to 2017. He said he does not need to discuss
which tax regime is better, he just wants to make sure, as
Alaska goes forward, "we look at a regime that works for us at
high and low oil prices - that they self-adjust and the state is
not put into a financial hardship in any regime." This meeting
today is really important to get these issues on the table, and,
he said, Alaskans do not need to talk about the past, but the
state must get control of its fiscal situation, and get
something that works for Alaska.
10:36:47 AM
SENATOR COGHILL said the investment that the legislature is
making by providing credits is to have fuel during the winter.
He felt that the credits worked, but he asked if they have lived
their useful time. On the North Slope, he was interested in
production capacity, so there were incentives for exploration.
Under the tax scheme that evolved, it was putting Alaska's money
into new production, not contemplating that the price would drop
to what it did, he said. It has been a highly volatile
international market, and consultants say we are probably not
even a noticeable sliver. "So we have to be competitive in that
world," he stated. The tax credit was to invest in production,
he reiterated. The question in his mind is if Alaska is getting
what it asked for. It should not be about being short on cash,
but whether it gets to the production that Alaska wants. If not,
"then maybe we are wasting our time." He said the legislature
decided to incentivize certain behavior but also share the risk,
but is it getting the value?" he asked.
10:39:24 AM
SENATOR WIELECHOWSKI asked about the interplay between Cook
Inlet and the North Slope for a company that operates in both.
MR. APLER answered that there is not a material difference for
smaller companies, because credits are essentially cashable. For
a large company with operations in both areas, it could cash out
its credits, he explained. From the ACES legislation, a lot of
those credits would have been lost from Cook Inlet, because
there was only so much tax liability and it had to be held onto
until there was future tax liability. House Bill 280 enabled
those credits to migrate to the North Slope and be used against
that tax liability.
SENATOR WIELECHOWSKI asked if there was a significant amount
used in that manner.
MR. ALPER said he has only seen "anecdotal information" in a
memo from a prior commissioner to a senator that said it was
$50-$100 million annually, but that is speculative.
10:40:46 AM
SENATOR MCGUIRE said she would like to remind people how
integrated Senate Bill 21 was with regard to credits. Senate
Bills 309 and 280 were for Cook Inlet. She suggested that when
incentives are successful, people to want to "take more." She
asked people to think through how the legislature accomplished
what it wanted. The Senate Resources Standing Committee held
hearings where the mayor of Anchorage was contemplating
importing LNG from Indonesia and experiencing rolling blackouts.
She said the committee used data from the old field to employ
two tax regimes that have been successful, and she urged caution
in taking more, because that is power cost equalization for
Southcentral residents. It is a center of commerce, and taking
more [revenue] means killing the golden goose. She said she will
be protective of Cook Inlet tax credits that are in place.
Something is coming back in property taxes that were not coming
in to the general fund before, because "those fields were dead."
CHAIR GIESSEL said there is an interior energy plan to draw gas
from Cook Inlet as well.
10:43:44 AM
MR. ALPER spoke of credit projections and said the department
talks to companies and gets their reports and attempts to figure
out what is going to happen, and the "net result of this whole
conversation is if it's enough of a real expenditure to show up
in the production forecast, it's enough of a real expenditure to
have the credits show up in the credit forecast." Alternatively,
regarding explorers, if a project is planned and announced, then
the cost of the reimbursements will be in the analysis, but many
other things are not yet in there. It is necessary to understand
that the more successful Alaska is in attracting new oil and gas
development, the more, under current law, the state will be
paying for credits two to five years down the road.
CHAIR GIESSEL thanked him for the extremely valuable
presentation. She introduced, enalytica, legislative consultant.
10:45:54 AM
JANAK MAYER, Chair and Chief Technologist, enalytica, said it
was his fourth year advising the legislature on oil and gas
taxation.
NIKOS TSAFOS, President and Chief Analyst, enalytica, said the
price of oil is what is really driving this topic. The price has
rebounded somewhat from its low of $41 per barrel. He turned to
slide 3 and said the graph shows the boom in U.S. production
over the past five years, where 5.5 million barrels a day have
been added. As a comparison, he noted that Alaska's peak oil
production was about 2 million barrels per day. When the U.S.
starting adding production, there was a decrease in global oil
due to the civil war in Libya. About the time that Libya
stabilized, sanctions were placed on Iran, which decreased the
amount of oil entering the market. Then, in 2014, the growth of
the U.S. production started translating almost 100 percent on
the additional supply of the global market. Prices started
dropping last summer, because production started to really grow
and expectations for demand turned.
