Legislators hear updates from enalytica
Consultants Janak Mayer, Nikos Tsafos, discuss production tax credits, confidentiality concerns, issues around Alaska LNG project
As work began for the 29th Alaska Legislature, committees heard updates from legislative consultants Janak Mayer and Nikos Tsafos of enalytica on production tax credits, confidentiality and the Alaska LNG project.
In a paper accompanying a Jan. 27 presentation to the Senate Finance Committee, Mayer and Tsafos noted that credits to large producers reduce the tax payments those companies make, while small producers without tax liabilities can receive direct payments from the state.
Because of the recent plunge in oil and gas prices, enalytica said, forecasts for fiscal years 2015 and 2016 indicate that, for the first time, “the state will outlay more on credits to small producers than it will take in production tax revenue.”
“In the current low price and high investment environment, Alaska’s finances are in fact substantially sounder as a result of SB21 than they might have been otherwise,” enalytica said.
Credit reformsSB 21 did reduce credits the state pays out. But there were a number of credits it did not change, principally those to Cook Inlet producers, “which in FY 2015 are estimated to account for more than half of the state’s spending on credits paid out to producers,” enalytica said.
Credits claimed by Alaska’s large producers fall into a different category - credits used against tax liability - and “cannot reduce producers tax liabilities below zero, and in most cases also cannot reduce their liabilities below a set floor that is a percentage of their gross revenue,” enalytica said.
Credits claimed by small producers or by explorers which do not yet have commercial production are accounted as spending items by the state.
For FY 2015, production tax revenue before credits is estimated at $1.274 billion, with $750 million of credits used by companies against that tax liability, resulting in production tax revenue of $524 million, enalytica said, citing numbers from the Alaska Department of Revenue’s Fall 2014 Revenue Sources Book.
Against that estimated production tax, however, is an estimated $625 million in credits which the state will pay out to small producers, so “in net, the state will, for the first time in 2015, reimburse more in credits than it collects in revenue through the oil and gas production tax,” enalytica said, noting, however, that the state receives other revenues from royalties and corporate income tax.
Broadly speaking, the state collects production tax revenues from major producers - and those revenues are used to pay credits to smaller companies, enalytica said, noting that fiscal year 2015 is the first time this has occurred, and it has occurred due to low oil prices.
More revenue at low pricesThe report points out that taxpayer records are confidential, so enalytica cannot do a detailed analysis, but says a general comparison of how the previous system - Alaska’s Clear and Equitable Share - functioned with how SB 21 functions indicates that under ACES FY15 revenues would have been barely a third of the revenue generated at currently estimated prices under SB 21.
“In FY2016 under ACES the production tax system would likely not have generated any tax revenue at all, even before spending on reimbursable credits to companies without a liability,” enalytica said.
The 4 percent gross minimum floor instituted in SB 21, designed to better protect the state at low oil prices, “substantially” improved the state’s fiscal position, the report said.
In passing SB 21 the Legislature also decided not to extend some credits reimbursable to companies without tax liabilities, allowing them to sunset Jan. 1, 2016.
The report concluded that while SB 21 significantly limited loss of production tax when the price of oil is low, “major government support for capital spending continues” in the form of cash outlays by the state, particularly Cook Inlet capital, well lease expenditure and carried-forward-annual loss credits, enalytica said.
ConfidentialityOn the subject of confidentiality, enalytica discussed the commercial case for confidentiality, citing the difference between confidentiality during negotiations and after an agreement has been reached when, it said, much of the need for confidentiality disappears.
Confidentiality protects the state’s negotiating position, enalytica’s Nikos Tsafos told Senate Resources Jan. 26, and said negotiating in the open would be like playing poker with cards showing.
He said key questions for legislators come down to how much information they need to “pull the trigger” on a project; what they are willing to give up in order to have transparency; and how the process would work.
There is a lot of information known about LNG projects at final investment decision, Tsafos said - particularly technical information, environmental impacts and usually a total for the cost.
The basic structure for financing would be public, he said, but rarely the price.
The number of contracts would be known, he said, and some terms, but almost never the actual price formula.
Looking at the debate in the Norwegian parliament over the Snohvit LNG project, enalytica said there was no mention of contract prices but there were mentions of expected return for the project, expected revenues and basic sensitivity numbers.
Tsafos noted that under SB 138 the administration negotiates with input from legislators - both in public hearings and executive sessions - and brings the agreement back to the Legislature for ratification.