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House Rules hears CS for HB 247
A House Rules substitute for House Bill 247, the governor’s oil tax credit bill, had hearings in the committee May 10 and 11 and appeared headed for the House floor, perhaps as early as the weekend of May 14-15, as this issue of Petroleum News went to press May 12.
The issues remain the same - the state lacks the funds to pay credits under existing statutes and industry, both producers and developers, have based plans on existing statutes.
The driver is low oil prices which are pummeling both the state and industry.
The bill has some significant changes from previous versions and while the administration said it was movement forward, industry testimony on the committee substitute was negative.
A previous CS was amended on the House floor in early April, but was returned to the Rules Committee April 13.
CS version summary A summary of the “D” version CS, prepared by House Rules, says under the work draft the state’s tax credit program would be closed out between Jan. 1, 2017, and Jan. 1, 2020, except for the Middle Earth 40 percent exploration credit which sunsets Jan. 1, 2022.
The net operating loss carry forward credit on the North Slope is phased out in the CS and replaced with a system of carrying forward for lease expenditures that a business is unable to deduct in the current year, which hardens the gross minimum tax floor against losses.
Under the current tax regime losses can reduce the minimum gross floor of 4 percent to zero, an unanticipated result of Senate Bill 21 passed in 2013. At that time legislators did not anticipate that major North Slope producers would have losses, a result of the drastic drop in oil prices.
Cook Inlet unsustainable The Legislature’s consultants enalytica focused on North Slope new developer impacts, but said the Rules CS provides a steady ramp down to zero for the Cook Inlet credit regime, which enalytica has characterized throughout the hearings as unsustainable, while providing time for current companies to become cash self-sustaining.
The CS lowers the limit on reimbursement and then ends refundable credits altogether, enalytica said, noting that companies with capital-intensive projects will need to find more equity capital or bring in working interest partners.
By phasing out NOL credits in favor of expenditure carry forward, the CS effectively hardens the 4 percent floor, enalytica said.
The 10-year limit on the gross value reduction, which benefits new oil, mitigates the impact of that change on project value, but 15 years would be required to preserve most of the status quo value.
Ending the credit refund impacts capital needs for new developers, increasing capital needs by more than 50 percent, enalytica said, and new projects currently proposed by smaller companies may not be feasible in their current form.
Industry response Speaking for Alaska Oil and Gas Association members, AOGA President and CEO Kara Moriarty told the committee the bill represented a “flagrant money grab” that would result in “less oil production, less investment, fewer Alaskans working, and ultimately, and somewhat ironically, less revenue for the State.”
She said AOGA member companies “will not pursue projects that don’t pencil out.”
Moriarty noted that Prudhoe Bay owners have just updated their plan of development and are now estimating that production will decline by 20,000 to 60,000 barrels per day due to the shutdown of three rigs and fewer workovers due to lower oil prices.
Bill Armstrong of Armstrong Oil and Gas, which has been planning a major development on the North Slope, said the bill appeared designed to get independents off the North Slope.
Scott Jepsen and Paul Rusch, testifying for ConocoPhillips, said the hard minimum floor represents a potential tax increase when oil prices are low. ConocoPhillips had obligations to the state of $665 million in 2015, they said, with negative cash flow in excess of $100 million, and obligations of $77 million in the first quarter of 2016, with negative cash flow of some $100 million and said the 10-year time limit on the GVR potentially makes new oil developments less competitive.
Administration response Commissioner of Revenue Randall Hoffbeck and Ken Alper, director of Revenue’s Tax Division provided the administration’s view on the CS.
Hoffbeck noted that the state’s production tax is not an income tax, but a severance tax imposed on the removal of nonrenewable resources. The severance tax, he said, while calibrated using the income tax, is different than an income tax and in the opinion of the administration losses shouldn’t be carried forward under a severance tax.
Alper said the CS makes progress on some goals - reducing future spending by rolling back credit programs, a limited strengthening of the floor and transparency - but maintains large future liability through carried-forward lease expenditures.
He cited several major and minor concerns the administration has with the CS, including that it represents a shift in favor of producers and away from support for independents, and provides for ongoing liability without any state pre-approval or other filter.
- KRISTEN NELSON
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