Legislature(2009 - 2010)BUTROVICH 205

04/06/2010 03:30 PM Senate RESOURCES

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Heard & Held
Heard & Held
         SB 271-OIL AND GAS PROD. TAX: CREDITS/INTEREST                                                                     
3:33:43 PM                                                                                                                    
CO-CHAIR MCGUIRE announced consideration of SB 271.                                                                             
PAT GALVIN,  Commissioner, Department  of Revenue (DOR),  gave an                                                               
overview of SB 271, the governor's  oil and gas tax credits bill.                                                               
He said  the bill deals with  three primary themes, the  first is                                                               
to  increase tax  incentives available  for activities  that will                                                               
result in  more oil and  gas jobs, the  second is to  provide all                                                               
taxpayers with  the full value for  incentives currently offered,                                                               
and the  third is  to provide fairness  in administration  of the                                                               
production  tax. This  goes  to the  provision  dealing with  the                                                               
application  of  interest for  underpayment  of  taxes due  to  a                                                               
retroactive application of a regulation.                                                                                        
SENATOR STEDMAN joined the meeting.                                                                                             
3:36:04 PM                                                                                                                    
COMMISSIONER   GALVIN  said   SB  271   consists  of   four  main                                                               
components: one  is that it  establishes a 30 percent  credit for                                                               
well-related expenditures  (infield drilling) that would  fill an                                                               
existing space in the oil and  gas credit area where they already                                                               
provide  a blanket  20 percent  credit  for capital  expenditures                                                               
across the board. If it takes  place outside of existing areas of                                                               
activity they  provide either a 30  or a 40 percent  credit. This                                                               
credit  is intended  to target  well related  expenditures within                                                               
existing fields.  Second, it  eliminates the  current requirement                                                               
that  the capital  credits  must  be spread  over  two years  and                                                               
allows them to be used in the  year in which they are earned. The                                                               
third one  is to eliminate  the current  reinvestment requirement                                                               
(taxpayer must demonstrate  that they are reinvesting  in the two                                                               
subsequent years) for  those taxpayers who want the  state to buy                                                               
their  credit  when  they  don't   have  current  production  tax                                                               
obligations to  put their credit  up against. They have  found it                                                               
could provide a  barrier to companies who are  looking to partner                                                               
on individual exploration  projects where they may come  in as an                                                               
investor for a particular well  program and then see what happens                                                               
after that. Their  impression of their ability to  get full value                                                               
of the  credit will  be based  upon whether  they expect  to make                                                               
additional  investments in  the  future. Finally,  it provides  a                                                               
waiver of interest when retroactive  regulations are put in place                                                               
that result in an underpayment in a past tax return.                                                                            
3:39:45 PM                                                                                                                    
COMMISSIONER GALVIN provided more  detail to the first component,                                                               
the 30 percent credit for  infield drilling. They saw the overall                                                               
level of investment and well  activity raising after ACES passed,                                                               
but not the number of  wells being drilled. This provision raises                                                               
the 20  percent credit currently  available for  all well-related                                                               
work to 30  percent for well-work within existing  units. It also                                                               
provides a  30 percent credit for  certain well-related operating                                                               
costs that currently don't qualify for any credit.                                                                              
3:41:59 PM                                                                                                                    
SENATOR  WAGONER  asked what  would  insure  the state  will  get                                                               
additional production for that additional 10 percent credit.                                                                    
COMMISSIONER  GALVIN  answered  there  is no  guaranty  that  the                                                               
activities qualifying for the credit  will be additional, because                                                               
they can't easily  identify what they would  have done otherwise.                                                               
However, the department recognizes that  they have seen the level                                                               
of activities  among explorers increase, so  they anticipate that                                                               
these  credits   for  this  particular  type   of  activity  will                                                               
encourage more of it.                                                                                                           
3:43:35 PM                                                                                                                    
SENATOR STEDMAN said  he sees it as more of  a 50 percent credit.                                                               
