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Rules proposes changes to HB 247
Cook Inlet oil and gas tax credits would be phased out and North Slope credits phased out and partially replaced with expenditure carry forward under a committee substitute for House Bill 247 rolled out April 26 by the House Rules Committee.
Work began on revisions to a House Finance Committee CS after that bill couldn’t get traction in the House earlier in April and was returned to the Rules Committee.
The Rules CS, dated April 25, had not yet had a committee hearing when this issue of Petroleum News went to press April 28.
An analysis by the Legislature’s consultants, enalytica, which appeared April 27, compared features of the Rules CS to the status quo and to the House Finance CS.
Cook Inlet Credits for Cook Inlet oil and gas were enacted by the Legislature when Cook Inlet had such a large foreseeable gap in natural gas volumes that utilities were discussing the importation of liquefied natural gas.
Cook Inlet oil also benefitted from the credits, which enalytica called unsustainable in its analysis, with 25 percent net operating loss credit, 20 percent qualified capital expenditure credit and 40 percent well lease credit resulting in up to 65 percent government support for spending. The state receives royalties from Cook Inlet oil and gas, but no production tax from oil and very little from gas.
All credits currently in statute for Cook Inlet continue through 2016 under the Rules CS. To receive any Cook Inlet credits from 2017 on, a company must have oil or gas production in Cook Inlet by the end of 2016. The Rules CS repeals the 40 percent well lease credit in 2017, with a 30 percent capital credit and a 25 percent net operating loss credit remaining. The NOL credit terminates at the end of 2017, leaving only a 20 percent capital credit, which terminates at the end of 2018.
The Rules CS changes for Cook Inlet, enalytica said, provide time “for current companies to seek to become cash self-sustaining.”
A summary of changes by the Rules Committee says the legislative working group is included in the CS, but with tighter language, requiring that a new Cook Inlet tax regime be in place effective Jan. 1, 2019, when the last of the credits expires.
North Slope For the North Slope, the 35 percent net operating loss credit ends this year for companies producing more than 20,000 barrels per day and for companies with no production. For companies producing up to 20,000 bpd on the North Slope by the end of this year, the 35 percent NOL continues through 2019.
In place of the NOL, companies in pre-production development or with more than 20,000 bpd of production will be able to carry forward lease expenditures they were unable to deduct in the current year, which has the effect, House Rules said, of hardening the 4 percent gross minimum floor, because “unlike credits, deductions cannot reduce production tax value before the gross minimum tax.”
On the impact of changes in refundable credits, enalytica said the Rules CS ends refundable credits in Cook Inlet in 2019 and in 2020 on the North Slope, allowing companies which have “major, capital-intensive projects” the time to “find substantially more equity capital or bring in working interest partners” to proceed with or complete projects.
Gross value reduction “The GVR reduction for new oil,” House Rules said, “goes from a timeless benefit under current statute, to a 10-year benefit once regular production starts.”
The House Finance CS allowed the GVR only for five years from first production, or until Jan. 1, 2021. The Rules CS allows the GVR benefit for 10 years from first production or until Jan. 1, 2026.
The five-year limit effectively eliminates much of the GVR benefit, enalytica said, with major negative impacts on recently sanctioned eligible developments. The 10-year limit in the Rules CS “mitigates this significantly,” enalytica said. In a previous analysis the consultants said that a 15-year limit would preserve almost all of the status quo value.
House Rules also said that once “new” oil graduates into normal oil after 10 years “it is taxed as any other normal oil and is eligible for the sliding scale per-barrel reduction, like all normal oil.”
Previous versions have included a provision preventing the use of GVR from increasing the amount of a loss, and House Rules said its CS retains that provision. Other provisions The CS requires the Alaska Oil and Gas Conservation Commission to determine the start of regular production of new oil, effective Jan. 1, 2017. The Rules CS also limits refunds to $85 million per company per year, but only for companies producing in 2016 and only for companies producing less than 20,000 bpd. Refundable credits end in Cook Inlet in 2019 and in 2020 on the North Slope.
Refunds to companies are prioritized for companies with at least 80 percent Alaska hire.
The Department of Revenue will make public the name of a company receiving refunds for credits, and the amount.
Municipal producers may only earn credits for taxable production.
Tax certificates for work done in 2017 and forward “will no longer be transferable to entities for application against production tax liability” but can be assigned to other parties for cash.
Interest rates increase from 3 points above the federal discount rate, simple interest, to 5 percent above, compounded.
- KRISTEN NELSON
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