10:52:40 AM
MR. TSAFOS said that every month the International Energy Agency
provides a forecast of oil demand, and the agency predicted a
drop in demand, which helped drive down the price of oil. The
forecast is starting to come up, and growth in supply is not as
dramatic, he said. He added that he does not want to discuss
OPEC [Organization of the Petroleum Exporting Countries] and
what it did, but basically what OPEC realized is in this new
world, there wasn't really much that it could do, and so there
was no point in trying to defend a price that was "out of sync
with the fundamentals." People read that OPEC is saying that the
crazy Americans are producing all of this oil out of nowhere,
"but it's so scattered," he said. There are about 70 companies
operating across the Lower 48, "and it's really hard to figure
out what's going on." Part of OPEC's strategy is to let the
price move according to the market, such as: "Let the market
tell us at what price American producers go bankrupt, rather
than … trying to figure it out from Saudi Arabia." He showed, on
slide 4, a chart with the rig count in the major shale areas in
the U.S., and it shows that, depending on the play, there may be
a peak of 200 rigs to 600 rigs. The charts showing oil
production at a low level depict mostly gas plays, he explained.
The point is that low prices are creating a response in
activity; the rig counts are crashing. People are scaling back,
but the bottom chart shows that production is not crashing, and
that is because not all wells are equal. In North America, a
large cut in the rigs may have only a minor cut in production.
Ignore the news articles about big declines [in the oil
industry], because what really matters is production, not the
rig count, he stated.
10:57:17 AM
MR. MAYER said North Slope crude went from $107 per barrel to
$67 per barrel in two years. Slide 5 shows state revenues and
credits, and he said that revenues from petroleum sources went
from $5.7 billion to $2.1 billion this year. If the only revenue
was royalty, the decline would be linear, but net value falls
much more sharply than oil prices, because costs are essentially
fixed. A 37 percent decline in oil price gave Alaska a 63
percent decline in total revenue. In 2014, royalty was about 30
percent of the revenue and production tax contributed 45
percent, and in 2015, royalty makes up 45 percent of the
revenue, and production tax contributes only 17 percent. "In
terms of credits that are paid out and [the] production tax
number you see there in the green, and net of credits and
deductions that have gone through the tax system, not including
things like the dollar-per-barrel credits, which simply … act to
reduce a taxpayer's liability, looking solely at credits that
are actually paid out or potentially paid out by the treasury to
companies that don't have liability, those are pretty similar
between last year and this year," he said, referring to slide 5.
It was $593 million in 2014 and $625 million in 2015. "The big
difference is that's a much bigger picture of the revenue total
for this financial year than the previous one, and that's true
if one compares it to the overall revenue pie, particularly true
if you compare it specifically to production tax."
11:01:54 AM
MR. MAYER said, regarding other credits that are not explicitly
shown in the previous slide, there are the credits that are paid
to companies that have a tax liability, and they are the largest
number of credits overall. This year there was $363 million in
tax liability, but $570 million in credits. Last year had a much
happier revenue picture with $2.6 billion in production tax
versus $888 million in credits. These credits are a fundamental
part of the design of the system, he stated. He spoke of credits
increasing as oil prices decline, and the basic function is to
reduce the rate of tax at lower prices. He said that it is a
progressive system, and it functions much like the ACES
progressivity scheme, although ACES started with a lower 25
percent tax rate and increased with the price of rising profits
and prices. He noted that there were problems with marginal
rates in ACES. That was changed by setting a higher maximum tax
rate, 35 percent, but that is too high at low oil prices, and
"so we'll find a way to bend that tax rate down at lower prices,
and that's exactly what these credit do." But the question is if
it is a reasonable system.
MR. MAYER asked whether the system is denying money Alaska
should be earning from its oil-leaving aside the question of
credits that are paid out directly to companies, which he will
discuss later. He said one way of looking at the question is by
doing simple math, but he cautioned the use of simplified
numbers. Comparing other resource owners like North Dakota and
Norway must be done on a like-to-like basis, he stated. He said
this is a crude, aggregated look at a single year, and every
company's finances are lumped together [slide 7]. The chart does
not account for spending heavily now to create future
production-it is just one point in time. This average barrel
price does not really exist, but it is a useful way to look at
the tax in the current environment, he explained. If oil were
$107.60 per barrel, the gross value would be $98.20 at the point
of production. He then subtracted $59.40 in production costs and
$13.80 in royalty and property taxes, generating a net value of
$45.60. He then applied a production tax of 35 percent with a
$6.00 per barrel credit, as well as state and federal corporate
income tax, and he ended up with a producer value of $19.20 per
barrel.
MR. MAYER [moved to slide 8] and showed a similar calculation
with oil at $67.50 per barrel, and royalties fall, but not as
much as the net components. Property tax stays the same, and
production tax falls, because the net has fallen from $45 down
to $10 [per barrel]. The producer ends up with $2.40 per barrel.
He noted that the graph shows royalties going from 27 percent of
the net price to 70 percent. Royalties are regressive, and if
prices go down far enough, they will take up everything, he
stated. Alaska has a progressive credit system that is supposed
to reduce the effective rate of the tax as oil prices fall, and
to a certain point it does, but when the 4 percent minimum kicks
in, the $2.30 in production tax cannot fall any lower. Because
of the substantial fixed royalty, at $107 per barrel, the
government takes 68 percent, and at $68 per barrel, the
government take is 88 percent. When looking at the amount of
money there is to go around, the tax system is taking almost
everything there is to take, he stated.
