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House Resources continues HB 111 hearings Ken Alper, Tax Division director, consultant Rich Ruggiero of Castle Gap Advisors, discuss bill, answer questions from committee KRISTEN NELSON Petroleum News
The Alaska House Resources Committee is continuing hearings on House Bill 111, the committee’s proposed changes to oil and gas production tax payments and credits, hearing from Rich Ruggiero of Castle Gap Advisors, a consultant for the Legislature, and continuing to hear from Ken Alper, director of the Department of Revenue’s Tax Division.
The bill reduces carried forward loss credits, NOLs, on the North Slope from 35 percent to 15 percent effective Jan. 1, 2018; hardens the floor so credits cannot reduce payments below the minimum tax; raises the minimum tax from 4 percent to 5 percent; making NOLs ineligible for cash beginning next year; reduces cash each company can receive for repurchased credits to $35 million; reduces maximum production credit to $5; says gross value at the point of production can’t go below zero; eliminates zero interest rate after three years of delinquency; and limits per-taxable barrel credits to month in which they were earned.
Consultant’s views Ruggiero was formerly with Gaffney, Cline and Associates, which advised the Palin administration when ACES, Alaska’s Clear and Equitable Share, was adopted. He has worked for Amoco Production Co., Gaffney, Cline and was then with Baker Hughes for six years after it acquired Gaffney, Cline. He is a licensed professional engineer with degrees from the Colorado School of Mines.
Ruggiero said in a Feb. 20 presentation by phone that operators routinely ask for stability whenever a tax change is proposed, but said change is the only constant in the oil industry, noting that in 40 years with the industry he has never seen stability.
Another thing industry routinely cites when tax changes are proposed is competition, with the risk that raising taxes will make other regimes more attractive. Ruggiero said competition is a moving target because areas which are the competition today are not likely to be the competition tomorrow or in the future. Tax rates are not the only consideration when companies are making investment decisions, he said. The quality of the reservoir can overcome high taxes and quick profits, as with shale developments, can make up for marginal reservoirs.
Need for balance Ruggiero emphasized the need for balance between short- and long-term issues in fiscal system design.
Not causing the premature shutdown of the trans-Alaska oil pipeline should be a focus he said, particularly because new developments will generally take longer to put together in Alaska than in most other areas. Capturing significant remaining production from Prudhoe Bay and Kuparuk should also be a goal, he said.
Another possible goal of a fiscal design is encouraging new players, both to diversify and reduce dependence on the Slope’s major operators, and to encourage finding and developing new fields.
Ruggiero also said that with a goal of durability for a fiscal system, it should be designed to be “self-correcting.”
On the issue of credits, which were built into the existing system for competitive reasons and to generate drilling activity, he said while it is early, credits appear to have been successful, and the question then becomes how to keep the incentives without creating financial hardship for the state during low oil prices.
His overall view of the state’s fiscal structure is that it is “complex with too many moving parts,” that there is a lack of data transparency and that too many items are tied to fixed prices.
He called for data transparency and said that in other venues companies have a much more open dialogue with governments and said in areas where he has worked he sat down with government and had multiple discussions about the plan, what it would cost and what was expected to come from it. He said specific insights into future plans or probabilities are more useful than generalities.
Issues on table before Alper noted in a Feb. 17 presentation that most issues in HB 111 have been previously debated: the interest issue was in HB 5005 from the governor; the minimum 5 percent tax was in the governor’s original HB 247, as was hardening of the floor and elimination of the migrating credit. A reduction in the NOL rate was in the House version of HB 247, as were cash limits. Not allowing gross value at the point of production to go below zero was in the governor’s original version of HB 247, while a per-barrel credit was in the Senate version of SB 21 in 2013.
Alper also identified some policy issues in the bill. On hardening the floor there are three different issues, he said: should everyone and not just major producers pay a minimum tax? On per-barrel credits for gross value reduction “new” oil, should the tax on production from new fields be allowed to go to zero? On net operating loss for producers not eligible for refundable credits, should the major producers ever be able to pay below the minimum tax?
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