Industry thumbs down on HB 111 in Finance Criticisms include tax increase, different treatment of existing producers and explorers, data sharing, new approval role for DNR KRISTEN NELSON Petroleum News
The House Finance Committee heard from industry March 22 on House Bill 111, the proposal passed out of House Resources March 14 on a 5-4 party line vote.
Finance began considering the bill March 17, with Rep. Geran Tarr, D-Anchorage, co-chair of House Resources, telling the committee that the state’s oil and gas tax system is now broken. When Senate Bill 21 was passed, she said, oil was $94 per barrel and $60 per barrel seemed low, so there wasn’t a lot of time spent crafting a system that works well at low prices. With unanticipated consequences at low prices, she said, the goal was to find an alternative for credits while maintaining the state as a favorable place for investment. The bill makes adjustments to the underlying tax structure to get a more appropriate value for oil, Tarr said.
But industry told House Finance that the bill is a tax increase.
Tax increase Kara Moriarty, president and CEO of the Alaska Oil and Gas Association, said the bill raises taxes and increases costs for industry and would put Alaska toward the bottom of the competitiveness scale.
The increase in the minimum tax from 4 percent to 5 percent is a 25 percent increase for taxpayers subject to the minimum tax, she said, and an “infinite increase” for smaller companies and newcomers to Alaska who do not yet pay the 4 percent tax, because they go from zero to 5 percent.
Moriarty noted that industry has testified that just this type of increase would likely lead to a reduction of one drilling rig for at least six months.
Scott Jepsen, ConocoPhillips Alaska vice president external affairs and transportation, called the bill a significant change in the cost of doing business in the state, highlighting the minimum tax rate increase, a reduction in the per-barrel tax credit and a “punitive” interest change.
He said the migrating tax credit change would create a monthly tax and is inconsistent with the overall tax structure.
Dan Seckers, ExxonMobil tax counsel, said he was “disheartened” to be in Juneau again testifying on efforts by the state to raise taxes and change policy and said the bill changes the underlying rules of the game.
He said section 23 of the bill, which prohibits the gross value at the point of production - which includes transportation costs - from being less than zero, is a disguised tax increase which would encourage investment only near existing facilities, thus picking winners and losers.
Disclosure requirements Moriarty said the portions of the bill on confidentiality and transparency would allow disclosure of commercially and federally protected sensitive downstream information and allow the Department of Revenue to request “other information” through regulations, providing the department with what Moriarty called “unfettered and unsupervised power” to request and disclose any information it desires.
Seckers said the bill would allow disclosure of some very confidential and taxpayer sensitive data. While ExxonMobil partners with BP and ConocoPhillips on the North Slope, the companies are competitors, he said, and are bound by law on what can and cannot be said. The language in the bill is written to allow almost any information to be released, he said, and would chill investment.
DNR preapproval The bill requires the Department of Natural Resources to provide preapproval of any amounts claimed under net operating loss, something Moriarty described as creating one of the largest regulatory processes in state history. The process is not defined in the bill, she said, but because industry does not know at the time of expenditures that they will suffer a net operating loss, it would mean almost every penny of proposed investment would need to be preapproved.
Seckers said the preapproval process was hard to address since it was just a statement in the bill, but said it was a very troubling provision and raised all sorts of questions: Would it be a line-by-line audit? How long would it take? And if when the Department of Revenue audits tax returns it disagrees with DNR’s preapproval, who wins? DNR’s fiscal note said they wouldn’t have regulations up until 2019, Seckers said, but the provision takes effect in 2018, so how would a company invest? And what if it made an investment in 2018 that DNR says in 2019 doesn’t qualify?
Picking winners Pat Galvin, chief commercial officer and general counsel for Great Bear Petroleum, addressed issues from the perspective of a company still in the exploration stage.
He said the bill abandons a state policy of encouraging new companies to enter the North Slope, reduces incentives for new investment, tilts the playing field in favor of incumbent producers and treats new companies as second class citizens when it comes to North Slope investment.
It would also create partner misalignment where one partner in a project had existing production and one partner was a new entrant, he said.
And because only expenditures resulting in carried forward losses, the net operating losses, are subject to preapproval by DNR, it would create uncertainty solely for new companies, because the North Slope’s existing producers, with production, would expect to write off losses against production taxes, not carry them forward.
Galvin said the bill “barely moved the needle” for the state but would put new companies at a significant disadvantage compared to incumbents.
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