11:16:02 AM
SENATOR MICCICHE referred to a paper by Roger Marks, April 25,
which was based on a lower price but summarized Mr. Mayer's
comments. He said he is seeing that people confuse Alaskans by
comparing production costs with the Lower 48. Because of the
effects of royalty and taxes, the lower the value of oil, the
more the government takes.
MR. MAYER said that is what he said. Those are levied on the
gross barrel.
REPRESENTATIVE SEATON asked about corporate income tax.
MR. MAYER said his recollection is 35 percent federal tax and
about 6.5 percent state tax.
11:17:48 AM
MR. MAYER moved to slides 9 and 10, comparing tax rates in ACES
to those in SB 21. At the low prices, SB 21 brings in more money
for one reason alone: the gross minimum tax. Under ACES, 20
percent capital credits were applied after [the minimum], so the
credits could have taken [the production tax] down to zero. "At
some point, it takes you down to that floor and it can't take
you down any further, so once you hit 4.5 percent of the gross,
your tax rate not only can't decrease, but it starts to
increase." So, under SB 21, the state gets $2.30 in production
tax, and under ACES it would have had a negative value; however,
large companies cannot have less than zero in production tax,
but they can carry amount forward against future liability, he
explained.
MR. MAYER moved to slide 11. Regarding the impacts of negative
revenue of $625 million from credits paid [to the oil industry]
by Alaska, "most of these things are as they were previously."
He said Alaska has taken the 20 percent capital credits and
replaced them with the sliding per-barrel credits, and "those
all simply affect credits that are paid against the liability,
not the cash that is actually paid back to producers who don't
have a liability," which is the biggest source of concern here.
[The $625 million] includes the net operating loss credits given
to a company that is spending a lot of capital on new
developments and does not have much or any revenue to
compensate. These credits of 45 percent are "a substantial
portion of this piece." Cook Inlet activities also contribute a
substantial portion of the $625 million. He said SB 21 made
changes "that do reduce a few small pieces." The alternative
credit for exploration, the Frontier basin credit, and the small
producer credit were not changed by SB 21, he said, and they
sunset in 2016 and 2017. If a company was able to collect the
credits before they sunset, it can continue to claim them for
nine years afterwards, he noted, but overtime, the sunsets will
save $113 million out of the $625. Senate Bill 21 also
temporarily increased some of the credits with transitional
arrangements to protect small producers. It got rid of the 20
percent capital credits, and it increased the loss credit to 35
percent to go with the increase of the base tax rate from 25
percent to 35 percent. He said that the transitional
arrangements raise the credit for the small producer to 45
percent through to January, 2016. There will be some decrease in
credits paid out after that time, he added.
11:25:28 AM
SENATOR MICCICHE asked about production tax for FY 2015 and
about "the footprint of the producer paying tax versus not
paying tax." The legislature has had empathy for small producers
and encouraging them with generous tax credits. He asked which
producers are paying a net-positive in production taxes.
MR. MAYER said that no company producing 50,000 [or more]
barrels per day can receive a credit paid out by the treasury,
[except] producers that do not have a tax liability. The
[substantial producers] with tax liability "and possibly some
additional smaller producers that also have a tax liability
collectively contribute that $362 million to the treasury in
production tax as well as all these other elements of the total
revenue pie," which is about 90 percent of the state's total
unrestricted revenue. "Separate to that, there are small
producers that don't have a tax liability that do claim credits,
and those credits are paid out to them." These are separate
companies "and quite separate revenue streams." The companies
that are paid for the credits have relatively little or no
production, he said. These companies may have only a small
amount of production and, relative to that production, high
amounts of spending in future production such that the credits
they are entitled to exceed any liability that they would have,
and the net balance is negative. He added that the largest
portion of this is the net operating loss credits, currently 45
percent from any net operating loss. He said the effect is
exactly the same for large producers and small producers as both
can spend $1 billion and decrease a tax liability by $350
million. It is an important equalizer between the large and
small producers, particularly in the North Slope. Cook Inlet is
different, he explained, but for the North Slope, the bulk of
that is effectively achieving the same deal for those small
producers that do not pay tax as the deal the big producers get.
He explained that if a big producer invests in future
production, the state pays 35 percent of those costs, because it
will take 35 percent of the revenues "down the track."
11:30:14 AM
SENATOR MICCICHE asked if the risk balance for larger producers
is healthy or if they are victims of low oil prices. He asked if
the balance may be "off" for smaller producers and if they
evaluate whether future potential production is worth "being
somewhat out of balance."
MR. MAYER said Alaska has a slightly lower tax than North
Dakota, because North Dakota gets less revenue at higher oil
prices. Any fiscal system is a balance between risk and reward.
He said ACES was a balance that had the state take more risk on
the downside but take in more on the upside, and SB 21 did the
opposite. A large producer is better equipped to weather the
volatility, he said, and may be willing to spend the money now.
