Committee bill cuts Cook Inlet credits, not much more

Legislators began putting their imprints on Gov. Bill Walker’s oil and gas tax credit overhaul with the first committee version of the legislation released March 19.

The House Resources Committee substitute of House Bill 247 is a mild version of the original bill; it gradually reduces the value of credits companies could claim for capital expenses, but does not address the minimum production tax rate or “tax floor.”

Tax Division Director Ken Alper said in testimony March 21 that the bottom line savings to the state from the committee bill would be roughly $45 million to $65 million per year versus the status quo credit program. The administration’s bill would save an expected $400 million in fiscal year 2017 mostly by eliminating a 20 percent credit on capital expenditures and a 40 percent credit on drilling expenses, both in the Cook Inlet basin. Walker also proposed raising $100 million in new revenue through increasing the minimum production tax from 4 percent to 5 percent and preventing North Slope producers from using credits to take their tax liability below the minimum tax floor.

The House Resources Committee is co-chaired by Reps. Benjamin Nageak, D-Barrow, and Dave Talerico, R-Healy.

The committee version was promptly passed to House Finance late March 22 after 43 of 45 amendments to the bill were dismissed. They were brought primarily by Anchorage Democrat Reps. Geran Tarr and Andy Josephson. The lone amendment to pass from the Minority members was introduced by Tarr to ensure a legislative working group the bill would establish to evaluate the future of the Cook Inlet oil and gas tax regime includes members of the minority caucuses in the House and Senate.

Rep. Paul Seaton, R-Homer, also introduced numerous amendments to the committee substitute mostly focused on further reducing the state’s direct cash outlay for refundable credits for existing producers.

Of the seven Majority caucus members on the Resources Committee, Seaton has been the most critical of the state’s current industry tax credit program through the lengthy hearing process.

“Once you’re giving people a lot of monetary support they want to keep giving to even if it’s not necessary,” he said in an interview.

Tax credits should focus on helping companies develop new projects rather than producers working on existing fields that are already profitable with the basins high natural gas costs, he said, which the committee bill doesn’t adequately do.

The only amendment of Seaton’s to make the bill requires companies engaged in exploration or development to file a $250,000 surety bond with the state to cover its unsecured creditors. It grew from Buccaneer Energy filing for bankruptcy in 2014 after developing the small Kenai Loop gas field, which left several Buccaneer small contractors on the Kenai Peninsula high and dry. He described the bond as a “small insurance policy” for businesses providing goods and services such as fuel or camp services to explorers.

So far in fiscal 2016 the state has paid $473 million in refundable oil and gas tax credits for work that predominantly occurred in 2014, according to Alper. The total 2016 refundable tax obligation is expected to reach $700 million, but the state will be able to pay the remainder of that in the 2017 fiscal year, he said.

To date, the State of Alaska has paid out roughly $3.5 billion in refundable oil and tax credits, Alper said, since the subsidy program took off in the 2007 fiscal year.

Walker introduced HB 247 and its Senate mirror bill, SB 130, as a way to significantly reduce what he characterizes as an unsustainable expense that is a large part of the state’s $3.5 billion-plus budget deficit.

Company representatives have said the administration’s policy changes would pile on an industry that is already losing money on every barrel it produces at current prices. The cost of producing North Slope oil and getting it to market is approximately $46 per barrel, according to the Revenue Department, while Alaska North Slope crude sold for $41 per barrel March 21, the first time it was above $40 this year.

The committee’s HB 247 focuses on Cook Inlet and “Middle Earth” refundable credits. The Middle Earth region is anywhere in Alaska other than the North Slope and Cook Inlet geologic basins.

It would reduce the current 40 percent Well Lease Expenditure credit to 30 percent in 2017 and 20 percent in 2018. The Net Operating Loss, or NOL, credit for those areas south of the Slope would also be cut from 25 percent to 10 percent on Jan. 1 2017.

The committee bill also replaces a $25 million per company annual limit on refundable credits proposed by the administration with a $200 million annual repurchase cap.

Alper said the $200 million cap would likely come into play only for companies executing major development projects requiring annual spending approaching $600 million.

A requirement to make public the companies receiving refundable tax credits pushed by the governor was also left out of the substitute bill.

Alaska Oil and Gas Association Executive Director Kara Moriarty said in an interview that the committee bill is recognition of the industry’s position in that it doesn’t make structural tax changes, but that changes to the Cook Inlet credits are still a concern.

“Regardless of the (fiscal) situation the state is in, raising taxes on an industry in our situation only makes the situation worse,” she said.

Tarr and Josephson, on the other hand, described the version of HB 247 that is moving on as a missed opportunity to save the state hundreds of millions of dollars per year in a Minority caucus press release.

“I want to support the oil industry and in some cases can see the usefulness of co-investing in exploration and development projects,” Tarr said in a statement. “However, the (credit) current system is out of balance and needs to be reformed. House Bill 247 in its current form is unrecognizable from the original bill.”

The two versions of HB 247 do align on eliminating a loophole in current statute that allows North Slope producers of new oil — production brought online in recent years — to compound a 20 percent new oil credit known as the Gross Value Reduction with a 35 percent NOL credit to produce a refund greater than the company’s actual loss. The Gross Value Reduction credit lowers the taxable wellhead value of new oil by 20 percent before other considerations are added to the oil’s taxable value.

Alper said closing the Gross Value Reduction plus NOL loophole was first projected to save the state about $13 million next fiscal year, but that figure continues to go up as low oil prices force more producers to claim operating losses.

Members of the committee and the Walker administration have noted throughout the tax policy debate that the loopholes allowing companies to take their tax liability below the 4 percent floor and grow their operating loss credit are a consequence of current oil prices below $50 per barrel that were not modeled when Senate Bill 21, the broader oil tax structure, was passed in 2013.

According to the Tax Division, the committee bill would not impact tax structure for major North Slope producers — companies with over 50,000 barrels per day of production. It would impact new entrants to the Slope or small producers only at low prices through closing the NOL loophole.

For Cook Inlet producers and companies developing production, however, the final impact of the latest version of HB 247 would be a reduction in state support that is now up to 55 percent for development costs to the 20-30 percent range by the time the credit reductions are fully implemented in 2018, Alper said.

The Senate Oil and Gas Tax Credit Working Group held last year and headed by Sen. Cathy Giessel recommended hardening the production tax floor, which the committee substitute does not, and making any changes to the credit program forward looking, which it does.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

Updated: 
03/23/2016 - 2:59pm

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