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Senate takes up oil tax, credit discussion Administration, industry testify on HB 111; Hoffbeck says governor supports changes in North Slope credits; industry opposes bill Kristen Nelson Petroleum News
The Alaska Senate Resource Committee began hearings on House Bill 111, the oil and gas production tax and credits bill, on April 14, met jointly with Senate Finance for more testimony April 15 and continued to hear the bill the week of April 17.
The House Finance Committee substitute which passed the House April 10 makes a number of changes in the state’s oil and gas production tax statutes.
Ken Alper, director of the Department of Revenue’s Tax Division, reviewed provisions of HB 111 for Senate Resources at its first hearing on the bill April 14.
The bill keeps the current minimum tax rate, but hardens the floor, preventing most credits from being used to reduce taxes below the minimum tax, with the exception of the small producer credit.
Under HB 111, the state would no longer issue transferable or cashable tax credit certificates for North Slope work. (HB 247, passed last year, focused on ending Cook Inlet credits.)
The 35 percent net operating loss credit for the North Slope is eliminated, Alper said. Instead, the bill allows companies to carry forward 100 percent of their losses to be used against future production tax obligations.
For companies without current production those losses would have to be carried forward until they have production, but with the limitation that after seven years the value of those carried forward losses decreases by 10 percent per year. The bill also contains a “ringfence” provision: expenditures which are carried forward can only be used to offset production value from the lease or property where they were incurred.
HB 111 drops the base tax rate from 35 percent to 25 percent of production tax value, and eliminates the per-barrel credit.
Alper said this would be a tax increase of $100 million to $300 million at oil prices in the $50-$100 per barrel range. The bill also adds a 15 percent surtax on that portion of production tax value greater than $60.
The bill hardens the floor for the minimum tax at 4 percent for legacy production and 3.2 percent for new oil and, a protection for the state at high-tariff fields at low prices, establishes that the gross value at the point of production can’t go below zero. Administration view HB 111 is not an administration bill. It was introduced by House Resources co-Chairs Geran Tarr and Andy Josephson, Anchorage Democrats.
Department of Revenue Commissioner Randy Hoffbeck told Senate Resources April 14 that the governor feels strongly that oil and gas tax credit reform is a crucial part of a fiscal plan.
HB 247 (introduced by the administration last year) included both credit and tax changes, but passed with a more narrow focus on Cook Inlet credits, Hoffbeck said.
This year the governor has flagged that changes to North Slope credits are necessary, Hoffbeck said, but has left the specifics of how to achieve that to the Legislature. He said the governor stands with the House on moving HB 111 to the Senate for further consideration.
In an overview of the bill Alper said it resolves four “high priority concerns” identified by the governor: transitions the state away from the business of providing cash credits; reduces the state’s liability related to potential large future investments; defers the state’s direct participation in the cost of a new project until it comes into production; and includes oil industry participation in a fiscal plan for the state. Industry view Industry opposes HB 111.
Alaska Oil and Gas Association President and CEO Kara Moriarty told Senate Resources April 17 that HB 111 goes beyond the governor’s goals, eliminating not only cashable credits but another portion of the gross value reduction, devaluing net operating losses, both non-cashable and cashable, and eliminating the sliding scale per-barrel credit. That one element, she said, causes a large tax increase in the $45-$80 per barrel range, and basically alters the structure of SB 21.
She argued for a mechanism to maintain as much value as possible to allow for continued investment and said companies need to recover 100 percent of their costs.
Damian Bilbao, BP’s Alaska vice president for commercial ventures, said SB 21 made Alaska more competitive for investment and told legislators that North Slope production decline rates will reflect policy.
Alaska policy principles should encourage more oil down the trans-Alaska oil pipeline, extend the life of the North Slope’s backbone fields, encourage more independents and not pick winners and losers, he said.
Casey Sullivan, director of government and public affairs for Caelus Energy Alaska, said long-term drivers of policy include natural gas for Cook Inlet and filling TAPS with more oil from legacy fields and oil from big new fields. He said HB 111 is a significant tax increase which negatively impacts project economics and will chill investment, hampering new field development.
Paul Rusch, vice president of finance for ConocoPhillips Alaska, called HB 111 a significant tax increase in an already high-cost environment, representing a 100 percent to 200 percent production tax increase at prices between $60 and $80 per barrel.
He also said the net operating loss provisions in the bill need improvement, telling legislators that ringfencing and reduction of NOLs forces producers to reduce spending in low price environments to avoid NOLs.
Senate Resources action Senate Resources Chair Cathy Giessel said April 19 that hearings for April 20-21 were cancelled due to members being out of town on state and personal business. The next hearing will be April 24.
As to what Senate Resources might do, Giessel said the bipartisan tax working group she chaired in 2015 began to wrestle with the state’s cashable credit system, dividing the topic into three buckets.
Cashable credits held by financial institutions which took them as collateral are now worthless, and that’s one bucket the Senate seriously wants to solve, Giessel said.
The middle bucket is what the state will do going forward in terms of accruing more debt and how to fix that.
The third bucket is SB 21 and the question of whether it’s working. “We believe it is,” and fundamentally want to leave it in place, Giessel said, but the 4 percent hard floor is another issue: it was believed to be hard and isn’t. “That’s something we have to deal with,” she said.
But SB 21 is complex and changing one element puts other elements out of alignment, which is a challenge, Giessel said, noting that it was unfortunate the bill came to the Senate so late in the session because the topics are serious and the goal is to make something durable.
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