11:33:26 AM
REPRESENTATIVE SEATON noted that the 35 percent federal tax is
actually 23 percent, and the most recent average of [Alaska's]
corporate income tax is slightly over 4, not 6.6 percent. That
money is left in the producers' hands, he said. He asked about
calculation using those more accurate figures.
MR. MAYER said he would not like to use his methodology to
benchmark government take, because that would require a lifetime
analysis of assets. He said he would not want to use these
"headline" figures "and say this is emphatically the level of
government take we're at, because I don't have the knowledge or
information to do that." The aim of his exercise is more about
the differentials between "what things are like" at $100 and $66
per barrel. Companies in the hole do not pay the effective rate
of 35 percent, but oil companies frequently pay very high rates,
so using the 35 percent figure is probably not that far from the
truth, he offered. He added that actual figures will not make a
dramatic impact on the overall picture.
REPRESENTATIVE SEATON said that the producer value of $2.40 [per
barrel] is significantly different if the tax is less. That
would show a lot of value as if it were government take, but the
producer keeps it. He said he is not challenging the analysis,
but he questions the retained value versus the state's value.
11:36:59 AM
MR. MAYER said the final slide is important regarding credits
that are refunded by the treasury. He noted that the credits "go
to very different companies than the large companies that
provide a vast majority of the tax revenue." Geographically, the
$625 million is split about evenly between the North Slope and
Cook Inlet, and Cook Inlet does not contribute any more than
about 5 percent of total petroleum tax revenue. This exercise is
stacking credits that come from current investments into future
production against current revenues, so there is a time
"mismatch," he stated. The North Slope picture looks a lot less
"out of whack," he said, as the credits that are refunded are
the 35 percent reinvestments into future production tax revenue.
In most cases, Cook Inlet production tax on oil is "effectively
zero," and royalty is reduced. By any measure, there is a
substantial subsidy for the Cook Inlet petroleum industry. He
noted that there was a fear of rolling brown outs in Anchorage
and a need to turn Cook Inlet basin around, which has been done,
but these credits that are paid out directly to petroleum
companies may not be sustainable with [Alaska's] current budget
constraints. The chart paints a strong picture of where that
conversation might start, he offered.
11:40:20 AM
CHAIR GIESSEL announced that the committee would hear from
several Cook Inlet producers.
PATRICK FOLEY, Senior Vice President, Caelus Energy Alaska, said
Caelus recently purchased all of the assets of Pioneer [Natural
Resources Co.]. He said his goal is to dispel myths, to remind
the committee of Caelus activities, and to put a face on "your
co-investor." It is finances from the state that helps many of
Caelus's projects, he said. Since 2002, his company spent $2
billion in Alaska, and it is one of the companies that gets the
tax credits. He said the company was named after the Roman God
of the sky, and "we have a large North Slope business; we're
exclusively focused on the North Slope." Caelus has conventional
loans and very large private investments from the Apollo Global
firm. It operates the Oooguruk field with a 70 percent working
interest, producing about 15,000 barrels a day, he stated.
Pioneer/Caelus has been in Alaska since 2002 and has yet to make
a profit. He said the company's 2015 capital budget is about
$220 million for Oooguruk and Nuna, which had gravel installed
last year and has a commitment for first oil in the fourth
quarter of 2017. He added that Nuna has "something north of 100
million barrels." The big oil companies "have all the good
stuff," and Caelus has to deal with tight, crummy reservoirs on
the North Slope, but they can be successful with the right
technology. He said his company is the leading fracker in the
state. These are very expensive wells, he said, and they are
about 6,000-foot laterals with very large frack programs where
the company pumps somewhere between 3 and 4 million pounds of
proppant in each. He said it is difficult because the company
operates out in the ocean, drilling all year round but fracking
only in the winter from a fabricated ice pad. He said last
winter's drilling season was very successful, and the company
brought all its wells on line. He said Caelus did a capacity
test to determine "how much oil we could make through our
system, through our existing wells, and we peaked at 22,500
barrels, which is phenomenal." When drilling a well, "we pre-
produce a water injector ... then pretty shortly we actually
convert them to water injection," so rates drop from 20,000
barrels a day to more like 11,000 barrels, he explained.
11:46:30 AM
MR. FOLEY said the credit program is instrumental in helping
Alaska "grow the pie." Caelus paid $18 million to purchase
leases to the east of Prudhoe Bay and immediately shot a high
resolution seismic 3D program. The company shot a 3D program on
Oooguruk, so there are two seismic programs that it spent $30
million on, and it installed gravel and a road, and it will come
back and install facilities and begin to drill development
wells. In the first phase of Torok, there will be 30 development
wells and something close to 20,000 barrels a day, he said. He
said he is exited to announce another project near Smith Bay
that NordAq had put together. It is a legitimate billion-plus
barrel recoverable reserve resource in the shallow waters of
Smith Bay, he said, and it was a complicated transaction. NordAq
had difficulty with its financial backing, and the only way this
deal could go forward was by solving all of the problems. He
said he was locked in a room with NordAq, business people,
engineers, CIRI [Cook Inlet Region, Incorporated], attorneys,
Doyon, and Cruz Construction to find a way to make a deal to
allow the two wells to be drilled this winter. He noted that he
hopes to close the deal tomorrow. Caelus will be the operator
and have 75 percent interest, he added. The state of Alaska did
not have a seat at the table, but without state tax credits
Caelus would not be doing this. He said he appreciates the
budget problems and hopes the state finds a solution without
getting rid of his credits.
