House Bill 247, a committee substitute for Gov. Bill Walker’s oil tax credit reduction bill, was stalled in the House as Petroleum News went to press April 21. The bill was in House Rules with a meeting, originally scheduled for April 20, showing a “to be announced” time for April 21.
The bill was heard extensively in House Resources and a committee substitute was passed out March 23. The House Finance Committee heard the bill and moved a committee substitute April 9, which was debated and amended on the House floor April 12 and 13.
The bill was then returned to the Rules Committee, an indication that it lacked the votes needed to pass.
From discussion in House committees and debate on the floor it appeared some members thought the bill went too far in reducing oil tax credits while others thought it did not go far enough.
Senate Finance held hearings on a Senate Resources committee substitute for Senate Bill 130, that body’s version of the governor’s proposal, but last heard that bill April 18 and had no further hearings scheduled.
The Legislature’s consultants, Janak Mayer and Nikos Tsafos of enalytica, gave a series of presentations in Senate Finance, comparing versions of the bill and discussing impacts they projected from various provisions.
On major changes for the North Slope, Mayer said changes eliminating the interaction between the gross value reduction and net operating loss credit, an unforeseen result of Senate Bill 21, the state’s current production tax, would make North Slope state support for spending uniform at 35 percent, but would have a negative impact on current gross value reduction new developments.
A proposal to add a time limit to the gross value reduction of five years would effectively eliminate much of the GVR benefit, Mayer said, with a major negative impact on recently sanctioned projects. The impact of a 10-year limit would be much lower, he said, and a 15-year limit would preserve almost all of the status quo value.
Moving revenue forward
Provisions in the governor’s bill and the House Finance version would harden the gross floor for production tax. Legislators have said in hearings that the expectation when Senate Bill 21 was passed in 2013 was that the 4 percent rate was a “hard” floor for legacy output. One thing not evaluated under SB 21, however, was legacy producers losing money on North Slope production, which brings net operating loss into play. That can make net value negative, allowing NOL to “pierce” the floor. HB 247 would harden the floor at 2 percent, not allowing credits to reduce tax liability below that level.
Mayer said while hardening the floor shows as a positive in fiscal notes, most is just revenue brought forward from the future, not additional revenue. He said that change would make the system more regressive, adding strain to companies already cashflow negative.
Changing the refundable credit cap would affect small producers on both the North Slope and in Cook Inlet. Mayer said a major North Slope development, such as that proposed by Armstrong, could place a significant strain on state cashflow, while limiting the annual reimbursement would substantially increase capital needs for new developments, raising hurdle rates and breakeven prices.
Cook Inlet
Cook Inlet is a separate issue. The state receives no production tax from Cook Inlet oil production and little from natural gas production, but companies working Cook Inlet receive up to 65 percent support for spending. Mayer said the Cook Inlet credit regime is clearly unsustainable. HB 247 would reduce Cook Inlet credits gradually; the committee substitute for SB 130 produced by Senate Resources would reduce credits gradually by 2017, and then provide no credits - but also an exclusion from production taxes - from 2018 onward. Cook Inlet crude oil currently has an ELF cap on production tax, scheduled to end in 2022.
Nikos Tsafos said state credits for Cook Inlet have generated activity and at current natural gas prices brownfield investment, work in existing fields, should be profitable under what he called a stricter fiscal regime.
It gets trickier with newer natural gas resources, he said, because the market is constrained and it’s tough to develop new resources because the market is so tight.
But, he said, it is clear to enalytica that the current system is not seen by players as sustainable, and uncertainty, he said, causes investors to assume the worst. Tsafos said investors need something that’s viewed as sustainable for both Cook Inlet and the state, which means something the state can afford.
On the issue of attracting investment to Cook Inlet he said the state has almost supercharged the system: there are good natural gas prices and good credit, but no one thinks those credits will last.
What Cook Inlet needs, Tsafos said, is a well balanced market with demand such as that formerly provided by Agrium and the LNG facility at Nikiski.