Several years ago when they did  PPT [revising the state oil tax]                                                               
legislative  consultants cautioned  that if  the state  moved the                                                               
credit from the  25 percent base tax it would  be offering credit                                                               
that  wasn't  needed, and  he  didn't  recall ever  discussing  a                                                               
credit as high as 30 percent. So  he thought as they go down this                                                               
road they should have some cash-flow modeling.                                                                                  
3:46:29 PM                                                                                                                    
COMMISSIONER GALVIN said  he would agree if they  were looking at                                                               
increasing  the capital  credit  across-the-board from  20 to  30                                                               
percent.  But  here  they  are  trying  to  incentivize  specific                                                               
activities similar  to the existing exploration  incentive credit                                                               
program which  is at 30  percent and  sometimes a 40  percent for                                                               
particular  activities. They  have modeled  the fiscal  impact of                                                               
this  based upon  the expected  spending they  are seeing  in the                                                               
next couple  of years. While they  expect it to go  up, they have                                                               
estimated $250-300  million per year in  additional credits being                                                               
generated by this activity that would qualify for these credits.                                                                
SENATOR STEDMAN  said he understands these  credits are targeting                                                               
Prudhoe Bay,  Kuparuk, and  Alpine, the older  side of  the field                                                               
with a lot  of heavy oil and comparatively  lower operating costs                                                               
(where most of the oil and  the money are). Consultant David Wood                                                               
had done  some work in that  area and testified in  Finance about                                                               
concerns  with   some  of  the   timing  and  placement   of  the                                                               
3:49:07 PM                                                                                                                    
SENATOR FRENCH  said his  question goes back  to the  ACES debate                                                               
and the model that was done  by Rich Ruggerio [Gaffney Cline] and                                                               
Bob  George  that  showed  high  profitability  for  Prudhoe  and                                                               
Kuparuk  wells  of  50  percent and  under  almost  any  taxation                                                               
structure. He  wondered where that  level of  profitability plays                                                               
into the governor's calculation of  the size of the stimulus that                                                               
is necessary, given  that drilling wells there  is "like shooting                                                               
fish in a barrel."                                                                                                              
COMMISSIONER GALVIN  said the economic  modeling they  did during                                                               
the   ACES   session  was   based   on   numbers  the   companies                                                               
(particularly BP) provided, and he  thinks those were an accurate                                                               
reflection.  He did  not believe  those  particular wells  needed                                                               
this kind  of credit,  but he  further expects  a second  wave of                                                               
well work that  will be less economic - because  either the costs                                                               
are higher or  the production profile would be  less attractive -                                                               
and  those wells  are not  being  drilled. This  credit seeks  to                                                               
provide  a broader  economic  uplift, looking  to  bring on  some                                                               
activities  (infield drilling)  that are  currently being  passed                                                               
3:52:17 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI asked  how the $350 million  fiscal note is                                                               
apportioned between new wells and  what they expect to be drilled                                                               
because of  this credit remembering  the increase from  the 20-30                                                               
percent in the old wells that would have been drilled anyway.                                                                   
COMMISSIONER  GALVIN answered  they don't  have any  projections,                                                               
and technically the  fiscal note is indeterminate  for this bill.                                                               
It is the  balance between the additional credits  that the state                                                               
would  incur   because  of  the  additional   activity  with  the                                                               
offsetting  additional production;  so  he couldn't  give him  an                                                               
accurate revenue impact.                                                                                                        
3:53:45 PM                                                                                                                    
CO-CHAIR  WIELECHOWSKI  echoed  Senator  Stedman in  that  it  is                                                               
important to  do some  kind of  modeling to  figure out  what the                                                               
state is  really getting for  the $350  million. He would  have a                                                               
hard  time supporting  giving it  away  for wells  that would  be                                                               
drilled anyway,  but if they  are going to  get new wells  out of                                                               
it,  he would  be more  supportive. He  asked how  much more  oil                                                               
would be going into the pipeline  and how much more revenue would                                                               