11:50:24 AM
MR. FOLEY said slide 7 demonstrates the amount of money Alaska
pays out in credits, which is less than its revenue. He said
Pioneer started in 2002 during ELF and committed to a project.
The tax regime changed to the PPT and then to ACES. He said has
worked in other states and other countries, and he has never
seen a less stable fiscal system than in Alaska, and for an
investor, stable is more important than favorable. His industry
does a good job of following the rules and making investment
decisions, but the legislature makes the rules. "Thankfully,
I've had an opportunity to have a seat at the table and at least
participate in how some of those rules are drafted," he noted,
but he asked to be able to experience the fiscal terms that were
expected when making a commitment. He said there is almost a
sense of fear that the state might have to pay out a really big
amount, and "isn't that a great thing?" When the state pays, it
is a result of the investments made, and he cannot imagine
anything better than paying out very large credits, because that
means that very large investments were made.
MR. FOLEY said the next slide shows the difference between a 023
credit, which is a loss carry forward credit, and a 025 credit,
which he calls an EIC or exploration incentive credit. For the
EIC credits, there is a "very active" application process, and
the state decides if the project is worthy. He said NordAq went
through that exercise and has preapproval for the EIC credits.
When the industry makes an investment, part of the rules is that
it would earn a credit certificate, and it needs absolute
reliance that the state will pay for the certificate. Having
uncertainty would chill investments, he added. Referring to an
earlier question of state purchases eroding the third party
market, he said his business sold its credits early on for a
modest cash discount to a big producer. "Then the state had a
program to be able to buy credits directly, and that's all we've
ever participated in," he stated. He said he heard that the
purchasing market is very thin with high discounts.
11:55:52 AM
MR. FOLEY said the oil industry is magical because of the job
multiplier effect; every industry job creates 20 indirect jobs.
He turned to slide 10 showing all of the [petroleum industry]
activity in 2015 when oil was $100 per barrel, and now, none of
these companies have their foot on the brake, because they have
confidence that oil prices will recover. It is not important
what oil prices are now, but what they are going to be in the
future, and as the legislature contemplates changes to the
credit system, he asked for members to keep that in mind. Please
keep in mind the relationship between the tax rate and the
credits, because they go hand-in-hand, he said. Alaska made a
bargain to help investors with credits upfront in exchange for
higher taxes when they make a profit. There are tremendous
resources on the North Slope, and the credit system motivates
explorers and appraisers. Caelus is the kind of company Alaska
would like to have, he opined.
11:59:27 AM
CHAIR GIESSEL congratulated Mr. Foley regarding its partnership
with NordAq, and she introduced the next speaker.
11:59:44 AM
BENJAMIN JOHNSON, President and CEO, BlueCrest Energy, said
BlueCrest is a small independent oil company, and he would like
to explain the process for deciding to come to Alaska. The
company is privately-held, but all executive managers are from
major oil companies. One board director was a chief operating
officer of ConocoPhillips, and the Alaska vice president was the
operations manager for Prudhoe Bay. Mr. Johnson was an executive
with ARCO and grew up in Kenai, working his way through college
on the Cook Inlet platforms. He noted that he also worked on the
North Slope and in the Gulf of Mexico. BlueCrest looked all over
the U.S. and what made the company look at Alaska was the tax
credits and the opportunity, he said. He added that BlueCrest is
not trying to find the next biggest deal, and it has only one
property to develop: the Cosmopolitan Project. There are 30
people working in Alaska for BlueCrest, and there will be about
250 people later this year. He noted that there are no
production taxes on oil in Cook Inlet, but the royalties alone,
over the initial 10 years and based on $65 per barrel oil, will
be $300 million, and that is not counting any property taxes,
income taxes, or future production taxes. There will be about
$20 million in property taxes in the next 10 years, he added.
This year, his company plans to spend about $80 million, and
next year about $120 million. He said capital is limited for
smaller companies, and the cost of money for BlueCrest is very
expensive.
12:04:45 PM
MR. JOHNSON said BlueCrest has spent $144 million to date and
has received $21 million in tax credits. The company does not
have any third-party debt - it is using shareholder money - but
to go forward it will need to borrow money. BlueCrest will be
closing on a $30 million loan facility from AIDEA [Alaska
Industrial Development and Export Authority]. He turned to page
3 of his handout, and said "this is what we saw when we bought
it from Pioneer." BlueCrest bought Cosmopolitan in 2012, and
Pioneer took those funds and put them into the Permian Basin and
made a lot of money. The people of BlueCrest saw potential, he
said. There was an initial well drilled in 1967 that found some
oil, but no one had ever seen "the upper part of the main part
of the heart of the structure." In 2013, he said, BlueCrest
drilled one vertical well offshore and found what he had hoped:
a lot of gas and more oil. The field is located about three
miles offshore of Anchor Point, but it will be reached by
drilling onshore with a large rig that is under construction.
