Both House and Senate committee substitutes for the governor’s oil tax credit legislation were in play when this issue of Petroleum News went to press April 14, with this Legislature slated to end April 17.
After being amended on the House floor April 12 and 13, House Bill 247 was returned to House Rules.
Senate Resources moved a CS for Senate Bill 130 April 12 and Senate Finance began hearings April 13.
The House Finance CS for HB 247 was amended prior to leaving committee to remove adding a production tax for Cook Inlet oil.
Difficulties the House is having in moving the bill reflects issues in committees, with House Resources reaching more consensus than House Finance based on recommendations when those bills passed out of committee.
The Finance CS was adopted on the House floor April 9 and the bill continued to show on the calendar, but was not heard until April 12, when numerous amendments were taken up in an evening session.
No easy answers
Low oil prices are squeezing both the producers, who have told legislators they are running net losses, and the state, which has for decades depended on revenues from the oil and gas industry to fund its operations.
The most recent changes to the state’s oil and gas tax system, in Senate Bill 21, were put in place in 2013 before the dramatic drop in oil prices, and were intended to encourage investment in the state.
At current oil prices, however, the state finds itself hard pressed to afford the incentives - in the form of credits and reductions against production taxes - established as part of the state’s net tax on oil and gas production.
In Cook Inlet there is an additional issue because credits put in place to encourage development of natural gas for the state’s Southcentral population center also provide credits for oil production and in Cook Inlet crude oil is exempt from production tax, although production does benefit the state through royalties and corporate income tax.
The bills proposed by Gov. Bill Walker would save the state money by walking back some of the credits and increasing revenues by measures such as putting a hard floor on the production tax paid by North Slope producers.
Industry has told legislators in testimony that investment is based on the current credits and tax system, and that hardening the North Slope production tax floor and reducing credits will make the state less attractive for investment.
In an April 12 presentation to Senate Resources, enalytica, the Legislature’s consultants, summarized provisions of the committee’s CS.
For both old and new oil, the CS continues the ability to reduce taxes below the 4 percent gross floor, as well as continuing the annual basis of tax assessment - both things the administration proposed changing, and which would increase revenues to the state.
Continuing the annual basis of tax assessment reduces the revenue impact as the administration proposal to make the assessment monthly would have netted some $100 million in additional taxes annually under conditions in 2014.
The Senate Resources CS does remove the impact of the gross value reduction for new oil in calculating net operating loss, and imposes a five-year time limit on GVR, enalytica said, with the five-year limit producing a major impact on project value, having the potential to wipe out all value at $60 oil, where a project’s value is marginal. The issue, enalytica said, is that most tax liability occurs after the end of major spending. If the limit were 10 years the impact would be much lower, and a 15-year limit would preserve most of the status quo value, enalytica said.
The CS reduces all Cook Inlet credits starting Jan. 1, 2017, and sunsets all credits effective Jan. 1, 2018, in conjunction with exempting Cook Inlet from production tax. Cook Inlet production was exempted from the move to a net tax system, an exemption slated to end in 2022.
The consultants said the CS avoids making a regressive system even more regressive, because the floor hardening in the original bill would shift up government take at lower oil prices and in times, such as this year, of high investment and low prices the effective government take under the administration bill would exceed 100 percent.
The refund limits, enalytica said, would boost capital needs for companies and lower the internal rate of return for projects, with a strict refundable limit increasing capital needs by as much as 50 percent. If refund limits were applied to projects already under development, there could be major adverse impacts.
If a major new development were to take place on the North Slope, such as that proposed by Armstrong Oil & Gas, the company could easily have net operating losses of more than $2 billion in the development years, which poses a problem for the state in selecting a per-company limit on annual refunds, enalytica said.
Bill comparisons
Senate Resources held several hearings on SB 130 and adopted a CS which moved on to Senate Finance April 13.
The Department of Revenue’s Tax Division compared provisions in the different proposals as they stood April 13.
While the Senate Resources CS would eliminate Cook Inlet credits beginning in 2018, in conjunction with a zero Cook Inlet production tax, the House Resources and Finance CS kept the credits, reducing them gradually.
The governor’s bill does not change the net operating loss for Cook Inlet, but eliminates the qualified capital expenditure and well lease expenditure, dropping average support for developers to 25 percent and average total support for producers to zero.
All versions have kept language in the governor’s bill that would eliminate a loophole in the gross value reduction - a benefit for new oil - which allows net operating losses to interact with GVR, allowing NOL credits to approach 100 percent of loss. This has been described by enalytica as an unanticipated result of SB 21.
All bills have all kept some version of the repurchase cap, limiting repurchase for a single company to $25 million a year (governor’s bill), $200 million (Resources CS), $100 million (Finance CS) and $85 million (Senate Resource CS).
The North Slope minimum tax floor is 4 percent but can be reduced to zero with the application of credits, something legislators have said was not expected. The governor’s bill would harden the floor and increase it to 5 percent. The House Resources CS made no change to the floor; the House Finance CS partially hardened it at 2 percent; the Senate Resources CS makes no change to the floor.
All versions kept the governor’s language which prohibits the gross value reduction, a credit for new oil, from artificially increasing the size of an NOL.
GVR oil remains “new” oil forever under current law and the governor’s bill make no change. Both House Finance and Senate Resources set a limit of five years for GVR.
Interest on delinquent taxes, which under current law is 3 percent, non compounded, over the federal rate, was increased to 7 percent compounded under the governor’s bill, reduced to 3 percent compounded by House Resources, changed to 5 percent compounded for only the first four years and set at 7 percent compounded for the first three years in the Senate Resources CS.
Most of the changes in the governor’s bill were effective July 1; all of the committee versions have most changes effective Jan. 1, 2017.
The governor’s bill also makes a change in confidentiality requirements, allowing a report on how much an individual company gets in cash credits; that provision is eliminated in all the committee versions.