be generated because of these credits.                                                                                          
COMMISSIONER GALVIN  said he appreciated  the sentiment  and felt                                                               
that they would model this  if they could, but without additional                                                               
detail  from the  companies they  can't do  it. However,  they do                                                               
know  that the  increased credits  in the  exploration areas  are                                                               
working,  and  that kind  of  credit  doesn't exist  for  infield                                                               
drilling, and they think it is worth trying.                                                                                    
3:56:32 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI commented  that it is hard for  him to make                                                               
a  big  policy call  without  this  information,  and now  he  is                                                               
hearing  that the  commissioner  cannot give  him any  confidence                                                               
that one single well will be drilled as a result of this credit.                                                                
COMMISSIONER GALVIN responded that  he can't say specifically how                                                               
much activity is going to be  created, but he can say this credit                                                               
will  result in  more  favorable economics  for  the wells  being                                                               
evaluated for a decision. That  will increase the likelihood that                                                               
more wells will be drilled and that more production will occur.                                                                 
3:57:47 PM                                                                                                                    
SENATOR WAGONER asked if this  credit doesn't result in any wells                                                               
being drilled, then the state isn't out any money, right?                                                                       
COMMISSIONER GALVIN responded yes.                                                                                              
SENATOR WAGONER  asked what history  he has about the  wells that                                                               
have been  drilled over the past  five years, so they  can use it                                                               
for comparison.                                                                                                                 
COMMISSIONER GALVIN  said he  will have to  look at  how detailed                                                               
their  information is  on  specific  incremental production  that                                                               
results from drilling activities.                                                                                               
3:59:03 PM                                                                                                                    
SENATOR  FRENCH  wondered  if  they had  looked  at  the  Kuparuk                                                               
experience  where prior  to the  PPT  tax revisions  in 2006  the                                                               
severance tax was nearly zero.                                                                                                  
COMMISSIONER GALVIN replied  that they don't see  this as falling                                                               
in  the rubric  of lower  taxes means  higher production.  Rather                                                               
they see this as investment results  in a credit off your current                                                               
tax  bill.  It changes  the  dynamic  significantly in  terms  of                                                               
investment decision making.                                                                                                     
SENATOR FRENCH asked where the $250  to $300 million comes from -                                                               
from projecting  the current level  of infield  drilling activity                                                               
or does it envision some modest increase?                                                                                       
4:00:29 PM                                                                                                                    
COMMISSIONER GALVIN answered that  it actually breaks the current                                                               
level  of  total  expenditures  down  into  activities  that  are                                                               
considered to potentially be subject to this credit.                                                                            
4:01:38 PM                                                                                                                    
CO-CHAIR  WIELECHOWSKI asked  where  he gets  the information  to                                                               
make these  projections and  based on  these projections  do they                                                               
expect an  increase, a  decrease or the  same amount  of drilling                                                               
compared to now.                                                                                                                
COMMISSIONER GALVIN answered that  their information comes from a                                                               
variety of sources. The projected  overall expenditure comes from                                                               
the  companies, themselves,  that  under the  current tax  system                                                               
have to  project spending  levels for  a number  of years  in the                                                               
future.  They  get a bit more detail on  past spending from other                                                               
past reports  and have tried to  differentiate well-related costs                                                               
from non-well related costs.                                                                                                    
4:03:09 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI  asked again if  he expects an  increase, a                                                               
decrease or the same amount of drilling in future years.                                                                        
COMMISSIONER   GALVIN  replied   that   the   level  of   overall                                                               
expenditure is  expected to  increase, which  would lead  them to                                                               
expect additional wells  will be drilled. It is  a combination of                                                               
new  exploration   and  development  wells  and   what  would  be                                                               
considered infield  drilling type  programs, but they  don't have                                                               