There will be no oil production in the water, and he anticipates
that they will be on production with the first well by April of
2016. At some point, BlueCrest will begin drilling water
injection wells to keep the pressure up in the reservoirs.
Through 2019, its total projected spending is $690 million. The
gas they discovered is another story, he said. It is a good
example of how Alaska's credit program motivated the company "to
get to the right place." It has found a lot of gas, but it is
too shallow to reach from onshore, so the plan is to put two
very small gas production platforms offshore. Capital was
limited, and the company had been focused on oil, so they have
been working with WesPac Midstream, a company that came to
Alaska to deliver gas to Cook Inlet. He said the two companies
are now talking, and WesPac will pay 100 percent of the
development costs and receive all of the gas, until later when
BlueCrest will work its way back into an 80 percent ownership in
the gas. He said WesPac is willing to commit this gas for
Alaskans. He does not want the gas to go away if Alaskans need
it. The gas production will start in 2016 and be ready in 2018,
at a time when there may be a shortfall of gas in Cook Inlet.
12:10:34 PM
MR. JOHNSON said Cook Inlet is a prolific basin, but there has
been very little discovery-the last large discoveries were made
in the 1960s. Access is easier than the North Slope, but much
more difficult than the Lower 48. The offshore exploration well
BlueCrest drilled in 2013 was 7,400 feet deep and cost $45
million, and a similar well in the Gulf of Mexico would cost $8
million, he said. The company's onshore wells will have a 5,000
foot horizontal opening and will cost $30 million, and in the
Lower 48 it would cost about $9 million. In general, there is
enormous potential in the state, and the major oil companies
have done a great job of developing the enormous projects - no
one else could do that. But, well-run, independent companies
will have a big part in Alaska's future, he opined. BlueCrest is
well-suited for exploration and development of small projects
and has strong technical abilities, efficiency, flexibility, and
innovativeness. He reiterated the limited capital for small
companies. He turned to slide 9, and he opined that most of the
new Alaska discoveries will be small. "I don't know how many
more Prudhoe Bays we'll have," he stated. Looking at the typical
evolution of basins around the world, they are started by majors
who do the costly projects, and then the independents move in
and "reinvent the resources." He spoke of the Permian Basin, as
an example. It is estimated to have a fourth of all U.S. oil
reserves, and in the 1970s to the 1990s, the majors produced the
fields and then sold them to independents. It was too mature for
the big players. In the 1970s, it was producing 2 million
barrels a day and declined in 2005 to 850,000 barrels a day.
Then the independents came in, and they got the rate back up to
1.3 million barrels per day. Alaska has to compete with other
areas, and the credits were why BlueCrest chose to come here.
12:16:06 PM
MR. JOHNSON said he views the credits as offsetting the high
costs of working in Alaska. Without them, he could not have
convinced investors to buy into his company, and if credits
stop, it would not continue full development as planned, he
stated. His company is not producing anything now, but it is
receiving credits. If the credit program stays the same,
Cosmopolitan will receive about $190 million in state credits
within the next four years. The state royalties will be $600
million, and that is a 200 percent return on Alaska's
investment. Additionally, Alaskans will have access to the gas
and oil, he noted.
12:18:10 PM
SENATOR MICCICHE said this is the natural gas of the retirement
homes and households of Cook Inlet, Alaska. It has become normal
that the service providers in Cook Inlet have a premium because
of the proximity to the North Slope, "and I'm not sure the costs
are justified." He encouraged independent producers to bring
down those costs.
12:19:43 PM
MR. JOHNSON said he agrees. His company bought a drilling rig,
which locks in prices for the next four years-it cuts over $50
million out of its drilling budget.
SENATOR MACKINNON asked about the cost of capital.
MR. JOHNSON said it is very expensive; money for preproduction
has a 10 to 20 percent interest rate. After production it gets
much more reasonable, but exploration is high risk and there is
no certainty of a discovery. But on the development side, which
is what his company is doing, money is still expensive. The
objective is to quickly get into production and then refinance.
12:21:53 PM
JOHN BARNES, Senior Vice President, Hilcorp Exploration &
Production, Alaska, said he has been with Hilcorp Exploration &
Production for about three years, and the company has been a big
player in Cook Inlet. Showing slide 2, he stated that Hilcorp is
incredibly cost-conscious. Operating costs in Alaska are too
high, he noted, and Hilcorp has to be innovative and cost
effective to be competitive with its Lower 48 business.