information  that there  is going  to be  an increase  in any  of                                                               
those individual segments.                                                                                                      
CO-CHAIR WIELECHOWSKI  asked what level of  increase they expect.                                                               
How many  years out does this  information go? Is it  public? Can                                                               
he get a copy of it?                                                                                                            
COMMISSIONER GALVIN replied  that it is part  of the department's                                                               
revenue forecast.                                                                                                               
CO-CHAIR WIELECHOWSKI  asked what the projected  increase is over                                                               
the next five years without this credit.                                                                                        
COMMISSIONER GALVIN replied the  overall (capital) expenditure is                                                               
expected  to go  up  about  10 percent  a  year,  but that  would                                                               
include things that don't qualify for these credits.                                                                            
CO-CHAIR MCGUIRE  pointed out  that if no  investment is  made no                                                               
tax credit is given. It's a  question of whether or not the state                                                               
feels it's  worthwhile to  "partner in the  risk." She  said this                                                               
committee has  been looking at a  number of tax credits  and that                                                               
she has heard from industry that  ACES is broken. She thanked the                                                               
governor  for  bringing  stakeholders  together  to  discuss  how                                                               
corporate behavior could be influenced in  a way that would net a                                                               
positive outcome for the state.                                                                                                 
4:07:09 PM                                                                                                                    
SENATOR HUGGINS said  the commissioner listed the  items based on                                                               
a letter  from the House  asking for some adjustments,  but there                                                               
have to  be some  things that  didn't make the  cut. He  asked if                                                               
there is  anything else  he could share  with the  committee that                                                               
might be "objective fixes."                                                                                                     
COMMISSIONER  GALVIN replied  that  they looked  at lowering  the                                                               
progressivity level from  the current .4 percent  or changing the                                                               
kick off point.  Some of the others were more  technical, such as                                                               
working with  the definition  of lease  expenditures and  the way                                                               
the facility sharing costs are incurred or accounted for.                                                                       
4:08:41 PM                                                                                                                    
SENATOR  HUGGINS  said  the  item   that  intrigued  him  is  the                                                               
technique  of "bracketing  the progressivity."  He asked  if they                                                               
looked at that.                                                                                                                 
COMMISSIONER  GALVIN  replied  that  was  looked  at  before  the                                                               
session; the other body had  also proposed a similar methodology.                                                               
Currently,  if the  production  tax value  per  barrel goes  over                                                               
$30/barrel, the progressivity rate  applies to the entire stream.                                                               
The concept  would be rather  than applying the  progressive rate                                                               
to the  entire stream to apply  it to that portion  of the stream                                                               
above  $30/barrel. If  you just  shear  off the  bottom $30  with                                                               
prices   where   they  are   now,   that   amounts  to   dropping                                                               
progressivity  from .4  percent to  .2 percent.  It means  at the                                                               
higher end of the progressivity you'll  be at a lower state take.                                                               
In  looking  at the  question  of  progressivity, the  department                                                               
always asked  if it  would result  in more  activity (investment,                                                               
jobs and production). There seemed  to be less connection between                                                               
the benefit being provided by  that change and the expectation of                                                               
increased activity. So, they gravitated more to credits.                                                                        
4:11:58 PM                                                                                                                    
SENATOR  HUGGINS  asked  if  he   thought  the  timing  of  these                                                               
incentives  would   positively  impact  the  big   gas  pipeline,                                                               
particularly in the context of  a successful instate gas pipeline                                                               
and some petrochemical industry.                                                                                                
COMMISSIONER GALVIN answered that he  can see it in two different                                                               
ways;  for   example,  impacting  those  who   are  investing  in                                                               
exploration  almost exclusively  for gas  in the  Foothills right                                                               
now. To  the extent that  the credits will provide  incentives to                                                               
them, that would be a positive.                                                                                                 
One  of  the  limitations  to the  exploration  incentive  credit                                                               