Allegedly, costs are higher in Alaska, "but we won't accept
that." He said that, right now, Cook Inlet's cost structure is
competitive with Hilcorp's Lower 48 work. The company has
recently moved on to the North Slope, and its goal is to get the
North Slope cost structure in line with Cook Inlet's - that's
how you deal with low-cost environments, he stated. Low prices
force companies to wake up to operating costs, and Hilcorp
talked to its contractors, who deserve to make their return,
because they are in this as well, he stated. He said Hilcorp
tries to save operating expenses and put that money into new
wells. He added that by capturing adjacent opportunities, a
company leverages its infrastructure, and that is what everybody
does, because it dilutes fixed costs against more barrels. He
said his 2014 investment in Cook Inlet was about $374 million.
There are a lot of old, broken wells in Cook Inlet, and Hilcorp
acquires assets from major companies, "and then we go in and we
work really, really hard to get production up." If you want
more production, spend more money, he added. In 2015, Hilcorp
will spend about $340 million, which includes its business on
the North Slope. It closed on three properties from BP in
November. He said the acquisitions in Cook Inlet and the North
Slope total about $1 billion each, and "that's just to get a
seat at the table."
12:27:36 PM
MR. BARNES said the oil and gas business needs optimists,
because pessimists will not drill. In 2011, he was the only
employee, and at the end of 2013, there were 360 employees, and
97 percent were Alaska residents. The Alaskans are now 88
percent of Hilcorp employees, but the intent is to hire Alaska
residents. Additionally, in Cook Inlet, Hilcorp has 1,500
contractors, off and on. When Hilcorp took over in 2012, it
acquired Marathon, "so we moved more gas that winter," but in
the summer, Hilcorp needed more markets and export options. He
said it is important to find ways to create market. Competition
is good so people will be competing in trying to move gas from
Cook Inlet to Fairbanks and other Interior areas. It is
rewarding to see the market plays at work to solve energy
questions, he stated. Things were not booming when Hilcorp took
over, but Hilcorp increased production from 6,000 barrels per
day to over 12,000. After Hilcorp closed on North Slope
acquisitions, it has gone from zero barrels to 60,000 barrels
per day in December of last year, he stated. The key is the
mindset to just go out and do the work.
12:31:36 PM
MR. BARNES said 20,000 barrels per day on the North Slope does
not look interesting, but the company has held flat compared to
the decline. He said Hilcorp is commissioning a smaller
automated service workover rig to change wells out "without
using these buildings that they move around on the Slope called
'drilling rigs'." He said production went down a couple of times
because of normal summer activity, but he is incredibly
optimistic about the North Slope. He showed a chart of Hilcorp's
royalties, which went from $28 million per year to $56 million.
It is important to have a long view on investments; the state
encourages investment and payout will be longer than what is
happening just this year. If production goes up, the value of
assets go up, and property tax payments increase, he explained,
so the state and industry have the same goal of increasing
production. He showed his last slide. The green bars represent
cumulative Hilcorp investments since January 2012. Previous
operators were not investing enough to hold production flat, and
Hilcorp produced 20 million more barrels than previous operators
would have. The state has to decide if it wants a tax structure
that asks "why can't production go up?"
12:36:25 PM
SENATOR STOLZE said there is a little facility in his district
that is 170 megawatts, "and I guess we're relying on about 7
million cubic feet a year." He said he thinks they are paying
"about seven now," with an escalator. He asked about the policy
of Southcentral and Railbelt energy reliability and tax credits.
He said the district has the facility and is depending on it,
and "I think that number is only going to go up on consumption."
MR. BARNES said the tax credit structure is part of an overall
analysis of the cost to do business, and it is working. The Cook
Inlet tax credits are working, because production is going up
and people are looking at exciting new opportunities.
Competition will be good for providing gas and drilling new
fields, and more players bring in more contractors, which ought
to drive prices down, he said. It is the free market system at
work, and people will not look for the gas without good
contractors and tax structures.
SENATOR STOLZE said the decision was made to build that big
multi-megawatt, so there is no choice.
12:39:01 PM
MR. BARNES said the Permian basin keeps on giving. Cook Inlet is
not, but it has a lot of opportunities. No one knows what is out
there, but are people optimistic or pessimistic?
CHAIR GIESSEL said Hilcorp has been exciting to watch.
12:39:56 PM
JASON BRUNE, Senior Director, Land and Resources, Cook Inlet
Region, Incorporated (CIRI), said CIRI has a long history of
participating in the oil and gas business as a lessor and a
royalty owner. It has contributed to finding and developing the
28 producing oil and gas fields in the Kenai Peninsula and
offshore of Cook Inlet, he said. It is a lessor to a number of
operating companies, including Hilcorp, Cook Inlet Energy,
NordAq, and Aurora Gas, and CIRI has an exploration agreement
with Apache, one of the largest independent oil and gas
corporations. The agreement covers a large portion of CIRI's
acreage, and the ultimate goal is to yield a better
understanding of the land through seismic acquisitions and
identifying promising drilling opportunities. He said CIRI also
holds a minority interest in Alaska Storage Holding LLC, also
known as Cook Inlet Natural Gas Storage Alaska (CINGSA). It is
Alaska's first underground gas storage facility and is in Kenai.
MR. BRUNE said he is constantly being approached by new
companies because of CIRI's large land base and interest in
development. In September, 2013, CIRI topped $1 billion in total
dividends payed to its 82,000 Alaska Native shareholders. He
said 70 percent of profits from natural resource development is
shared with the ANCSA [Alaska Native Claims Settlement Act]
regional corporations and all of Alaska's village corporations.
The impacts can be felt from Homer to Healy and from Fairbanks
to Chugiak, he said. Oil and gas development in Cook Inlet led
to statehood with the discovery of oil in Swanson River. In
1971, the Cook Inlet basin was producing over 230,000 barrels a
day, and it was flush with natural gas. When oil was discovered
in Prudhoe Bay, interest moved out of Cook Inlet, and oil
production declined to less than 9,000 barrels per day, and
there were rolling brownout drills. In 2010, the legislature
passed the Cook Inlet Recovery Act, which expanded tax credits
and incentives. As large companies moved on, smaller companies
came in, he said, upgrading platforms and drilling new wells.
Since 2010, 75 new oil wells were drilled, and Cook Inlet saw
its fourth annual increase in production. There is now adequate
supplies of gas to meet local demand, and there is storage
capacity, he stated. During the same time, CIRI saw production
on its land increase, and so it gets larger royalty income and
the state gets more in tax revenue. This can be attributed to
the incentives and tax credits, he opined.
MR. BRUNE reported that he spoke with companies in Texas that
once invested in Alaska but had left, and they said Alaska's
previously high tax regime was a major factor for leaving. Each
company expressed enthusiasm for the new tax regime and its
endorsement by Alaska voters, he stated. Other issues were a
lack of infrastructure, small supply chain, fewer contractors,
limited drilling seasons, increased permit timelines, and the
antidevelopment community. That drives costs up, and the
companies have a responsibility to their shareholders. While in
Texas, he said he attended the Nape conference with 20,000
attendees; "anyone and everyone who's involved in the oil and
gas business was there." The mood was somber because of the
price of oil. He had a booth and those whom he talked with were
intrigued at the allure of 1.5 million acres of opportunity on
CIRI land. Many companies talked about the high costs that exist
in Alaska, and when he showed them the Alaska tax credits and
the tax ceilings in Cook Inlet, it demonstrated that the state
wants to be a partner with the industry and encourage new
investments and new players.
12:48:47 PM
MR. BRUNE said the incentives are not handouts, they are
investments that pay back in royalties, production tax, property
tax, and corporate income tax. The tax credits cannot be used to
offset CIRI royalties, he explained. These returns will be
measured over generations and not in fiscal year budgets;
additionally, there will be year-round high-paying jobs, local
property and sales taxes, and economic opportunities for Alaska
Natives statewide. Continuing these tax credits is imperative
for Cook Inlet, he opined. Ending these credits would be unwise.
He was on the losing end of an investment decision, and "we
should continue to send a message that we want new investments,
we want new players, and as a state we want to be partners."
People at the conference wanted more information and he sent
them to the State of Alaska booth, which was encouraging
companies to come to Alaska, and those efforts should be
commended, he said. While working with the state with renewed
oil and gas tax incentives, he said, Cook Inlet production will
continue to trend upward and will lead to more revenue, more
jobs, and enhanced opportunities for CIRI shareholders.
12:52:04 PM
CHAIR GIESSEL thanked everyone for their participation and
attendance.
12:53:54 PM
ADJOURNMENT
There being no further business before the committee, the Joint
House and Senate Resources meeting was adjourned at 12:53 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Joint HRES SRES AK DOR Fiscal Impact of Cook Inlet Production Tax Limitations 2007-2013, 06-17-2015.pdf |
SRES 6/17/2015 9:00:00 AM |
|
| Joint HRES SRES enalytica, Oil prices and tax Credits, June 17- 2015.pdf |
SRES 6/17/2015 9:00:00 AM |
|
| Joint HRES SRES- BlueCrest Energy Presentation-June-17-2015.pdf |
SRES 6/17/2015 9:00:00 AM |
|
| Joint HRES SRES- HillCorp-06-17-2015.pdf |
SRES 6/17/2015 9:00:00 AM |
|
| Joint HRES SRES-Caelus Energy-06-17-2015.pdf |
SRES 6/17/2015 9:00:00 AM |
|
| Joint HRES SRES -AKDOR Pres - Credits 6-17-15 final2.pdf |
SRES 6/17/2015 9:00:00 AM |
|
| Joint HRES SRES AK DOR CREDIT TABLE-06-17-2015.pdf |
SRES 6/17/2015 9:00:00 AM |
|
| Joint HRES SRES AK DOR FINAL Historical Forecasted Production Tax Credits Detail 06-17-2015.pdf |
SRES 6/17/2015 9:00:00 AM |