program is that the activity has  to be a certain number of miles                                                               
from an existing well, and  given the seasonal nature of Alaska's                                                               
drilling program,  a producer might  start drilling one  year but                                                               
have to  wait to finish  it the next year  and would not  get the                                                               
same exploration credit for that  pad. This measure would benefit                                                               
that type  of activity. Also,  to the  extent that a  producer is                                                               
looking to use these credits  for additional infield drilling and                                                               
that  enhances their  expectation  of future  gas production,  it                                                               
will decrease  their perceived reservoir  risk associated  with a                                                               
long-term commitment on a pipeline.  To that extent it could have                                                               
an incremental value.                                                                                                           
4:14:51 PM                                                                                                                    
SENATOR WAGONER  asked how  much development has  to happen  in a                                                               
new field  prior to this  credit kicking in and  being applicable                                                               
to each well - for instance at Pt. Thomson.                                                                                     
COMMISSIONER GALVIN  replied basically  none. Development  is not                                                               
directly defined  as to an  existing field or a  developed field.                                                               
It applies to "all wells."                                                                                                      
4:15:28 PM                                                                                                                    
SENATOR FRENCH asked if the oil industry supports this bill.                                                                    
COMMISSIONER  GALVIN  said  he  believes  so.  A  number  of  new                                                               
entrants spoke very  positively with regard to access  to the new                                                               
credits and the cash back from the state.                                                                                       
4:16:31 PM                                                                                                                    
SENATOR FRENCH  remarked that he  didn't see  a lot of  people in                                                               
the audience.                                                                                                                   
COMMISSIONER GALVIN  responded that  if he  wanted to  invite the                                                               
industry to comment, he thought they would be here.                                                                             
CO-CHAIR WIELECHOWSKI asked if this  bill passes, does it end the                                                               
oil tax debate once and for all.                                                                                                
COMMISSIONER GALVIN  replied this  is an  attempt to  address the                                                               
concerns that have been raised,  and from his perspective it will                                                               
send  a very  positive message  that the  state is  responsive to                                                               
industry's concerns. But it is up to the legislature to decide.                                                                 
4:17:44 PM                                                                                                                    
SENATOR HUGGINS commented that North  Dakota is booming and asked                                                               
if the commissioner is familiar with what they are doing.                                                                       
COMMISSIONER  GALVIN said  he is  not  aware that  they have  any                                                               
particular program  in place and  he suspects the boom  is driven                                                               
by  the resource.  Comparing  Alaska  with any  of  the Lower  48                                                               
states isn't really a fair  comparison because they don't own the                                                               
resource themselves and  don't have the same  levers available to                                                               
them  as Alaska  does. Also  their relationship  to the  industry                                                               
isn't the same.                                                                                                                 
SENATOR HUGGINS asked why Alberta is so "upside down."                                                                          
4:19:37 PM                                                                                                                    
COMMISSIONER GALVIN  replied what he understands  from Alberta is                                                               
they had a couple things  happen to them almost simultaneously to                                                               
form a sort  of overheating of the industry. The  oil sands had a                                                               
huge  influx of  activity, and  in that  time they  significantly                                                               
changed their fiscal  system by creating tiers. If  you come into                                                               
it now it is different than a  couple of years ago. Then when the                                                               
oil prices  came down,  everything started  to implode  and their                                                               
fiscal system looked out of place.  Beyond that he hadn't spent a                                                               
lot of time comparing their system to ours.                                                                                     
CO-CHAIR MCGUIRE invited  the commissioner to look  at what other                                                               
jurisdictions  are doing  with regard  to taxes  and tax  credits                                                               
over the Interim.                                                                                                               
4:22:05 PM                                                                                                                    
CO-CHAIR MCGUIRE closed public testimony and set the bill aside.                                                                

Document Name Date/Time Subjects
HB 306 - Bill Packet.pdf SRES 4/6/2010 3:30:00 PM
HB 306